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November 18, 2024 | PIONLINE.COM
Commentary: Pension funds can help lift returns while giving workers a boost too
By Pete Stavros
Kent Meister
Pete Stavros
Imagine, with the stroke of a pen, America could have stronger businesses, a more fulfilled workforce, safer workplaces, and higher pension fund returns — all while building wealth for workers at the same time.
This is not a pipe dream. It’s already happening in some pockets of the economy and the opportunity to expand it is well within our reach.
In 1974, Congress passed the Employee Retirement Income Security Act which governs all qualified retirement programs. A small — and largely unknown — part of ERISA established something called an ESOP, or employee stock ownership plan. ESOPs give tax incentives to companies that share stock ownership with front-line workers.
Initially, there was a boom in ESOP formations in the 1970s and 1980s, and at one point there were more than 10,000 ESOPs in the United States. Numerous studies showed that ESOPs built substantial wealth for workers and resulted in more stable, productive companies. Unfortunately, for reasons that are largely technical, but fixable, the boom faded. Today, only about 275 new ESOPs are formed each year, and they are mostly small companies (the median size is fewer than 50 employees).
It’s time to modernize this 50-year-old law and make employee ownership of companies the norm, not the exception.
I’m an investor. In my day job, I work at the investment firm KKR. We work for institutions, including pension funds, to invest in businesses on their behalf and create value to support the retirements and livelihoods of the millions of beneficiaries who rely on them. We take our responsibility very seriously and are constantly working to make sure we are doing all that we can to deliver for our clients.
We have been working with companies since 2011 to create ownership cultures and extend ownership to all employees in the business. This is a free, incremental benefit for employees, not a trade for wages or other benefits. And to be clear, this is not an ESOP, but the throughline of the idea is the ownership culture and what it does for the workers and the business.
We saw the results of an ownership culture in action last month at one of our companies called Geostabilization International (GSI). GSI remediates landslide risks by holding back the earth through elaborate construction work. It’s a hard and physically demanding job that helps keep our roads safe. When we first invested in the business, the company had an annual quit rate of nearly 50%. That meant the company was literally re-hiring its workforce every two years. This was as bad for workers as it was for the company. People weren’t staying at GSI long enough to build skills and advance their careers. What’s more, the newest workers were usually the ones most likely to be injured on the job.
Six years later, the company had a different story. The quit rate had declined 70% and injuries declined by 50%. Here’s why: Workers (both union and non-union) participated in the ownership of the business through a program established in the beginning of our investment. We changed the way the business ran, specifically by soliciting more input from the owner-workers and acting upon their good ideas. We shared the business plan, and transparently reported on our financial results and operational priorities at quarterly owners’ meetings.
Our investors saw a 5x return, and GSI employees shared in that success. Anyone who had been with the business for at least 2.5 years received a payout of more than $100,000 and the most tenured front-line colleagues earned $325,000.
I am convinced that this is the vanguard of corporate value creation today. Sharing stock ownership with workers and building “ownership cultures” has proven time and again to be a win-win initiative. Ownership cultures work. Happier, more engaged employees lead to stronger businesses with more cohesive cultures and better returns.
In my personal time, I have been working with more than 50 organizations to launch a new coalition called Expanding ESOPs that is intent on modernizing ESOPs so more workers can be owners of their companies.
Our mission at Expanding ESOPs is to educate legislators and the public about the potential of ESOPs, and what needs to change in the law to re-accelerate new ESOP formations, including among larger companies. We’ve commissioned polling that shows the idea is popular across the political spectrum. Regardless of ideology or party, policymakers and their constituents see a need for more employee ownership, and they want policy intervention to make it a reality. The concept is met with overwhelming support. Our data shows that voters across the political spectrum support policy action to modernize the existing ESOP model and encourage the broad adoption of ESOPs across sectors.
With more than $5 trillion of assets, U.S. pension funds have a unique and important voice to lend to this issue. They control trillions of dollars of workers’ retirement assets and serve the tens of millions of workers who would be most directly impacted by a reinvigorated ESOP program. Together, we have an opportunity to broaden ownership of corporate America, and simultaneously lift your investment returns while giving workers a boost too.
Pete Stavros is co-Head of KKR’s global private equity business, founder of Ownership Works and Expanding ESOPs. He is based in New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.