At ESOP Builders, we know there is value in doing things face to face, however certain circumstances require conducting business virtually. And why not conduct more and more business virtually? It’s almost more challenging to not conduct work virtually since there is motivation to do so in the form of COVID restricting in person contact, and ease or convenience to do it in the form of user-friendly technology.
As our previous ESOP clients will know, a key step in our implementation process is to have a Town Hall with employees to describe and explain the program, as well as educate and answer questions. Recently, however clients in the middle of the implementation process in March 2020 were suddenly thrown a completely unexpected curve-ball. One client moved forward with their ESOP, although delayed, and conducted our first ever virtual Town Hall. This client had moved all company meetings to virtual and said that overall it went well, but they found the need to significantly reduce meeting durations because people just can’t pay attention on a screen for that long. We worked with them to cut down the content from a 1-2 hour session to 30 minutes (including time for questions). However, the management team also did informal communication to ensure everyone understood the program, pushing to get everyone to ask questions, which was key when having such a short minute meeting for something that does require more. Also a key part of the Town Hall was having a detailed and straight forward employee info package for employees to review and contemplate after hearing about the plan during the Town Hall. This is something we always provide, but it is particularly useful when dealing in a virtual environment.
This particular client experienced a 60% and 70% participation rate (they implemented ESOPs in two different companies) which is excellent given the norm is 60-75%. Under the circumstances we revised our expectations to around 50% participation, therefore we are very pleased with the result and commend the company for making it happen!
Fortunately, technology made it easy to adapt and work through a different way of doing things.
While many businesses deferred thinking about implementing a shared ownership plan back in April, now may just be the right time to start taking action. Businesses have adapted and started to see the beginning signs of operations picking up again.
There are around 7,000 ESOPs in the US according to Mary Joseph’s article in Forbes (2020). A Deloitte (2018) found that about three quarters of publicly traded companies offer ESPPs (Employee Stock Purchase Plan). However, we want to see Canadian plans continue to rise. A plan can be set up many ways driven by the goals of the owner, the company, and the participants.
Joseph outlined some reasons why an ESOP should be implemented. In this blog we will use her concepts to similarly highlight some reasons but from a Canadian perspective.
Company Performance – The most compelling purpose for a time like this is that ESOPs outperform non esop companies during tough times. This is seen in studies comparing companies’ sales, profits, hiring activities, etc. For example, the researchers at the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University found that ESOP companies grew sales during 2008-09 11.1% while non-employee-owned companies grew by just 0.61%.
An Ownership Mindset – Employees are also owners and they have a different mindset toward their company and how it works compared to non-employee owners. Think about a renter of a building versus an owner. Employees think about things like their paycheck, Fridays, time off, or the “me mentality”. Owners think of things like sales, profit, expenses, clients, company projects, cash flow, etc. or the “us mentality”. Employee owners understand the bigger picture and are likely to find ways to boost sales and/or cut costs more so than if they were not an owner. When the company does well, everyone individually does well too. As a customer would you prefer to deal with the owner or someone who doesn’t have that level of stake in the company’s success? Usually the owner will be the one giving the best service. When all your employees are also owners client satisfaction soars. Research from the NCEO shows that employees at ESOP companies are less likely to be laid off. Recent research from Rutgers University (2018) also indicates that retirement accounts of employees at ESOP companies are significantly greater than those at non-ESOP companies.
Successful Exit for the Founding Owner – It makes sense for the founding owner because sale to a third party is only successful about 50% of the time. Selling to your employees on the other hand has an 80% success rate. Why is this you may wonder? For a small or medium sized private Canadian company, third party offers may be hard to come by, and when they do they may not meet the expectations of the owner in terms of what the company is worth and what will happen to the company once the deal is done. Many of our clients want to share the success that their employees have helped create and continue the legacy of their business. The employees are already invested by way of the time and effort they have committed over the years, they are more likely to want to see the business succeed. Not to mention they already know their jobs, know how the company works, and know the clients. Additionally, the owner doesn’t have to share extensive financial and confidential information with a third party. The fact that it is also a lucrative and effective way for an owner to exit is an added bonus.
Flexible Transition – Control can still rest with the founding owner until such time that they are ready to fully transition controlling ownership. Employee owners are not typically provided a seat on the board until they hold a significant ownership percentage. See our last blog post which talks about participation and what that can look like.
Overall, it is a win for all, the founding owners, the employees, and the economy. An added bonus is that it can support democracy by strengthening the wealth of the middle class without government intervention.
By Joanna Phillips, CHRL, CVB, Vice President, and Perry Phillips CPA, CA, CBV, President
Back in 2011 EBI watched with interest as EllisDon, a long-time ESOP company, took the recession in stride as one of Canada’s Top 100 Employers for 2012. In The Globe and Mail article, the firm’s vice-president of leadership and entrepreneurial development shared that in the previous year, 84 percent of employees who were offered shares accepted, an increase from the usual rate of around 70% — because they believed in the ESOP and the company. Our president, Perry Phillips, told the Globe and Mail “the employees who are engaged as owners will now do whatever it takes to get that company through tough times. I’ve seen this constantly. A lot of companies survive downturns and come back up very quickly because they’re still around, thanks to their employees.”
We can expect the same resilience from ESOP companies today as we all get back to work. Finally.
Now, 9 years later in the midst of a global crisis, Canada’s EllisDon announced recently that a final agreement was executed under which 100 per cent of the company’s equity will be transferred to the company’s employees.
Electrical Business Magazinereported that the majority shareholder, Smith family shareholders, have signed off on an agreement to allow the company to be 100 percent employee-owned over a specified period of time. The company’s Board of Directors chair, Gerald Slemko, the Smith family, and representation from EllisDon’s shareholder employees were the parties driving this agreement forward. EllisDon will continue to be governed by an independent Board of Directors. “EllisDon’s share structure and independent governance will ensure that we continue to strive together for complete fairness in equity of ownership across all employees, both present and future,” said CEO Geoff Smith. “Shares will continue to be offered to employees every year and loans will still be offered on an interest-free basis. Shares will always be purchased and sold at book value, ensuring the ability of every employee shareholder to participate fully in the share value created while they are at EllisDon, and then to pass that opportunity on to future employees.”
By Joanna Phillips, CHRL, CVB, Vice President, ESOP Builders Inc.
The shut-down of the economy has lasted for almost 2 months and businesses are either facing negative impacts from the COVID-19 crisis, along with most Canadian businesses, or are among the minority of businesses experiencing positive impacts.
It’s likely that very difficult business decisions have had to be made to ensure your company’s existence through the crisis. Part of the challenge is having to lay off valued employees, and maintain a positive culture.
Although things are still changing rapidly, business owners are likely considering long-term impacts on the company’s ability to retain their employees, but also to attract top talent once the crisis is behind us. The many reasons why owners turn to an ESOP (Employee Share Ownership Plan) include to exit the business, to establish a succession plan, and especially to attract and retain the top talent in the industry. In some sectors ESOPs are de rigueur and companies cannot be without one. Rather than turning away from investing in your business growth now, this may be exactly the right time to take opportunities to work on your business rather than simply in it.
As your company grows and time goes on, your workforce demographics naturally become younger. It certainly seems that ESOPs appeal greatly to Millennial workers who are looking for something more out of their companies. More studies are confirming this as more millennials enter the workforce. Every business owner knows how much time it can take to put together the “perfect” team. Additionally, employees overall are not staying in one job, or one company, for long compared to in the past. For these reasons, an ESOP can be a very strategic and valuable tool to attract and retain your team which you have invested in and worked hard to establish. Many studies of ESOPs in the US conducted by the NCEO indicate that ESOP companies have a greater resilience for staying in business through economic downturns. While the current crisis is unprecedented, these studies do suggest companies who have a participative ESOP will be more likely to come out of the crisis and emerge in a relatively strong position.
In ESOP Builders’ ESOPs as an Attraction and Retention Tool (November 2019) survey of Canadian ESOP companies 75 percent of respondents indicated their ESOP offers an edge on the competition to attract and retain talent. Therefore, it is likely that taking these steps will set your company up for success against your competition by ensuring you have the team to bounce back incredibly strong once the country experiences a positive shift in the economy.
By Joanna Phillips, CHRL, CVB, Vice President, ESOP Builders Inc.
Our April 2020 survey gathered responses from ESOP companies across Canada to help understand their strategies undertaken to manage operations as an ESOP during the COVIC-19 crisis. The survey summary is illustrated below.
First is the philosophy of personal wealth creation. Employees are motivated by financial gain and ESOPs deliver wealth.
Second is the philosophy of cultural engagement on a personal basis. The Theory of Group Wisdom holds that groups are more successful over individuals due not to the intellect of each person but due to the social interaction of the group. ESOPs create the conditions of group success through a participative culture of engagement.
It is estimated that less than 10% of the workforce actually own their own business. That means over 90% are employees. This statistic is important because owners and employees differ in how they think about business issues.
Most owners of privately-held companies are also the founders. Why? At some point in the past, they had a dream and a desire to own their own business. For many, this required giving up a secure job working for someone else and entering the uncertain and ambiguous realm of an entrepreneur. Although there was a huge risk, they believed in themselves and their dream, and they took the leap. For many, this required using their own savings, as well as putting their house and everything they owned on the line as collateral. This was not an easy decision on their part.
On its 10th anniversary, the owners of Canada’s largest organic brewery, Beau’s All Natural Brewing Company, announced it will be selling the company to employees through an Employee Share Ownership Plan (ESOP).
The owners, a father-and-son team, said selling to employees ensures the Vankleek Hill, Ont., brewery that has approximately 150 employees stays independent, an important factor for the founders.