To make companies moral, make the employees the owners: Having stockholders can offer confusing incentives for business owners with a mission–but not if those stockholders are employees who believe in the mission, too
In the minds of many entrepreneurs, taking a company public, with shares trading on a public stock exchange, represents the pinnacle of success–a dream come true. For EA Engineering founder Loren Jensen, that dream proved a nightmare.
Located in Hunt Valley, Maryland, EA Engineering, Science and Technology is an environmental consulting firm with 500 employees and $140 million in annual revenue. For more than a decade, the firm traded on NASDAQ, but after initial success the company cycled through three presidents, saw morale plummet, and found itself in trouble with the Securities and Exchange Commission over accounting misstatements. Pressure for aggressive growth had clashed with the company’s scientific culture, damaging its environmental mission.
Jensen led a move to buy the company back in 2001. He then worked with new president Ian MacFarlane to transition to 100 percent employee ownership through an Employee Stock Ownership Plan (ESOP). MacFarlane also organized the firm as a benefit corporation, embedding in its DNA a commitment to the environment and community.
The company has prospered ever since. Its design keeps its environmental mission in the hands of genuine stewards, employees, rather than in the hands of absentee owners removed from the organization’s life. “Now we focus on who we are and what we’re doing. We returned immediately to the task of understanding environmental problems and knowing what to do about them,” Jensen said. “Nobody buys stock except in the hope of a good return on investment. The problem this poses for a company like EA is you confuse the goals. It was very difficult to manage in that environment.”
EA Engineering is one of multiple companies examined by my organization, the Democracy Collaborative, in research aimed at answering questions critical to 21st century enterprise design and the future of our planet: Are mission-controlled, employee-owned companies better environmental stewards than conventional finance-controlled corporations? Could these be the harbingers of next generation enterprise design?
If our goal is to design an economy that lives within planetary boundaries, we need to better understand the relationship between enterprise design and sustainability outcomes. Environmental advocates generally make the “business case” for sustainability, but research by the Massachusetts Institute of Technology found that such steps resulted in commercial benefits for only 37% of firms.
As U.K. sustainability consultant Carina Millstone observes in Frugal Value, true sustainability cannot be driven purely by commercial concerns. It requires moral decision-making. What enterprise designs enable and encourage moral decision-making?
Our research findings, though still preliminary, point to an emerging model, viable in today’s economy: the employee-owned B Corporation or benefit corporation. Weaving together worker ownership with mission-driven governance, this model embodies design elements required for true environmental sustainability.
In this model, mission is embedded through the B Corporation nonprofit certification process, or the benefit incorporation framework in state law. Among B Corporations, we have identified 35 employee-owned firms, including Eileen Fisher, King Arthur Flour, New Belgium Brewing, Namaste Solar, and Gardener’s Supply. In these companies, founders avoided sale to financial owners, instead passing ownership to employees as stewards, embedding a commitment to social and ecological benefit in governing documents. The companies show an alternative exit for founders, rather than going public and facing the multiple pressures that make it more difficult to have a deep sustainability mission.
Shareholders in publicly traded companies are large in number, geographically remote, disengaged from companies, and structurally unable to effectively voice social and ecological responsibility. Creating shareholders with different characteristics–fewer in number, close to the firm, engaged, committed to a common social or environmental mission–could help create companies compatible with an environmentally sustainable economy. In this configuration, owners can become moral agents.
Eileen Fisher Inc. is a good example. A $440 million company that designs and markets women’s clothing, it is 40% employee owned, a B Corp, and a leader in human rights and sustainability. Founder Eileen Fisher’s vision is of a world where business is a force for good. As the company website says, “Our vision is for an industry where human rights and sustainability are not the effect of a particular initiative, but the cause of a business well run. Where social and environmental injustices are not unfortunate outcomes, but reasons to do things differently.”
Fisher at one time thought about selling to another company. When Fisher met the CEO of Liz Claiborne and asked why she wanted to buy the company, that CEO said, “We can’t meet our mandated target of 10 percent annual growth without buying other companies.” As Fisher said, “I realized that most people were interested in what they could get out of the company, not what they could give to it.”
Instead, Fisher decided on an ESOP, in which shares are held in trust for employees until they retire or leave. The average equity share of employee-owners in an ESOP is $134,000, according to Rutgers University employee-ownership expert Joseph Blasi; this is almost 10 times the average retirement account for American households headed by someone between the ages of 55 and 64 ($14,500). The ESOP ensures that, when Fisher retires, the company will be owned by “the people who put their blood sweat and tears into it; the people who love it and care about it and think about it every day,” as Fisher said. That’s very different from owners who see the company as a way to extract maximum short-term profits.
Employee-owned benefit corporations–like Eileen Fisher and EA Engineering–embody a powerful model of enterprise design for a new era of ecological sustainability and social equity, a corporate design for the 21st century and beyond.
Marjorie Kelly is executive vice president at The Democracy Collaborativeand cofounder of Fifty by Fifty, an initiative helping to catalyze 50 million employee owners by 2050. She is the author of Owning Our Future: The Emerging Ownership Revolution and The Divine Right of Capital: Dethroning the Corporate Aristocracy.
Next Generation Enterprise Design: The employee-owned benefit corporation
Employee Ownership’s Relationship to Sustainability Focus of New Research
“Instead of picturing companies as objects owned by shareholders, designed to produce earnings like ball bearings off an assembly line, we need to see companies as living systems, part of the larger living system of the earth, designed to benefit life,” write Marjorie Kelly and Sarah Stranahan in a new report from Fifty by Fifty.
Next Generation Enterprise Design hypothesizes that mission-controlled, employee-owned companies have the design elements necessary to build enterprises for a more sustainable, equitable 21st century economy. These are employee-owned certified B Corporations or benefit corporations incorporated under state law. The founders of these companies have avoided selling to financial interests and instead have chosen to pass ownership to employees as stewards, embedding a commitment to social and environmental benefit in governing documents.
Mission-controlled, employee-owned companies have the design elements necessary to build enterprises for a more sustainable, equitable 21st century economy. These are employee-owned certified B Corporations or benefit corporations incorporated under state law.
Through research funded by Partners for a New Economy, Fifty by Fifty identified 35 certified B Corporations that were employee owned and, in a pilot study, compared these companies to B Corporations without employee ownership. The total B scores of the 35 employee-owned companies were significantly higher than their counterparts; their environmental scores were similar, suggesting that employee-owned benefit companies are good for workers and good for the environment.
The 35 companies included brands such as Eileen Fisher, Inc., King Arthur Flour, New Belgium Brewing, and Namaste Solar. A series of case studies further illuminates the thinking of company founders such as Eileen Fisher, whose $440 million women’s clothing enterprise is at the forefront of sustainable textile production. Fisher has a vision of business as a force for good and was unwilling to sell to either another company or outside investors when she realized their only motive was better profits.
When firms are sold to multinationals or large competitors, mission is often squeezed out. Employee ownership provides an alternative exit, where employees as stewards are more likely to keep mission intact.
The vast majority of B Corporations are owned by founders and their families, enabling them to have a strong mission. The real test comes when founders sell. When firms are sold to multinationals or large competitors, mission is often squeezed out. Employee ownership provides an alternative exit, where employees as stewards are more likely to keep mission intact.
Based on an analysis of B Corporation data and interviews with company leaders, the authors suggest that investor-owned firms laser focused on maximum profits also are less likely to have the same genuine commitment to sustainability that employee-owned companies are capable of. There is too much pressure for short-term financial gain, Kelly and Stranahan explain:
Shareholders in publicly traded companies are large in number, geographically remote, disengaged from companies, and structurally limited in their ability to effectively voice social and ecological responsibility. Creating shareholders with different characteristics — fewer in number, close to the firm, engaged, committed to a common social or environmental mission — could help create companies compatible with an environmentally sustainable economy. In this configuration, owners can become moral agents.
Environmental advocates generally make the “business case” for sustainability, but research by the Massachusetts Institute of Technology found that such steps resulted in commercial benefits for only 37 percent of firms. Moral agency is essential for a true environmental commitment — and critical to getting there is to be more deliberate in thinking about enterprise design. With this in mind, Fifty by Fifty will be releasing a more in-depth research report on mission-controlled employee-owned enterprises later this spring.
— @karenakahn provides communications consulting and editorial support for Fifty by Fifty
Fifty by Fifty, an initiative of @Democracy Collab, is working to transform the U.S. economy by growing employee ownership. Join our campaign, and we’ll send our monthly newsletter, filled with great company stories, right to your inbox.