Supporting Workers and Strengthening Communities Through Employee Ownership

[JIM BONHAM]

It's funny. We sort of joke around that our mascot should be a platypus because, you know, ESOPs sort of borrow parts and pieces from all kinds of different things. You know, for some people, it is a mechanism of finance, you know, to acquire a company. For others, it's a way to sell your business. For others, it's a retirement plan. For others, it's an amazing vehicle to develop company culture and increase productivity. So there are so many different benefits to an ESOP.

[J.B. WOGAN]

I’m J.B. Wogan from Mathematica and welcome back to On the Evidence.

For this episode, Mathematica’s president and chief executive officer, Paul Decker, steps into the host chair for a conversation with Jim Bonham, the president and chief executive officer of the ESOP Association.

What is an ESOP you ask? ESOP stands for Employee Stock Ownership Plan. It’s a type of retirement plan where company shares are distributed to employees. After almost 20 years as an employee-owned company, Mathematica became an ESOP in 2005. Today, every regular-status, full-time at Mathematica employee becomes vested and receives ESOP benefits following six months of employment. That helps nurture a broader culture of employee ownership where staff contribute to the company’s success through a commitment to quality work, innovative ideas, and dedication to our mission of improving public well-being.

And it’s not just a nice perk companies offer their employees. As our guest Jim Bonham explains, business leaders and policymakers across the political spectrum have applauded the potential of ESOPs to strengthen the middle class and keep jobs in local communities.

There’s even research showing that ESOPs help reduce gender and racial wealth gaps.

This episode is dropping in October, which is Employee Ownership Month. Our guest, Jim Bonham, has led the ESOP Association since 2019. Before joining the association, Bonham’s career included public affairs roles in the private sector and several posts in government, working for two members of Congress and the Senate Committee on Energy and Natural Resources. In addition to his role with the ESOP Association, he also serves as president of the Employee Ownership Foundation, whose mission is to educate and expand employee ownership throughout the United States.

In the episode’s show notes, I’ll link to some of the research about ESOPs.

If you’re new the podcast, please take a moment to subscribe. We’re on YouTube, Apple Podcasts, Spotify, and elsewhere. And if you like this episode, consider leaving us a rating and review. It helps others find our show.

With that, I’ll turn it over to Paul and Jim. I hope you enjoy the conversation.

[PAUL DECKER]

Jim, welcome to Mathematica and to the On the Evidence podcast. It's great to have you with us. It's an honor to have somebody who's a nationally recognized expert on the topic that we're going to be discussing today.

[JIM BONHAM]

Right. Thank you. Paul, I really appreciate the chance to be here and to talk a little bit with your listeners.

[PAUL DECKER]

That sounds great. So, I want to talk about your role with the ESOP Association and get into that. But before I do that, maybe we just start at the basic level, for our audience. What is an ESOP and why should the audience care about it?

[JIM BONHAM]

Well, ESOP was a series of fable stories. No, I'm kidding, they're not. But when most people hear about ESOP, they think about Aesop's Fables.

An ESOP is actually a way to own a company. And it's called an employee stock ownership plan. They were created by an act of Congress 50 years ago this year, called the Employee Retirement Income Security Act, or ERISA, was passed in 1974.

And, in its most technical form, an ESOP is a qualified retirement plan where a company is owned by that plan, either in whole or in part. And the part that is owned by the ESOP, is owned by the employees of the company who have qualified to be plan participants. So clear as mud. Right?

[PAUL DECKER]

Right. Well, in fact, you bring up two topics, ownership and retirement plan, that I want to get to later in the course of the discussion, because I think that'll be of some interest to our audience.

So you are the president of the ESOP Association. Tell me about the role of the association and what you do there in terms of your leadership of the association?

[JIM BONHAM]

Sure. I've had the, the honor of being the president and CEO of the ESOP Association and our affiliated Employee Ownership Foundation for the last six years or so.

And the, the association has been around for almost 50 years as well. And our role is to serve as the nationwide trade association and voice of the employee-owners, their companies, and the professionals who provide services to those employee-owned companies, nationwide. We have, you know, a little more than 3,200 members, nationwide. And in, in the United States, there are approximately 14.5 million American households that have an ownership interest in employee stock ownership plan. That represents about $2.7 trillion worth of wealth.

[PAUL DECKER]

Has that number been increasing in recent years?

[JIM BONHAM]

It has been. In fact, the number of employee-owners has been increasing pretty dramatically. I believe the most recent year that we have data for, I think there was a almost a 22% increase in the number of employee-owners.

Although the number of employee-owned companies or ESOP companies has been staying relatively steady at around 6,700. The companies are getting bigger, and ESOP companies are also acquiring other businesses. So they're growing. The base is getting bigger. Even if the top of the infant pyramid isn't getting taller.

[PAUL DECKER]

Yeah. Yeah. Okay, good. So, you personally, you're a long-time player in the political world.

How did you become interested in ESOPs? And what was your path that you took to become the association's president?

[JIM BONHAM]

Well, how far back you want me to go, Paul? The reality is, employee ownership has really sort of been in my family's DNA and our lifeblood, as far as I can remember, because of my great-grandfather who actually had instituted a form of employee-ownership in the small mercantile stores that he ran in Wyoming, you know, many, many, many years ago.

And so growing up, we always heard these stories about Grandpa and his, his company and the people that he worked with and how they were also owners in the stores and how they would gain equity and gain ownership of the stores and even so much that, when I took my first job where I got an actual paycheck, at McDonald's, I got—I still remember bringing home the paycheck and showing it to my mom and being very confused that, well, first of all, you know, this guy FICA was who was taking so much money, but then—excuse me.

But then I, you know, I was like, well, can you show me where they start accumulating my ownership in the company?

And my mom looked at me like, oh, sweetheart, it doesn't really work that way with most companies. And she had to explain that no, you're not going to get shares at McDonald's just because you're the fry cook.

But, you know, fast forward. When I first came to Washington, you know, over 30 years ago, I was working in the Congress as a staff member. I was a, at the time, I was a legislative director back in, I think it was 1996 or so, and I was working for a very senior member of the House Ways and Means Committee, and the Congress was actually considering legislation to expand the tax treatment of ESOPs to include S corporations.

And so we were getting heavily lobbied by the ESOP community, in support of this. So I kept taking all these meetings and learned about, you know, more about ESOPs way back then when I was a congressional staffer, and it was appealing to me. And honestly my, my boss at the time was very, very skeptical because there was a, ESOPs did not have the body of research and support behind them that we that we have now, that we enjoy today.

So they were still they were still fairly new back then, and there was a lot of skepticism. And there were, a lot of people who thought that ESOPs were just a way for wealthy business owners to cash out of their businesses and not leave their employees with a viable enterprise, which turns out, you know, after 50 years of this, we know that's not the case.

But then I, you know, I spent many years working in the Congress, both in the House and the Senate. And then I had a public affairs and advocacy practice for many years. And around the 2016 elections, I decided, you know, I'm sort of heading into this last major chunk of my career, and I really would like to go back to doing something that, that would be more meaningful to me, that I could look at and say, you know, I made a I made a difference there. I made an impact.

And, I was approached by, a dear friend from the Senate who said, hey, the ESOP Association needs a new CEO. You would be really good for it. You're going to apply right?

So, so I threw my hat to the ring and, met with the recruitment team and I'm terribly humbled and rewarded by this great job that I get to do.

[PAUL DECKER]

That's great. Before I get into the motivation around ESOPs in our discussion, I just want to point out that Mathematica, our company, has been employee-owned since 1986, when we bought ourselves out from Martin Marietta. And we've been an ESOP since 2005. And I think it's a model that's worked very well for us, the model of employee ownership, but also the ESOP that allowed us to pass that on to the next generation, have the financial viability to do that and, kind of bring everybody into the plan by moving to the ESOP model.

So I know a lot about this from the perspective of what Mathematica’s experience is. But more generally, and you already hinted at some of this, what do you think of as the key expected benefits of ESOPs? And how do ESOPs go about creating opportunities that differ from any other kind of business model that's out there?

[JIM BONHAM]

Yeah. You know, it's funny, we, we turned a joke around that our, our mascot should be a platypus because, you know, ESOPs sort of borrow parts and pieces from all kinds of different things, you know, for some people, it is a, it's a mechanism of finance, you know, to acquire a company. For others, it's a way to sell your business, for others, it's a retirement plan.

For others, it's an amazing vehicle for, to develop company culture and increase productivity. So there are so many different benefits to an ESOP. You sort of have to approach it from, with the question of art. Well, from whose perspective? So, I'll start from sort of society at large because I always talk about the public good that flows from employee stock ownership plans and employee-owned businesses. And we've done a huge volume of research in collaboration with a lot of others.

We've helped fund, you know, millions of dollars for the research at Rutgers University in particular, but also at other schools like Pepperdine. We've provided funding and, University of California San Diego, and a number, dozens of fellows and institutions all around the country.

And, you know, from that research, we know, you know, that, employee-owners have about double the average retirement savings of non-employees, or non-employee-owner peers. They report a much higher-quality work experience. They're happier. They actually tend to be healthier. They have longer longevity in their jobs. The businesses themselves report significantly higher productivity. They have obviously greater job retention.

You know, in economic downturns, we've been able to study this twice in real time, once during the 2008 recession, and once again during Covid, employee-owned companies tend to lay people off at much lower rates compared to non-employee-owned firms. And then as a result, they're much more resilient coming out of economic downturns than their traditional business peers. So they're much more resilient.

But then from like a community perspective, you know, I joke around with some senators and members of Congress, that an ESOP is the single best local job retention program out there, because it turns out that, you know, ESOPs don't—when a company is employee owned, they don't tend to outsource their jobs to other countries.

And importantly, the wealth that they produce, the wealth that they generate tends to stay in that community. And this is actually one of the biggest travesties that we don't talk about a lot in America, that so many of our rural areas and even suburban areas where there have been longstanding businesses, you know, the small manufacturers, the electronic parts manufacturers, you know, the engineering firms, you know, the auto parts manufacturers. So many of those businesses have been acquired by strategic buyers or private equity. And what happens is when those owners are not local owners, what happens is they become an extractive industry. And the single biggest import from these areas has become the wealth that had been accumulated over generations in those communities. And it's getting shipped off to investors that have nothing to do with the community.

And over time, that leaves that community very hollowed out. And you end up with and eventually those businesses get closed and they get moved somewhere else, or they get consolidated with other businesses. And what's left are sort of subsistence jobs, you know, that you can work at the local Walmart or at the McDonald's. But you don't have that heartbeat and the reinvestment of wealth that, that we used to have. And I actually believe that that's one of the biggest drivers, some of the real frustration and anger we have in our country and some of the economic dislocation, is that the sort of sense of hopelessness that, you know, our community isn't what it used to be, but people can't really put their fingers on it.

I think the ESOPs are a real solution to that, especially as we start heading into the retirement of the baby boomers.

[PAUL DECKER]

Well, I'm very familiar with the story you just told, because that’s the story of my hometown, which is a small town in Illinois that I grew up in as a farming and manufacturing town. And over the years, all of that manufacturing was eventually acquired by companies or strategic buyers, as you said, outside of the, the community, and those manufacturing facilities are pretty much all gone, as a result of that.

And so, you know, the resources migrated just the way that you described, so I appreciate that perspective.

What about owners—or maybe founders, people who are starting businesses—that want to establish an ESOP? What, in your discussions related to that, what's important to them?

[JIM BONHAM]

You know, it's interesting. You know, I, I don't say this a lot out loud, but the reality is that an ESOP probably isn't right for every business. You know, it does require a certain size to really be an effective ESOP because, you know, you do have some administrative requirements. You're you are owned by a large and a large number of people. So you have to keep track of all of that. And there are there are legal requirements or fiduciary requirements to run the company in the, in the interests of those plan beneficiaries.

So there's some expense related to that. So there's some additional complexity involved. But for a founder, often, the first thing that they're really focused on is their employees themselves. And, you know, most, most ESOPs, come into formation because there's a business owner who, you know, started a business or maybe inherited a business from their parents.

And they get to a point where they're thinking about their retirement, or maybe they just want to exit the business for some reason, they don't have their, a family member that would like to take it over. Maybe their kids are doing something else. They became a doctor or a lawyer, and they said, you know, I don't really want to run the widget manufacturing company anymore.

So they need to sell it, but they look around the landscape and I'm like, I don't want to sell the private equity because I know what those guys are going to do. They're going to come in here, they're going to squeeze every penny out. They're probably going to hire a bunch of people that I've worked with and who have helped me get where I want to be.

And I just, I don't want to do that to my employees, that I want to do that to my community, because I want to live here, and I want to be able to continue to go to church. So those founders are really sort of thinking about more than just how do I maximize the profit I can get by selling this business.

And then the second thing is that companies that become very successful ESOPs tend to have a very strong internal culture already, a culture where the employees are already really engaged, that the employees tend to feel like they already have some voice. And the ESOP becomes a natural extension of that. But there are some real benefits to a business owner selling through an ESOP.

So that, yeah, there is an opportunity for that business owner to defer the capital gains that they will earn from a transaction. And I'll be clear. Not all business owners end up taking that, although it's one of the things that gets their attention right away. It's like, oh, wait a minute, I can defer paying capital gains taxes, you know, potentially indefinitely.

But then they start looking at us like, you know what? I'm going to I won't take the 1042 benefit and I'll just, pay the taxes now. But I still want to do the ESOP. And they also look at the benefits for the company and realize that, you know, I, I do need to transition the business, but I don't really want to be fully out for another ten years.

But I could sell 30% of my business into the ESOP now. Continue to run the business, and that 30% of the business, gets, gets significant tax benefits on the business side. So that, the, the loan that is used to purchase that portion of the company from the business owner, that loan the federal government has made fully deductible both for the principal and the interest.

And that means that, you know, during that transitionary period, that part of the business is functionally running tax free. And, you know, and the business owner, it's such a flexible tool to transition your business that you can do some or all. And it's just a really great way to transition, especially if you're concerned about the community and concerned about what will happen to the company and you're concerned about your legacy.

[PAUL DECKER]

And I think beyond the original founders or leaders that continue to lead through the time that a company’s an ESOP, it's just a nice alignment of all the incentives and the stake holding that, you know, there's no conflict between outside ownership interests and the internal employees. They're the same people, and we all have the same incentives.

If the company is successful, the employees benefit from the company's success. And so everybody is aligned in terms of wanting the company to succeed. And as a CEO of an ESOP company, I do feel a strong obligation, to look out for the welfare of our employees. And the ESOP is consistent with that.

In fact, in some ways consistent with the idea of making sure we're looking out for the long run interest of employees that might not have developed their long run interest yet. Because they're participating in this program that really has this horizon on it that builds up wealth over time.

[JIM BONHAM]

Right. Right. Well, and, you know, you're talking about some of the alignment, and that's one of the real, sort of miracles of, ESOPs.

And you see it happen with every company. You know, at first, the announcement is made to the employees that. Okay, we've just purchased this company and then, you know, a lot of employees, like, what do you mean? We just purchased this company. I didn't put anything in. I didn't buy anything. I mean, I owe money now.

No, it's not like you don't actually have to put any of your money in. But wait a minute. Does that mean I'm going to pay higher taxes? No, you're not going to pay higher taxes. But what it means is there's an account and it's going to, over time, accumulate in value. And as you know, you'll get your your wages, you'll get all your benefits.

But in time you'll also have this additional, account that has grown as the company grows. And then there's also this, I, I've mentioned that it's in qualified retirement plans, but that can also sometimes confuse people because, yes, it's a qualified retirement plan that when you retire, you can get the proceeds from it, just like you're 401k.

However, if you exit the company, the company still has to buy you out. So it's not like, you know, you don't see the money until you're 65 or 67. If you leave the company, go somewhere else. The company has an obligation to repurchase your interest. And what's nice about it is that you can actually take that and roll it into a different qualified retirement plan, if you choose.

If you choose not to, you can take the money and, you know, you pay taxes on it, but, you can you can take the money. So it's, you know, it's just a really terrific system to align the interests of the employees with the interest of the companies.

[PAUL DECKER]

Yeah. I think you've already answered one of my questions which is a question that came up from the staff when we were having an ESOP discussion where, they wanted to know, hey, is this really about ownership or is it about retirement?

And it sounds like your answer is, well, it's both.

[JIM BONHAM]

Right. Well, it is, and, you know, your retirement will be better because you're an owner. And if you, you know, if you align your work interests with your retirement interests or honestly, your accumulation of wealth in that account, over time, then you're going to you're going to do very well.

You'll be at least twice as well off as the average retiree that's out there. And yeah, I mean, it's particularly challenging to put that in focus for, younger workers, millennials and Gen Z's who, you know, you hear all the time, like, what are you talking to me about a retirement plan?

You know, I can't afford a mortgage. I can't pay off my student loans. You know, I, I don't understand this whole idea of a retirement plan. But when you explain it to them in terms of, you know, you're going to get everything that you would normally get, but you're—it’s like your house.

It's the difference between renting and owning. And you're an owner, and just like your house, over time, as the market grows, the equity in your house grows. The same thing with your job; as the market grows, as the value of the company grows, so does your interest in that company.

[PAUL DECKER]

Yeah, I want to highlight how profound I think this is, the idea of widespread employee ownership.

You talked about the history of your great grandfather in a setting. And, you know, your subsequent stories reflect that, that that was a really unique thing . . .

[JIM BONHAM]

Yeah.

[PAUL DECKER]

. . . That was happening back then and not something that people really thought about back then. But with the formalization, with ESOPs, I've got a friend who's a professor at University of Pennsylvania, and he describes this as the third generation of capitalism, where the first generation of capitalism was the industrialists and the robber barons control everything.

The second generation of capitalism was the rise of unions, or recognition of workers’ rights, and a little bit of sharing of power. And this is the third generation where actually there's no longer a separate schism between the employees and owners. The employees are participants, as owners and in both a, in a financial sense as well as other senses.

And, you know, you described some of how that, you know, the not only my theory or the, this person's theory about why it's profound, but you describe it in an empirical sense of generating better outcomes and making companies more resilient, in terms of the what they face in terms of economic fluctuations, so benefits for both the companies as well as their employees that are tangible benefits.

In addition, I know that you mentioned the folks at Rutgers, and I know, they met with us about six months ago and they shared some data showing how ESOPs help reduce race and income disparities, because, of, through the, share, spread across employees and how that turns into personal wealth, the people have access to wealth building opportunities in cases where they might have access to wealth building opportunities.

Otherwise, it comes to their job.

Now, I wondered about kind of the evidence on ESOPs helping reduce racial inequity and wealth and inequality. I wonder if that's part of the marketing of the benefits of ESOPs for employees. Now, and just I'm interested in your perspective on that.

[JIM BONHAM]

Yeah. I mean, I think, I don't think of it in terms of sort of marketing for ESOPs or sort of, a way to promote it on a sort of a public affairs sort of way.

I think about it in terms of this is this is a real important economic tool that our policymakers can use to close the wealth and income gap. Because everybody really wants to do that. I mean, even, you know, obviously, even some private equity firms want to do that because they're saying that if we don't have a solid middle class in this country, and we have a shrinking middle class right now, if we don't have a solid middle class, the economy doesn't work.

So I think of it in terms of, you know, even my own family, you can look at, you know, your ancestors and generations back and you can see. All right, that was the point where our family really kind of got their feet underneath. And we talk about. All right, you know, I'm the first generation to go to college. You know, my parents are the first generation in their family to go to college. And we all recognize all right, that's an accomplishment. And once you sort of reach that accomplishment, then you doors open up to additional, benefits and opportunities in our society and in our economy. The same is true with ownership. You know, there's a there's a real difference when you own your home.

Over time, you've accumulated a genuine a real asset. You have some equity in that home, and you can do things with that equity. You can borrow against it to send your kid to college. You can, you know, you can leverage that to pay off other debts. You can, borrow from that or you can use is the equity in your home to start a business.

It creates more opportunity. And as a tool for closing that wealth gap, you know, I, I haven't seen any other tool that is a fair tool to both the, the current owners of businesses as well as the employees and future owners, because, you know, an ESOP, they're not getting the business for free. You know, the employees don't just get it handed to them.

They are—they have to buy it from the original owner, from the founders, and they buy it through a, frankly, a leveraged buyout. They borrow against the future, profits of the company, and then they use those profits to pay off the loan. So those profits that would have otherwise gone to the business owner are instead going to benefit the, the employees and the new owners.

And once you sort of get into that virtuous cycle, it really does genuinely close the wealth and income gap. Now in terms of, you know, economically underserved communities, whether it's, you know, African American communities, or other minority communities, there absolutely is an opportunity here. And I in particular—we do a lot of work with some of the underrepresented businesses that do work with the federal government. So women owned businesses, minority owned businesses, even veteran owned businesses.

But there's a challenge because, you know, a lot of those businesses were formed starting in the 70s and 80s when the government started to incentivize and recognize, hey, if we encourage minority owned businesses through government contracting, well, turns out we'll have more minority owned businesses.

And there's a public good to that. The problem is that a lot of those founders and those business owners are now at retirement age. And if they exit the business, it's no longer minority owned. So we're trying to find a way so that if they sell to at least a lot of them, we'll sell 49% of the business to the ESOP.

But the moment that it becomes, less than 51% owned by the veteran or the woman or the minority that is part of the class. The second it becomes less than 51%, they lose their status.

So we're trying to work on that because it can be a huge wealth spreading opportunity. It turns out, you know, women owned businesses tend to hire a lot more women. Minority owned businesses tend to hire a lot more minorities. So there is a real opportunity there. But the downside right now of these ESOPs is that they haven't really spread into, those communities as much as I think a lot of us would like them to have. But a lot of it is because those businesses didn't really exist as much 50 years ago. So we're sort of on the front end of that opportunity.

[PAUL DECKER]

Right. Well, we've had some direct experience with that at Mathematica. I was, had an all-staff meeting this is six or seven years ago where I was talking to our staff, and I did a review of what the situation looked like for our top 10 shareholders. And, I think our employee owners were surprised to hear that at that time, nine out of our 10 top owners were women, and three of those nine women were women of color.

Now the statistics have changed since then, but it was something I wouldn't necessarily predicted. And I looked at those numbers and I could really see the power that was consistent with the research in terms of what Joe Blasi and his folks at Rutgers were finding.

[JIM BONHAM]

Well, you know, that's interesting. You say that in part because I, you know, it actually sort of triggers for me, you know, the secretarial pool or the executive assistants, the people who answer phones, the people who keep the mailroom running. And these are often folks who didn't go to college. But they'll work. They'll work at a company for 20, 30, 40 years. And then all of a sudden, when they retire, they have a very substantial nest egg.

I mean, I've heard, of, you know, an assistant, one woman who is an executive assistant to the CEO who actually owned more of the companies than the CEO because she had been in the business for so long, and, you know, you hearing a, you know, high six- or even seven-figure retirement checks.

It's just it's amazing. And the difference is that for most Americans and we hear people living paycheck to paycheck. But what that really means is, you know, their disposable income, their total paycheck is consumed just with living, right? They've got to pay for their housing. They've got to pay for their food, and got to pay for their transportation.

And at the end of the month, there's nothing really left over to put aside and invest, to grow wealth and ESOPs, you know, you can use your entire paycheck for your life, but you're still going to have an opportunity to grow wealth because you don't have to pay for your shares in the ESOP.

[PAUL DECKER]

Right. You know, so, one thing I liked about your, discussion was this analogy to homeownership.

And I'll just touch on that for a minute because, you know, there are all the benefits of owning a home that you described so well, but it's also an obligation, because the more engaged you are as a homeowner, the more you learn about your home, the more you get involved in the maintenance, the better it is in terms of both in terms of building equity, but also how much you enjoy the home during the time that you live in it.

And so that kind of takes me to ESOPs and employee engagement and ESOPs in the analogy. What are some of the best practices that you see from ESOPs that are successful with regard to promoting employee engagement?

[JIM BONHAM]

Well, you have to have a reasonable level of transparency. Because it's one thing to tell your employees, hey, you’re owners now. But if their actual experience isn't any different than what it was before, then it doesn't ring true.

And sure, once a year they're going to get a statement that says, all right, here's what the company is worth, and this is your ownership stake.

All right. Terrific. But, you know, nothing's really changed for me. And that's great. And until that account really starts to accumulate some value, it doesn't really resonate too much.

But if you actually engage with your employees, explaining, all right, here's what's going on in our business right now. Last quarter wasn't that great. You all know we lost the contract with the Acme Corporation. So that means that our targets are a little bit off, and they explain this is what's going on in the business. They say, listen, you know, interest rates are killing us right now because we need to buy, you know, we need to build that new warehouse, and we had to borrow money to do it, but we had no choice. And that means that our profits are going to be a little bit thinner, because we're making interest payments instead of being able to be count it as profits.

And when you're open with your employees that way, what happens is they, you know, they reciprocate. They say, all right, well, you know, it's a little bit tough right now. So, hey, you know, Paul, you shut off the lights in the bathroom next time you walk out. That's costing us money when you leave them on, you know?

You know, don't throw that giant wad of paper towels in the garbage. We, you know, we need to save some money.

One of the one of my favorite things whenever I go to an ESOP office, and so many of them do this is there's, like, an idea wall.

You know, one of my favorite stories is talk about Harpoon Brewery up in Boston. You know, first of all, people like to talk about beer. So it's a good story to tell. But when they became an ESOP, one of the things they did is it created this idea wall where employees could just write on a note card, hey, I think if we tried to do this, we could do we could improve things this way.

And for every idea that got put in a box that way that was implemented, you know, they'll hang it up on the wall. And it's literally like this giant long hallway full of ideas now. Well, because of that process, they, you know, they were sort of struggling with high demand, but they, they couldn't afford to buy new equipment to expand their operations.

But just through the ideas of the employees, they were able to take the very same fermentation equipment and holding tanks and doubled their production just through innovations and ideas that the employee-owners came forward with. So they literally didn't have to spend any money and they doubled their production. Sort of an amazing story if you think of it that way.

And had they not been employee owners, their investment in—their personal investment in trying to accomplish that would never have come through. They would have had to have waited, bought more equipment when they could. And their production would have been less efficient.

[PAUL DECKER]

I like that idea. We might have to use it. The idea wall.

So tell me about the political environment around ESOPs. Are ESOPs popular with lawmakers?

[JIM BONHAM]

They are, you know, it's, this is one of the things that we're very, very careful about. You know, I start talking about politics or advocacy or federal government or even state government, I always start with the admonition, I really don't care if you are on the red side, the blues side, the green side, the purple side—I don't really care.

But if you're supportive of employee ownership and you're willing to actually take action, we're going to be there and we're going to be supportive of you if you're supportive of us. Because there's such an opportunity. And, I think in no small part because of that, but also because of the recognition of the win, win, win that employee ownership brings.

We have tremendous support in the Congress, on both sides of the aisle. You know, I sort of joke around that, you know, when you can get Bernie Sanders and Mitch McConnell to agree about something especially related to the economy and jobs, you're doing something right. And, you know, both of those senators, you know, a socialist from Vermont and a conservative Republican leader from Kentucky, you know, they both strongly support ESOPs and ESOP companies.

And it's really rooted in what we started talking about, sort of that, you know, economic strength, the local jobs, the creativity and the wealth creation, as well as sort of the engagement of employees in a capitalist system. You know, it's interesting, we sometimes we talk about ESOPs a little bit differently when we talk to a Republican versus a Democrat. You know, the message of reducing wealth and income inequality, and helping minority communities and underserved areas improve their economic standing. That's a very, attractive argument for Democrats, and it's all true. And then and when we’re, appealing to Republicans. Well, all those arguments are also, useful for them.

What seems to be most useful, it's about—listen, this is a greater engagement of our population in a capitalist system. You know, it's not just management versus labor. It's everybody understands if we're more efficient, if we're more creative, if we bring better products or better services to the market, we all do better. And that's sort of the heart of our economy.

[PAUL DECKER]

So employee ownership and ESOPs, they're an idea that generates better outcomes for companies, generates better outcomes for the employees, and it's politically popular. So it seems like a no brainer. There must be some challenges on the horizon. What are they for ESOPs?

[JIM BONHAM]

Yeah. You know, what's funny is that, I think probably the biggest challenge that we've faced in the community and this is going to sound odd to maybe some of your listeners is a lack of regulation, a lack of clear regulation.

You know, we we've had decades where, political messaging has sort of over-simplified, the rules of the way our economy needs to work. And regulations can sometimes be a very good thing because for something that's sort of a relatively new phenomenon in our economy, ESOP-owned businesses and industry, we need regulatory clarity.

And our primary regulator, the Department of Labor, has sort of refused to issue those regulations for 50 years. Now, that's created a whole host of problems. Because in the absence of regulations, people are going to do what they're going to do. And, the Department of Labor will sometimes look at an ESOP deal, well, we don't think that that was in the best interest of the employees. And you know, the founder will say, well, you know, the valuation is the what the valuation was, and then they get into a fight over it.

And that has a chilling effect on new ESOP formation. So we would rather just have our regulators say this—if you are a trustee, follow these guidelines. Then, you know, it's a fair transaction. And we've been seeking that regulatory guidance. The Congress ordered the Department of Labor to issue that formal guidance. And they are in hopefully, the final stages of preparing their draft regulation. And we hope to see that issued before the end of this year. So that getting that clarity and regulation is really important.

You know, the other real challenge that we have is what I call the leaky bucket problem, which is ESOPs are—they’re so well run and they become so efficient and so good at what they do that ultimately they become very attractive businesses for strategic buyers to come in and try to buy. I'm sure that you've had a lot of people come in and try to make offers to buy Mathematica.

And, you know, the trustee has a responsibility, has an obligation to consider bona fide offers for purchase because that's what owners of businesses do. And that's what's in the fiduciary interest of the employee-owners. So we suffer from, you know, private equity and investors coming in and buying really good ESOP companies. Yes, the employee owners usually get a very nice payday, but then it's no longer an employee-owned company.

So for every ESOP that we're adding, we're kind of losing one out the bottom of the bucket. So it's why I call it the hole in the bottom of the bucket problem.

[PAUL DECKER]

Yeah. Yeah. Just as you said. Yeah. We see that a lot around us, both with our company, but also with other ESOPs. This is a theme of conversation around CEO ESOPs—CEOs of ESOPs.

So, I want to wrap up here because you've been very generous with your time. And I don't want to, keep you too long, but, to wrap up, tell us what's on the horizon for the ESOP Association, kind of looking further out. And how do you look to measure the success of the association?

[JIM BONHAM]

Wow. I got to be careful here because, you know, whenever I say I have the, my membership’s going to measure me.

I mean, listen, we've got, it's such an exciting time to be involved in employee ownership. Both domestically in the U.S, but also internationally. There's absolutely no doubt in my mind that employee ownership and certainly having a moment right now, and I hope that our association and the foundation are able to grab that moment and extend it, and that's happening for a number of reasons.

One, there's this thing called the silver tsunami that we look at, and that's in reference to the 2.8 million baby boomers who own their own business, who in the next 10 years have to transition that business to somebody else. Now, a lot of them will get transitioned to a family member. A lot of them will just get sold. Sadly, a lot of them just get shut down.

So we have a lot of efforts going on to get to those owners so that they'll consider selling to their own employees.

And, you know, our association, we've actually, doubled in size in the last five years. So we are growing rapidly. We're really focused on both, sort of education of employee-owners and our employee-owned businesses to help them become better businesses and to truly leverage the advantages of being employee-owned, because we know through our research that a well-run, employee-owned business has distinct market advantages over their non-employee-owned competitors. And how do they use those advantages to grow the business and to provide more value to their employee-owners?

We're really looking at ESOPs as becoming, in some ways a competitor to some of those strategic buyers and private equity. Because what they're doing is the ESOP is actually becoming a holding company, and they are acquiring different businesses and diversified businesses. And they're all owned under the ESOP holding company. And what's happening is that they are they're able to grow and, diversify and create a broader base of economic activity for their employee-owners and their communities.

And the reality is that a well-run ESOP can throw off a lot of cash, and that cash can be used for business acquisitions or reinvestment. And, and it really does create the opportunity to bring more employees into the employee-ownership world through merger and activity—merger and acquisition activity by the ESOP.

Now, internationally, we've been helping to lead efforts, you know, around the world. And I was in Slovenia a few weeks ago because their country is about to adopt, hopefully, legislation that will enable employee ownership in their economy. And in many ways, what happens there is likely to be adopted by the entire European Union.

Canada, earlier this summer, they passed their new laws to create a very robust employee ownership system in Canada. In fact, we're actually going to have an entire track of content, at our employee-owned conference in Las Vegas in a month, just for the Canadians. So that's pretty exciting. And, you know, in the UK, they created employee ownership trusts a few years ago, and now something like, you know, a solid 30, 40% of all business transitions are going to an employee-ownership trust.

I mean, they've just exploded. And the reason that's important for us here and important for the association, is that it's actually it is causing the Congress and our lawmakers to look at our system and go, maybe there's more we can do here. You know, this is such a great thing. It does create—it does help lower the wealth and income inequality in this country.

It does help preserve jobs and businesses and rural communities and states. And it helps keep jobs here in the U.S. Maybe there's more that we could be doing. So the Congress is looking at, our own laws because they're seeing this growth around the world. So that's pretty exciting. And largely, we really just want to see more of our current ESOPs stay as ESOPs, and transition their current ownership, to the next generation of employee owners, and keep it going down the line.

[PAUL DECKER]

That's great. Well, that's a great note to end on, a note of excitement about the benefits of the ESOPs being brought to people throughout the world. So thank you for joining us, Jim. Appreciate your insights. And glad to have you at the Association as an ally in these efforts.

[JIM BONHAM]

Well, thank you, Paul, and thank you and all of your employee-owners for all you do. I know Mathematica is an incredibly impressive business. And the work that you all do and your research is pretty awesome as well. So thanks for having me, and I really enjoyed the conversation.

[PAUL DECKER]

Take care.

[JIM BONHAM]

You too. Thanks.

[J.B. WOGAN]

Thanks again to our guest, Jim Bonham, and thanks to Paul Decker for stepping in as the guest host for this episode. In the show notes, I’ll include links to research about the benefits of ESOPs. I’ll also include more information about Mathematica’s use of an ESOP as part of a broader orientation around employee ownership. This episode, by the way, was produced by my Mathematica colleague, Rick Stoddard. If you liked this episode, please consider leaving us a rating and review wherever you listen to podcasts. To catch future episodes of the show, subscribe at mathematica.org/ontheevidence.