Certifying Minority- And Women-Owned ESOPs

How can we create opportunities for more workers to enjoy the benefits of employee ownership? Over the years advising on employee stock option plans, I’ve wondered why the number of ESOP-owned companies has shown little growth, hovering around 6,500-6,700 for the past decade. This sluggishness comes despite compelling and consistent evidence that employee ownership drives higher worker engagement, lower resignations, superior operating performance, and improved worker financial security.

Thanks to the National Center of Employee Ownership (NCEO) and others, some of the roadblocks on the path to becoming an ESOP are dissolving. For instance, the NCEO has launched the NCEO Registry, a groundbreaking certification program for 100% ESOP-owned companies majority-owned by women, minorities or individuals deemed socially or economically disadvantaged. Initially, it aims the program at private sector contracting.

The NCEO’s initiative is noteworthy: Many minority- and women-owned businesses, especially those that rely on government contracts, had rejected becoming an ESOP – even when their owners preferred that avenue.

Historically, purchasers, including federal agencies such as the Small Business Administration, interpreted preference laws as benefitting individual minority owners, not employee-owned trusts. These outdated policies stripped minority-owned status from companies once ownership shifted from an individual to a trust benefiting all employees.

Consequently, minority business owners routinely were cautioned against doing an ESOP, warned that “you’ll lose your government preferences.” This discouragement kept them from embracing the most powerful avenue for economic equity, wealth-building, and community stability of the post-WW II era.

For example, many African-American business leaders in the 1990s sought to transition their companies to ESOPs, believing that empowering their workforce, largely composed of people of color, would strengthen their businesses and communities. But doing so would have disqualified them from government contracting preferences.

That happened in Brooklyn, New York, when an IBM division that repaired PCs and servers for small businesses was sold to an ESOP where all but one of the 200 employees were African Americans. The company lost its minority-owned designation and, ultimately, its access to crucial government contracts. The business shuttered and those jobs vanished.

The NCEO already has granted its “majority minority” ESOP certification to Lewis Services, a provider of utility vegetation management services in 27 states that employs 4,000 team members and based in West Henrietta, N.Y., and United Forming Inc., one of the largest concrete structure builders in the Southeastern and Southwestern U.S. with 1,500 employees and based in Austell, Ga. The majority of employees at both ESOPs are Hispanic, Latino, African American, or People of Color.

Lewis Services CEO Leslie Kass says the ESOP’s utility customers have strongly asked for this minority ESOP certification because it fulfills their community impact goals. “While it’s not a deal sealer, with all other elements being equal, this certification puts us in a position to win contracts,” she says. Besides allowing his company to bid on certain minority-owned business contracts, United Forming CEO Stephen Krause considers the certification “a means to stand out among other organizations to attract talent.”

In addition, MyPath, a provider of specialized education, therapeutic and community support services for high-need individuals in Wisconsin and Indiana based in Oconomowoc, Wis., has been certified as Majority Women Employee-Owned.

The NCEO’s certification program bridges the gap between employee ownership and traditional minority-owned business certifications. The initiative is supported by the W.K. Kellogg Foundation, North Coast Holdings, Rutgers University, and the NCEOX Inclusivity Fund.

“We hope this certification will become a powerful tool that allows more companies to move confidently into employee ownership while retaining access to a certification important to how they present themselves,” says NCEO Executive Director Loren Rodgers, who with NCEO founder Corey Rosen and Communications Director Timothy Garbinsky have been longtime proponents of such certification.

To qualify for certification, companies must be 100% employee-owned via an ESOP or worker cooperative; have 51% or more of ownership attributed to the appropriate demographic, and be a member of the NCEO or the U.S. Federation of Worker Cooperatives. The certification eases the transition for closely held businesses that hold minority-owned status and wish to become employee-owned and, at least initially, land minority contracts from private companies. It also recognizes and rewards companies with diverse employee-owner bases, expanding the reach and impact of employee ownership in underserved communities.

In addition to the NCEO, states and municipalities are adopting or considering similar certifications for minority- and women-owned companies. North Carolina, for instance, was the first state to qualify ESOPs for historically disadvantaged contracting preferences.

It’s hoped that the NCEO certification program will lead to more governments following suit because no federal, state or local government has yet recognized its certification, reflecting a long decision-making process. But over a dozen large private companies have expressed interest in the certifications, and 10 already are recognizing the NCEO’s certification in their purchasing decisions.

The NCEO Registry is a welcome step toward aligning government policy with shared prosperity. It empowers businesses to pursue employee ownership without sacrificing their identity or access to vital resources. It signals a broader shift that recognizes ownership shouldn’t just be defined by who holds the title, but by who shares in the success. Indeed, the NCEO looks ahead to future certifications, such as rural employee owned ESOPs.

Yes! This program and others like it, including the Expanding ESOPs coalition, are creatively, practically, and actionably opening paths for more workers to become employee owners. Undoubtedly, they will end the static number of ESOP-owned companies by imagining exponentially more worker ownership. I’m in!