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THE PRINCIPLE OF DEMOCRATIC OWNERSHIP

CREATING ENTERPRISE DESIGNS FOR A NEW ERA

The employee- owned benefit corporation, EA Engineering

“These are retirement fish,” Mike Chanov said, pointing to a half- dozen spotted, six- inch fish in a tank, swimming lazily around a fake green palm. “Rainbow trout is one of the more sensitive species,” he explained. These fish survived the tests this water quality lab put them through and have been put out to pasture, so to speak, as retirees.²

Mike gestured around the water lab—a low, white warehouse of a building, adjacent to the headquarters of EA Engineering, Science, and Technology, Inc., PBC, the environmental consulting firm in Hunt Valley, Maryland, that runs this ecotoxicology lab. “We raise testing species,” he continued, pointing to eight shallow, round dishes, each holding a dozen or so water fleas. “All the water fleas are under 24 hours old,” he said, all clones of each other. If the fleas fail to reproduce, that’s an indicator of toxic water quality.

Mike showed us other species—Kevin the crab, fathead minnows, Atlantic purple urchins. The latter are richly hued, spiny creatures in a plastic bin the size of a brownie pan. “They’ll be exposed to distillery effluent and will have to be euthanized,” Mike said. We began to understand the trout’s good fortune.

As EA Engineering (EA) tests water samples on these organisms, it’s looking for violations of regulatory limits. These can be costly; a Maryland power plant operator recently paid $2 million for fines and upgrades to wastewater treatment facilities.³ The lab runs 1,500 tests annually, just one part of the expansive work of EA, which has more than 500 employees and revenue of $140 million.

The far-flung work of this company has included testing low-maintenance ways to reduce erosion in stream banks in Guam using native plants and grasses; doing a stream flow study for a municipal power plant in West Virginia looking at impacts on fish; and cleaning up a shuttered defense site at Lake Ontario once used for manufacturing chemical warfare materials. As its mission statement says, EA Engineering is in the business of “improving the quality of the environment, one project at time.”

EA Engineering is a profit-making company. Yet it’s out to balance purpose with profit, not to maximize profits at all costs. That, they’ve discovered, makes all the difference.

This enterprise is a rare creature that has experienced both extractive and democratic ownership and lived to tell the tale—escaping, like the retiree fish, into a more humane existence. Today it’s 100 percent employee- owned. And it’s incorporated as a public benefit corporation (the “PBC” after “Inc.” in its name), which means its core mission is to benefit society, not just company owners.

EA embodies the principle of democratic ownership, where enterprises have a designed-in commitment to the common good, with asset ownership broadly held by ordinary people. It’s a harbinger of enterprise design for a new era of equity and sustainability. How EA found its way to this design is instructive.

A COSTLY DETOUR THROUGH NASDAQ

In the minds of many entrepreneurs, the chance to take a company public, with shares trading on a public stock exchange, represents the ultimate dream come true. For EA founder Loren Jensen, that dream proved a nightmare.

Loren is a limnologist, a scientist studying fresh water bodies such as wetlands and lakes, who at one point was mentored by Rachel Carson. In the early 1970s, when the Environmental Protection Agency was created and the Clean Water Act passed, Loren was a professor at Johns Hopkins University. He began consulting with companies. In 1973, he left the university to start a consulting firm, initially named Ecological Analysts, with a staff of aquatic biologists. It was one of the first firms to approach environmental work from a scientific perspective rather than an engineering perspective.

“We went into business with a half- dozen good clients, and in a few years, we had 70 or 80,” Loren, now retired, recalled in a Skype interview. “We were being encouraged to go national. To do that, we needed capital.” All of the firm’s advisers encouraged Loren to take it public.⁴

He did so in 1986, and through the 1990s, the company’s shares traded on NASDAQ. Initial success gave way to tumult, as EA cycled through three presidents, watched staff morale plummet, and found itself in trouble with the Securities and Exchange Commission over accounting misstatements.

Outside executives had been brought in, intent on pleasing Wall Street. They were “Enron kind of guys,” senior scientist Bill Rue told us, as we sat in a small conference room at EA headquarters—in a LEED-certified Platinum building (Leadership in Energy and Environmental Design is a green building certification; Platinum is its highest level). As he spoke, Bill sipped from a compostable plastic cup. “A lot of the family atmosphere disappeared,” he continued.⁵ Numbers had to be hit. Quality work and integrity took a back seat to share price.

At a conference one day, Loren invited Bill for a walk and asked him, “What do you think of how things are going?” “I didn’t feel comfortable, but I told him that [this executive] wasn’t looking out for the company as a whole, he was looking out for himself,” Bill recalled. Three weeks later, that executive was gone.

Loren bought back controlling interest with a minority partner. The outside executives were expunged. Their approach, current President Ian MacFarlane told us, was incompatible with the firm’s environmental mission, which “couldn’t be cooked into quarterly earnings.” That was 2001.⁶

BUYING BACK SANITY

Late in 2001, the Enron scandal broke. Countless firms—Enron, Tyco, WorldCom, Adelphia, and Arthur Andersen in the US, Parmalat in Europe, and others—were discovered cooking the books to keep share prices aloft. Amoral leadership stood revealed as alarmingly pervasive in the extractive economy.

“Shareholders are only looking to get rich,” Loren told us. “I don’t mean to disparage capitalism, but the reality is, nobody buys stock except in the hope of a good return on investment. The problem this poses for a company like EA is you confuse and compromise corporate goals. It was very difficult to manage in that environment.”

As Loren spoke over Skype, he came across as a plain-spoken, no-nonsense person—like a kind uncle. One value Loren instilled was “prudence,” Ian said. “Prudence is decidedly Loren. Who has that in the core values of their company? We give money back to our clients if we don’t use it all.” EA had always focused on client intimacy, on protecting ecosystem health, a sensibility that clashed with the go- go culture of the stock market.

“My sense is the years we spent in the public markets were educational, but only in the sense that a horsewhipping is educational,” Loren said. “We returned immediately to the task of understanding environmental problems and knowing what to do about them.”

Loren brought in his son- in- law, Peter Ney, as chief financial officer (later named a “Top CFO” by Baltimore Business Journal).⁷ He and Ian led a buyout of Loren and his minority partner, transitioning to full ownership by an employee stock ownership plan (ESOP) in 2014. At the same time, they rechartered the firm in Delaware as a PBC, declaring a binding commitment to balance purpose with profit.

Ian had learned about the benefit corporation idea at a nephew’s wedding in 2012, in conversation with a guest, Christina Forwood. She works at B Lab, the nonprofit that developed the concept and worked to enact it in 34 states. “I said to myself, wouldn’t this be cool to consider,” Ian recalled. Peter saw an ESOP as good fit with Loren’s goal of preserving his legacy and the company culture.

The two design elements—employee ownership and a purpose of public benefit—meshed perfectly. Bringing control into the hands of mission- oriented owners empowered EA to restore its identity and financial health. Through the ESOP, the company used its financial strength to buy out the founder, Peter explained. “We were already doing things that were ESOP-like, so it was no change at all,” Ian added.⁸

EA has been profitable ever since. Legal and related costs for the new design were $750,000, but that “was much less than one year’s savings in taxes,” Peter said. As an S Corporation fully owned by an ESOP trust, EA pays zero income tax on profits at the enterprise level. Profits are passed through to employees, who pay taxes when they retire and withdraw holdings, when they’re in a lower tax bracket.

Loren got additional personal tax advantages for selling to the ESOP. Employees received their shares for free, as a retirement benefit (unlike a worker cooperative, where workers buy their shares). As share price advances, employees gain more; in the first 12 years of the ESOP, share price quadrupled (this too differs from a worker co- op, where share price stays the same). Bill Rue, the senior scientist, with EA for more than 38 years, told us he had six figures in his retirement account. No individual today holds more than 5 percent of ownership.

A CATALYST FOR EMPLOYEE INVOLVEMENT

“We all feel more equal” with employee ownership, Bill said. “But it’s not employee- controlled,” added Barb Roeper, senior engineer, also there in the room with us. “People would love to have more say, but it can become unwieldy,” she continued. As with many ESOPs, employee- owners at EA do not vote for board seats (in worker co- ops, by contrast, all employee-owners have a vote). An ESOP trustee is generally appointed by management. EA does, however, pass through more voting to employees on major decisions than the law requires, Ian explained.

Under the old Enron-style leaders, arbitrary layoffs were made, Barb said. “Now we have a policy of openness,” she continued. “It’s become more participatory. Millennials want more of that.” There are more committees, plus soliciting of employee feedback. EA also practices open book management, sharing financial information.

On the day we visited, we sat in on an “all-hands” meeting, where Mike Battle, chief operating officer, discussed revenue and profits, including “66 consecutive quarters of profitability.” He talked about sources of company contracts, the ESOP, paid time for volunteering, new green composting bins, company donations to Water for People, how one employee would go to Guatemala to observe that nonprofit in action. Bruce Muchmore was celebrated for joining the 40-year club of those with four decades at EA.

Afterward we asked young analyst Erin Toothaker whether she thought of herself as an owner. “When I think about my ownership of EA, I think about how I align myself with what we want to accomplish, rather than with a dollar holding in the company” Erin said. She said being a public benefit corporation was a “huge part of our strategic plan.”

“One of the big things ESOPs wrestle with is employee engagement,” Peter said. Some solve that by creating a board governance role for all levels of staff. “We could never do that and actually survive,” Ian said. Peter added, “In our industry, the biggest thing that drives our employees is improving the environment.” He said if you stopped an employee in the hall and asked: Would you rather help to clean up a site or be part of board discussions about risk? Ian broke in, “Oh my God, they would much prefer to do what our mission has us do.”

Ian said being a public benefit corporation had been a catalyst for employee involvement, helping the firm sort out its corporate social responsibility (CSR) ethic. Public benefit incorporation is “CSR on steroids,” he said. EA from the start was about multiple stakeholders—government entities, corporate clients, the ecosystem. “You’ve got to look at the whole system,” Ian said. Because ecosystems are inherently long term and multistakeholder, enterprise design must be the same.

COMPANIES AS LIVING SYSTEMS

If the arc of EA’s ownership shift may be esoteric to many people, it offers vital design lessons for the journey to a democratic economy. In the extractive economy, companies are seen as objects owned by shareholders, designed to manufacture earnings like so many ball bearings off an assembly line. EA is a model of a company as a living system, part of the larger living system of the earth, designed to benefit life.

EA Engineering’s story illustrates the fork in the road that founders face. No founder lives forever, and few firms survive in family ownership beyond the second generation. A choice arises: to transition to financially oriented ownership or maintain the founding legacy through mission-oriented ownership. Most founders don’t realize there is a choice, so strong are the forces pushing toward a purely financial sale. In the case of EA, all the company’s advisers urged it to go public.

But new models are arising, showing what enterprise design for a sustainable and equitable era can look like. Both EA Engineering and Cooperative Home Care Associates are employee- owned benefit corporations. Both have public benefit as their core mission, along with broad-based ownership. It’s a design that empowers ethical leadership.

It’s a starting framework of enterprise design for the 21st century and beyond. At The Democracy Collaborative, we’ve found more than 50 enterprises that are employee- owned benefit firms and B Corporations, including Eileen Fisher, New Belgium Brewing, Gardener’s Supply, South Mountain Company, King Arthur Flour, and Namaste Solar. These companies pair a mission of serving the public good with ownership broadly held. In short, they’re models of democratic ownership.

BEYOND THE BUSINESS CASE

Most of us don’t realize ownership has a design. We think of ownership as a fact: you own something or you don’t. The sustainability community, in particular, has ignored the issue of ownership, says UK sustainability consultant Carina Millstone. While the environmental movement has focused on physical technologies, it’s neglected the more fundamental question of the ownership designs driving corporate decisions—and the question of which ownership designs are more supportive of ethical, sustainable decisions.

Environmental advocates tend to make the “business case” for sustainability, emphasizing reputation, risk, cost savings, and brand positioning. But Millstone points to an eight-year study by Massachusetts Institute of Technology and Boston Consulting Group, which found that only 37 percent of firms had discovered how to reap financial rewards for sustainability steps.⁹

Millstone says sustainability cannot be driven by purely commercial concerns. It requires moral decision making. When investors and executives are laser focused on maximum financial gain, sustainability investments can only be justified when they yield short-term profits. That’s particularly true with publicly traded companies, where shareholders are large in number, geographically remote, disengaged, and structurally limited in their ability to effectively voice social and ecological responsibility. It’s not a design for moral leadership. For owners to become moral agents, Millstone argues, companies need shareholders that are fewer in number, close to the firm, engaged, and committed to a common social or environmental mission.¹⁰

Sustainability rests on the ethical notion that we have a responsibility to others, those living today and in the future. Extractive design relies on the principle of shareholder primacy, which dates to the 1919 Michigan Supreme Court case, Dodge v. Ford, which said directors are to operate a company to benefit shareholders, not workers or customers. That premise, a living fossil of the Model T era, is a century old this year. Ours is a different time. It’s an era, as Millstone writes, when “[p]rivate-sector firms have helped bring the Planet to its knees.”

WHY EXTERNAL REGULATION ISN’T ENOUGH

Ownership design will shape our future fate—as it shaped the fate of Toms River, New Jersey, where the chemical company Ciba- Geigy and its predecessor firms made a home for 30 years, and where EA Engineering and its water testing once made a walk- on appearance. It’s a tale that tells us about the difficulty of trying to regulate companies externally, while leaving their profit-maximizing DNA untouched.

The chemical industry came to Toms River in the 1950s, and in the following three decades the town suffered a poisoned town water supply, toxic backyard wells, and dozens of childhood cancers, “far too many to be coincidence,” wrote Dan Fagin in his Pulitzer Prize-winning book, Toms River. In this community, EA was retained at some point—as Bill Rue put it in an email—“to conduct a dye dilution study of wastewater being discharged to the Atlantic.”¹¹

The wastewater in question was the 5 million gallons, per day, of highly acidic, partially treated toxic waste that Ciba- Geigy dumped into the ocean for 20 years. It was waste from synthetic dye manufacture—as Fagin wrote, “a phenomenally profitable business, as long as no one paid too much attention to what the manufacturing process left behind.” Only when the US Superfund law was passed in 1980 did toxic waste become of serious corporate concern, because it became a substantial liability on balance sheets.¹²

Ciba- Geigy’s continued ability to do ocean dumping now hinged on water testing. In 1982, when wastewater was tested on tiny mysid shrimp, more than half died. Later, water testing discovered toxins in backyard wells near a leaking company pipeline. So after 34 years, when it had dumped an estimated 40 billion gallons of wastewater into the Atlantic, Ciba- Geigy threw in the towel.¹³ Like many chemical companies at that time, it moved production to places like Alabama, Louisiana, and Asia, where wages and environmental oversight were much lower.¹⁴

Regulation didn’t solve the problem of toxic pollution. Ciba- Geigy addressed the only problem it cared about, which was financial liability. That alone was material. The possible death of millions of ocean creatures—for whom the mysid shrimp had been tiny stand-ins—was not material. Since ocean creatures are not assets of a chemical corporation, the company believed it had no fiduciary duty to protect them, or the residents of Toms River.

This is not a view the planet can long survive. That it remains the view of globe- spanning multinationals—which have become like private governments, as Franklin Roosevelt observed—goes to the heart of today’s crises.¹⁵ Regulations at odds with corporate purpose are seen by companies mostly as nuisances they seek to shed. The public good needs to penetrate the DNA of enterprise.

It’s no accident that Ian MacFarlane is a trustee of the Greenleaf Center for Servant Leadership. As the center’s website says, the servant-leader “puts the needs of others first.”¹⁶ This kind of moral leadership is made possible by democratic ownership design.

The innovative ownership design of EA Engineering is a promising emerging model. It has much to teach us about changing the DNA of larger corporations like Ciba- Geigy. But what’s the route to getting there? One possible path is illustrated by the advance of LEED green building norms. What began as the visionary work of a few green architects and builders became a set of codified norms, over time enacted into law. New York City in 2005 required new buildings receiving city funding to meet LEED standards, and other cities following suit include Boston, Dallas, Kansas City, Los Angeles, and more. Pleasanton, California, requires LEED certification for all commercial construction over a certain size.¹⁷

Benefit corporations are themselves a form of codification, with requirements in state law, such as reporting publicly on social and environmental performance. Encouragement of ESOPs is already codified in the US in substantial tax incentives, and worker co- ops are designs in the law of many nations. One could envision such norms advancing to new stages, with government incentivizing and ultimately requiring a phase- in of democratic ownership. At the same time, we could prohibit extractive ownership in sectors like healthcare and education. At some point, society must redesign the operating system of major corporations. If we don’t, democratic designs may remain forever marginal or face absorption.

First, we need to recognize ownership design matters. How many theorists worldwide today are working on ownership design, compared to the number working on climate change? How many business schools teach alternative forms of ownership? Abysmally few.

THE DEMOCRATIC ECONOMY MODEL READY FOR SCALE

Unlike the monoculture of extractive design, democratic design relies upon a diversity of public, private, cooperative, and employee- owned designs, structured at different scales and in different sectors to create the outcomes we seek. Among these models, employee ownership is the most ripe for going to scale.

Employee ownership is growing in the UK, and already widespread in the US, where there are 6,600 firms with some employee ownership. The average equity share of employee- owners in an ESOP is $134,000, according to Rutgers University employee- ownership expert Joseph Blasi—almost ten times the average retirement account for American households headed by someone between the ages of 55 and 64 ($14,500).¹⁸

Employee- owned companies are more resilient in times of economic stress, and worker- owners are one- fourth as likely to be laid off. The National Center for Employee Ownership in the US found that, among workers aged 28–34, those at employee- owned firms had nearly double the household net worth compared to other workers, plus they enjoyed 33 percent higher wage income.¹⁹

Retiring baby boom entrepreneurs are likely to sell or close 2.34 million businesses over the coming decade; many will simply shut down, resulting in layoffs and the loss of local jobs.²⁰ If these could be converted to employee ownership, it could bend the curve of history. To help advance this, we at The Democracy Collaborative created our Fifty by Fifty initiative, aimed at catalyzing 50 million employee owners by 2050.²¹ There are also 6,000 benefit corporations—the vast majority still owned by founders. If more of these converted to employee ownership, to preserve mission, next generation enterprise design could be well on its way.

“I’ve gotten even more radical since the last time we spoke,” Ian said, when we talked after our visit. He spoke of the Academy of Management academic meeting he attends, where he’s involved in a group on “critical management studies,” examining all that’s wrong with business management. Much of the focus is stakeholder management. For Ian, it’s more than theory. “The combination of employee ownership and being a benefit corporation—if you get into that framework,” Ian said, “you have new fiduciary duties.” EA Engineering has a legally binding duty to create public benefit, and as the company’s value grows, that wealth goes to employees.²² The reason is simple but invisible: ownership design.