Hippie musicians Kurt Listug and Bob Taylor were young coworkers at a small guitar shop called the American Dream when the owner quit to go backpacking (it was 1974, after all). The pair bought the store for $3,700, including machinery and parts, and renamed it. Nearly 50 years later, Taylor Guitars has 1,200 employees and factories in El Cajon, California, and Tecate, Mexico.

Listug and Taylor aren’t quite ready for retirement, but they’re serious about ensuring that their departure won’t hurt the company’s fortunes, its products or its employees. Taylor Guitars is too big for individual employees to buy, which usually means Wall Street or private equity would end up pulling the strings. (Rival guitar maker Gibson endured several ownership teams and fell into bankruptcy protection; it’s now owned by KKR, the world’s top leveraged-buyout firm.)

Instead, early this year the former hippies formed an employee ownership trust (EOT) that helps transfer company shares to all employees, based on seniority and tenure, funded by an innovative form of long-term debt. But the deal came together only because a small group of Canadians think employee ownership is the best form of capitalism.

Our Winter 2021 issue included a story on Toronto-based Social Capital Partners (SCP), an entrepreneurial not-for-profit that has spent two decades looking for social-development tools that work. Recently, SCP decided that the best way to fight income inequality is to give workers a share of the equity they build for their employers. “Employee-owned firms grow faster, default less often, are far more resilient in economic downturns, and pay their people more – even before you factor in the wealth-generating effects of ownership,” says SCP managing director Jon Shell.

The Taylor deal was partly funded by Listug and Taylor, and also by a duo that wants to make lots more music together: SCP and HOOPP, the Healthcare of Ontario Pension Plan. Essentially, Taylor Guitars borrowed the money to give shares to all its employees – and will pay back its lenders through future profits. As Bob Taylor announced, employee ownership “allows us to ensure our independence for the long-term future, and continue to realize our vision.”

“Taylor is a terrific first deal for us,” says SCP’s Shell. “The owners are wonderful people, the company is a top performer, the structure of the deal is great for the new employee-owners, and Taylor Guitars are a well-known, sexy brand.”

Employee ownership is more than a passion for SCP – it’s a road to wealth redistribution. “We think an economy owned by oligopolists, monopolists and financial firms motivated with the wrong incentives is an existential threat to society,” says Shell. “We spend every day thinking about what we can do to get in the way of that.”

Unfortunately, the SCP-HOOPP solution doesn’t work in Canada, where EOT regulations are different. So SCP is actively lobbying to change Canada’s Income Tax Act to support EOTs that can borrow to invest primarily in employer shares, and hold those shares for the long-term without tax penalties to the employees. “We have had some great conversations across the political spectrum,” says Shell. “Everyone likes it. It’s everything ‘building back better’ is supposed to be.”

Related read: Is employee ownership a better way for businesses to beat the Big Quit?

The post Meet the Canadians who pulled strings to make Taylor Guitars employee-owned appeared first on Corporate Knights.

SCP was founded by tech entrepreneur Bill Young, who made two fortunes in the 1990s and has spent 20 years giving away money to boost the prosperity of people who face employment barriers. SCP has gone through three phases: investing directly in social enterprises, developing innovative social-finance tools, and promoting innovative employee-training programs. Now Young and his team are focusing on a new solution: enhancing workers’ capital, rather than income, to increase prosperity and their resilience to economic shocks (say, the next pandemic).

How do people accumulate wealth? Usually through financial assets, such as stocks and bonds. After exploring various paths, SCP concluded that putting more shares into employees’ hands solves multiple problems:
• it helps workers build long-term wealth;
• it avoids the risks of new, inexperienced leadership after the founders or owners sell; and
• it bypasses the nefarious private-equity investors, who snap up companies in transition, looking for fast paybacks through mergers, layoffs and asset sales rather than by stewarding ongoing growth.

In addition, says SCP partner Jon Shell, worker-owned companies fare better than conventional businesses. In the U.S., where legislation encourages companies to borrow money to transfer shares at no cost to their employees over time, research indicates these firms grow faster, achieve higher profits and pay employees more.

The U.S., says Shell, now has about 6,400 employee-owned companies, with 14 million employees who share – wait for it – US$1.4 trillion in wealth. Canada, sadly, has only a handful of such companies – because our employee-stock-ownership plans (ESOPs) are mainly designed to sell (not give away) shares. And those shares go mainly to an elite group of affluent executives.

Moreover, when SCP investigated the U.S. landscape, it saw an untapped opportunity – to encourage huge pension funds to invest in ESOP companies. (Their loans compensate owners for giving up equity and are repaid over time from the proceeds of the business.)

SCP is now taking a two-pronged approach to encouraging employee ownership. First, it’s encouraging Canadian pension funds – many of which are looking for more opportunities for impact investing – to start lending to American ESOP companies. “If we can demonstrate how pension money can be used to support employee ownership while generating an attractive return,” he says, “we think we can move billions of dollars into the sector, resulting in billions more in employee wealth.”

Second, SCP has launched a campaign to bring more robust ESOP legislation to Canada, to give lower-income employees a better chance to build wealth. Shell says SCP is embarking on a lobbying campaign to get Canada to adopt the American “employee ownership trust” model, as the U.K. did in 2014. Since then, he says, employee ownership in the U.K. has grown 150%.

After years of opposing wealth concentration, Shell believes SCP has finally found a winning strategy. “It often seems we’ve been fighting an almost impossible battle. But for the first time it feels like we have a tank, not just a pistol.”

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