[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
CHALLENGES AND BENEFITS OF EMPLOYEE-
OWNED SMALL BUSINESSES
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 12, 2020
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 116-072
Available via the GPO Website: www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-620 WASHINGTON : 2021
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA VELAZQUEZ, New York, Chairwoman
ABBY FINKENAUER, Iowa
JARED GOLDEN, Maine
ANDY KIM, New Jersey
JASON CROW, Colorado
SHARICE DAVIDS, Kansas
JUDY CHU, California
MARC VEASEY, Texas
DWIGHT EVANS, Pennsylvania
BRAD SCHNEIDER, Illinois
ADRIANO ESPAILLAT, New York
ANTONIO DELGADO, New York
CHRISSY HOULAHAN, Pennsylvania
ANGIE CRAIG, Minnesota
STEVE CHABOT, Ohio, Ranking Member
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
TROY BALDERSON, Ohio
KEVIN HERN, Oklahoma
JIM HAGEDORN, Minnesota
PETE STAUBER, Minnesota
TIM BURCHETT, Tennessee
ROSS SPANO, Florida
JOHN JOYCE, Pennsylvania
DAN BISHOP, North Carolina
Melissa Jung, Majority Staff Director
Justin Pelletier, Majority Deputy Staff Director
Kevin Fitzpatrick, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Nydia Velazquez............................................. 1
Hon. Steve Chabot................................................ 2
WITNESSES
Mr. Daniel Goldstein, President and CEO, Folience, Cedar Rapids,
IA............................................................. 5
Mr. R.L. Condra, Vice President of Advocacy and Government
Programs, National Cooperative Bank, Arlington, VA............. 7
Mr. John Abrams, CEO and Co-Owner, South Mountain Company, West
Tisbury, MA.................................................... 9
Mr. Mark Gillming, Senior Vice President, Messer Construction
Co., Cincinnati, OH............................................ 10
APPENDIX
Prepared Statements:
Mr. Daniel Goldstein, President and CEO, Folience, Cedar
Rapids, IA................................................. 27
Mr. R.L. Condra, Vice President of Advocacy and Government
Programs, National Cooperative Bank, Arlington, VA......... 35
Mr. John Abrams, CEO and Co-Owner, South Mountain Company,
West Tisbury, MA........................................... 38
Mr. Mark Gillming, Senior Vice President, Messer Construction
Co., Cincinnati, OH........................................ 40
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
American Sustainable Business Council........................ 49
Capital Impact Partners...................................... 51
National Center for Employee Ownership....................... 53
National Cooperative Business Association CLUSA.............. 64
Capital for Communities...................................... 68
Cooperative Fund of New England.............................. 71
Cooperation Works............................................ 73
ECR.......................................................... 76
LEAF......................................................... 81
NRS.......................................................... 85
Sustainable Economics Law Center............................. 89
US Federation of Worker Cooperatives......................... 91
CHALLENGES AND BENEFITS OF EMPLOYEE-OWNED SMALL BUSINESSES
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WEDNESDAY, FEBRUARY 12, 2020
House of Representatives,
Committee on Small Business,
Washington, DC.
The committee met, pursuant to call, at 11:30 a.m., in Room
2360, Rayburn House Office Building. Hon. Nydia Velazquez
[chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Finkenauer, Golden,
Kim, Davids, Delgado, Craig, Chabot, Balderson, Hern, Hagedorn,
Stauber, Burchett, Spano, Joyce, and Bishop.
Chairwoman VELAZQUEZ. Good morning. The Committee will come
to order.
I thank everyone for joining us this morning, and I want to
especially thank the witnesses for being with us today.
Our Committee has a longstanding tradition of working in a
bipartisan manner on behalf of America's 30 million small
businesses. We work together to make the programs at SBA more
effective and seek ways to encourage entrepreneurship and job
growth on Main Street.
And because small businesses are such an important part of
our economy, what we do here impacts the lives of nearly every
American.
At a time when income and wealth inequality are at record
levels, real wages for middle class workers are nearly
stagnant, retirement security is no longer guaranteed, one way
to combat these problems is through the employee-owned business
model. Employee-owned companies can take on many forms, but the
central premise is that interests of the employees and owners
are aligned. As a business generates more revenue and profits,
a direct connection is drawn between an employees' work and how
much he or she is compensated, thereby creating a culture of
ownership.
This business model helps workers and communities raise
their standard of living and quite literally feel more invested
in the success of the enterprise. The best-known kinds of
employee ownership are the Employee Stock Ownership Plan, also
known as an ``ESOP'', and cooperatives. There are many benefits
to employee ownership that can address some of the economic
issues facing workers today. ESOPs report higher wages, better
employee benefits, and stronger job security, especially during
periods of economic distress.
In addition to better wages and benefits, worker-owned
firms are also known for reinvesting more in their local
community than conventional businesses, and for democratizing
management and decision making. Because the workers themselves
make the company's strategic decisions, there is little danger
of a worker-cooperative unexpectedly leaving town or being sold
to outside investors. This ensures the economic vitality of
local communities.
In recent years, the option of converting a business to an
employee-owned model has grown in popularity, though there are
challenges in financing and completing such a conversion. For
example, businesses seeking to transition to an employee-owned
model frequently face difficulty in obtaining adequate capital
to cover the costs, which are often prohibitive.
That is why last Congress, I led and helped pass the Main
Street Employee Ownership Act, which sought to minimize those
capital access barriers and encourage more SBA-backed lending
to cooperatives and ESOPs. By easing some burdensome guarantee
restrictions, it was my hope that we could continue to make the
employee-owned model more affordable for local businesses,
creating opportunities for more entrepreneurs, while
financially empowering employees with a stake in their
workplace. The legislation was also intended to help millions
of baby boomers who own private businesses and plan to retire
create a succession plan that helps them ``cash out'' while
keeping jobs and investment in the local community.
However, we have heard from numerous employee-owned
businesses and lenders that accessing the SBA lending programs
has been nearly impossible because of current SBA policy. At
today's hearing, we will hear about the good work that
employee-owned businesses, like the cooperatives who are
booming in popularity all over my district in Brooklyn, are
doing for their employee-owners and local communities.
We will also explore the negative impact of SBA's failure
to follow Congressional intent when implementing the Main
Street Employee Ownership Act. We know there are still many
challenges ahead as we seek to encourage greater employee
ownership of business, challenges that are often unique to
either cooperatives or ESOPs.
And as we continue our work here in the Small Business
Committee, we need to hear about those challenges, too. So, I
look forward to hearing from our distinguished panel of
witnesses today about the benefits of employee ownership of
business, but also the challenges these unique businesses face
in starting up and expanding.
Again, I want to thank the witnesses for being here today,
and I now yield to the Ranking Member, Mr. Chabot, for his
opening statement.
Mr. CHABOT. Thank you, Madam Chairwoman.
In the lifecycle of a business, many important and crucial
decisions are made. Some of these decisions lead to brilliant
success; others could mean failure. One of the most significant
decisions a business must make is how to structure its
organization. From sole proprietorship to C corporations, there
are a multitude of options available that could benefit both
the company and the company's employees.
Today, we will explore one structure that has assisted
thousands of companies all across the country. The employee-
ownership model provides employees with an opportunity to own a
stake in the company that they work for. One form of employee
ownership is the employee stock ownership plan, or ESOP as the
Chairwoman mentioned for short. A company that is organized as
an ESOP provides its employees with the opportunity to obtain
ownership shares through a qualified defined contribution plan.
Research shows that ESOPs provide important retirement options
for employees seeking to save for their retirement.
This Committee has a long history of examining employee
ownership to determine both benefits and also some of the
shortfalls. For example, Chairwoman Velazquez authored the Main
Street Employee Ownership Act of 2018, which was designed to
enhance the ability of the SBA, the Small Business
Administration, to work with businesses interested in employee
ownership. Ultimately, that legislation was favorably reported
out of this Committee and was signed into law as a part of the
National Defense Authorization Act for fiscal year 2010.
Today, we add another chapter to this Committee's long
history of discussing employee ownership. In particular, I am
interested in hearing about what is working and what is not
working as businesses move through the employee ownership
conversion process. Additionally, I would like to hear about
the economic benefits of employee ownership.
My hope is that this hearing will shed more light on this
very important business structure.
And I want to thank all the witnesses for being here and
participating this morning. I look forward to all your
testimonies.
And Madam Chairman, I yield back.
Chairwoman VELAZQUEZ. Thank you, Mr. Chabot. The gentleman
yields back.
And if Committee members have an opening statement, we
would ask that they be submitted for the record.
I would like to explain the timing rules. The witness gets
5 minutes to testify and members get 5 minutes for questioning.
There is a lighting system to assist you. The green light comes
on when you begin, and the yellow light means there is 1 minute
remaining. The red light comes on when you are out of time, and
we ask that you stay within that timeframe to the best of your
ability.
I would now like to introduce our witnesses today.
Our first witness is Mr. Daniel Goldstein. Mr. Goldstein is
the CEO and president of Folience, a company that for over 130
years was primarily a family-owned print and broadcast media
company. Their ESOP was started in 1986 and became 100 percent
ESOP-owned in 2012. Today, 570 employee-owners work in Folience
media business, ambulance manufacturer, and high-end horse and
livestock trailer manufacturer.
We welcome Mr. Goldstein.
And Ms. Finkenauer, would you like to add anything to my
introduction of Mr. Goldstein?
I yield to the congresswoman.
Ms. FINKENAUER. Thank you. Thank you, Madam Chairwoman, and
thank you for holding this hearing today. We are so excited to
have you all here, and thank you for taking time out of your
busy schedules.
Now, we obviously know employee ownership is good for
business, it is good for people, and it is good for communities
like the one I represent in Northeast Iowa. When employees have
a stake in the company, these businesses have deep roots in the
area where they are located. These businesses are more likely
to stay local and invest in their communities. Employees are
literally bought into the business, often increasing overall
productivity and success. Employee-owned businesses can also
offer strong wages and retirement security to people who work
there. I am lucky to have some excellent employee-owned
businesses in my own district. VGM Group, a member service
organization for post-acute care headquartered in Waterloo was
named Iowa's 2019 Best Large Employer by the Des Moines
Register. Timberline, an electrical contract manufacturer in
Marion, has brought innovation and growth to the area.
Folience, in Cedar Rapids, once a family-owned print and
broadcast media company, has become an employee-owned company
of 570 workers. Today, I am pleased to introduce my
constituent, Daniel Goldstein, president and CEO of Folience,
who helped transform the company. Since Daniel joined Folience
in 2016, he has helped diversify its revenue base through
acquisitions. Today, Folience owns media businesses, an
ambulance manufacturer, a high-end horse and livestock trailer
manufacturer, and more. Daniel brings 20 years of executive
leadership to his current position. He is a passionate advocate
for employee ownership, and is on the Board of Governors of the
ESOP Association, the Board of Trustees of the Employer
Ownership Foundation, and the Board of the Employee Ownership
Expansion Network. You are a very busy guy, Daniel, and it
means a lot to me that you took all this time to come here to
D.C. We look forward to hearing your insights today. Welcome to
D.C., and thank you again for your leadership.
With that, Madam Chairwoman, I yield back.
Chairwoman VELAZQUEZ. The gentlelady yields back.
Our second witness is Mr. R.L. Condra. Mr. Condra is the
vice president of Advocacy and Government Programs for the
National Cooperative Bank, a national financial institution
dedicated to providing banking solutions for co-ops and their
members. Mr. Condra also serves on the board for Cooperation
Works, a national network of organizations focused on co-op
development. Prior to joining the private sector, Mr. Condra
served as professional staff on the Senate Committee on
Agriculture, Forestry, and Nutrition for Chairwoman Blanche
Lincoln.
Welcome, Mr. Condra.
Our third witness is Mr. John Abrams. Mr. Abrams is the
founder, president, and CEO of South Mountain Company, a 45-
year-old integrated architecture, engineering, building, and
renewable energy company committed to triple bottom-line
businesses practices. Located on Martha's Vineyard, South
Mountain has been a worker cooperative for 32 years, was one of
the first beneficial cooperatives in Massachusetts, and is
currently in transition to second generation leadership. Mr.
Abrams is also the author of the book, Companies We Keep:
Employee Ownership and the Business of Community and Place,
which was published in 2008.
Welcome, Mr. Abrams.
I would now like to yield to our Ranking Member, Mr.
Chabot, to introduce our final witness.
Mr. CHABOT. Thank you, Madam Chair.
Our final witness will be Mark Gillming, who is the senior
vice president and secretary of Messer Construction Company,
which is headquartered in America's greatest city, Cincinnati,
Ohio. Messer has multiple locations around the country,
including in several members' districts or close to them on
this Committee, Mr. Burchett's in Tennessee, and Mr. Bishop's
district in North Carolina. Messer Construction went through an
ESOP conversion back in 1990 and is still prospering today. Mr.
Gillming is a long-time employee of Messer Construction, having
started his career there in 1985, 35 years ago. Coincidentally,
the same year that I was first elected to Cincinnati City
Council. He currently runs all of Messer Construction's
professional development operations and has multiple degrees
from the University of Cincinnati, including not one, but two,
distinguished alumni awards.
Mr. Gillming, we very much appreciate you being here today
and all the other witnesses as well.
I yield back.
Chairwoman VELAZQUEZ. Thank you very much.
Mr. Goldstein, you are now recognized for 5 minutes.
STATEMENTS OF DANIEL GOLDSTEIN, PRESIDENT AND CEO, FOLIENCE;
R.L. CONDRA, VICE PRESIDENT OF ADVOCACY AND GOVERNMENT
PROGRAMS, NATIONAL COOPERATIVE BANK; JOHN ABRAMS, CEO AND CO-
OWNER, SOUTH MOUNTAIN COMPANY; MARK GILLMING, SENIOR VICE
PRESIDENT, MESSER CONSTRUCTION CO.
STATEMENT OF DANIEL GOLDSTEIN
Mr. GOLDSTEIN. Thank you, Chairwoman Velazquez, Ranking
Member Chabot, and members of the Committee.
I am Daniel Goldstein, CEO of Folience, a Cedar Rapids-
based company in business since 1884, and 100 percent owned by
our employees since 2012.
I also represent the ESOP Association, a non-profit whose
purpose is to protect and grow employee stock ownership plans,
or ESOPs.
6.6 percent of the U.S. workforce has ownership in an ESOP.
That is more than 10.6 million employees. ESOP employees
outnumber the workforce of the entire U.S. auto industry by
more than half a million. We outnumber the combined workforce
of the Federal and state government by 3 million.
ESOPs contribute substantially to our economy, and we
believe they hold a solution for many of the intractable issues
facing our economy.
As you know, one of the biggest challenges ahead is the
looming retirement in the next 10 years of baby boomers who own
2.5 million small businesses. Known as the ``Silver
Tsunami,'' it will be the largest transfer of business
ownership in the shortest period of time in our Nation's
history.
The businesses, and their employees face difficult futures
if supportive policies are not adopted. I have seen what can
happen if a succession plan is not made and the role employee
ownership can play in preventing catastrophe.
Let me tell the story of a typical small town. Sumner,
Iowa, population 2,000, has one major private employer. Life
Line
Emergency Vehicles designs and builds ambulances that
provides 180 good-paying jobs. Ten years ago, the founder
passed away leaving control of Life Line to his 69-year-old
widow. When I met her, she was 75 and had no heirs prepared to
take over the business.
Most in this situation face three choices: sell to private
equity, to a competitor, or close and sell off the parts.
Folience gave them another option--sell to their employees
through an ESOP. Folience's ESOP purchased Life Line, and those
180 employees became owners of Life Line and every other
business in the Folience portfolio.
Despite the many well-known benefits of employee owned
businesses--benefits, those seeking to launch ESOPs face
multiple, unnecessary obstacles, and I would like to focus on
three.
The first is an absence of clear Federal regulatory
guidance, particularly on business valuations. Second, a
shortage of lending capital for ESOP formation or acquisitions.
And, third, education. There is low public and professional
awareness about ESOPs.
Today, I ask Congress to task Federal agencies with
solutions to all three.
First, I submit that the biggest obstacle to forming and
expanding ESOPs is the chilling effect of the U.S. Department
of Labor. DOL has perpetuated an absence of formal regulatory
guidance, while simultaneously pursuing a litigious approach to
oversight. The effect has been a deep chill on the market.
Every year, hundreds of business owners attend educational
events the ESOP Association hosts to learn about ESOPs. And
once exposed to the lack of clear
guidance, many turn away out of fear that some unknowable
misstep will invite never-ending DOL scrutiny.
Forty-five years after ESOPs were established with the
passage of ERISA, the Department of Labor has yet to finish its
rulemaking process. They started. They nearly finished in 1988.
But they never issued regulations. But here is the travesty. It
is impossible to prove how many American workers have lost the
opportunity to become employee-owners as a result of this
chilling effect.
The solution can start very simply. Congress should require
DOL to define one thing: what constitutes adequate
consideration when an ESOP trustees values the price to be paid
for a company. This one simple piece of guidance could be a
gamechanger for employee ownership.
Second, to start addressing lending shortages, the SBA must
streamline lending for the ESOPs, as outlined in the Main
Street Employee Ownership Act. Unfortunately, in implementing
the legislation, the SBA excluded ESOP loans from the Preferred
Lending Program, instead continuing to require headquarters
approval for all ESOP loans.
We ask that the SBA be unambiguously directed to include
ESOP loans in the Preferred Lending Program.
Third, the Main Street Act tasked the SBA with promoting
awareness of ESOPs and employee ownership. The ESOP Association
knows that some in the agency already take this task seriously,
but they are too few and they lack adequate support, structure,
and resourcing.
Business owners must know the ESOP option exists and be
able to obtain useful, unbiased information. To that end, we
ask that the SBA be directed to resource a specific office,
such as the Office of Small Business Development Centers, with
active public education and information efforts. These three
actions will provide a clearer path to launching and expanding
ESOPs.
Thank you for the privilege of sharing the testimony.
Chairwoman VELAZQUEZ. Thank you, Mr. Goldstein.
Mr. Condra, you are now recognized for 5 minutes.
STATEMENT OF R.I. CONDRA
Mr. CONDRA. Thank you. Good morning, Chairwoman Velazquez,
Ranking Member Chabot, and members of the Committee. I am
honored to discuss the benefits and challenges of employee-
owned businesses. Thank you for bringing this topic out to the
light and providing a forum for discussion it so richly
deserves.
Today, I will discuss how a prohibitive policy requirement
by the Small Business Administration is hindering the growth of
the cooperative business sector. If this issue is resolved,
lending institutions like the one I work for will be able to
make loans that will help to grow small businesses, create
quality jobs at increased wages, and provide healthy food and
grocery options for communities throughout the country.
My employer, the National Cooperative Bank is a national
commercial bank headquartered in Arlington, Virginia. With $2.8
billion in total assets, NCB delivers banking and financial
services throughout the Nation to cooperative organizations
complemented by a focus on economic development in low-income
communities.
A cooperative is a business that is organized, owned and
governed by the people who use its products or services. Those
people are called member-owners, and they own the business.
They have a voice in its operations through a board of
directors that members elect, and the profits from the
cooperative flow back to the member-owners. Employee-owned
cooperatives, also known as worker cooperatives, give employees
an ownership stake in the company in which they work.
Cooperatives have evolved since the 1960's when the SBA
recognized them as buying clubs. There are now over 40,000
cooperatives in the U.S., and the top 100 generated $222
billion in annual revenue in 2018. Some notable cooperatives
include REI, ACE Hardware, Ocean Spray, Land O'Lakes, and
Congressional Federal Credit Union.
Since the Great Recession, worker cooperative numbers have
doubled, and have become a business option for young people,
women and minorities. According to the 2019 Worker Cooperative
Economic Census, 50 percent of owners in worker co-ops are
Latino and African American, and 62 percent of women make up
the majority of the workforce.
Municipalities have also recognized that co-ops are a
viable business option and have taken steps to promote the
growth and development of worker cooperatives in cities such as
New York, Philadelphia, Madison, Minneapolis and Austin.
Over the past 40 years, my bank, NCB has provided loans of
more than $2 billion to cooperative businesses and independent
retailers including over $77 million to consumer-owned food co-
ops. Per our loan policies and guidelines, NCB does not require
a personal guarantee for consumer and worker-owned co-op loans
due to the unique structure of our cooperative borrowers.
In contrast, the SBA requires a personal guarantee from
anyone who owns 20 percent or more of a business and will not
guarantee a loan under the program if there is no such
individual. This agency requirement makes it impossible for
cooperative businesses to access the agency's lending programs.
For decades, the co-op sector has asked the SBA to level the
playing field for cooperatives to no avail from the agency.
In 2018, Congress passed the Main Street Employee Ownership
Act that directed the SBA to recommend and implement practical
alternatives for cooperatives that will satisfy the agency's
loan guarantee requirements.
We were greatly disappointed to learn the SBA did not
provide practical alternatives as the law required. Instead,
the agency relied on its existing requirements that continue to
block cooperative businesses from much needed access to
capital.
Further, SBA's recommendation regarding an existing
business to be sold and converted to an employee-owned
cooperative would create new barriers. The agency recommends
that a selling business owner provide a full, unlimited
personal guarantee for the life of the loan. Imagine a small
business owner selling their business to a buyer, but also
having to put up their home as a guarantee for the buyer's own
loan until it is paid off.
The SBA's guarantee requirement is also contrary to
industry practice for cooperatives. As mentioned, my bank does
not require a personal guarantee, and CDFIs that specialize in
co-op lending do not require one. The Department of
Agriculture's Business and Industry loan program does not
require a personal guarantee for loans to cooperatives.
In addition, the SBA has shown flexibility with respect to
the guarantee in similar situations in the past. Thus, the SBA
does not require a personal guarantee when a loan is made to an
ESOP business.
The SBA has stated that cooperatives can satisfy the
requirement by providing an ``entity guarantee'' to be the
guarantor of the loan. We were recently approved by SBA using
an ``entity guarantee'' for a food cooperative loan in
Fredericksburg, Virginia. To my knowledge, this will be the
first food cooperative loan in the history of the agency. While
we are excited that SBA approved this loan, we have strong
concerns that the ``entity guarantee'' is not a long term
solution for cooperative businesses for the following reasons:
SBA is not prepared for an ``entity guarantee'' submission
with its application process; the borrower adds more debt to
the loan than is needed; the lender adds more risk to the loan
than is needed; and only wealthy communities with the ability
to raise cash will be able to use this process.
I am here today to discuss how the SBA's taxpayer-funded
loan programs should be fair and available to everyone,
including cooperative businesses.
I look forward to answering your questions. Thank you.
Chairwoman VELAZQUEZ. Thank you.
Mr. Abrams, you are now recognized.
STATEMENT OF JOHN ABRAMS
Mr. ABRAMS. Ms. Velazquez, Mr. Chabot, members, thank you
so much for having us. It is an honor.
South Mountain, the company I founded nearly a half century
ago, is an integrated architecture, engineering, building, and
solar company. We do all the parts, from beginning to end. For
33 years it has been a worker co-op. Nearly 2/3 of the 37
employees share ownership today. We balance the triple bottom
line of people, planet, and profit--quality, performance, and
mission are all more important to us than growth.
The company is built on humble beginnings. I had an older
friend and mentor who followed our work in the early days. One
day we were showing him a house in progress, and he said, ``It
is beautiful work. It is artful.'' And then he said, ``Are you
making any money?'' ``No,'' I chuckled. ``We seem to lose money
on every project we do.'' And he said, ``Well, Abrams, you've
got a unique idea here. Subsidized housing for the rich.''
And that bombshell inspired me to learn about business--
what it is, the impact it can have, and how to make fair
profits--and that pursuit has become a passion. Now we make
subsidized housing for those who need it. We devote ourselves
to service to each other, to the communities we work in, to
strengthening our local economy.
In 1987, two long-time employees told me they preferred to
spend their careers at SMC rather than going off on their own,
but they needed more of a stake than an hourly wage. Not long
after, I agreed to restructure as a worker co-op, to make a
system that would welcome them, and other committed employees
over time, to ownership.
To be honest, at the time I thought this was more symbolic
than substantive. Nothing could have been further from the
truth. Worker ownership has been more far meaningful and
valuable than I ever imagined. There is no question in my mind
that it has been a critical factor in our modest long-term
success.
I believe that owning our work is as essential to a good
life as is owning our homes.
Former Treasury Secretary Laurence Summers once remarked,
``In the history of the world, no one has ever washed a rented
car.'' Ownership is powerful. When employee-owners are making
the decisions, it is more likely that companies will stay
rooted in place and be positive forces in the community.
Economist Richard Wolff says, ``If our workplaces had been
democratized long ago, would the workers have stopped raising
their own wages? Hardly. Would they have destroyed their own
jobs by moving production overseas? Doubt it. Would they have
employed technologies that pollute the local environment? No,
they live there. Would they have allowed some to earn
astronomical salaries while the rest got no raises? No way. Our
economic history over the last thirty years would have been
radically improved if we had had a different way of organizing
our enterprises, with a more cooperative community-focused
method that is democratic at its core.''
Growing the worker cooperative approach has the potential
to positively affect the economy, our democracy, the quality of
working peoples' lives, and I do not think it is a stretch to
say that the benefits of the democratic workplace may even aid
and influence the essential repair of our battered civic
landscape. It could change, in effect, the chemistry of our
culture. If you spend your days working in an environment of
collaboration, mutual respect, and shared power, it is bound to
spill over into other parts of your life--better parenting,
kinder relationships, more civic engagement.
Today, we are among the highest scoring of the 3,000+
certified B Corps (among them are socially responsible icons
like Patagonia, Ben and Jerry's, Seventh Generation), and we
annually make the B-Lab ``Best for the World'' list. During the
past 7 years, six first-generation employee-owners have retired
who, collectively, represent 180 years of employment. Six
people, 180 years. That kind of stability is rare in business
today.
We are deeply engaged in transitioning to our next
iteration. As a new group of owners take the reins, I am
grateful that we will only have to change leadership, having
dealt with the ownership part many years ago.
We often assist companies transitioning to employee
ownership. It is not uncomplicated, and all companies making
this move need technical and legal assistance. The need is
great. The Main Street Employee Ownership Act of 2018 was a big
step forward, but there is far more to do.
The value and benefits of employee ownership continue to
fly under the radar, and you cannot take this important step
without knowing the option exists and understanding what it
means. So perhaps the greatest need is extensive education and
publicity. The stories of employee ownership successes need to
be shared and celebrated. Employee ownership ``ambassadors''
should be funded to visit companies considering transitions, to
teach, to train, to advise, to inspire. Widespread technical
assistance should be made available. Employee ownership should
be the number one business succession planning option. But it
is not. I hope this Committee will build on the great work that
it has done so far, and I am grateful for the opportunity to
make this request.
I would be happy to answer questions. Thank you.
Chairwoman VELAZQUEZ. Thank you, Mr. Abrams.
Mr. Gillming, you are now recognized.
STATEMENT OF MARK GILLMING
Mr. GILLMING. Chairwoman Velazquez, Ranking Member Chabot,
and distinguished members of the Committee, thank you for
inviting me to testify before you today to share my story of as
our retired CEO phrased it, ``inclusive capitalism,'' and the
impact it has had upon hundreds of my fellow employees at
Messer Construction. Thank you for holding this hearing to
learn more about ESOPs and the legislation that can encourage
more small businesses to become employee owned.
My name is Mark Gillming. When I began working at Messer
Construction, it was a Cincinnati-based, medium-size, family-
owned construction company with a long history and a good
reputation. But, like most companies in construction, it had
little in the way of employee benefits. By 1990 company-funded
retirement benefits totaled only $1.5 million on behalf of
about 99 participants.
In 1988, the last son of the company founder died, and we
found ourselves with an uncertain future. The grandchildren of
the founder wanted access to their wealth, and having no
connection with the employees, were not committed to
maintaining employment at the company. In 1990, the Messer
employees were able to buy their future from the Messer family
using the ESOP structure. I was one of the employees that
participated in that purchase, and we could not have purchased
the company if not for the important tax advantages that the
ESOP model afforded us.
Our country's investment in ESOPs allowed 99 Messer
employees to purchase their future, and the engagement that
opportunity created has resulted in growth. Today, operating
from 10 regional offices, Messer performs more than a billion
dollars in construction annually.
And, here is the measure of how that change our ESOP
brought to our retirement savings. Messer now provides quality
jobs and predictable retirement for over 1,200 individuals and
has company-funded retirement assets for those employees
totaling more than $400 million.
Through our engagement with the Employee-owned S
Corporations of America (ESCA), we have come to know of
hundreds of companies with stories similar to ours, and the
data from ESCA's quality research shows that ESOP companies are
more robust, more sustainable, and provide higher levels of
diversified retirement benefits than non-ESOP companies. The
Messer ESOP is in place and working well for us. However,
Messer manages a vendor supply chain of small local
subcontractors who are increasingly at risk from forces both
external and internal. For that reason, Messer supports ESCA's
work to promote bipartisan legislation, H.R. 2258, that would
encourage more employee ownership by providing incentives to S
Corporation business owners to sell to an ESOP when they are
looking to transition out of the business. This will allow more
American workers to build meaningful retirement savings that
those of us at Messer have realized through employee ownership.
It was more than 20 years ago that Congress passed
legislation creating S ESOPs, and in addition to what I have
shared with you about Messer, data shared by ESCA continues to
show that S ESOPs are a remarkable success story from young
workers to retirees.
Just a few highlights from recent surveys that Committee
members will find of interest:
Close to 90 percent of ESOP retirees said their savings and
ESOP benefits are enough to meet their retirement needs. Less
than half of non-ESOP retirees said the same.
56 percent of millennial workers at ESOP companies said
they had at least 6 months' salary saved for retirement, while
66 percent of their non-ESOP counterparts said they had no
savings at all. The opportunity to become an employee-owner has
helped Messer Construction recruit and retain millennial
workers in a tight labor market. These individuals share the
vision of working as an owner and not just an employee and
embrace the challenges and opportunities that come with being
an employee owner.
Messer is a clear example of the power of inclusive
capitalism that results from supporting S ESOPs. I invite you
to visit us or an employee-owned company in your district or
state so you can see firsthand the pride employee-owners take
in their work and the confidence that employee-owners have in
their future.
Ms. Chairwoman and Committee members, I thank you for this
opportunity to address the Committee and share Messer's story,
and for your consideration of legislation that will allow more
hardworking Americans to share in the American dream at work.
Chairwoman VELAZQUEZ. Thank you, Mr. Gillming, and thank
you all for the insightful information and stories that you
have shared with us.
I will now recognize myself for 5 minutes.
Mr. Goldstein, the Main Street Employee Ownership Act now
allows the 7(a) preferred lenders to process ESOP loans under
delegated authority streamlining the process for small firms.
Unfortunately, the proposed rule implementing the law says
those loan cannot be processed under delegated authority. What
is the impact to the ESOP community with SBA taking this
position and contradicting the clear language of the statute?
Mr. GOLDSTEIN. Thank you.
While Folience has not utilized the SBA's 7(a) loans, and I
probably would not given the delay in how long it takes to get
them approved, I can speak to the importance of timing in
completing ESOP deals. There are two principles that I have
learned from my experience. The first is that time is the enemy
of all deals, and the second is that accessing capital is the
greatest bottleneck in timing.
So when Folience acquired Cimarron Trailers in 2018, we had
a 12-day delay due to a financing issue, and just 12 days
called into question changes in inventory, work in progress,
working capital, finished goods delivered, and a variety of
other criteria that mean that the adequate consideration, the
fair price of the deal had to be recalculated. And as you look
at moving the local approval of SBA loans to preferred lending
providers who have local knowledge of the companies, they will
have more direct knowledge to make more timely decisions which
will get more funding to create more ESOPs.
Chairwoman VELAZQUEZ. Thank you.
Mr. Condra, how many businesses that you work with have
been good candidates for the 7(a) loan program but could not
get one because of the personal guaranty requirement?
Mr. CONDRA. Thank you for that question. And some of my
answers today will refer to food cooperatives, like Park Slope
in your district in Brooklyn.
Chairwoman VELAZQUEZ. Yes.
Mr. CONDRA. Because the food co-ops and worker co-ops are
in the same boat with SBA. And food co-ops are a more mature
sector at this point. But we get multiple inquiries every month
from cooperatives. There is a nonprofit called the Food
Cooperative Initiative that provides technical assistance
through startup food coops. There is currently 125 in different
phases, and in employee-owned, in the worker co-op sector, 25
new worker co-ops are created every year. And all that being
said, we do not know what the need is, the total need out there
is because it is common knowledge among the industry that you
cannot access the SBA programs. And also, additionally, a
letter was sent to you in December from the Village of
Williamsburg outside of Buffalo, New York. They were counting
on SBA for this alternate requirement for the guarantee and
they sent you a letter saying that now they are hindered from
moving forward because there is not an option for them.
Chairwoman VELAZQUEZ. So I know that in the USDA Business
and Industry loan program they offer a waiver from the personal
guarantee requirement for co-ops, and that is a $25 million max
loan program. So do you think a waiver provision like the one
the USDA has would work at the SBA?
Mr. CONDRA. I think it is a good option. I need to get more
knowledge about that waiver process to learn more but that is
just another example of thinking outside the box of how SBA
could do this along with the other alternatives that the
sectors recommended. And they said no to all of that. And I
just want to remind you as well that SBA met with their
counterparts at USDA to talk about alternatives and USDA
recommended a number of those and the agency said no to those
as well.
Chairwoman VELAZQUEZ. Okay. Thank you.
Mr. CONDRA. Yes.
Chairwoman VELAZQUEZ. Mr. Abrams, well, the new
administrator that was recently confirmed is coming before this
Committee at the end of February. Rest assured that we are
going to ask the question about this.
Mr. CONDRA. Thank you.
Chairwoman VELAZQUEZ. Mr. Abrams, I know that in a co-op,
employee-owners have a seat at the table when important
business decisions are being made. Can you tell us how this
process enhances employee morale and drives strong wages and
benefits for employee-owners?
Mr. ABRAMS. I think it is at the heart of----
Chairwoman VELAZQUEZ. Do you have your mic on? Is it on?
Mr. ABRAMS. I believe so.
Chairwoman VELAZQUEZ. Okay.
Mr. ABRAMS. Can you hear me?
Chairwoman VELAZQUEZ. Yes.
Mr. ABRAMS. Okay.
I really think it is at the heart of what makes these
businesses successful, that the employees know that they have a
seat at the table, that they know that their voice is heard
loud and clear, and that in the end they are going to make the
decisions about policy. And I think when the people who are
making the decisions bear the burden of the consequences of
those decisions but also benefit from the rewards of those
decisions, we just get better decisions.
Chairwoman VELAZQUEZ. Thank you.
My time is up. So now I recognize the Ranking Member, Mr.
Chabot.
Mr. CHABOT. Thank you, Madam Chair.
Mr. Gillming, I will go with you first.
Your company was being sold or transitioning from the
family that owned it and 99 employees purchased it. And
obviously it has gone very well. What are a couple advantages,
benefits would you say versus any downsides?
Mr. GILLMING. I do not see any downsides.
Mr. CHABOT. The mic.
Mr. GILLMING. I do not see any downsides. It has been a
great experience for us. But what it has meant is we became
employee owners and there were 99 of us when we started out. We
were all in this----
Mr. CHABOT. Was there any magic in that number at the time
or anything?
Mr. GILLMING. No, it just----
Mr. CHABOT. It just seems like such an interesting number,
99. Not 100, not 98, but 99.
Mr. GILLMING. It is just where we were.
But what it has meant is that it changed some, you know, we
had a great culture to begin with but it made it even better
because I no longer was worried about, well, I want to succeed
so I want to see one of my coworkers not do so well. I am
interested in seeing them succeed because a rising tide raises
all boats. And the culture just got better. And it becomes
cohesive. And when you are an employee-owner and making
decisions as an employee-owner, you know, those small decisions
become big decisions and you are making them. How we treat our
owners, how we treat our subcontractors is so important.
Mr. CHABOT. I remember at a previous hearing we had one of
the witnesses that talked about that they had gone to an ESOP,
and it may have even been Messer, I am not sure, but they
talked about things like some employees in the past may have
walked off with tools or office supplies or things like that.
Other employees, hey, that is my stuff you are doing. And they
would amongst themselves stop bad things from happening. Is
that accurate?
Mr. GILLMING. Good observation. We had two mid-year career
hires that came in, and about 6 months after they had been
there they were talking. They said, do you know what is
different? They turn the lights out when they leave the
conference room.
Mr. CHABOT. Excellent. Excellent.
Mr. Abrams, I will go to you next.
In your testimony you mentioned that your decision to
restructure as a worker cooperative was really critical in
South Mountain Company's success. How did it contribute to the
success of your company in particular?
Mr. ABRAMS. Well, for one thing, I think the origin----
Mr. CHABOT. I am not sure if the mic is on.
Mr. ABRAMS. Sorry about that.
Mr. CHABOT. That is all right.
Mr. ABRAMS. The origin of that decision was inspired by
employees coming and saying this is where we want to be. But,
the usual path is to achieve some level of competence and then
go out and start businesses in your own. The fact that they
wanted to be there meant that we needed to have a structure
that would keep them there. And that was repeated time after
time.
So first of all, I see a level of dedication that I do not
see in other businesses, and this fact that people want to make
their careers there and stay till the end, till retirement.
Mr. CHABOT. Thank you very much.
Mr. Condra, could you walk us through with what a small
business would experience if they approached your office to
inquire about becoming an employee-owned ESOP?
Mr. CONDRA. Let's give an example, a landscaping worker co-
op. If it was in a certain state, we would immediately direct
them to cooperative development center, and that center would
provide the technical assistance and the needs for how they do
that. That co-op would then, if they were moving forward,
create a planning committee. They would create a business plan.
They would form a board. And they would go through the steps
just like any other business would. And then at the end of the
day they would provide an application to our bank. One thing to
note on that is USDA provides technical assistance grants to
these development centers in rural areas. So if you are in
rural Ohio, you can go to a development center and get some
assistance. If you are in Cincinnati wanting to form a worker
co-op, there is not any Federal technical assistance to provide
that.
Mr. CHABOT. Thank you very much.
Mr. Goldstein, before I run out of time here, in your
written testimony you had described a chilling effect caused by
``policy of regulation by litigation by the Department of
Labor.'' Could you tell us in a little more detail what small
businesses are going through with the Department of Labor with
respect to what you were talking about?
Mr. GOLDSTEIN. Yes, absolutely.
The most important element in an ESOP formation or
acquisition is price. And adequate consideration is the process
by which the trustee determines the fair price to be paid for
that transaction. The trustee is representing the buyers; the
buyers being the employees. For over 45 years, the DOL has
refused to define what this process is and over the last 10
years there has been aggressive litigation which has
scrutinized and challenged ESOP valuations. The chilling effect
is that because there is no clear guideline on this and there
is the fear of litigation that there are a lot of transactions
that otherwise would not happen. There is evidence that you can
see with the SEC of issuing robust guidelines for public
companies that are being bought by other public companies or by
private companies and the process is evaluated by the SEC. A
letter of no action is given if that process is determined to
have been followed. So all we are asking is that the DOL issue
guidelines that adequately define this process, the adequate
consideration.
Mr. CHABOT. Thank you very much.
I appreciate all the witnesses, and my time is expired,
Madam Chair.
Chairwoman VELAZQUEZ. The gentleman's time has expired.
And now we recognize the Chairman of the Subcommittee on
Contracting and Infrastructure, from Maine, Mr. Golden.
Mr. GOLDEN. Thank you, Madam Chair.
Mr. Goldstein, I think following up on that a little bit,
could you try and walk the Committee through how an ESOP
trustee might currently determine the value of ESOP stock?
Mr. GOLDSTEIN. Sure. Absolutely.
The ESOP trustee uses a valuation firm. They may look at
other comparables with small private companies. There is not a
good amount of information so they may have to extrapolate the
information from public companies. They may have to look at
what is the best next comparable that is available from
transactions that are known but that is not from all
transactions. There is no checklist of items to examine. There
is no suggested metrics to use. There is no system of
comparison. The DOL has used litigation which some say has set
precedent but that precedent can be very individual to the
actual transactions. So the metrics used for acquiring a
manufacturing company will be very different than those used
acquiring a technology or service company.
Mr. GOLDEN. Thank you.
Do you have a preference or some input about how you think
the Department of Labor should define the term ``adequate
consideration'' in this context?
Mr. GOLDSTEIN. Yes. Again, if they were to give clear
guidelines that unequivocally can be followed by a trustee to
ensure that a process is going to be followed, it eliminates
that fear that once a transaction has been done it will be
under scrutiny that can be costly and take a lot of time and
could be undone years later. And that is really what is causing
a lot of these transactions to not happen. The employees of the
companies that do not become employee owned are the ones that
lose because the business owners will find another buyer. They
will find private equity or strategic. It is those employees
that are losing because there is not an adequate consideration
regulation that is clearly identified.
Mr. GOLDEN. So you just want clarity and consistency.
Mr. Abrams, because you assist companies that transition to
employee ownership, I know you know a lot about some of the
technical and legal assistance that is necessary in the
process. And I wanted to ask what more might be done to help
promote companies transitioning to employee ownership. What
kind of assistance to people generally need to pull this off
successfully?
Mr. ABRAMS. That kind of publicity would be welcome and
could be effective. In terms of technical assistance for making
the conversion, the most important thing is that people know
that there are companies and consultants that are doing this
work. There are accountants that are well-versed in co-ops and
others, mostly, they are not. So to know who to go to, what
attorneys to go to, all of this information is important. But I
think even more important, at the beginning, employees often
feel like this is an owner leaving and they need to understand
that it can be inclusive and the owner can stay and work with
them through the transition.
Mr. GOLDEN. Thank you.
Just going back to Mr. Goldstein, you mentioned in your
testimony that you thought small business development centers
might be a good place, a focal point for educating people about
this particular option and maybe helping people through the
transition. I cannot remember if it was you specifically or
someone else who also mentioned about small business
development centers, that some regions are doing this kind of
work, others are not. I was not sure if that was anecdotal or
if anyone had any feedback about that.
Mr. GOLDSTEIN. Yes. What I have seen is that it is
anecdotal. There are different regions of the company that may
have a more proactive approach to giving information about
employee ownership. And what is most important is that any
business owner that is looking at this transition in the
``Silver Tsunami,'' the 2.5 million small businesses that need
to change ownership in the next decade or two, that they have
access to that information, unbiased, and that they are not
going to be misled by professional service providers that are
going to steer them away from that. They need to see that that
is an option, which is going to keep companies and jobs in
communities.
Mr. GOLDEN. Thank you very much.
Madam Chair, I yield back.
Chairwoman VELAZQUEZ. The gentleman yields back.
And now we recognize the gentleman from Ohio, Mr.
Balderson, Ranking Member of the Subcommittee on Innovation and
Workforce Development, for 5 minutes.
Mr. BALDERSON. Thank you very much, Madam Chair. And good
afternoon, panel. I thank you all very much also for taking the
time to be here today.
Throughout this hearing we have heard numerous times about
the benefits that exist in employee-owned businesses. Some of
these benefits include higher wages, better working conditions,
and more flexible working hours. However, one aspect that is
vital to employees and employers alike is health care. Would
you all please elaborate, and you can start with Mr. Goldstein
and just go down the line there, on some of the challenges of
this healthcare space, and are the associated health plans part
of the solution?
Mr. GOLDSTEIN. Certainly. ESOPs do address income
inequality through competitive pay and benefits, and we offer
both to our employees. Certainly, increasing costs can be a
challenge to any business. I would like to stress that the
other benefit is the retirement accumulation which ESOPs
address, which is wealth inequality. And it is important to
point out that the difference between income inequality and
wealth inequality is that income inequality will get the
employee and their family through their next pay period; wealth
inequality, if you address that, gets them and their family
through a funded retirement. So it is very important that they
have the benefits which we offer and also that they are
accumulating these retirement benefits.
Mr. BALDERSON. Okay. If you all could just be more specific
on the healthcare piece of it. I am trying to dial in on the
associated healthcare plans and some of the tools that are out
there, whether it is the HSAs, the health savings accounts.
Mr. GOLDSTEIN. Yes. So we do offer the high-deductible
plans with HSA. Of course, it is important to educate an
employee so that they are contributing to the HAS as they take
those high-deductible plans. We use wellness programming to
improve the wellness of the employees so that it is proactive
and not just reactive. We do lots of wellness challenges. That
is an important part of taking care of our employee population.
Mr. CONDRA. So I am discussing worker cooperatives, which
are separate from the ESOPs. Examples for worker co-ops in my
mind are construction, retail, custodial, daycare, hourly paid
wages for the smaller ones. So it would be up to the co-op if
they were able to bring in their own insurance or that nature.
There are larger worker cooperatives such as Equal Exchange and
Home Care Associates that have over 1,700 owners which they
would have their own healthcare plans.
Mr. BALDERSON. Thank you.
Mr. ABRAMS. Our employee-owners feel that health insurance
is absolutely essential for them and their families, so we
provide 100 percent coverage of everything imaginable, all
deductibles paid. It is a high priority. Meanwhile, the Amicus
co-op, which is a purchasing co-op of 50 solar companies
nationwide, is working to bring insurance to lower those costs
because most of their members are worker-owned and they are
looking for ways to provide these benefits at lower cost.
Mr. BALDERSON. Thank you.
Mr. GILLMING. We provide healthcare benefits for our
employees as well. The employees pay a portion of it. The
company pays a portion of it. But because we are employee-
owners, there is realization that this falls right to the
bottom line and expenses are important. So we have the benefit
programs, you know, the wellness programs trying to reduce it
and I am one of the healthcare trustees for our company. So I
am aware of what we do every year of going back out to the
market to see what we can do to provide the best healthcare for
our employee owners that we can at the best pricing.
Mr. BALDERSON. Okay.
Mr. GILLMING. So going to the high-deductible plan was one
of those ways to help provide that as well.
Mr. BALDERSON. All right. Thank you all very much.
Madam Chair, I will yield back my remaining time. Thank
you.
Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
And now we recognize the gentleman from North Carolina, Mr.
Bishop.
Mr. BISHOP. Thank you, Madam Chairman. Thank you, panel.
And Mr. Gillming, in particular, I represent Charlotte,
part of Charlotte, which is one of Messer's expansion markets.
And I am curious whether ESOP ownership impacted your decision-
making concerning expanding to markets like Charlotte.
Mr. GILLMING. It absolutely has. As we continue to grow, we
are not growing because we want to do more work. We are growing
to provide additional opportunities for individuals within
Messer to continue to grow. It does not have to be a narrow
pyramid where I have to retire for someone to take my place.
I was asked in 2002 to go move to Louisville to run the
Louisville region. When I left the Cincinnati region, someone
had to take my place. In 2010, I was promoted again to cover
multiple regions. Someone had to take my place, so we do it for
the growth of our employees and we look for very active,
vibrant communities because our people become part of the
community. So that is obviously one of the reasons we are in
Charlotte.
Mr. BISHOP. I am grateful for that and I congratulate
Messer on your success, all your employees.
Picking up on Mr. Balderson's point, earlier in this
Congress I introduced H.R. 5224, the Increasing Health Coverage
through HRAs Act. And that legislation would codify, that is,
give permanent effect in statutory law to the new IRS, DOL, HHS
rule that allows employees to use health reimbursement
arrangements funded by employers to purchase individual market
coverage and correspondingly allows employers to fund those
accounts and deduct the amounts as pay but it does not increase
taxable pay to the employees. And then employees can obtain and
maintain their own coverage that way. Early estimates are that
this option will increase by 800,000 the number of Americans
with health insurance coverage.
And so my first question for the entire panel is, do you
think the availability of new benefits, flexibility like that,
puts smaller companies, especially employee-owned forms of
businesses in a better position to compete for top talent?
Anybody who wishes to volunteer for that?
Mr. GOLDSTEIN. As was previously said, we do go out to the
marketplace every year and look at what are the available
options, pricing, looking at ensuring that we do not
disadvantage any one population as we have different companies
that we bring together. And so absolutely increasing the
options is always advantages as we look at how to best provide
benefits at the most cost-effective method to our employees.
Mr. BISHOP. Thank you very much.
Madam Chairman, I yield back.
Chairwoman VELAZQUEZ. The gentleman yields back.
And now we recognize Mr. Spano, from Florida, for 5
minutes.
Mr. SPANO. Thank you, Madam Chair. And thank you all for
being here today. Thank you for your testimony. Appreciate it
very much.
As many of my colleagues know, I am personally familiar
with many of the challenges that small business owners face.
Before coming to Congress, I owned my own small business for 13
years. In the entire time that I owned that business I used an
employee-owned model. I found that by giving employees stake in
the business, it not only allowed them to feel more invested in
the business, but it motivated them to succeed. They had skin
in the game, so to speak. But it also gave them a taste of what
it was like to be entrepeneurs.
One of the most daunting aspects of small business
ownership is getting started. You see so many businesses fail.
And I think entrepeneurs take enormous risk in their business
and often with little experience when they first start. So the
employee-owned model can correct this problem in my opinion
because it allows people to develop the skills of business
ownership with substantially less risk essentially than making
a go of it on their own. It better equips these folk to start
businesses with that knowledge.
Some of the most rewarding moments in my experience as a
business owner is to see some of the folks that have been
owners in my business then step out and start their own
business. I have enjoyed that on several occasions. But, so I
strongly believe that that employee-centered model can really
make for better businesses and more productive employees.
One theme that I have been noticing is that because
employees are directly involved in ownership decisions of the
business, that organizations tend to make decisions that
benefit the employees, which makes sense. The question I have,
however, does this impair a business potentially from making
tough decisions sometimes that may be necessary for the health
and growth of the business? For instance, if you have a market
that is dynamic and changing rapidly and there need to be quick
changes, potentially downsizing and so forth, how do you get to
the point where you get employees who are, by nature, self-
interested to come together and make a decision?
And I will just open the floor to anybody who wants to
answer that.
Mr. ABRAMS. In 2008, in response to the financial crisis,
we set out six layers of actions and the last on the list was
actual layoffs. We never got there, fortunately. But I will
never forget when we did get to the point where we decided that
we would have a 20 percent across the board reduction in pay,
and at the end of that company meeting a number of people came
up to me and thanked me. And I said, ``Wait a sec. Your pay
just got reduced by 20 percent.'' And they said, ``So did
yours, and you lost more than I did.'' And they were just in it
together. So that is a pretty tough business decision to make.
And everybody was on board.
Mr. SPANO. Would anybody else like to offer an answer to
that question?
Mr. GOLDSTEIN. I cannot speak to the start of our business
because that was in 1884; however, I can tell you that in 2016
when I was brought in, it was with the realization that while
we had a 130-year-old profitable newspaper that was still
independent, if we are going to be around for the next 130
years we had better diversify our revenue base. And that is why
we went through building an employee-owned platform that brings
transition of other private companies into our company. And
today, we are 570 employees, two-thirds in manufacturing and
one-third in media. And there are plenty of difficult decisions
and allocation of resources, capital, staffing that go along
the way in building that.
Mr. CONDRA. I would say on the worker co-op front, we have
seen this since the Great Recession, is that young people are
wanting to start their own businesses. Some do not want to work
for a corporation. They want to own their own business and they
are happy to share that. Especially with conversions, you know,
the worker co-op model is not for everyone. Some people want to
go to work, work 8 hours and go home. They do not want the
responsibility of making the decisions or they stress on the
pressure. But some people, it is natural for them and those are
the ones that prosper.
Mr. GILLMING. The only thing I would add is, you know, when
the recession hit, obviously, it hit construction really hard.
We did the same thing. We all came together and we knew we were
in it together. But the other thing within our company is the
realization that good ideas come from people. They do not come
from titles. So a lot of what we do and continue to advance
ways to build buildings for our owners and deliver them,
quality projects at quicker schedules come from the ideas. And
it may be somebody that just started with us last year.
Mr. SPANO. Thank you.
I yield back, Madam Chair.
Chairwoman VELAZQUEZ. The gentleman yields back.
And now we recognize the gentleman from Tennessee, Mr.
Burchett, for 5 minutes.
Mr. BURCHETT. Chairlady, I hope I did not cut in front of
one of the other members down there. Did I do that? Now we are
good? Okay, great. I do not want that to be reflected in
anything I do in this bipartisan that might hurt me in the re-
election bid. So I just want to clear the air with that.
Thank you all for being here. And thank you, Madam Chair,
for always being courteous to me.
Mr. Gillming, is that how you say your name?
Mr. GILLMING. Yes.
Mr. BURCHETT. Messer Construction, of course, has a big
operation there in Knoxville in my area and they do quality
work. And thank you for being here, brother.
As an employee-owned company, what do you think the biggest
challenge is that faces Messer Construction?
Mr. GILLMING. The biggest challenge that we face is that
Congress will change the laws that they created in 1998 that
allowed for S ESOPs, because that allows us to continue to
build towards our retirement and all of us working together and
knowing that when we get up every morning and go to work, we
are working for ourselves and we are building for the future
for not only us but for our families.
Mr. BURCHETT. Yes. I am kind of a gearhead and I visited a
place called Jasper Motors and they have a little operation in
Knoxville. I was at a radio station and I said, I am going to
go down there and check those boys out. And sure enough, they
were one of you all, an ESOP. How do you say it, ESOP, ESOP?
Mr. GILLMING. ESOP.
Mr. BURCHETT. Anyway, they educated me pretty quick on
that. It is always good to talk to folks that actually work for
a living. Not that we up here do not do any work but the
reality is we do not.
You said Messer's supply chain of local contractors
earlier, you said that they were facing some numerous
challenges. Do you think that the subcontractors and
subcontractors across the country could benefit from an
employee-ownership model? And what do you think that would look
like?
Mr. GILLMING. Well, I absolutely do. And we are seeing that
happening. There is a firm in Cincinnati, a long-time HVAC
mechanical contracting firm that has just gone through the
transition at Peck, Hannaford and Briggs and it is time for the
third generation now to move out. But what happens then to the
employees? So they had the foresight to say there is a
structure here and our retired CEO helped consult with them
about some of the ways to help do that. And the options that
are there. But it allowed that company now to continue on and
for all of their employees to still have employment.
Mr. BURCHETT. Very good. And I will give the rest of you
all some face time because I realize your wives and/or sons and
daughters are watching you all right now.
So, what do you see Congress can do to further help support
employee ownership?
We can just go down the line. And I have got 2 minutes and
23 seconds, so you all divide it up amongst yourselves.
Mr. GOLDSTEIN. I will be quick. Thank you first of all for
pointing out that this is bipartisan, and so hopefully these
changes can be made.
I will go back to if this Committee could bring up the
issue of adequate consideration. The greatest challenge facing
the formation of new ESOPs and acquisition of private companies
to transition them to employee ownership, which is what
Folience is doing, is this issue of not having a clear
definition of adequate consideration. So if you could bring
that to the Department of Labor, please.
Mr. BURCHETT. I believe you just did, but we will. Thank
you.
Mr. CONDRA. Congressman, my answer, and it will be to this
Committee, is access to capital. If a group wants to start a
worker co-op in rural Tennessee, they go to their local bank.
The bank sends it to USDA and gets a loan guarantee and they
are off to the races. If that same group wants to start a
worker co-op in Knoxville, they go to their local bank, same
thing, everything, SBA denies that application due to the
personal guarantee requirement. So it is access to capital at
this point.
Mr. BURCHETT. All right.
Mr. ABRAMS. My answer would be that very few business
owners know that a worker co-op is a viable entity of choice.
More people need to know.
Mr. BURCHETT. Let me go back real quick. Guy in the middle
right here, I am sorry, I am not looking at the names, here.
Do you think the banks want to do that business or do you
think they are coming up here and doing the old side step and
saying, oh, you know, do not allow them to do that, brother?
Oh, we cannot do it. It is those bureaucrats in Washington.
Mr. CONDRA. No. There is not a process at SBA to provide a
cooperative loan. The banks want to do this. I mean, this is
what we specialize in. And it is just not us. It is other
national interests.
Mr. BURCHETT. Thank you all so much.
Chairlady, as always, this is a very bipartisan Committee,
and actually, it is one of the few Committees where I think
something is actually getting done up here.
Chairwoman VELAZQUEZ. Thank you.
Mr. BURCHETT. So thank you, ma'am, for your work. And
appreciate you all coming out.
Chairwoman VELAZQUEZ. The gentleman yields back.
And now we recognize the gentleman from Minnesota, Mr.
Stauber, Ranking Member of the Subcommittee on Contracting and
Infrastructure for 5 minutes.
Mr. STAUBER. I thank you, Madam Chair. And thanks for your
testimony.
I, too, am a small business owner with my brothers. This is
our 30th year. The ups and downs of small business. And for me,
you know, my colleague just asked, like, what can we do? It is
critically important that we take care of our small businesses
in this country. They are the engine of our economy and I say
you have never been a small business until you have had to
reach into your back pocket and pay for something unexpected to
capital or what have you like my brothers and I have. It is not
fun. It is not easy. So I think the Committee members recognize
the importance of small business.
Mr. Abrams, did you talk about adequate consideration?
Would you define that to me? Or maybe Mr. Goldstein, you said
that. Okay. Would you define that?
Mr. GOLDSTEIN. Yes, absolutely.
Adequate consideration is the process by which a trustee
determines a fair price in a transaction. So you have a seller
and a buyer. They have to agree on price. The buyers, the
employees being represented by the trustee. And the problem is
that a lot of transactions are not being done because there is
not a clear definition of that process. And so sellers and
trustees are too worried to get into that transaction, whether
it will be tied up in litigation and scrutiny and potentially
unwound years after.
Mr. STAUBER. Well, I am going to publicly ask you to help
not only this Committee but me, personally. I would like to
connect with you afterward with my staff assistant because I
want to get down to that because that appears to be a major
problem concerning in the ability to make the transaction. The
bottom line is the best legislation comes from you folks, and
to hear this in the Small Business, and I have only been here
13 months, but some of the ideas that are coming from our small
business men and women are unbelievable and they seem to be so
common sense. And so as I read your notes, each of your notes
before this, I just want to tell you, number one, thanks for
coming up and testifying. And we are here, and should be here,
to make sure that Main Street America, and as I say, Main
Street Minnesota, succeeds. Because the engine of our economy.
I really do not have any other questions other than that,
but thank you for your attendance and your testimony.
Chairwoman VELAZQUEZ. The gentleman yields back.
And I am going to recognize myself for 5 myself. If any
other members to wishes to ask questions you are welcome.
Mr. Condra, we hear you on the issue of access to capital
and the problem that we have at this point with SBA's
interpretation, but we are going to tackle that issue.
My other question is that part of the Main Street Employee
Ownership Act directed the SBA to provide outreach and
educational materials to participating lenders. It also
directed SBA to establish a Small Business Employee Ownership
and Cooperative Promotion program. As a lender on the ground,
can you give us an update on whether you have seen any of these
provisions being implemented?
Mr. CONDRA. We have had zero communications on the
creationist program. We have heard indirectly that SBA just
started implementing it in October with the 900+ SBDCs that
they were now required to promote the cooperative model and
training and everything. It is a little bit frustrating because
the co-op organizations and development centers throughout the
country have already done a lot of this work with the
materials, the resources. They could be advisors on this. And
for us not to know anything about it, I am afraid the SBDCs are
going to start recreating the wheel. And also, they will be
duplicating efforts. And the fact is that there has been a lack
of communication. So when the administrator comes to see you,
you might want to suggest that they communicate a little bit
better with the co-op sector.
Chairwoman VELAZQUEZ. Sure. And today, I am holding a
roundtable with the SBDCs Network across the country, so I will
be raising this issue with them.
Mr. CONDRA. This program is one of the biggest
accomplishments of the legislation. Now we have 900 centers
promoting the cooperative model. I mean, it is a huge thing.
Chairwoman VELAZQUEZ. It is important that we get it right.
And it is important for the Small Business Administration to
understand the role that they could play.
Mr. CONDRA. Absolutely.
Chairwoman VELAZQUEZ. So Mr. Goldstein, I understand your
company began acquiring other companies in the media industry,
and so my question to you is, how have employees at the
companies that you acquired reacted to learning that they are
now employee-owners of the company?
Mr. GOLDSTEIN. Absolutely. And just a correction. We are
acquiring companies that are not in media so that we are now in
manufacturing.
So two of my favorite days in my career were getting up in
front of Life Line Emergency Vehicles and Cimarron Trailers and
letting them know that, yes, their company has been sold, but
now they become employee-owners. And something that is very
important is that we give each of our employee-owners a license
to act. And I can pass these out afterwards. There is literally
a card that people hold in their pocket. And one example of
what this means to employees is that when I was showing the
Cimarron leaders during that due diligence period, so nobody
knew who they were, around Life Line Emergency Vehicles, one of
the employees on the floor came up to us and they knew, of
course, that I am CEO. He pulled his license to act out of his
card and he said, ``I would like to stop you for a moment to
talk about an idea.'' So I stopped the group. We talked about
the idea. I said, ``I need to continue the tour. Jeff, that is
a great idea. Let's get back on that.'' I did not realize what
an impact this had on Ben and Tony from Cimarron. They said,
``That is the kind of culture that we want to join, where each
employee understands the rights and responsibilities of
ownership.'' And that is what I think you have been hearing
from my colleagues.
Chairwoman VELAZQUEZ. Thank you.
Mr. Gillming, we know that over the next 10 years, more
than 2.4 million baby boomers who own private businesses will
retire. Can you talk about how ESOPs allow for a smooth
transition for owners looking to retire from a business without
being forced to sell it or close it down all together?
Mr. GILLMING. Absolutely, Chairwoman.
What it allows for, as Mr. Abrams said, that there is a
transition, because the owner does not have to leave. There can
be a transition period where the individual or individuals that
started the company are still there and helping the new owners
transition in as they take on that responsibility. But I have
also seen what it means for individuals that were employees
that are now employee owners and helping. They make the
decisions. And when you show them, yes, you are a part of this.
And, then, you know, at the year-end when they see that, hey,
if the company is profitable it is good for all of us, it is
just a powerful wheel that continues to roll and build
momentum.
Chairwoman VELAZQUEZ. Mr. Abrams, would you like to
comment?
Mr. ABRAMS. I certainly agree it is wonderful to see owners
come to the realization that the people who built the business
with them for all those years actually can take over and become
new owners. I think watching transitions from a sole
proprietorship or a partnership to a worker co-op is so
heartening because it is big change and it makes a big
difference and those doors do not close.
Chairwoman VELAZQUEZ. Any other? Mr. Goldstein?
Mr. GOLDSTEIN. Yes, absolutely. The employee-owners, I have
heard things said, for example, in Chickasha, Oklahoma, that
nobody ever retired from the trailer industry but now we expect
that people will. We have employees in our commercial printing
plant that have been employees for 44 years. Employee ownership
makes a difference. It is addressing wealth inequality. It is
allowing families to fund their retirement. It is very
important to this country.
Chairwoman VELAZQUEZ. And the impact that it has in the
local economies and also the communities. And it is just an
unbelievable, empowering feeling to know that they are invested
in the success of those companies because they are owners.
Well, thank you so much for your powerful testimonies. And
we have now heard about many of the benefits of employee
ownership a business can generate for employee-owners, their
families, and their local communities. And yet, despite all
those benefits and despite our work in the 115th Congress to
address some of the obstacles to employee ownership, it is
clear we still have more work to do and progress to achieve.
And I heard you loud and clear on the Department of Labor. We
will be dealing with that issue, too.
If we intend to promote a secure retirement for America's
entrepreneurs, we must continue to find ways to ease their path
to employee ownership. Time and again, it has proven to be the
most effective retirement plan for those small business owners
who want to retain the independence of their business while
empowering their employees by turning them into employee
owners.
As I did last Congress with the Main Street Employee
Ownership Act, I look forward to working with my colleagues
from both sides of the aisle to continue minimizing those
barriers to employee ownership, help preserve the independence
of thousands of small businesses, and save thousands of more
jobs.
I will ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you.
[Whereupon, at 12:50 p.m., the Committee was adjourned.]
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