WHEN THE WORKERS CALL THE SHOTS
Employee-owned businesses having a moment in Pittsburgh
Four years ago, Gary Reed was reflecting on three decades of growing his nearly 30-year-old Glassport business providing chemical milling services to the aerospace industry and other industrial manufacturers.
But he was anxious about who should take the reins of Tech Met Inc. — a tough decision faced by a growing number of aging business owners. Usually, they sort through bids from private equity firms, strategic buyers and competing firms that swoop in — sometimes from other cities or countries, sometimes with little knowledge of how to run the company.
Mr. Reed went a totally opposite route: He sold the business to his employees. “As we began to look at it, it made more and more sense,” Mr. Reed, 66, said during a phone call from Florida.
Tech Met used an obscure kind of transaction authorized by Congress in 1974 as an incentive to keep businesses rooted in communities.
The arrangement works like this: Workers take out a loan from a bank to buy the company from the owner. By law, a trustee is appointed to represent employees in negotiating a sale price.
Once the deal is done, every worker — whether or not that individual wanted to be a part of the deal — owns shares in the company, which are put into a retirement account governed by a trust.
Profits flowing into the worker-owned business are untaxed, a key perk that, supporters say, makes paying back the loan significantly easier.
To proponents, it’s a sense of shared prosperity — and fear of shared loss — that leads to better performance.
Tech Met has nearly doubled the number of employees since the sale to employees, said Mike Vidra, president of Tech Met who took over after Mr. Reed retired. (Mr. Vidra declined to say how much employees paid Mr. Reed.) The company stock price, based on an annual valuation of the company, has grown by an average of 13% each year, he said.
New shares are issued each year and
put into employees’ retirement savings, giving them a personal stake in growing the company, Mr. Vidra said.
“Everybody’s an owner — and they act like they’re owners,” Mr. Vidra said. “Everything we’re gaining, we’re gaining collectively. They’re not putting in sweat and tears to make someone else rich.”
A slow start
After some initial acceptance in the 1970s and 1980s, the employee stock ownership plan, or ESOP, failed to gain much traction: Only about 6,000 businesses in the country — and 300 businesses in Pennsylvania — are employee-owned.
The setup can be complicated and requires consulting with a wide range of financial and legal experts, said Dan Zugell, a Cranberry-based senior vice president of Business Transition Advisors Inc., a national business succession consulting firm based in Portland, Ore.
The bulk of business transactions remain initiated by strategic buyers or investors, who like to avoid government bureaucracy and who view employee ownership as complicated, Mr. Zugell said. Those buyers can also offer a premium bid.
“They prefer an outright sale,” he said. “It’s the unwillingness in some part or the lack of education, and then the perception. I don’t totally disagree with it necessarily. It can be extremely complicated.”
A renewed push nationally is aiming to change that through advocacy amid a wave of baby boomer retirements and the millennial generation’s desire for a bigger piece of the pie.
“Employee-owned companies are much more productive, and the business stays where it is, and the community benefits and prospers — and nobody knows about it,” said Kevin McPhillips, executive director of the Pennsylvania Center for Employee Ownership. The organization, based near Philadelphia, is one of a growing network of advocacy groups across the country.
Mr. McPhillips’ career spanned 10 years in nonprofit groups and another 20 years in business ownership.
At one of his businesses, a printing and marketing company, he implemented employee-friendly benefits like a generous 401(k) program and team-based incentive plans.
Sales grew from $1 million to $60 million, at which point he sold the business to a private equity firm. Eight years later, the business folded and laid off 800 people.
“I am convinced, if we had known about ESOPs, that business would still be around today,” he said.
Pittsburgh is interested
In Pittsburgh, Mr. McPhillips has found plenty of sympathetic ears that have helped the nonprofit, started about three years ago, gain a foothold.
In January, Pittsburgh City Council created the nation’s first local task force to promote the program. Erika Strassberger, in a recent interview, called employee ownership “low-hanging fruit” to tackle more difficult issues like income inequality and the loss of businesses that anchor communities.
“We’re a city of neighborhoods,” Ms. Strassberger said. “People appreciate the local restaurant and local hardware store, and mourn them when they’re no longer there.”
In April, the largest-ever conference on employee ownership was held at the David L. Lawrence Convention Center. Hosted by the National Center for Employee Ownership, its sessions sold out to about 1,900 attendees. Dozens of companies around Pittsburgh have converted to employee ownership, including Voodoo Brewery, Thermo Twin Industries, Silver Star Meats and KTA-Tator. Some converted recently, some many years ago.
Mr. McPhillips’ nonprofit has offices at Chatham University in Shadyside, space that was arranged for by university president David Finegold.
Ripe for study
Mr. Finegold came to Chatham in 2016 from Rutgers University. There he helped establish the Institute for the Study of Employee Ownership and Profit Sharing, which grew to a network of more than two dozen labor researchers at other centers across the country.
While academic discourse around employee ownership was strong in the 1970s, Mr. Finegold said he “didn’t see a next generation of scholars that were really tackling these issues.”
He said employee ownership in Pittsburgh is ripe for study as advancements in technology, seen in the constellation of startups on the Strip District’s so-called Robotics Row, potentially contribute to income inequality. As workplaces across industries see big productivity gains through automation, he said, workers tend to lose through job cuts while business owners see bigger profits.
With employee ownership, he said, “The people share in the profits of productivity.”
As businesses transact along generational divides, a growing disenchantment with capitalism could offer a foot in the door for advocates like Mr. McPhillips. A promotional video from his nonprofit describes this popular unrest.
“Capitalism has a problem,” a narrator says. “It’s not that capitalism is wrong, but rather capitalism is right — and the problem is there aren’t enough capitalists.”
At the same time, the institutions of capitalism — banks — also love employee ownership.
Loans issued to finance sales to employees tend to be less risky than the average commercial loan, “thanks to flexibility that employees exhibit during hard times,” said Julie Williams, who manages the ESOP Solutions group at the PNC Financial Services Group.
While hardship may lead one business owner to default, Ms. Williams explained, employees are more likely to make collective decisions to avoid that decision at all costs.
“Employee ownership is a mentality. It’s really a part of the fabric of these companies, and it’s why they’re so successful,” Ms. Williams said.
Spreading out nest eggs
Once employees own more than 50% of a company, they can vote on major moves like mergers and spinoffs and elect the board of directors. A management team would still handle dayto-day decisions.
Employee-owned businesses, run by managers, can fail like any other. A prominent example is the bankruptcy of West Virginia’s Weirton Steel in 2003, two decades after mill workers bought it from National Steel. Hundreds of workers lost their shares and retirement savings amid a steel downturn.
Federal regulations allow workers to diversify their retirement investments after a period of time, and Mr. Vidra said he makes sure Tech Met employees are aware of that option.
“It’s their entire retirement — and plus they work here,” he said. “Their future is tied to the company. We have and will continue to do education on why diversification makes sense.”