This report has two goals. The first goal is to answer questions about undue risk in order to prevent companies from adopting employee ownership structures that endanger workers and jeopardize the collective benefits of broad-based sharing. The second goal is to help create widespread support for policies that would encourage greater adoption of beneficial employee ownership and other sorts of broad-based profit-sharing programs throughout the economy.
The report reviews existing research on risk for workers participating in ESOPs or investing in company stock through a 401(k) plan and finds that the vast majority of workers who are participating in these programs are not exposed to undue risk.
The report also features analysis of the high-profile failures of Enron, United Airlines, and the Tribune Publishing Company—both in terms of the effect of an employee ownership structure on company failure and the ensuing effect on workers.
Building on existing research and the lessons from these cases, this report offers the following policy solutions to mitigate risk while still allowing workers to benefit from inclusive capitalism:
- First, the federal government should limit 401(k) investment in company stock to 15 percent of total holdings. This would protect workers who are invested heavily in their employer’s stock, either by their own choosing or as a result of matching contributions from the company.
- Second, the federal government should allow early diversification for workers who are participating in an ESOP that requires wage and benefit concessions or when the employer does not contribute to another retirement vehicle, such as a 401(k). ESOP companies rarely require wage and benefit concessions, and they are far more likely to offer another retirement plan than comparable companies without an ESOP. Yet in companies that do require concessions or do not contribute to another retirement vehicle, company failure would have a much greater adverse effect on workers.
- Third, the federal government should strengthen its oversight to ensure that companies correctly value stock that is being sold to workers. The government can do this by requiring companies to adopt valuation best practices at the outset of a company sale and better targeting the riskiest ESOP sales for audit by the U.S. Department of Labor, or DOL.
These policies will not affect the vast majority of companies that have employee ownership and that are already acting in employees’ interests. In fact, policies such as better targeting of DOL audits hold the promise of reducing burdens for employee-owned companies with few risk factors. Rather, they are targeted to address the minority of companies with employee ownership where workers face undue risk. In sum, this report aims to start a dialogue about how to better protect workers while still offering the benefits of inclusive capitalism.
In July 2015, the Center for American Progress released the report “Capitalism for Everyone,” which details policies that encourage greater employee ownership and broad-based profit sharing throughout the economy. That report should be read as a companion to this report, and the policies outlined in “Capitalism for Everyone” should be adopted in conjunction with the policies profiled in this report.