Federal legislation could broaden access to employee ownership
by Karen Kahn
In its recent budget, Canada’s federal government committed to investigating employee ownership trusts as a means to promoting a more equitable recovery, following the crippling pandemic. The recommendation follows on an October 2020 report issued by Social Capital Partners, a Canadian nonprofit, which noted that Canada does not have an employee ownership trust structure similar to the US Employee Stock Ownership Plans (ESOP) or the British Employee Ownership Trust (EOT). These corporate structures make employee ownership a feasible succession option.
Drawing on British and U.S. EOT structures, Canada could potentially create a hybrid form that would give employees both additional current income as well as the long-term wealth building benefit of equity.
“There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to reduce wealth inequality, support business succession, protect local jobs, and promote economic resilience,” Jon Shell, managing partner of Social Capital Partners, said in press statement.
Employee Ownership Trusts
Employee ownership trusts (U.S. ESOPs and UK EOTs) are a way for business owners to sell all or part of their business to their employees. What makes them unique is that the owners sell the business at market value, but the workers do not pay for their shares. A loan is used to buy the shares, which are put into a trust. The trust then pays back the loan through company profits.
About 14 million US employees own $1.4 million in shares at about 6000 US ESOPs. The UK, following the Nuttall review in 2012, implemented a new framework for employee ownership trusts that has been quite successful. In 2019 alone, almost 100 companies became employee owned.
Canadians Support EOTs as Succession Strategy
The Canadian Federation of Independent Business (CFIB) recently completed a survey of Canada’s business owners and found significant interest in employee ownership. Of respondents, 59 percent were either strongly or somewhat in favor of introducing some form employee ownership trust, and 53 percent said they were more likely to consider selling to employees if such a policy provided that option.
A Uniquely Canadian EOT?
Shell’s hope is that Canada’s government will look at the pros and cons of the U.S. and UK employee ownership trust experiences in order to create a structure that is unique to Canada. ESOPs, which are U.S. retirement plans, are great at creating wealth, but delay the access employees have to the equity they accumulate in their individual accounts. The UK version of an employee ownership trust is a profit-sharing scheme. Canada, Shell suggests, could potentially create a hybrid form that would give employees both additional current income as well as the long-term wealth building benefit of equity.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.