STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 5, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call the meeting to order and welcome everyone here this afternoon.

This is one of the round tables we decided to have. It's an issue members are interested in, the employee share ownership plan. It's come up quite a few times. Even in my days with Human Resources Development, when I was parliamentary secretary, a lot of people were talking about this issue, and I'm sure it's going to be one we will debate when we have to make recommendations to the Minister of Finance for the next budget.

I want to welcome, from the Crocus Investment Fund, Sherman Kreiner, president and chief executive officer, and Robert Hilliard, chairman of the board. I also have Nick Logan, president of National Leasing Group Inc.; from ESOP Builders Inc., Perry Phillips; and from the Employee Share Ownership and Investment Association, Julia Markus, executive director, and John Kidder, director.

Welcome. You've all appeared before the finance committee. You have five to seven minutes to make your presentations, and then we'll get to the Q and A.

We'll begin with Sherman Kreiner.

Mr. Sherman Kreiner (President and Chief Executive Officer, Crocus Investment Fund): Thank you. Good afternoon, Mr. Chairman, and members of the committee.

Crocus Investment Fund is a Manitoba labour-sponsored fund with nearly $200 million in assets and 30,000 Manitoba shareholders.

The purpose of my remarks today is to encourage your committee to initiate appropriate tax law and related legislative changes so as to increase employee ownership of Canadian companies. We are specifically requesting appropriate legislative changes to facilitate the creation of employee benefit trusts modelled on U.S. employee stock ownership plans, or ESOPs. In the U.S. these trusts are designed to leverage corporate assets to borrow acquisition capital for the benefit of the firm's employees. A broad-based group of company employees become owners through a mechanism that requires no out-of-pocket investment by employees. The U.S. framework offers tax incentives to shareholders who sell shares to employees in this fashion, to the employee-owned companies themselves to repay the debt in pre-tax dollars, and at times to lenders who provide ESOP financing. ESOPs have been extremely successful in the United States, where more than 10% of all corporate equities are owned by employees and business productivity is extremely high.

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The benefits of employee ownership are significant. Shared wealth creation can close the increasing gap between rich and poor more substantially than improved employment opportunities alone. Employee ownership can be a valuable tool in our efforts to close the productivity gap. Employee-owned companies with participative management outperform conventional companies with regard to productivity, sales growth, and employment growth. Employee ownership is an effective mechanism for intergenerational transfer of family-owned businesses, and it also ensures that decisions affecting local businesses are made locally.

In addition to the economic benefits associated with employee ownership, we believe an analysis of return on taxpayer investment associated with ESOPs would be extremely positive. Newer studies in the United States, including an extremely comprehensive study in Washington State in 1993, continually confirm these results. Interest in employee ownership in Manitoba is quite high. Among the 55 current Crocus investee companies, broad-based employee ownership plans are in place at 20, including, among others, Cando Contracting, Wellington West Capital, Online Business Systems, and National Leasing Group.

Arthur Andersen in the National Post recognized the latter three of these companies as being among the 50 best-managed private companies in Canada this past year. You'll hear from Nick Logan, president of National Leasing, in a few moments. I also have letters of support with me today from Angus Reid, president of the former Angus Reid Group, recently purchased by Ipsos, the ninth-largest market research firm in the world; David Friesen, president and CEO of Friesens Corporation, a leading Canadian printing company based in Altona, Manitoba; Terry Smith, CEO of the Boyd Group, a large Manitoba-based auto repair company with locations throughout Canada and the U.S.; and Brian Klaponski, president of Carte International, a Manitoba manufacturer of electoral transformers distributed in North America and overseas. These are all local Manitoba companies that are committed to employee ownership and have implemented employee ownership plans through their relationship with Crocus.

There are numerous challenges associated with establishing employee ownership in Canada, but none is greater than the lack of specific ESOP legislation. Because Canada has no ESOP legislation, the plans being used to date jury-rig other employee benefits structures to create employee ownership. In some circumstances where we would like to create employee ownership the use of these structures is flatly prohibited by existing law. In other cases the structures used are unnecessarily complex.

We think the U.S. experience can be successfully adapted to Canada. For Canada, it is clear that legislative changes and associated tax treatment must be consistent between Ottawa and the provinces. With this in mind, we have been exploring a strategy under which Manitoba would also undertake a tax law change, providing preferred tax treatment for ESOPs under provincial law. Discussions with the Manitoba government have been positive. A letter forwarded today by Manitoba finance minister Greg Selinger to federal finance minister Paul Martin reads, in the relevant part:

For some time governments in Manitoba have viewed employee ownership as an important tool to retain and expand business in our province. The Crocus Investment Fund was created with a mandate that included promoting employee ownership.

It is time that Canadian governments looked closely at other mechanisms to promote employee ownership. There are several successful examples in North America that indicate opportunities for success. In particular, Employee Stock Ownership Plans (ESOP) deserve serious study.

Here in Manitoba our officials have begun to review ESOPs to see if they are feasible in our province. I also understand that you have expressed some interest in ESOPs during a recent visit to Manitoba. To this end it is possible we could achieve greater success if our governments worked together cooperatively on possible options.

At Crocus we believe strongly that successful implementation of new employee ownership legislation in Canada and the provinces will benefit all Canadians. Accordingly, we encourage you to consider the significant merits of this proposal.

I now call upon Rob Hilliard, the chair of our board and president of the Manitoba Federation of Labour.

The Chair: Thank you.

Mr. Rob Hilliard (President, Manitoba Federation of Labour): Thank you for the opportunity to address the committee in support of a proposal to undertake legislative changes to facilitate expanded employee ownership in Canadian companies. My remarks and involvement today are as the president of the Manitoba Federation of Labour, although I am also chair of the board of directors of the Crocus Investment Fund.

The origin of the Crocus Investment Fund lies in a resolution that was adopted in 1983 at a convention of the Manitoba Federation of Labour, and from that day onwards members of the Manitoba Federation of Labour's leadership played a central role in shaping the fund. From the outset the labour movement pursued this project with two central and interlinked goals, job creation in Manitoba and the expansion of employee-owned enterprises. We are pleased with the significant job creation that has resulted in Manitoba, and enthusiastic about the demonstrated benefits for workers associated with employee ownership.

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In my role as board chair of the Crocus Investment Fund, I have had the opportunity to witness the real and direct benefits to the 2,500 employees in both unionized and non-unionized Crocus investee companies where it has been entrenched. One of the challenges in cascading employee ownership down to the rank and file level is that employees often do not have the personal resources to make a significant investment in their own company. Yet the research evidence is quite clear in demonstrating that positive business and job satisfaction outcomes associated with employee ownership are most pronounced when plans are broad-based and create a significant level of ownership for employees. Too often the few employee ownership plans created in Canada are limited to senior management.

The framework being proposed by Crocus overcomes this skewed result. The work of the Crocus Investment Fund, with many of its investee companies, has served to reinforce the MFL's commitment to the concept of employee ownership. It is clear that companies with employee ownership are more productive, and therefore more likely to remain competitive and successful in the future. This means more job security. In an increasingly competitive world, this is an important benefit for all Canadians.

Equally important for the labour movement, successful employee ownership can also provide workers with additional wealth that can serve multiple needs in Canadian families. To provide context, in the U.S. experience the average employee will accumulate an ownership stake equal to twice annual earnings within ten years. This new wealth is significant for employees. In our view, it is important that it not be seen as a substitute for current wages or pension benefits.

The Manitoba Federation of Labour is supportive of legislative changes that facilitate broad-based ownership opportunities for workers in Manitoba companies.

Thank you for your time and consideration.

The Chair: Thank you very much, Mr. Hilliard.

We'll now hear from Perry Phillips of ESOP Builders Inc.

Mr. Sherman Kreiner: Excuse me, but is there an opportunity for Nick Logan to speak?

The Chair: Absolutely. Would you like to follow?

Mr. Nick Logan (President and Chief Executive Officer, National Leasing Group): Sure. Thank you, Mr. Chairman, and members of the committee.

My name is Nick Logan. I'm the president and CEO of the National Leasing Group. I'm pleased to offer the support of our company to this proposal, and to be a living testimony that these ideas actually work and work well.

The Crocus Investment Fund has been a shareholder in the National Leasing Group since 1996. At the time, it funded a successful employee ownership plan. Today approximately 50% of our 170 employees are owners. This includes employees at all levels of the organization. For National Leasing, the benefits have been long term and significant.

In today's marketplace, the key to success is the ability to attract and retain quality employees. At National Leasing we have been extremely successful in both areas. The turnover rates among staff are lower than the industry average. We have consistently been able to attract the quality staff necessary to support our significant growth in each of the past several years.

We demand high performance and get it. Shareholders are pleasantly surprised each year, as both their profit sharing and share value reward them for their extra efforts or late nights. Growth has been in excess of 20% per year. We have met our board's ROE expectations each year. At the same time, I think we've won the productivity battle against our competitors.

While all of our success cannot be directly attributed to employee ownership, it is my personal belief that it is a key factor. We have not only embraced the concept, but are studying ways to expand it. Over the years I have encouraged my colleagues to think like owners, not like line staff.

I have to tell you, it has been a lot easier working with owners over the last four years, as we made the transition from a completely paper-driven company in 1997 to a completely electronic work-flow today. Owners expect change. They thrive on it. In fact, I think they demand it.

This past year our director of human resources completed a certificate program in participative management that was started by Crocus in cooperation with the University of Manitoba. While skeptical at first, this individual found the experience tremendously rewarding. Our company has already seen the value of her expanded knowledge. This experience reinforced our belief that the combination of employee ownership and participation in management decision-making is a formidable combination in business.

A major challenge for National Leasing initiating employee ownership was the uncertainty associated with the tax mechanics. Any structure that involves tax must be certain. What would happen if we had to undo the plan at any time? It would have been disastrous. For us, it would have been beneficial if legislation and tax treatment were in place to eliminate the concerns and even widen the selection of options available.

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Our society, through its government legislation, needs to say out loud that we believe, support, and encourage the principle of employee ownership. Many times I have spoken to colleagues in other companies across Canada about employee ownership. In the discussions, a common barrier to the concept of employee ownership is the financing of such a program.

It is clear from our experience that appropriate financial incentives should support existing employees to access ownership, either by adding new equity or facilitating the transition of ownership from one generation to another. It is not realistic to expect, as our banks do, the existing ownership should finance the next period for the new owners.

I am the current chairman of the Canadian Finance and Leasing Association. I know our business well. I want to tell you the major issue at our company is the potential for a takeover by U.S. competitors. Today our competitors are four multinational, global organizations. At various times, all have made offers to buy our company.

An employee ownership base would not be as tempted to sell out to another owner, as would another ownership structure. As the only substantial Canadian company left in our industry, I am very sensitive to our longevity. At the current time, we are only 14% employee-owned. It is my job to see the base is expanded to ensure our future.

Thank you very much.

The Chair: Thank you, Mr. Logan.

We'll now go to Julia Markus and John Kidder of the Employee Share Ownership and Investment Association. Then we'll go to Perry.

Ms. Julia Markus (Executive Director, Employee Ownership and Incentives Association): Thank you.

I'd like to thank Mr. Bevilacqua, Mr. Cullen, and the other members of the committee for allowing us to come and delve into employee ownership for a little bit longer. All of us are very happy for the opportunity to do so.

I'm Julia Markus. I'm executive director of what's now actually called the Employee Ownership and Incentives Association, Mr. Chair. We've broadened to include stock options and share purchase plans. We are a national association.

We now have close to 300 member companies from coast to coast, ranging from the smallest to the largest, with tens of thousands of employees in the country. They come to us because there's so much interest in employee ownership. All of this has happened in the last five years. We haven't solicited the members, they've simply arrived.

Interestingly, we're headquartered in British Columbia, not in Toronto, believe it or not. We're there because British Columbia was the first province to introduce employee ownership tax credits 12 years ago.

I think it's important to note ESOP tax incentives in B.C. have never been a political issue. They were brought in by the Social Credit government and continued by the NDP government. The Liberal finance critic was one of our founding board members. We expect it to continue. There has never been a problem with employee ownership in that aspect.

Today I'd like to address the basic policy question of why we should have employee ownership in Canada in a larger way than we do now. I'm going to try to offer two suggestions as starting points. But before I get into it, I think it's quite pertinent to this discussion to review how employee ownership, as a concept, was started and what it was intended to do.

Louis Kelso, an American lawyer and investment banker, believed capitalism would benefit more people if employees were also able to own equity. He envisioned equity as an employee retirement benefit, where there would be less need for government assistance when people retired. However, although we have RRSPs in Canada, he wasn't thinking along those lines. He felt, if share ownership was limited to what employees could afford to invest, too many people would be left out. As an investment banker, he knew there would be great interest if companies were able to borrow money, ostensibly to buy shares for employees, that could be used for other business purposes as well. If they were permitted to treat the cost as a business expense, the stock would go to an employee trust. It would be held on behalf of the employees until they left the company or, ideally, retired.

Once the U.S. finally enacted its first of many federal ESOP tax incentives in 1974, they grew quickly to, as you can see, 11,000 ESOPs, with shares given to over ten million employees throughout the country.

As employee ownership grew, research began to uncover unexpected side effects of greater employee commitment and involvement. It led to increased productivity, lower staff turnover, and ultimately faster-growing companies that were generating more new jobs and paying better salaries and benefits to their employees.

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If you think about that employee response, it's not hard to understand in the context of the difference between renting a house and owning one.

For example, imagine you rent a summer cottage on the lake for your vacation. You relax and enjoy yourself, and you tidy up when you leave. But cleaning, maintenance, and repairs are definitely not your problem; they're the owner's responsibility. Now imagine that you bought that cottage. Right away you decide to install a wraparound veranda and do some gardening. The next year you decide to upgrade the dock. Think about this: Do you resent the extra work? No, because you know the investment is going to increase the value and that you ultimately will benefit from that. Being an employee-owner brings about a very similar transformation, and I've seen it in many companies.

Does employee ownership actually increase employment and strengthen Canadian business? Yes. Job creation is unquestionably one of our priorities as a country, and employee ownership is undeniably one of the solutions.

Here are some of the results. One statistic, according to the British Columbia government's own data, is that 8,000 jobs are a direct result of the government-sponsored ESOP program, which was at a cost of only $6 million in tax credits over 10 years. Generally speaking, in terms of how employee ownership strengthens businesses, ESOP companies will grow a third larger than their non-ESOP competitors, according to one U.S. study.

Clearly, employee ownership increases job creation, which indicates a thriving business. But growth in a business also takes money, and for private companies, financing is traditionally harder to come by in Canada than it is south of the border. So can we finance business growth with employee ownership? Yes, and there are two ways of doing this.

The first, which is already in use, is an employee share purchase plan, which, even though we say ESOP in Canada, is actually an ESPP. This sells shares to employees. In a typical private company, these plans can generate up to a few hundred thousand dollars for a small business with each share offering. In British Columbia, over $30 million has been raised by 70 companies using the government ESOP incentives, which provide employees with a 20% tax credit for the value of their investment.

It's my contention that ESPPs have similar objectives to labour-sponsored investment funds, such as Mr. Kreiner's Crocus Fund, and that they have the advantage of being able to offer a 15% federal tax incentive. To be equitable, ESPPs should receive the same treatment and should be able to offer that same 15% tax credit. That alone will encourage provinces without their own ESPP programs to create them, and it would improve the take-up in the provinces that do, which at this time are B.C., Saskatchewan, and, in its own way, Nova Scotia.

The second method for financing businesses with employee ownership refers to a model similar to what Mr. Kreiner has told you about. That's to create legislation equivalent to that used in the United States and allow companies the very simple action of being able to deduct the interest portion of loans used to buy shares for an employee benefit plan that does not require any investment on the employee's part.

Both these methods have value, and they benefit all parties. They're not exclusive; they are complementary. In one, the company can borrow money at a lower after-tax cost, and in return, employees acquire shares at no cost. Then, in addition, through the other program, employees would have the opportunity to invest voluntarily if they felt that the company would continue to be successful, which would again provide the company with new equity, as opposed to debt, which the other method offers them. With greater access to financing, companies are going to expand and, once again, create more jobs.

We've always had the question of whether employee ownership and trade unions are antithetical to each other, and I want to show this slide to give you an idea of how many unions I know of that have experience with employee ownership, both in Canada and in the United States.

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So that's not one of the problems, but there are several other large ones that employee ownership can alleviate. I don't have time to do anything other than mention them very briefly, although they are huge issues and will have to be addressed soon.

One is retirement security. We all know the baby boomers are going to strain our pension system. The ESOP concept, as it was originally conceived, is a retirement benefit. In the United States, it is not uncommon for employees to retire with equity in their ESOP accounts worth three- to five-years' salary.

The other is the business succession dilemma, also an offshoot of the baby boom. A huge number of business owners are approaching retirement, and far too many of them either have no interested heirs or no plans for succession. That means we're going to have a lot of companies that will either be simply shut down because the owners can't find somebody to buy them, or a competitor will buy them in order to gain their customers and then shut them down because they don't need the operations. ESOP buyouts by management and employees will be one of the very few viable alternatives in this circumstance and will need to be looked at further.

I was also asked to look at what some of the challenges are to implementing employee ownership in Canada. These are the three that I think we have to address.

One is encouraging companies to offer shares to employees. This will have to be done in a way that provides a financial advantage to either the owner or the company or they will not be interested. I think it's a very worthwhile investment on the part of the government. In British Columbia, the tax credit ESOPs generate $7 in new provincial taxes for every dollar in tax credits they issue, which is astonishing.

The second challenge is to reduce the financial risk, basically, to employees. I have personally seen companies that have been purchased by the employees and have failed. They have lost not only their savings but their jobs. It's a terrible tragedy when that happens. With the best of intentions, they've gone into these situations. I think this is one of the best arguments there is for encouraging employee ownership that allows employees to acquire shares at no cost other than their hard work and ingenuity, and their savings can be invested elsewhere and diversified so they're protected.

Our third challenge, of course, is making it worthwhile. One of the arguments is that even with incentives for employee share purchase plans, most employees can't afford to purchase enough shares either to have a substantial block of ownership or to create a large enough gain to make an impact on their retirement circumstances. I believe, like Kelso, we should be looking at ESOPs as a supplement to RRSPs.

In conclusion, I don't know if you're aware of this, but every European country, much of the former Soviet bloc, Egypt, Argentina, South Africa, and Japan all have legislation encouraging employee ownership. Knowing that it enhances job creation, corporate performance, and financial security for all the participants, we have to get involved in this area or we're going to lose out on the competitive advantage that other countries have. I think the time is excellent. We can build on the experience of these other countries and develop our own leading-edge legislative policy for employee ownership.

I know the country will respond to your leadership, and there are two initial steps that I recommend, very simple ones—to allow ESOP loans to be treated as a regular business expense and to extend the 15% labour-sponsored venture capital tax credit to employee share purchase plans.

Thank you, and I truly encourage you to move forward with this powerful tool.

The Chair: Thank you very much, Ms. Markus.

We'll now hear from Mr. Perry Phillips. Welcome.

Mr. Perry Phillips (Board Member, ESOP Builders Inc.): Thank you, Mr. Chairman and committee members, for inviting me to speak to you this afternoon.

I'd like to commend Julia for an excellent presentation. I think she summarized a lot of the issues that are important to ESOPs in Canada.

Canada is the only G-8 country other than Russia that has no ESOP legislation and no policy in this area. Why is this?

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I have been coming to Ottawa for about eight years now. I've met with the last two finance ministers. I've met with multiple numbers of department officials at the administrative and deputy-administrative levels. And I've come to the conclusion that there are basically two reasons Canada does not have ESOP legislation in place right now.

The first is that it's not on the radar screen of the politicians. There is a handful of politicians who understand this concept; they have an understanding of what it can mean to our country. But it's not enough. It really isn't enough.

Secondly, and probably more importantly—and I say this with all due respect—the senior bureaucrats in the finance department are hostile to the very mention of ESOP legislation. I don't know the reason for this. In talking with other people and in trying to understand why this is so, the only conclusion I can come to is that ESOPs basically empower Canadians to take control over their own economic destiny. This is an empowerment that...and I personally don't think the finance people trust Canadians to take that control over their own destiny. Basically, they don't trust the voters who put you into place to do that.

What I'm saying here is there's no reason Canada should not have ESOP legislation. We're not creating something new. This is something that's been in the U.S. for 25 years. They have $1 trillion invested in ESOP companies. One out of three employees in the U.S. owns shares in their own companies. In the U.K., they have had ESOP legislation for 10 years now. It was started under Margaret Thatcher and it was expanded under Tony Blair, so it crosses all levels of political thought. In the U.S., it was started by Republicans and expanded under the Democrats, and now it's been expanded again under the Republicans.

So again I ask, why is Canada not here? Why are we not doing this?

The ESOPs we're suggesting are basically ones that are going to solve a lot of problems. Canada is facing a brain drain. We are competing now with countries that are growing in sophistication, so whereas before we could bring people into this country into high-tech communities and knowledge-based industries, now we're going to have to compete with offshore countries who are growing their high-tech communities.

We're also looking at a baby boom situation, where people who have started their companies 20 to 25 years ago are looking to find succession for their companies. Where are they going to find these people? They're going to be American companies, just as Nick said. And once you sell out, it's very hard to start that company again.

The reason I'm here today is to urge you to go forward as politicians, because the only way this thing is going to get done is if there is the political will to do it. In the United States, the only reason this got put into place was that Senator Long, who was the chairman of the finance committee in the Senate, decided that he was concerned, and he didn't want his country to be in a situation where 1% of the population owned 90% of the wealth. He put through this legislation for that very reason, and the results have spoken for themselves.

The time is ripe to look at some type of legislation in this area. There are a lot of countries to look at, to see what they have done, what's done right and what's not done right, but again, it's going to take political will. I urge you to do that.

Thank you.

The Chair: Thank you very much, Mr. Phillips.

Mr. Kidder.

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Mr. John Kidder (Director, Employee Ownership and Incentives Association): Mr. Chairman, my name's John Kidder. I'll try to present rather briefly, because the other members of the delegation have, more ably than I can, covered a lot of general points. What I want to be able to do is to get through this and get into some data, which I think you'll find interesting and I hope compelling.

Perry's talked about the need for political will. Well, political will is necessary to put in place public policy, and public policy's necessary to try to get those things done that the country wants to get done.

I think it's very clear, and you'll see as I go through this little exercise here, that employee share ownership is one of those things that has tremendous benefits for companies, for employees, and for the nation as a whole. So I'll go very quickly through these things. We've heard them all before.

Frankly, I think you all know this, and I'm sure everyone in this room supports these objectives—the employee benefits from ownership; potential good long-term gains; low marginal cost of getting in; a clear understanding of the company position, since a kind of open-book approach is taken in most employee-owned companies; and a chance to have a piece of the pie that those people bake, which is a very important part of satisfaction, part of living a good life.

Employee owners' interests are congruent with those of the other shareholders, which gets their drive to work persistent over the long term. Performance is motivated by the overall success, and improvement in productivity, which is incredibly important these days, is empowered across the entire enterprise.

In regard to the employer's point of view, I'll go quickly through this. Perry talked briefly about competition for staff. I really am in competition for staff. I run a small technology company in Vancouver, and I'll tell you, the great sucking sound from south of the border is audible to me every day. I hear people moving on.

This kind of stuff helps us very much to attract, retain, and compete with the kind of benefits offered in the U.S. It's critical that companies in Canada have this. We're not talking about grand lowering of tax rates or that sort of thing. I don't think that's what's important. What's important is for us to provide employees with an equivalent-quality job with the same kinds of benefits that pertain.

It is an astonishing performance motivator. To have people who are fully aligned with the goals of the company, as Nick said, makes an enormous difference to performance. We all know about the situation with productivity in Canada. We're falling behind in the G-7, much of the world. We know this is a great driver for moving that ahead and it's a driver for continuous improvement, no matter what the metrics are, quality, etc. Everybody involved makes these things fly.

I'll go very quickly to new companies, only because I represent a new company. We're cash poor. New companies are cash poor generally in the near term. The market for people is extremely competitive now. It's only going to get worse as the boomers start to retire. Shares and options are used to make up competitive remuneration. Without a shadow of a doubt, employee share ownership is an important factor there.

I won't even get into shares versus options. Options can be complicated. Shares are simple. Financial benefits are only part of the equation here. The sense that people have a piece of the rock is a different sense in that they have a potential for making profit. It is a totally different feeling. I know that from all of my staff. Everybody in my company owns shares in the company. It's absolutely fundamental to the way they feel about it. They also all have options, which causes them to be reviewing the stock charts every day. That's a different set of feelings, totally different.

I don't know whether you can see this, but you do have the slides here in your packages somewhere. Let me just go quickly through and summarize some of the research results, which are immensely important.

First of all, there was a study done at Rutgers. ESOP companies grew 2.35% faster per year. That's a couple of more significant digits than you could probably put on that, but over 10 years, that's 26% extra growth attributed to ESOPs. ESOP companies paid in Washington State 5% to 12% higher than non-ESOP companies, and they had about three times better retirement benefits. That's a very significant benefit for the employees.

Northwestern University estimates that the return on assets of ESOP companies—I'm a chief executive, and these things are important to me—is 6.9% better post-ESOP. If that's compounded over 10 years, you're looking at 95%.

According to the Rutgers study, the ESOP share-price growth was 133% better than in the non-ESOP companies. This is from 1992 to 1997, when the stock markets were moving along pretty rapidly. Now, one may quibble over whether share prices are a proper metric of corporate performance, and certainly they are in many ways not, but clearly these companies outperformed other companies on that basis.

There was a study done in the TSE that I found startling. They had 24% higher productivity; 123% higher five-year profit growth; 95% higher net margins; and 65% higher return on capital. These are astonishing numbers. If you find anything in public policy that enables you to differentiate so quickly between high-performing companies and companies that don't do so well, I suggest you jump on it also, just as I suggest you jump on this.

In terms of operating margins, they're 2% better per year; that's about a 23% compound growth over 10 years. I can't resist this. My shareholders can't resist this. I want all the shareholders in my company, all the employees, to be owners so they can't resist it either. This is clearly a huge incentive, and I suggest it can be done by government at very little cost.

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Clearly, then, employee share ownership has benefits to the employee and benefits to the employer. What I want to talk about now is the benefits to the taxpayer, because we're all taxpayers here. As well as being people with various other axes to grind, we all write cheques to you guys to administer.

From the taxpayer's perspective, these tax credits are astonishingly efficient job creators—I'm going to base a lot of this on the data from B.C. that Julia referred to earlier—and astonishingly efficient revenue generators.

Here's the B.C. government data, as I have it. I don't have the direct study but I'm taking this from secondary sources. There were 8,000 new jobs from a 10-year ESOP program, with about $30 million in total raised in that ESOP program. They pay a 20% tax credit, so there was a $6 million tax expenditure to generate 8,000 new jobs. I'll point out that's $750 a job. You might want to ask HRDC, Industry Canada, and some of the others how they'd do with $750 a job, and see where that comes. This is an amazingly efficient way to work.

The government estimated in B.C. that they get 7% new tax revenues over a 10-year stream for a $1 tax expenditure. That's a 33% internal rate of return. You're not going to beat that. I know what the hurdle rates are for government investments, and they sure are lower than 33%. It's a remarkably cost-effective way to create jobs. It's a remarkably good investment to boot.

Now, that's just British Columbia. If you extrapolate that to Canada and make a few assumptions, let's assume for the sake of argument the federal government matches a 20% credit. So we're trying to overestimate the tax expenditure here following the leadership of our finance minister. The federal leadership, though, makes the program national. That is, other provinces, etc., say “Okay, we have some leadership coming from the feds here, we can follow British Columbia, Manitoba, and Nova Scotia”, which I think are the three now. And let's assume then that as a result of this participation nationwide, it grows 20% over the British Columbia rate.

The numbers are pretty straightforward. The federal tax expenditure to do that would be $5.4 million a year. That's not exactly peanuts to a little company, but it's not a very significant tax expenditure. Compare that with your SRED programs, compare that with any number of other tax credit programs—it's a very small amount of money.

The result is that over 10 years the total investment generated, assuming the B.C. numbers flow, would be $268 million. That is astonishing leverage. You're not going to get that with many other programs or any other ways to manage your fiscal policy. If you follow the B.C. model, 71,000 new jobs would be created; again, that's $750 a crack. And you would generate, according to the B.C. model, $375 million in new tax revenue over the period.

I'm happy to sit down with anybody or provide what data I have to the researchers so you can verify this and take a look at it. I want to suggest that even if you take these assumptions and whack them in half, what you have here is an astonishingly effective way to affect behaviour.

You'd get better business performance, certainly; look at those numbers from the TSE, local companies. You'd get better employee security, absolutely, without a shadow of a doubt; improved productivity, because employees are engaged in their businesses; greater Canadian ownership to help some of the things that Nick talked about and to ward off an ever-present threat; and of course enhanced government revenues. All those things flow from a relatively simple set of actions such as the ones Julia has recommended.

In summary, ESOPs are efficient. They're cost-effective means to assist economic growth. Non-partisan support, and I suggest all the members of the delegation have spoken to this, can be expected. I believe this kind of program speaks to the general needs of citizens, businesses, poor people, rich people—all people can get behind this kind of a program because it just makes sense all around. The tax expenditures required are small and the results are measurable and substantial. You can hang your hat on it, you can lay out a certain program of tax expenditures, and you can say “Based on prior experience, these are the results we expect to get”, and you can then measure whether or not those results do occur. And you will understand this is a program that needs your support, needs to be moved forward through this committee on into legislation.

Thank you very much.

The Chair: Thank you very much, Mr. Kidder.

Now we'll go to the question and answer session. Any member can have up to 10 minutes to ask questions.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you, Mr. Chairman.

I found this really fascinating. I was wondering how we could incorporate this in the federal government and maybe somehow make our employees of the government shareholders in the country more than they are. In a sense we're all shareholders of the country.

I have a couple of questions. It's curious that you should come here today because it's only three days ago that I was talking to two guys who worked for Canadian Airlines. It's interesting, because one guy told me it cost him $100,000 because he owned shares in his own company.

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As you know, Canadian Airlines had a very strong employee participation program just to keep their company afloat. He told me he lost $100,000. He paid $110,000 for his shares and at the end he got $10,000 for them. He said it wasn't a good deal, but the only thing he could argue was that he kept his job for about three years longer than he might have if they hadn't entered into that particular agreement. So I guess he did say there was a little bit of an indirect help there for him.

I like your enthusiasm for your topic. That's really good. But none of you has even come close to saying “But you know, members of the finance committee, you should be aware, there are a few downsides, and a few risks, and a few problems”. You didn't mention any of them. You must be aware of some of them.

Ms. Carolyn Bennett (St. Paul's, Lib.): I think you must have been snoozing.

Mr. Ken Epp: No, I sure wasn't.

Ms. Carolyn Bennett: It's right here under “risks”.

Ms. Julia Markus: It's one of the challenges, the risk of employees losing their investment.

Mr. Ken Epp: All right.

Ms. Julia Markus: May I respond to that?

Mr. Ken Epp: Sure, please.

Ms. Julia Markus: I'm fairly familiar with the Canadian Airlines employee buyout. In fact, one of the board secretary treasurers had been the international secretary treasurer with the machinists, who initiated that buyout to keep the airline afloat. I learned quite a lot about it and I can say that it was very badly designed. It was set up so that the employees had no control over their equity and they had no real level of participation in decision-making. It was a very difficult situation and it could have been avoided if there had been regulation for employee ownership plans, which of course there would be if there was any tax support for it. I think a very important aspect of the government being involved in it is to safeguard that these don't happen.

Mr. Ken Epp: But there are always risks, when you have shares in a company, that the company is not going to perform as anticipated. I know that having the employees involved, as you're suggesting, would certainly improve the probability of success because the employees are really all going to work together.

I've worked in both kinds of places, where the employees own the company and in other places where they're nothing but employees. One thing I have observed is that if there are two or three people working together and they own the company, the guy who isn't pulling his share of the load soon has what we call peer pressure to pull up his socks, whereas in the case where they are just employees you tend to say, I want to keep peace in the family so I won't say anything, and nothing happens.

So there is that part to it, but there are also many factors totally outside of the control or even the influence of employees or shareholders who aren't employees. There is an added risk in that sense.

I want to move on to another question. You indicated a few things specifically with respect to what governments should do. You mentioned allowing loans to be made to buy shares for employees and to allow that interest to be a business expense. Are there any other tax incentives that you have in mind?

Mr. Sherman Kreiner: Perhaps I can respond to that.

The American model both Julia and I spoke about basically tries to have a set of aligned tax incentives for all stakeholders in the transaction. The first thing it does is create a tax incentive for the selling shareholder. The selling shareholder could sell to anybody. But if the selling shareholder sells to an employee group, then there's a different capital gains tax treatment than if the selling shareholder sells elsewhere. If 30% or more of the company is sold to employees, then the selling shareholder doesn't have to pay any capital gains tax, there's a rollover. Basically he can take the proceeds, invest it in a qualified business, which can be IBM or a new start-up, and there's no capital gains tax that accrues to that individual until he disposes of the investment he makes subsequently. So it's trying to provide an incentive for shareholders to sell to employees.

For the employee-owned company itself, the mechanism is a borrowing mechanism, a leveraging mechanism. To make sure the company is not overly leveraged, both interest and principal payments are tax deductible. That's a way to encourage the company to proceed in that fashion.

And then for about 12 years during the seventies and eighties, the U.S. legislation also provided incentives to lenders to facilitate them participating in the transactions. Once it became a routine transaction they didn't do that any more. But they gave a 50% interest tax credit to lenders who provided loans to transactions that facilitated a selling shareholder selling 30% or more of the company to employees. So all the parties who would be part of that transaction were encouraged through a set of incentives that were appropriate to their needs to participate in the transaction.

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Once that was routinized, it wasn't necessary to provide those incentives to lenders any more. It was then a routine lending transaction, and the tax incentive for lenders was removed from the U.S. legislation, without there being any subsequent impact on the rate or scope of participation in those plans.

Mr. Ken Epp: Does that not generate an IRS nightmare, to attract these different components?

Mr. Sherman Kreiner: Just regular standardized filings are required by ESOP companies. There are 11,000 companies that do these filings, and there seem to be appropriate administrative safeguards in place to be able to track the programs, the employee benefits, and the tax benefits associated with them.

Mr. Ken Epp: This is a question I was actually going to ask first, but I had my mind thinking about these things. Going back to Crocus, you're an umbrella group that manages the shares of the different employees from the different companies. Is that what you do?

Mr. Sherman Kreiner: No, we're an investment fund. We're a labour-sponsored venture capital corporation. Manitoba shareholders invest in us and then we invest our money in small and mid-sized Manitoba businesses, primarily giving them equity capital to help them grow.

One of the judgments we made was that it was important, in terms of being able to help businesses grow and maintain these Manitoba-owned businesses, to have it as one of our objectives to try to facilitate those companies in the transition of their ownership to employees.

The question Julia raised was how do you get these companies from one generation to the next? You have a lot of family-owned businesses. There's no succession plan. The kids aren't there. They're doctors or lawyers, or whatever. They're not interested in taking the business over. The people who want to operate the business and maintain it are the managers and employees of the company, but nobody treats them as serious buyers because they don't have enough resources to be able to buy the company.

The idea of the Crocus Investment Fund was to create a supplemental pool of equity, so their money and our money could be facilitative of a gradual transition, instead of the owner shutting the business down on the day he retires, or selling to a non-local owner, who's buying for market share and not for operating capacity. Because we're so far away from commercial centres, on the first opportunity to rationalize the Manitoba business will be shut down. We're trying to facilitate a process of involving employees in that business, because they'll operate it from one generation to the next.

Because employee ownership has positive business effects, you can start implementing that when the owner is 45, 50, or 55. It doesn't have to occur right at the time of transition. If the employees have a stake, that's going to increase the value of the owner's shareholdings over the next 20 or 25 years. Then the employees will have a large enough stake that it will become another estate planning option. He might sell to them, or he might not sell to them, but if they own 15%, 20% or 25% of the business, it's another real option and an alternative to selling the assets and shutting the business down when he turns 65 or 70, and finds out there are no other buyers out there.

Our goal is to provide capital to help those businesses grow; to help transform them into minority employee-owned businesses, where there's an interest as they're growing; and then be facilitative of a major transition to employee ownership at retirement age, if that turns out to be in the owner's interest.

The Chair: Ms. Markus.

Ms. Julia Markus: I'd just like to place this in context. One of the major accounting firms recently did a study and said that this is a situation we're going to face in Canadian companies worth $1.7 trillion. Depending on which study you read, between 50% and 80% of them have no clue of what they're going to do as an exit strategy. This is a fairly frightening scenario, if we look at companies as being the wealth generators of our country.

The Chair: Mr. Epp.

Mr. Ken Epp: The other thing you talked about was productivity. We did some productivity study in this committee, and I found it interesting that productivity was correlated to, but not equivalent to, standard of living. It talked about the economic output per person employed. So if you had a whole bunch of people who were unemployed, they wouldn't enter into the productivity equation at all, which of course would affect the economic welfare of the whole country.

When you talk about productivity, I presume you are indeed talking about more output per employee. That certainly seems to be your theme. You had some numbers out there that flew by rather fast, but I'm just wondering whether you have any hard data, say from the United States, where this has been tried in a better experiment than here—actual productivity numbers, as opposed to just output per company, and so on.

Ms. Julia Markus: How would you define actual productivity?

Mr. Ken Epp: According to our definition—the best I could get—productivity is an economic output per employee.

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Ms. Julia Markus: Do you want to somehow roll in the unemployed as well?

Mr. Ken Epp: On the unemployment rate, according to your work, you're talking about employing more people, but if you employ more people, then the output for that company has to grow at a greater rate than the percentage of new employees.

Mr. Sherman Kreiner: That's what the study showed. Two things are happening. The level of revenue growth and the level of employment growth are increasing. In addition to that, the level of output per employee, even including the employment growth, is increasing.

So two things are happening at one time. The business is growing faster, so the number of jobs is increasing, and the level of output per employee is also increasing, taking into consideration the increased number of employees that are associated with the employment growth.

Mr. Ken Epp: I just wanted to confirm that this was the definition of productivity.

Mr. Sherman Kreiner: Yes, and the studies are actually quite sophisticated because they've been going on for 27 years now. There are matched pairs of businesses to look at—specific conventional companies with identical characteristics, or as close to identical as possible, matched up with companies that have either employee ownership, participative management, or a combination of employee ownership and participative management.

Ms. Julia Markus: We've provided a summary of all the pertinent research in your package of material.

Mr. Sherman Kreiner: We have, as well.

Mr. Ken Epp: We just got them.

Mr. Sherman Kreiner: There are 43 studies now in the United States. It's exciting when virtually all of them reach the same conclusion.

Mr. Ken Epp: Okay, good.

Mr. Nick Logan: One of the problems with measuring productivity is if you start measuring a company that isn't productive, it's not there when you finish measuring it.

I'm in the money business, and if we can't be productive in lending our money out, we're not going to be there at the end of the line. So productivity is not a very good measuring point.

Mr. Ken Epp: I have one last question on your relationship with employees. Do you find that the anxiety level of employees goes up? This is sort of the flip side of what I was saying before, where there seems to be peer pressure and employee-to-employee accountability, if you all own a cut of the cake.

In companies where there is employee ownership, I would think it could also lead to an increased amount of inter-employee conflict, because some people just don't produce up to par. Then they would get into trouble. I wonder if you have any perspective on that.

Mr. Perry Phillips: I think I can answer that. We found, in companies that placed ESOPs into their companies, it's not for everybody in the company. We're talking about human emotions and human behaviour. There is usually a certain percentage, around 10%, that because of their risk profile will not invest in their company. There is some peer pressure on those people to invest. They tend to leave the company, and the company then attracts more entrepreneurial types.

You're quite right, it's not a culture that lends itself to everybody, but because participation rates are high enough, it does create the culture where people are in the same boat and are pulling in the same direction.

An ESOP is not a magic bullet. You mentioned CP. When the economic conditions are such that a company is going to go under, it's going to go under. There's nothing you can do to prevent that. You can prop it up, but it's a false use of economy.

ESOPs are really good for companies that are growing and want to be even better. In the United States, studies have shown that 9 out of 10 companies in turn-around situations, such as CP, have used ESOPs to actually turn around their companies. So maybe CP was one of the 10 that didn't do it.

The Chair: Mr. Kidder.

Mr. John Kidder: I'd like to respond to both the last question and the first one.

I can't imagine any government program initiated that would eliminate risk from the business climate. I don't think any of us would countenance such a thing. Clearly, evolutionary pressure, if you can call it that, is very important for selecting good companies from poor companies, and good business plans, etc. But to a certain extent, I think, employee involvement, in whatever fashion it may take, certainly mitigates that risk. It reduces it quite substantially.

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I'm sure my company is a very different kind of business from Nick's, because we are in high-technology, start-up mode, and believe me, this is fraught with peril. We could fall at any moment, and everybody in the company knows that.

In the situation where the people in the company are employees working for wages, and they know they can fall off a cliff at any moment, there's a certain set of pressures there. In the case where they're shareholders, the same pressures exist. It doesn't change that. You may stand to lose your livelihood; you may stand to lose your benefits; you won't have a medical plan—all that sort of stuff. But you have a different set of incentives for working to keep that thing going. So it's actually less likely to fail. I don't know whether there's data on this in these many, many U.S. studies, but I'm sure there is some, or I'm sure it could be pulled out from other things.

So I think that's one thing that's very important. Nothing can eliminate risk. But my employees—and this is just a personal, anecdotal experience—are on me all the time about ways we can do this better, ways we can in fact further mitigate or reduce risk, or, “Have you seen this? There's some new competitor I found on the web. For God's sake, what are they doing?”

This is a different kind of a reaction than from people who aren't owners in the company. Sure, they live with a higher level of stress, I suppose, because in fact they're going to share the resulting rewards, and they feel like they're building the company. So it's quite a different mindset, in my particular experience.

The Chair: Thank you.

Ms. Markus.

Ms. Julia Markus: I'd like to add to that by reiterating that part of the reason we're recommending the creation of a no-cost equity plan for employees is the financial differential and the risk aversion differential that exist among employees. So I've seen before kind of a have/have not mentality develop in a company, which is somewhat divisive.

If you were to do an ESOP with the shares being allocated to employee accounts, it would be equal across the company. It would involve everybody and give them the incentive but take away some of the risk.

The Chair: Okay.

Mr. Cullen, followed by Ms. Barnes.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thanks to all of you, some of whom are very familiar, and vice versa. I thank you for coming, and I encourage you not to be frustrated. I'm glad that you came.

The productivity issue is an important one, to my mind. I know our chairman and this committee have been very much interested in productivity. If you look at productivity trends generally in Canada and compare us with our U.S. neighbours, although there has been some positive movement, there's always a challenge to keep up with the productivity in the United States. And that says a whole stack about our standard of living and our disposable income, etc.

Mr. Kidder, you talked about the Northwestern study. If we're looking at a return on assets of 6.9% better post-ESOP, it seems to me that there are so many different proxies here that speak so positively to productivity gain. If you're looking at total factor productivity, return on assets is a pretty good proxy for getting more mileage out of all your assets, it seems to me. The Toronto Stock Exchange study...24% higher productivity. I presume that was labour productivity per employee. But I know...and it seems to me the productivity argument is very, very strong.

Mr. Kidder, you talked about federal tax expenditure of $5.4 million a year, and you offered to share that with the committee and the researchers. It would be useful because I know that when Perry and Julia and I were mucking around with the department and that, we got significantly higher figures than that. Of course, that would be consistent if the department was not very keen on the idea. When you're making estimates, you can be conservative, or you can be whatever. But it would be interesting to know how you derived that number because it's significantly lower than the number we have. And, of course, it depends on the tax measure that you implement.

I have just a couple of questions. On employee share purchase plans and employee share ownership plans, can you—whoever wants to have a bash at this—just highlight the difference? Are employee share purchase plans sort of focused more on large, publicly traded companies? Define the difference.

Mr. Sherman Kreiner: I think the basis for them is different. The employee share purchase plan is basically a plan where we're trying to encourage an individual to reach into their jeans, take out some money, buy some shares, and try to get the most mileage out of that. And the way we get that mileage is through providing a tax credit for them so that in some ways they're able to extend their money a bit further.

An employee stock ownership plan is really a mechanism that is leveraging corporate assets. So they're leveraging individual assets. An employee stock ownership plan is a plan that's leveraging corporate assets. Basically, employees as a group are borrowing against the assets of the company to create employee ownership.

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I think there's a fundamental difference between those two, and the employee stock plan ownership model is the U.S. model. To the extent that we have a model at all in Canada, it's the employee share purchase plan. I think the productivity and other consequences are most profound when the ownership is as broadly based as possible.

I think it's instructive that in Canada, in the median private, employee-owned company—and there are fewer private, employee-owned companies than in the U.S.—employees own 11% of the stock. In the median private, employee-owned company in the United States, it's 35% ownership. In public companies in Canada it's 5% ownership, and in public companies in the U.S. it's 14% ownership. The scope of participation in the United States, where there's an employee ownership plan, is such that in most cases 80% to 90% of the employees participate in that plan. In Canada, in more than one-third of the employee ownership plans, less than one-half of the non-management employees participate in the plan.

So if you look at the breadth and scope of ownership, the employee stock ownership model has many more people participating with a much higher percentage of ownership. Share purchase models have many fewer employees participating with a much lower percentage of ownership. To the extent that you're trying to get employment growth, sales growth, and productivity growth, you want to have broader ownership and greater ownership. You can get much more ownership if you leverage corporate assets than if you leverage personal assets.

Mr. Roy Cullen: Okay. Now maybe everyone in the group can comment on this. In terms of employee share ownership plans, would you suggest that the employees would be required to, or should also, contribute? It touches on Mr. Epp's point about risk. It also touches on Ms. Markus' point about feeling more committed and involved. What formula would you be looking for?

Perry, do you want to have a crack at that?

Mr. Perry Phillips: Sure. I guess we probably differ there a little bit. It's been our experience that, if someone has an investment and actually signs a cheque, they take a higher level of interest in the company. You don't have to basically spend your total bank account to invest in the company, but there should be some type of investment and some type of cheque written because we find then that it becomes real to the person. When you give something to somebody, sometimes that's what they feel it's worth. But we would not go to the extent that anybody should be encouraged to spend a lot of their money investing in their own company.

Mr. Roy Cullen: Thank you.

You've touched on many of the advantages of employee share ownership plans. If you look at the demographics, the baby boomers, and the pressures that are going to be on our retirement system.... We looked at the baby boomers, succession planning, and some of the clear ideas there that make some sense.

As far as a source of capital, let's say for SMEs, which are always a challenge, could you just elaborate for the committee? If employees, for example, are not putting up any of their own capital, clearly, if it's tax deductible.... One of the witnesses mentioned that the principal and interest would be tax deductible. Maybe you could elaborate on how that would work. That's a pretty generous provision. But is it because of the tax-sheltered leverage finance that provides a new source of capital, or where does the new capital actually come from?

Perry, could you answer that?

Mr. Perry Phillips: Well, Sherman can answer for the venture capital.

What we've seen is that there's normal financing availability for these issues. In other words, the employees certainly have a certain portion of their capital invested. It may come from RRSPs. It may come from either current or past contributions, and then the vendor may do a take-back. In other words, like a mortgage...if they sell their company for $10 million, the vendor may take back $4 million or $5 million and finance it that way. As well, there are financial institutions that are looking at the succession issues and are financing the deals on leveraging the assets.

Mr. Roy Cullen: Sherman, maybe you could expand on this. I thought you'd said “deductibility of principal and interest”. Could you comment? Let's say employees are not putting up any of their own capital. Where is the source of capital coming from?

Mr. Sherman Kreiner: It would be from a conventional lender. The conventional lender would be loaning money to the employee benefit trust, often secured by a hard asset of the corporation. The trust is then using that money to purchase shares from a shareholder. The company is making an undertaking that it will contribute to the trust an amount that's equivalent to what the trust owes under the loan. So the company makes that payment to the employee benefit trust. Because it's a contribution to an employee benefit plan, it's deductible in the same way as a contribution to a health benefit or a pension plan. Then the trust just takes the cheque, turns it, and signs it back over to the lender.

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Since it's structured as a contribution to an employee benefit plan, the full contribution of that benefit plan is deductible. And that is the equivalent of interest and principal payments on the loan. So the way the American model works is that there's basically lending coming in for the benefit of employees being repaid by an undertaking from the company to contribute to an employee benefit plan. That undertaking and the money that's paid is all deductible. So both the interest and the principal payment are done in pre-tax dollars.

That model is a model of buying out a selling shareholder. I was talking about the incentive that's provided for that individual. Many transactions in the U.S. involve the same mechanism. Instead of purchasing from a selling shareholder, they're purchasing from treasury. So in fact it's normal corporate financing that's occurring, that's being funnelled through an employee benefit trust for the benefit of employees. It's expanding ownership. It's diluting current owners to the extent that it's expanding ownership. The benefit that the company gets or the existing owners get is that the repayment is in pre-tax dollars.

The dilution is to an extent an ownership base, but that ownership base has the outcome expectations in terms of productivity, sales, and employment growth that we're talking about here. Notwithstanding that there's diluted ownership, the return to the existing owner should still be as good or greater than it was in the past, because you now have everybody pulling together on the same side of the equation in terms of improving performance.

In response to the question you asked earlier, while it's intuitive that a sense of ownership comes from people going to their chequebook and writing a cheque, actually the U.S. experience and all the U.S. outcomes are non-contributory plans. They're based on people getting that ownership through the leverage mechanism I just outlined. The outcomes come from a sense of ownership associated with what occurs on your job from day to day.

So ownership alone doesn't do it. Ownership combined with participatory management does do it, because participatory management causes you to act and think like an owner. So the acting and thinking like an owner comes from what you do on the shop floor every day, what decisions you have, the ability to participate. That's going to have a longer-term impact than the impact that comes from writing a cheque.

For employee-owned companies alone, the performance outcomes are short term. There's the Hawthorne effect. It goes up and it goes back down. You write the cheque, you feel like an owner for a couple of weeks, but if you don't have any say on a day-to-day basis in what occurs, that gets lost. If you have it every day, then it's maintained.

Mr. Roy Cullen: All right.

Ms. Markus talked about the idea of a similar tax credit as it relates to employee-sponsored venture capital funds, to applying that to tax credits for ESOPs. Would an organization such as yours support that?

Mr. Sherman Kreiner: Yes. I don't think it's contrary to what we do. I think it has less of an impact because it's leveraging personal assets than would be the case if you implemented a mechanism that leveraged corporate assets, which is closer to the U.S. model. I don't think it's inconsistent, contrary to, or competitive with the tax credits that would be provided to investors in the labour-sponsored investment funds.

Mr. Roy Cullen: When you talked about the original thinker on ESOPs in the United States, Mr. Kelso, it looked like some kind of move against capitalism and sharing of the wealth and the assets...although in later years the productivity argument probably became stronger. It clearly distributes wealth as an incentive for more people to achieve those productivity gains and those personal gains.

Even if you look at the United Kingdom, under Margaret Thatcher, the very staunch Conservative, she brought in a number of measures to broaden employee ownership. Even the council houses—it gave them a piece of the rock, so they took more responsibility for it.

One of the propositions has always been that in Canada we need to deal with general tax relief first, because every time you look at specific tax measures...and this committee hears thousands of ideas that sound very good. If you added them all up and implemented them all, then our government would not have been able to introduce a $100 billion tax relief package in Budget 2000 and the economic and fiscal update.

It seems to me we're on our way. In the United Kingdom, I'm told that they started out with general tax relief first under Margaret Thatcher and introduced incrementally the employee share ownership incentives. You could perhaps tell me if I'm right or wrong on that.

I understand that recently the U.K. has introduced tax incentives for ESOPs, and all employees must be eligible to participate, not required, obviously. Employees are allowed to receive up to about $13,500 in shares tax-free, with no tax on subsequent capital gains, if shares are held for at least five years.

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Could you perhaps comment, Perry, on the U.K. experience and the way they've staged it, if they have, and whether this type of provision makes sense in Canada?

Mr. Perry Phillips: You're quite right. That's basically the way the U.K. plan implemented itself. It started off small and then the plan was amended as it went along.

The current situation is that Tony Blair has indicated publicly that he wants to triple the number of ESOP companies. So they've taken their current plan and expanded a lot of the limits they had prior to that.

Mr. Roy Cullen: So this is just an expansion, this tax-free, no-capital gains if the employees hold the shares for five years. It is not a new tax measure.

Mr. Perry Phillips: As I understand it, basically, they rolled a lot of the measures into one or two measures that were previously in multi-jurisdiction. So in that sense it's a new role, but it's still using a lot of the basics they had 10 years ago.

Mr. John Kidder: I'm sure you hear hundreds and thousands of proposals, and I know that in your various letters you get probably, in order of magnitude, more proposals. I would suggest, though, that data from various studies seems remarkably consistent. I haven't looked at this in anything like the depth that Sherman has, but I certainly concur with Sherman. It's quite astonishing to me.

Before I decided to have a real life, I used to be an economist. It's amazing to look at this very large number of different studies and see the consistency. It's quite something. So that tends to give it a certain veracity it might not otherwise have.

Assuming that some of those extrapolations are even reasonably true, then just from the direct tax expenditure point of view, the rate of return on this kind of thing is really astonishingly high. I would suggest it far exceeds whatever you might have set as a hurdle rate to look at things moving forward, and you'll find it to be extremely competitive. Certainly the numbers with respect to job creation, if the B.C. experience is right, are again a remarkably cost-effective way to do that.

So I understand you do have to go through a ranking process with these things. I suggest that a cursory look at this data suggests that this should come fairly close to the top of the stack. And that's not including the actual effects on the general economy of productivity, of employment, and of potentially saving businesses in Canada, which might otherwise go to foreign ownership, etc. All of those things can be viewed as very positive externalities of this kind of program, but on the basis of the direct measurable effects of fiscal policy, I think this thing should come fairly high.

Mr. Roy Cullen: I agree with you. The data is fairly strong. In terms of, let's say, jobs per tax expenditure dollar, productivity lift, or economic growth per tax expenditure, it looks fairly convincing.

In Budget 2000 we introduced the tax-free rollover. You could roll over your capital gains as long as you invested in a qualifying company, and a qualifying company is basically any kind of small company. Would that be equal or somewhat equivalent to what the U.K. has done? In other words, if an employee held shares in a firm, could they not take advantage of the tax-free rollover?

Mr. Sherman Kreiner: I think that's more equivalent to the selling shareholder rollover provisions that exist under the U.S. law. The section 1042 rollover is basically that, but it's triggered by selling 30% or more of the shares of a company to an employee group.

Mr. Roy Cullen: Our provisions don't require that. I'm not suggesting that this goes the distance, but in terms of what they've done in the U.K., it seems that if an employee held shares, they could at least defer their capital gains. The problem is that most of the people, in terms of longevity and turnover, don't want them to keep rolling their shares and moving to other companies, but at least that's a step forward.

I'm not sure it really addresses the challenge you're proposing here.

That's all for now, Mr. Chairman.

The Chair: Mrs. Barnes.

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Mrs. Sue Barnes (London West, Lib.): Thank you, Mr. Chair.

Thank you for coming today. This is my first hearing on this area, so some of my questions I'm sure are simple and straightforward, and then others are just exploring.

First, some of the provinces have legislation. Could you tell me which ones they are?

Ms. Julia Markus: British Columbia and Saskatchewan both have employee ownership tax incentives, though in different forms. Nova Scotia's is not specifically directed at employee investment, but rather investment in any provincial businesses.

Mrs. Sue Barnes: The American states all have their separate tax regimes, which are quite complex and quite different. I was wondering if, from what you see on the table in other countries, there is any one jurisdiction you would point to as a model piece of legislation.

Mr. Sherman Kreiner: The answer is that state legislation is not terribly relevant to this. In the United States it's all really federal tax and employee benefit law. What we would be advocating is an adoption of those U.S. provisions into Canadian federal tax and employee benefit law. But I recognize that in Canada it would be most effective if it were done correspondingly by the provinces as well, which is why we're also exploring similar corporate tax treatment of employee-owned companies in Manitoba, so that for provincial and federal tax purposes the treatment would be the same.

One of the things we would propose as a way to test this out and try to understand what the fiscal consequences, as well as the non-fiscal benefits, of this are is a demonstration project, where you introduce ESOP legislation with one province and say that if a province chooses that treatment under provincial tax law, they'll get the same treatment under federal tax law. You then have the ability to demonstrate that on a relatively small scale, and you can do a fiscal analysis of return on taxpayer investment without expending huge amounts of money across the country to try to see if the fiscal benefits we think will occur would in fact occur. Then you could roll it out more broadly.

Mrs. Sue Barnes: I was looking at the letter from the Boyd Group, and they're talking about cross-border issues. In their case, are they cross-border with federal U.S. tax?

Mr. Sherman Kreiner: Yes.

Mrs. Sue Barnes: And provincial legislation?

Mr. Sherman Kreiner: Yes. That's correct.

Mrs. Sue Barnes: Okay. We have a lot of multinational companies, obviously growing quickly, and there are cross-border issues. Would it be easier for these corporations to use the options method of compensating their employees, because they do not get into the cross-border issues that you're seeing here as a challenge and a problem?

Mr. Sherman Kreiner: I guess this is really a philosophical question—

Mrs. Sue Barnes: It certainly is.

Mr. Sherman Kreiner: —about what you accomplish by offering options. It may be that it's easier to implement options, but it's not clear that the outcomes you want to derive are going to be accomplished by options.

Mrs. Sue Barnes: But it is the main reward program for most multinational corporations that are growing at a fast pace right now. Do you have examples within the same company where they're using both options and employee share ownership?

Ms. Julia Markus: Yes, and it's more and more frequent. Celestica, for example, has a completely broad-based employee share purchase plan and an options plan.

Mrs. Sue Barnes: For executive level?

Ms. Julia Markus: No, company-wide. They did offer financial support to their management people so they would invest heavily.

We are now dealing with a lot of growing technology companies, and there is, as you probably know, a real backlash from shareholders about continuing to offer option grants. Stock options seem to be a necessity as a recruiting incentive, because other companies are offering them as well. But subsequent to that, a share purchase plan seems to be a way to keep employees onside. Even though there is no apparent advantage for employees in actually purchasing shares in their company, if the company adds a matching contribution to that, then it becomes advantageous for them to do so.

Mr. John Kidder: I'd like to make a quick comment on that too, if I could.

In our very small company—and I wouldn't suggest you can take data from Coldswitch and apply them to the rest of the world—we have both options and employee share ownership, and I wouldn't have it any other way. But I think some of Sherman's data, which indicated the wide discrepancy between Canadian and American companies, are relevant to this also. Junior companies in this country are very limited in the numbers of stock options that can be offered. There was a tendency, when these things were unregulated, for the CEO and his or her friends, of course, to have vast numbers of options, relative to what the shareholders got. This is now limited by the CDNX and various other regulatory bodies, securities commissions across the country, to the point where for junior companies it's very difficult to allocate more than, say, 5% of the total issued and outstanding share base as options.

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That then means there's a very strong push to find a better way to actually get ownership in the hands of employees, because you're very limited, as a junior company, in what you can do with options, there's a cap on the amount you can issue.

Mr. Nick Logan: Can I just add a bit to that?

There seems to be a logical progression in management style. What we're asking you for are some more tools for our tool box to build better organizations. We start off with employees who are on fixed salaries, with fixed responsibilities, and then they say, I'd like a little incentive to do some other things over and above what I'm assigned. So you build in a larger compensation package where some of it's at risk—if they can't achieve, they don't get paid as much.

Then management comes along and says, we need to borrow money to buy some stock. So the company has to lend the money to buy the stock, because they didn't make any money when they were building the company. Then you come back and say, we have to have a plan—like the one we set up with Crocus—where we can give all the employees stock if we're successful, and that begins to get everybody thinking like owners.

Then you get into these high-tech people who say, we've got to have options, because we're putting in 23 hours a day building Internet software, and if this things goes, we want to get a big spike with it. So you introduce options, but you are limited in the number of options you can give out, or even want to give out, because it dilutes ownership so quickly.

Mrs. Sue Barnes: It dilutes your shareholder price.

Mr. Nick Logan: And then why would you give someone new coming into the company so much benefit? Hence, employees come along and they're just as they are with John and me all the time—I just inherited some money, I'd like to buy some stock, why can't we buy some stock in the company we know something about?

So you've moved all the way down the scale, until you've got a lot of clients. It's very difficult to administer them, but it's very much a logical, methodical progression, until you get people who are very sophisticated at dealing with ownership issues within their company.

Mrs. Sue Barnes: Just like people who own their companies—they can buy other people's shares, but they can't invest in their own corporation out of their own retirement savings self-directed plan.

Mr. Graham also raised an issue in the same letter about a problem with a major trust firm which was unwilling to act as the trustee for the shares, and that just surprises me. Is there something unusual about that particular situation? Trust law is pretty mature law.

Mr. Sherman Kreiner: It's the nature of the details of the ownership plan and the legality of the plan, the framework for the plan, how that plan is legitimized, that raised some of the concerns. We've been able to circumvent that by using a non-trust company trustee.

But the problem is that there's no framework for employee ownership, there's no public policy support for employee ownership. So I think there's just some general uncertainty that companies have, and all potential stakeholders in a transaction, about whether this transaction is going to withstand scrutiny, what risks and liabilities there may be for somebody playing a particular role, because there's no framework that defines that within our legislation right now.

Mrs. Sue Barnes: But this isn't a problem in other jurisdictions that have legislation in place.

Mr. Sherman Kreiner: That's right, because they define what's in the trust document, who can be trustees, what the scope and responsibilities are for trustees in administering an employee benefit plan like this.

Mrs. Sue Barnes: Okay, that's all for right now.

The Chair: Dr. Bennett.

Ms. Carolyn Bennett: I have an interest in family-owned businesses and transition with the baby boomers. Is that something your organization helps people with? Obviously, most family-owned businesses are private and no one knows what's happening. How do you help founder companies move into this? Does the Canadian Federation of Independent Business have an opinion on this? If you're going to try to share the wealth, how do you move into that area?

Ms. Julia Markus: It's an interesting subject, because we have just started to see more interest in that. In fact, we're right in the middle of a period of putting on half-day seminars on management and employee buyouts for business succession with an accounting firm, a law firm, a trust company, and a financial firm.

Some of the approaches to potentially selling the business to the employees start with the management and either finance the transaction at a fairly high cost of equity, generally speaking, or have the owner carry back some of the cost. Once enough control has shifted, then the new manager owners can do a share offering to the employee group, which they use to pay down the high cost of money.

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There are a lot of emotional and psychological issues in that transition as well, but we don't really get involved in that. There's a whole industry of counselling that does that.

There is one new aspect to the British Columbia tax incentives from employee ownership, though. The way they were typically structured was employees could only invest up to $10,000 a year and get a 20% tax credit for a maximum of five years. Specifically for business succession, they modified the rules so that an employee could invest up to $50,000 all at once and still get that same 20% tax credit, although they would draw it out over the five-year period. So there really was no negative impact on the province, but it had a really positive effect on buying out company owners.

Ms. Carolyn Bennett: For companies that weren't public to begin with, who ran the company as a family business, there must be a huge transition in terms of transparency and in terms of how these people aren't used to sharing information.

Ms. Julia Markus: Yes, sometimes there is. Sometimes there are younger generation members in the business as well. But the founding owner or the current senior shareholder needs to recover some of their investment for their own retirement, so they consider bringing the employees in as shareholders.

There are a lot of issues, such as when do we give up the company truck and those sorts of things. There tends not to be ultimate financial transparency, at least in the succession buyouts I've seen. The law in British Columbia requires that employee shareholders be entitled to see annual financial statements—income statement and balance sheet.

Ms. Carolyn Bennett: Who requires that?

Ms. Julia Markus: B.C. company law. They work up from there. There isn't an immediate sharing of compensation data or retirement plans or whatever it may be. I think the transition is a little more gentle than that.

Ms. Carolyn Bennett: As you know, our chair is obsessed with productivity. It's this word that comes down from the ceiling. In any presentation that includes the word, you just watch his pupils dilate.

The Chair: It's the spelling that's the hard part.

Ms. Carolyn Bennett: Is the Canadian Federation of Independent Business interested in working with you and helping their companies become more productive, if indeed the numbers...say what they are?

Ms. Julia Markus: As I said, we've only started down this road and we're discussing with the Canadian Association of Family Enterprise, because they're the most logical target.

I would like to just take the beginning of that question about productivity and dangle it here. As opposed to simply sharing company-wide financial information and being concerned about the impact of that on employees, generally the stages of employee development are to have them work on budgets for their own areas.

Sharing financial information for profit centres is really what's important, the numbers they can have an impact on. Employees don't have much impact as a whole on revenues. What they do have an impact on is their own productivity and profitability. In fact, it's a huge industry in the United States, called the great game of business, where employees view this as going into huddles and meeting their targets. They set goals and see how they meet them. They learn an enormous amount about how business runs without endangering the confidentiality of whatever the owner's financial arrangements are. We would never suggest that they should endanger them.

The Chair: Is that it, Dr. Bennett?

Ms. Carolyn Bennett: Yes, thank you, Mr. Chair.

The Chair: I want to thank you very much for your presentation. Without actually talking about productivity, it's extremely important if we as a country want to maintain our standard of living. It's a serious issue. Any sort of creative way to enhance that we'd of course look at very seriously.

I think you made great points on a number of issues. First of all, with regard to the productivity issue, the competitiveness issue, the issue of profits, profit is not a bad word. The more profitable firms are in a country, then the greater wealth you generate. For those who are concerned about social programs in this country, that's the way to do it, not the other way around. You first have to create wealth before you can redistribute it.

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With regard to the whole issue of the number of jobs and the type of incomes, incomes tend to rise if productivity gains occur, not to mention that just in general greater opportunities arise. This can be a very important part of the productivity standard of living puzzle. That's why I think it was important to have this round table.

I want to thank Roy Cullen, because he actually suggested we have a round table on this particular issue.

Mr. Roy Cullen: And Reg.

The Chair: Yes, Reg Alcock also asked for it. So it was worthwhile.

Mr. Cullen, do you have another comment?

Mr. Roy Cullen: Just briefly, Mr. Chairman, if I may.

We were talking about succession planning. One of the ideas, Perry, you'll recall, that we kicked around was if a Canadian-controlled private corporation wanted to do succession planning with employees, they could transfer shares under some arranged schemes and it would not trigger a capital gain. Right now if you transfer shares to employees under some scheme, you're going to have a capital gain. It will be an actual deemed disposition. I think there are ways of trying to facilitate putting the shares in the hands of employees.

Mr. Chairman, I just want to come back to one point. Mr. Epp talked about risk and challenges, and some of those were laid out. We can learn from what they've done in the United States. There have been some abuses, and some risks have been created.

What can we learn from the U.S. experience, and how can we manage that situation here in Canada? How can we adapt it to our own circumstances to make it work better?

Perry, do you have any wisdom on that?

Mr. Perry Phillips: Well, I've been involved with ESOPs for about 10 years now, and closely involved in the U.S. ESOP association. What they keep telling me is that if you're going to do any legislation in Canada, keep it simple.

I've seen small companies spend upwards of a couple $100,000 trying to extract themselves from an ESOP situation because of the number of laws in the United States. It's very important that it be streamlined legislation. I think it can be. I think we can achieve the U.S. model by not taking the more onerous implications into account and adapting it to Canada. I don't think you can just holus-bolus take a U.S. model and put it into Canada. We have very special concerns and needs here. But it's a good base model to start with.

Mr. Roy Cullen: Mr. Chairman, just one quick one. In looking at the federal tax policy, there are some provinces that have legislation now. One of the concerns always is that the federal government comes in with measures, and that basically creates room for the provinces to back out and say, well, the federal government is doing it now.

Would there be a need to look at harmonizing so that you have a roughly comparable situation? How do you see that playing out?

Mr. Sherman Kreiner: I think it would be valuable to have as many different tools as possible available in as many different places as possible. I think you asked a question earlier about whether people have to pay out of their own pockets or not, in order to have a particular outcome. While I have an opinion about that, everybody has an opinion about that, and that means the owners of businesses have opinions about that as well. I think some different structures are going to be more comfortable for people, either from a philosophical perspective or from their particular circumstances and the outcomes they wish to derive. I think it would be beneficial and valuable to have as many options as are possible to meet the many different missions and objectives and concerns that people have, rather than trying to harmonize into a single particular structure.

I think if there's any weakness in the U.S. model, notwithstanding all the benefits that have been outlined there, the ESOP structure is so pervasive that it's very challenging to implement other models that may meet other specific needs. There are challenges around ESOPs, from complexity to cost to other concerns. There are issues around voting control, for example, in ESOPs. While the U.S. has been moving more and more towards passing through voting rights to the beneficiaries of the trust to have them act like real shareholders, even though they are inside of the trust structure. That progress has been slow. It's been very challenging. I think it's been a cause for some opposition from unions from time to time. In the absence of alternatives structures, it's either this or nothing.

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Mr. Roy Cullen: Julie, did you want to add to that? Or I'll do it for you.

Ms. Julia Markus: We're competing.

The Chair: It's part of our productivity.

Ms. Julia Markus: I think it's important to try very hard to introduce programs on a federal level that are complementary to any provincial programs that may go on, as opposed to trying to replicate them or bring them along. I've talked to quite a few companies that spend a lot of time with lawyers, because they're trying to conform to the different securities legislations in each province and all those different regulatory environments. It would be useful to try to build something on a federal level that would address that. Then, if the individual programs were there, companies could take advantage or not take advantage, if they had employees in different jurisdictions.

Mr. Roy Cullen: Thank you.

The Chair: Thank you, Mr. Cullen.

And thank you to the panel. It was very interesting. We also use this material during our pre-budget consultations. This creates a base of knowledge for members of Parliament. Members of the committee who are not here will also receive your presentations so that they may examine the benefits of ESOPs.

Once again, thank you very much, and on behalf of the committee, we look forward to seeing you, I'm sure, during the pre-budget consultation hearings somewhere in this country. Take care.

The meeting is adjourned.