October was Employee Ownership Month. Hardy Diagnostics, a 100% Employee-Owned medical device company, is celebrating with activities throughout the month, culminating with a company-wide tri-tip barbecue on Halloween put on by the Vandenberg Air Force Base Non-Commissioned Officer Association (NCOA). Through the Employee Stock Ownership Plan, or ESOP, employees are granted stock in their company every year at no cost to them.
ESOPs are the brainchild of Louis Kelso, a 20th century political economist. Kelso once said, “What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don’t have it.” Christian Alduenda, an Inside Sales Specialist at Hardy Diagnostics, said, “The ESOP gives people working here a sense of ownership and pride. We know we own a business. Being part of the decision-making process drives us to want to work harder.”As an employee-owned company, Hardy Diagnostics is not obligated to outside shareholders who care only about the bottom line. This ensures the freedom to emphasize other values, like community involvement, environmental responsibility, and the wellness and satisfaction of the workforce as a whole.“Our employee ownership program ensures the long-term viability of the company and eliminates the fear of Hardy Diagnostics being swallowed up by a larger conglomerate,” said Jay Hardy.
ESOPs generally have a superior track record compared to other companies. ESOPs are 25% more likely to stay in business. ESOPs are more profitable and have 25% higher job growth over the last 10yearscompared to non-ESOPs. Employees at ESOPs have retirement accounts that are two-and-a-half times greater than their non-ESOP counterparts and they were four times less likely to be laid off during the recent recession. Hardy Diagnostics’ ESOP also brings significant tax advantages which will make the company more competitive by allowing for increased investment in innovative products for future growth.
Our Founder, Jay Hardy, had the honor of presenting the benefits of employee ownership to Congress in 2016. Below is his oral testimony as it was presented to Congress as well as a video of the event.
First of all, I would like to thank Chairman Chabot today for inviting me to voice my support of H.R.2096 and the proposed incentives to increase Employee Ownership in America. I would also like to thank Ranking member Valazquez and the other members of the Small Business Committee.
My name is Jay Hardy. I am the President and founding partner of Hardy Diagnostics, a medical device manufacturer based in California with a manufacturing facility in Ohio and Texas. We have been in business for 36 years serving the laboratory industry and currently have 350 employees.
Four years ago, I sold 70% my shares to our newly formed ESOP (Employee Stock Ownership Plan). Last year I sold the remaining shares, making our company a 100% employee owned S Corporation. I have never had any regrets in making this decision, which has set our company on a course of increased growth and prosperity for the reasons that I would like to describe for you today. Since becoming an ESOP our company has grown by 78%. The numbers speak for themselves.
The ESOP structure was defined by Congress as a part of the ERISA laws in 1974. Just as the Abraham Lincoln’s Homestead Act of 1862 created wealth for ordinary citizens by granting them 160 acres of land, the ESOP also has the potential to create wealth for all Americans without having to own land. Within the ESOP, employees are granted shares of the company they work for without cost or taxation. Currently there are over 11 million ESOP participants in America. This number needs to grow.
Recent studies have shown that:
- ESOP companies are 25% more likely to stay in business than non-ESOPs.
- Employee Owners were four times less likely to get laid off during our last recession.
- Employee Owners have 2.5 times more money in their retirement accounts than non-ESOP employees
- Employee Owners receive 5 to 12% more in wages than non-ESOP employees.
- Employee Owners are 5 to 10% more productive than their non-ESOP counterparts.
So you can see that ESOPs are undoubtedly a very good thing for the American worker, and thus good for the overall American economy.
Today we hear a lot of talk about income inequality and capitalism being good only for the privileged 1%. Why can’t capitalism be accessible for all American workers by owning a portion of the companies that they work for? While capitalism may have its flaws, the modern ESOP provides a way to correct those flaws. This is why the ESOP has been nicknamed “Universal Capitalism” or “Capitalism for the Masses.”
The Employee Owners turn out to be highly motivated, because they know that their efforts will be directly rewarded through an increase in share value. This, in turn, makes the American ESOP more able to successfully compete in a world market.
Today, many workers are afraid that Social Security or their meager 401(k) savings will not be adequate for their retirement. The ESOP could substantially supplement those retirement programs in a significant way.
The original idea of Employee Ownership came from Luis Kelso, who formed the first ESOP in 1956. He once said, “The trouble with today’s finance is that they’re designed to make the rich richer. None is designed to make the poor richer.” He also said “If capital ownership is good for the rich, it is a thousand times better for the middle class and the poor.”
The workers at Hardy Diagnostics now know that their daily work is not drudgery, but rather an exciting investment in their financial future.
In preparation for this testimony, I asked the Employee Owners of our company to provide me with their thoughts about the ESOP which they own. One of them said, “Since becoming an ESOP, I have found an avenue in which every employee has an opportunity to be engaged in the company’s steady climb of growth. As a manager, nothing is more rewarding than seeing individuals in my department with such a high level of enthusiasm for the success of our company, as well as their own personal growth and achievements.”
Another Employee Owner said, “Being a part of an ESOP breaks down title barriers. We all have the same title…OWNER. Ownership inspires greater value and satisfaction in our daily work. Our work turns into an investment. It is no longer just a job.” I think you get the idea…
H.R.2096 is an excellent piece of legislation that provides incentives for S Corp business owners to create an employee ownership program. This will make the S Corp ESOP a very attractive exit plan for business owners that wish to do the “right thing” in turning the ownership of their companies over to the workers that make their businesses successful. H.R.2096 also provides incentives for banks to loan the funds that make this transaction possible.
Those that study history know that socialism and its close cousin communism don’t work. They rob the worker of incentive and the rewards that could be theirs. Winston Churchill once said, “Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy; its only inherent virtue is the equal sharing of misery.” Capitalism for all its flaws remains the best system the world has ever known. Let’s improve upon it by putting true ownership within the reach of all American workers through the wealth building program of the modern ESOP.
I’m passionate about employee ownership and I enjoy being an evangelist for the ESOP movement in America. I thank you once again and would be glad to answer any questions that you may have.