April 17, 2023

Investing in employee ownership could help the Canadian government meet its sustainability goals

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Employee-owned firms have better organizational performance and tend to be more resilient in the face of economic disruptions.

Buried deep in the Canadian government’s 2023 budget, and overshadowed by other announcements, is a plan to create an employee ownership trust — a specialized legal structure that makes it easier for business owners to sell equity to their employees.

We know from decades of research in other jurisdictions, like the United States, that mechanisms like this can have major benefits for workers and businesses. However, the potential benefits of this trust go beyond the workplace.

Building a strong foundation for employee ownership could also be a cost-effective way to tackle Canada’s sustainability priorities — if we get it right.

This means ensuring employee-owners play a meaningful, active role in their company’s decision-making processes. It also means bolstering efforts to encourage the widespread use of the new trust through education and incentives.

Benefits of employee ownership

The economic benefits of employee ownership for workers, businesses and communities are well-established.

After all, we all know the difference ownership makes. Think about rental cars and hotel rooms. When we use something we don’t own, we tend to be less careful than we would be with our own cars or homes.

Similarly — and not surprisingly — employees with a sense of ownership are more likely to work harder for their company, which leads to better organizational performance. Employee-owners also have more wealth at retirement, get paid higher wages and enjoy better job quality and security.

Employee-owned firms tend to be more resilient in the face of economic disruptions, like the pandemic, which means they are also better at anchoring the well-being of surrounding communities.

Addressing sustainability priorities

Given the benefits of employee ownership, the trust could address at least three of the sustainable development goals highlighted in Canada’s 2030 Agenda: reduced inequality, decent work and economic growth and sustainable cities and communities.

Increased employee ownership could also drive progress on other sustainability priorities, like environmental protection. Recent research shows that granting ownership to non-executive employees increases expenditures on environmental protection and improves the quality of environmental disclosures.

Employee representation on boards of directors can facilitate better environmental, social and governance performance. And financial incentives and strong social relations among employees facilitate sustainable innovation.

The Sustainable Development Goals are a set of objectives that were adopted by the United Nations in 2015 to bring ‘peace and prosperity’ to people and the planet by 2030.
(Shutterstock)

One reason for these anticipated benefits is that, unlike distant shareholders, employee-owners are more likely to experience the positive and negative effects of their companies. An ownership stake makes employees more likely to put pressure on management to address workplace issues.

Another reason is that the successful implementation of corporate sustainability strategies often requires employees to go beyond immediate job responsibilities. Employees are more likely to do this when they feel the responsibility of ownership.

Finally, when a critical mass of employees become owners, as is the case with worker co-operatives, it can create a self-reinforcing culture of corporate social responsibility, especially when supported by strong leadership and bold mission statements.

The importance of participation

Like any business model, employee ownership is not a panacea on its own. Researchers have highlighted how the economic benefits of employee ownership are contingent on supportive management practices, particularly those that encourage employee participation.

Building a sense of psychological ownership through participative management is important for organizational effectiveness. Though research on this topic is nascent, the same logic likely applies for sustainability performance. For example, we know that increased opportunities for participation are critical for cultivating bottom-up sustainability-related innovations in employee-owned firms.

There’s a top-down influence as well. Nearly three-quarters of employee-owned businesses in the U.K. had social and environmental statements of purpose, and almost all involved employees in decision-making.

This means that governments and businesses seeking to maximize the broader benefits of the employee ownership trust will have to pay close attention to participation. It’s promising that Budget 2023 committed to gathering feedback on how best to foster employee participation.

Deputy Prime Minister and Minister of Finance Chrystia Freeland delivers the federal budget in the House of Commons on Parliament Hill in Ottawa on March 28, 2023.

Fortunately, we have a wealth of knowledge at our disposal about the different forms this participation can take. Opportunities for meaningful and effective participation span the business organization, all the way from the assembly line to the board room.

Well-designed employee participation is not a constraint on management. In fact, employee engagement is key to realizing the long-term competitive advantage of employee ownership, while simultaneously driving corporate sustainability.

Not a moment too soon

These economic, social and environmental benefits are contingent upon many Canadian business owners deciding to sell their companies to employees. There are two important considerations that need to be highlighted here.

First, current and future business owners need to know about employee ownership and its wide-ranging benefits. Educational institutions, particularly business schools, need to step up their efforts to spread the word about its benefits. The Curriculum Library for Employee Ownership, which we are contributing to, has a wealth of resources educators can use.

Second, governments must provide the right incentives to support the widespread adoption of participatory forms of employee ownership to realize economic, social and environmental outcomes.

In recognition of these broader impacts, calls are emerging to consider financial support for employee ownership transitions as a viable investment strategy for impact-oriented investors.

Research in other jurisdictions like the U.S., United Kingdom and Europe shows that incentives and policies, like beneficial tax treatment for capital gains and employer contributions, can add to this momentum.

This is an exciting moment for Canadian business and labour. With the right next steps, Canada’s new employee ownership trust is poised to help us transition to a more equitable, sustainable and just economy.

Simon Pek receives funding from the University of Victoria’s President’s Chair award and the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University through this appointment as a Social Capital Partners Fellow.

Lorin Busaan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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