ESOPS as Diverse Spend
Employee Stock Ownership Plans (ESOPs) provide a pathway to company ownership for workers from every demographic category of the US workforce. That pathway is simply not available to most other employees, which is why numerous studies show that ESOPs help narrow wealth inequality.
Given the benefits for employees, their families, and their communities, we propose that spending with ESOPs that are owned by historically disadvantaged groups be recognized at the Billion Dollar Roundtable. You can learn more about the impact of employee ownership at the National Center for Employee Ownership’s (NCEO) infographic the Economic Power of ESOPs, on the NCEO main research page, and in the words of employee-owners in this video from Lewis Tree.
This proposal is to create a new pathway for those 100% employee-owned ESOP companies that are more than 51% owned by a historically disadvantaged group to qualify as diverse spend. The pathway will consist of three sets of documentation (1 to 3 below), a certification process (4 below), and will mobilize existing support within the employee ownership community (5 below).
The NCEO supports this proposal but will remain independent of its implementation.
1. Ownership: Documenting the 100% ESOP-Owned status
A nonprofit organization established in the ESOP community (similar to NMSDC or WBENC) will provide documentation that the company is employee-owned, relying on the following data, drawn from both public / governmental records and information provided by the ESOP company:
- Public data made available by the U.S. Department of Labor’s Employee Benefits Security Administration. The source of that data is an annual federal filing (Form 5500, “Annual Return/Report of Employee Benefit Plan”).
- IRS Form 1065, Schedule K-1 (“Partner’s Share of Income, Deductions, Credits, etc.”) to determine that the ESOP is 100% employee-owned.
- Company to provide their annual audit of their share plan required by the Employee Securities Retirement Act (ERISA).
- A formal letter from the trustee of the company’s ESOP trust, confirming that there is no substantial change since the 5500 and K-1 were submitted.
2. Control: Governance requirements for an ESOP company
The ESOP certifying organization will provide a concise overview of the implications of 100% ESOP-ownership on the control of the company, including the standards that guide the decision making.
3. Documenting ownership by appropriate groups
The ESOP company itself will provide a letter to the certifying entity that includes an audit of its demographics provided by a certified external auditor. When possible, that letter will rely on form EEO-1 and may also accept data provided by the company.
The definition of a qualifying ESOP will be consistent with the standards used by the Billion Dollar Roundtable.
4. Certification process
The ESOP certification organization will formalize and document the process by which submissions will be annually received, reviewed, and publicized to ensure completeness in satisfying all criteria set out in the three steps above. Once deemed satisfactorily completed, the qualifying ESOP will be issued with a letter of certification to provide to their customers to verify their diverse spend status. The ESOP certifying organization will also make a list of ESOPs that are qualified as diverse spend available on a public website as a resource to facilitate procurement organizations in identifying diverse suppliers.
The goal of this proposal to have spending by members of the Billion Dollar Roundtable appropriately recognize the positive impact of employee ownership. That end could be achieved without this new entity, most likely if the NMSDC or the WBENC were to better accommodate ESOP ownership into their processes.
5. Support in the employee ownership community
The National Center for Employee Ownership, a 501(c)(3) founded in 1981 to help employee ownership thrive, has agreed to support the new certification entity by providing expertise in understanding and using government documents, supporting the development of template documents that are both clear and accurate, allowing the new entity to use some of its intellectual property, and publicizing the new entity. The NCEO will encourage other nonprofit organizations in the field to support the activities of the new entity.