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Episode Transcript

Stephen DUBNER: So, Pete, over the past few years, we’ve produced a handful of episodes on the show looking at the rise of private equity, which has been really astonishing. And the results haven’t always been pretty — for consumers, employees, and so on. Do you find yourself having to explain or apologize for your industry often? Or maybe you don’t hang out with people who dislike the idea?

Pete STAVROS: I hang out with plenty of people who don’t love private equity. 

Pete Stavros is co-head of Global Private Equity at KKR, which was founded nearly 50 years ago as Kohlberg, Kravis, Roberts. The firm was immortalized in the 1989 book Barbarians at the Gate, about their leveraged buyout of RJR Nabisco. Just to be clear, KKR were the barbarians. But today, the firm is a mainstream corporate citizen, and the world’s second-largest private equity firm, after Blackstone. KKR has more than 250 firms in its investment portfolio, ranging across nearly every industry you can name; those firms employ nearly a million people.

As I mentioned to Pete Stavros, we have already made a few episodes about private equity. There was a two-part series about how P.E. firms are taking over the pet-care industry. One was called “Should You Trust Private Equity to Take Care of Your Dog?”; the other was “Do You Know Who Owns Your Vet?” We made another, broader episode more recently, called “Are Private Equity Firms Plundering the U.S. Economy?” These episodes cover a lot of the mechanics of what private equity is, who it tends to help and who it tends to hurt; you can listen to them before today’s episode if you want, but it’s not necessary. As you can tell from just the titles of those episodes: some people still think of private equity firms as barbarians, who have papered over their ruthlessness with a corporate sheen.

One common criticism has to do with what happens when they buy, or sell, a company. When they buy, the top executives at the target company usually get a big payout — but most employees don’t; in fact, they might lose their jobs or see their wages shrink as the new private equity owner tries to make the operation more efficient in order to resell the company a few years later at a higher price. And when that sale comes: once again, the firm’s employees typically don’t get a share of the tens or hundreds of millions of dollars — sometimes billions of dollars — that the private equity firm and its investors have earned from executing this turnaround. So: private equity firms take on some risk, but with the potential of a massive financial upside; for employees, there’s also some risk, but without the potential for a financial upside.

STAVROS: Yes, private equity has plenty of issues. We need to try to do better. We need to try to improve. But I also hope we can have an intellectually honest debate about the state of the economy, and how capitalism works.

Oscar Wilde once wrote that “every saint has a past, and every sinner has a future.” Today on Freakonomics Radio: Pete Stavros sees a future in which private equity is not the barbarian.

STAVROS: This is something I really believe in, and I think could create a much better economy for everybody. And that’s why I’m doing it. 

Some observers are optimistic about this plan.

Cory ROSEN: I think what he’s doing is genuine and I think it’s important. 

While others are not buying what he’s selling.

Marjorie KELLY: Pete works inside a massive industry, and that massive industry is a negative force on so many fronts.

Massive? Yes. Negative? Let’s find out.

*      *      *

When you think about how the ownership of a firm really works in America, and how private equity fits in, we need to go back to the ’70s — the 1770s.

ROSEN: If you look at what the Founding Fathers said, they said, “We need to create ways so that most people can eventually become landowners.” Of course in those days, ownership was land.

That is Corey Rosen.

ROSEN: And I’m the founder of the National Center for Employee Ownership. 

And how was ownership encouraged in the 1770s?

ROSEN: There were specific legislative things done, like abolishing primogeniture rules that passed on all of the land to the eldest son, which kept it concentrated. The Homestead Act, which opened up ownership to people across the West in the 1860s. You had people like Albert Gallatin, the Secretary of the Treasury, saying that employee ownership was the critical way forward. 

The big idea was simple: in a young country with vast and valuable natural resources, and without a king or oligarch to divvy things up for family and friends, it made sense to share the wealth, to widely distribute the actual ownership of the country. The 1770s being what they were, these policies typically applied only to white men. But as the Founding Fathers established the country’s economy, they did try to bake ownership — especially employee ownership — into the new country’s DNA. One of the earliest pieces of federal legislation gave a tax break to the New England fishing industry as it tried to recover from the Revolutionary War. George Washington, Thomas Jefferson, and Alexander Hamilton all insisted that this sort of Federal assistance would only be allowed if the industry’s profits were shared with its employees, and not siphoned off by owners and investors. So that was the idea, at least in the beginning of the U.S. economy.

ROSEN: And we lost sight of that essential notion from the Founding Fathers, that a democracy will work a whole lot better when more people have a real financial stake in it. So we moved to the corporation, in the late 19th century, that said that you could invest in a company and not have any individual liability. Wealth started to concentrate more and more. And then in the ’50s and ’60s, we started seeing private equity come.

Corey Rosen, by the way, has a background in political science.

ROSEN: I got my Ph.D. in 1973. And I taught for a couple of years, then decided I was more interested in playing that game than watching it. And so I got a fellowship to work on Capitol Hill. I was reading some testimony about this idea of employee ownership, and I thought, that’s really interesting.

It was interesting to Rosen not just because it echoed the economic views of the Founding Fathers, but because it made sense to him — that an economy in which ownership was less concentrated, and employees got to share in the profits, would inevitably be a healthier economy.

ROSEN: I ended up drafting some legislation around employee ownership plans that fortunately became law, and then I decided, you know, this is a really cool idea, but almost nobody knows about it. 

And that’s how Rosen crossed over, into an advocacy role. He founded the National Center for Employee Ownership, in 1981. His organization’s primary weapon is called the ESOP, which stands for Employee Stock Ownership Plan.

ROSEN: The most common use of an ESOP by far is where you have an owner of a closely held company who wants to move on, maybe sell some or all of their ownership. And they could sell to private equity, they could sell to some other big company, but instead they’d really like the employees to be owners. 

Here’s an example: Bob’s Red Mill. That’s a company in Oregon that produces natural cereals, flour, spices, things like that. Their branding is old-fashioned, not corporate; the logo has a picture of a cheerful man who looks kinda like Santa Claus. That’s Bob — Bob Moore.

ROSEN: Bob Moore just died recently. And Bob could have sold to any number of other buyers, but didn’t like that idea. He liked the idea of an ESOP, and what would happen is that the company would borrow money to purchase Bob’s shares. Those shares then go into a trust fund, and they’re allocated to all of Bob’s employees — including, over time, to the new people who join Bob’s Red Mill. There are now 700 of them. What’s really important here is the employees are not purchasing shares. 

In other words: an ESOP is not just an employee stock-purchase program, which you may be more familiar with. It’s a stock-ownership program. Here are some other well-known companies that are either entirely or partially ESOP: Publix supermarkets; Clif Bar; the Eileen Fisher clothing company. There are big employee-owned firms in Canada, the U.K., and elsewhere, especially China. The huge Chinese telecom firm Huawei, for instance, is almost entirely owned by its employees. Corey Rosen — now, keep in mind that Corey Rosen is a professional advocate for this idea — but Rosen offers hard evidence in favor of the ESOP model.

ROSEN: So what the research shows, if you take companies that weren’t ESOPs and compare them to their competitors for a few years, and then you take them after their ESOP and compare them to the same folks, you find that the difference in their relative productivity, sales, and employment are all 2 to 3 percent per year faster. You also find that they lay people off at one-third to one-fifth the rate. Their retention rates are hugely better. And their employees have retirement assets three times what comparable employees have in comparable companies that have retirement plans, and many don’t. So, it’s a dramatically improved performance for everybody. I remember being in a group of esteemed economists years ago saying, “This can’t be true. You can’t have that kind of free lunch.” And what we and others who do research on this said, ‘Well, you can if the company makes more money.” Then that becomes part of the deal, that we will make more money because we’re treating employees better. And that simple idea turns out to be true. 

For all these reasons, Rosen says, the ESOP idea has strong and bipartisan interest in Washington.

ROSEN: Employee ownership has been almost unanimously supported every time there’s been a vote on the 18 pieces of legislation that have passed on it. Tommy Tuberville and Elizabeth Warren think it’s a good idea.

Elizabeth Warren, if you’re not familiar, is pretty far down the left wing of the political spectrum on many issues, and Tommy Tuberville is pretty far down the right.

ROSEN: In 1997, when Congress said — and this gets a little technical, but the short story is, if you’re a 100 percent employee-owned, you don’t have to pay any taxes. And that really encouraged a lot of companies to become 100 percent employee-owned. 

So, how common is this setup?

ROSEN: It’s grown from just a couple of million people in employee ownership plans around the country to today, just if we look at the main form of employee ownership, which are ESOPs, 14 million participants, with over $2 trillion in assets

Those numbers may sound huge, and impressive. But they’re not that impressive — not in an economy as big as the U.S. economy. Here, again, is Pete Stavros, from KKR.

STAVROS: There’s about 250 new ESOPs formed a year. Seventy-one percent have fewer than 100 people. Ninety-six percent have fewer than 500. So it’s very, very small business.

But if ESOPs are so great, why are they so rare?

STAVROS: The barriers to ESOP formation are: it’s complicated, it’s expensive, it’s time-consuming. 

And here’s another barrier: often, the incentives just don’t line up. If your family started a company, and poured everything into it for 30 or 40 years, do you want to go through that “complicated, expensive, time-consuming” ESOP process, as Pete Stavros calls it, in order to share future ownership of the firm — or would you rather just reward yourself by cashing out, in the form of a big check from a private-equity firm, like KKR?

STAVROS: ESOPs tend to work in smaller businesses, fewer shareholders, and most ESOPs are in two sectors of the economy. Seventy-five percent roughly are in service companies or industrial companies. So we’re missing a lot of software and media and financial institutions and medical technology and pharmaceuticals. Yeah, there’s a lot that we’re missing.

Now, before you discount Pete Stavros’s critique, as coming from someone who is anti-ESOP — you should know that, weirdly enough, he is not! Stavros was a fan of ESOPs even before he got into private equity.

*      *      *

Pete Stavros joined KKR in 2005, and is now one of their most senior executives. This means he has made a lot of money — for his firm and for himself. And he is interested in spreading the wealth, at least a little bit.

STAVROS: So I was put in charge of investing in and improving industrial companies something like 15, 17 years ago. And that was the opportunity to start experimenting with these ideas I had always had about sharing ownership broadly. 

When Stavros was getting his MBA, from Harvard, he’d become interested in employee ownership; it wound up being his dissertation topic. Here, again, is Corey Rosen, the ESOP king.

ROSEN: I met Pete many years ago when he was getting his MBA at Harvard, and he gave me a call and said, “Hey, I read about this ESOP thing. That’s interesting. What can you tell me?” And so over the years, we’ve had a lot of conversations. And he certainly followed the research. And I know that’s exactly what he’s trying to do, is to get some of that same kind of ownership culture and performance in the companies that KKR and now some other private equity firms are doing. So I think what he’s doing is genuine and I think it’s important. It’s typically 5 to 10 percent of the stock going to people. So it’s not a huge amount, but it’s a step forward. And when these companies have been sold, employees have ended up with tens of thousands of dollars each, and sometimes more. So that’s a good thing. But it still represents a very small minority of private equity overall. It’s much better than what it normally is. But we have to keep in mind that these companies will be sold in five to seven years, and the new buyers are not likely to continue this. 

And Pete Stavros again.

STAVROS: We started with about a half-dozen test cases. They were all manufacturing companies. The very first one was a fall-protection, safety-equipment company called Capital Safety. So if you see a worker on a building and he or she is wearing a harness and a lanyard, attaching them to the structure, that was the equipment the company made. And it was a great test case because — just to give you a sense for what we walked into — here’s a safety-equipment company that had an injury rate for their own people in their manufacturing plant that was three times the OSHA benchmark. So the safety record, out of control for a safety equipment company. They had never measured employee engagement. There’s a lot of worker turnover. And so that was really the first test case of how could this be run differently. 

DUBNER: What was the ultimate payout for that first firm?

STAVROS: Gosh, this is so long ago. I want to say —

DUBNER: Was it positive, everybody got a check of some kind?

STAVROS: Oh, yeah. We sold the business to 3M. It was a fantastic investment for our investors.

DUBNER: There’s a one-time check, essentially. And then what happens to those employees with the firm under new ownership? 

STAVROS: So we exit our businesses in three ways. A company can go public, we can sell to another investor, or we sell to a big corporate. When we sell to a big corporate, it is the most difficult situation in terms of sustaining this program. Because if you are 3M or any big corporate with hundreds of thousands of employees, and you’re buying one of our companies, you’re not going to upend your whole comp and benefits philosophy for our little company. So it’s very difficult to sustain everything that we’ve built when you sell to a big corporate. Now, when we take the company public, that’s easy because effectively this model gets crystallized and it’s there in perpetuity. Now you’ve got employee owners, hopefully forever, in this public company. And then when we sell to another investor, that’s also pretty easy, because a new investor would be crazy to tear this model down. If we’ve done all this work over all these years to build this different type of culture, imagine you’re the new owner and you say, “Okay, well, we’re the new investment firm, and the bad news is, this is all over. No more ownership, no more voice. We’re not going to listen to you any more.” Like, all that stuff being taken away would be not viable. 

Since that first test case, Stavros has given employees an ownership stake in more and more of the firms that KKR buys. And in 2021, he and his wife helped start a nonprofit called Ownership Works, to try to spread this idea. So far, Stavros says, Ownership Works has helped 250,000 employees get into employee-ownership plans. The organization also has some influential backers.

STAVROS: It’s everyone from McKinsey, who has not only provided financial support, but they have done millions and millions of dollars of free work for Ownership Works to help develop the playbook. Deloitte and Touche, Ernst and Young is a massive supporter.

DUBNER: Is there any formal relationship between Ownership Works and KKR, other than obviously you, being at the helm of this? 

STAVROS: No. KKR is a founding member, but is not a larger financial sponsor than, you know, Warburg Pincus or something. 

It’s easy to be skeptical here. These are all big, wealthy firms whose contributions to a cause like Ownership Works may look like window dressing, or even conscience-laundering. Pete Stavros understands the skepticism. But his personal track record at KKR is impressive: he has brought partial employee ownership to 44 companies. One of his favorites to talk about is a company called C.H.I. Overhead Doors.

STAVROS: We acquired C.H.I. Overhead Doors in 2015. C.H.I. manufactures overhead garage doors, you know, with a little LiftMaster remote. The company is based in central Illinois. It’s about a half an hour from the University of Illinois, in Urbana-Champaign. The town is called Arthur, Illinois, and it is Amish country. Maybe there’s 2,500 people who live there. Average household income would be something like $50,000. C.H.I. was a good business. Most of the stock was in the hands of two people. And so when we bought the business, a couple people made tens of millions of dollars, there was a handful of others who made some seven-figure amount of money, and then everybody else got nothing. And then it’s like, back to work. 

When KKR took over, one of the first things they did was survey the employees. Stavros wanted to find out how happy they were with their work, and how engaged. The answer: not very. But Stavros saw that as an opportunity.

STAVROS: It’s one of the reasons we bought it. This is one of the weird things about being an investor of the type that we are, is, you’re looking for these situations of, wow, this is a pretty good business. Like, when you look at how the manufacturing plant is set up, when you look at their delivery model, it’s unique. But what could it be if everyone was engaged? It took us eight years and I always stress that none of this stuff happens fast. But day one, everyone was made an owner in the business, all 800 employees. When we rolled this out, the employee base was so excited, they gave me a live chicken.

DUBNER: What did you do with the chicken?

STAVROS: Well, it was awkward. I was like, well, I, I don’t have a crate with me, and I don’t know that I could check this on a flight back to New York. So, you know, everyone had a good laugh. 

DUBNER: So it stayed there.

STAVROS: Yeah, her name was Henrietta. She had a long life. She has since passed.

KKR’s ownership of C.H.I. Overhead Doors has also passed.

STAVROS: So it was sold in 2022 to Nucor, a big steel company. 

The sale price was $3 billion — around four times what KKR had paid for the firm seven years earlier.

STAVROS: So before it’s public, we told our whole workforce we’re selling the company. We told them it’s a corporate buyer that is not in this business. Your jobs are safe. They want to build the business, not cut. And now it’s time to share what everyone has earned from their ownership. And so tenured factory employees made hundreds of thousands of dollars, some as much as a half million. We had truck drivers make as much as $800,000. You really have to — it’s one thing for me to tell you about it, you really, like, have to see it. 

And you can see it. KKR made a video that shows a bunch of C.H.I. employees after they learned about the deal, and that they would be sharing in the profits of that $3 billion buyout.

EMPLOYEE 1: It’s truly emotional. Like, I’ve never seen anything like it in my life. 

EMPLOYEE 2: The, just, sheer excitement. Everybody was in shock, honestly. 

EMPLOYEE 3: It’s gonna change the whole community. 

DUBNER: I’ve seen the video and I would ask anyone to watch it and not cry because there are so many people in there crying with joy at the massive payout. But, you know, a video made by a firm to showcase what they’ve done like that — that’s positive, I’m not saying it’s propaganda, but it’s plainly meant to evoke that kind of emotion and it really, really works. What I want to know next is a little bit about employee retention and satisfaction and their financial benefits continuing on under new ownership.

STAVROS: You know, we talked earlier about how when you sell to a big corporate, the disappointing part is the ownership program is highly unlikely to sustain itself. Having said that, what type of a company gets attracted to a business where this culture has been created? It’s a company like Nucor, that is world-famous for their safety record, for how they treat their employees, for their profit-sharing program. I mean, they just announced their most recent profit-sharing program, which I think was $18 or $20,000 per worker. You know, do the math. If a worker can make $20,000 a year over 20 years and smartly invest it, that’s a lot of money. So although Nucor didn’t to the letter of the law retain our employee-ownership program, they did something pretty similar. Employee retention has been amazing, I think the company has lost in total 12 people, all to retirements. So that’s been great. Nucor has been thrilled with the acquisition. 

DUBNER: In the KKR video I watched, one employee says, “This doesn’t just change my life, it’s going to change the whole community,” which is, as you mentioned, a small, rural community. Do you know anything about that? Is there any evidence of the larger impact on the community, the region, etc.?

STAVROS: There was $340 million of wealth injected into this local community, where the average household income is $50, $60,000, average home price is something like $100,000. So that can, there’s no question, totally transform a local economy. That means new business formations, new restaurants. It means more tax revenue. It means dignified retirements for people. So I think there’s no question this is an opportunity for all of America, but particularly these rural communities that have kind of been forgotten about. These are folks who typically never participate in the upside. They’re in — quote, unquote — ”flyover country.” Everybody forgets about them. And when you have this type of injection of capital into a local economy like that, it’s huge. 

Coming up: if you are still skeptical about KKR’s model of employee ownership, you are not alone.

KELLY: You have to look at private equity overall and say, is this a force for good for workers? And it’s massively not. 

*      *      *

We’ve been speaking with Pete Stavros, a senior executive at the private-equity firm KKR, about why he has been trying to give an ownership stake to employees at the companies that KKR takes over. He also helps run the Ownership Works nonprofit, which is trying to spread the idea beyond KKR. I asked Stavros to talk about his family background, on the premise that many of us live a life that is at least somewhat influenced by how we grew up.

STAVROS: So, I grew up in a suburb of Chicago, called Arlington Heights. And my dad, for, I think, 45 years, operated a road grader for a union construction company in Chicago. So we were a union family. My dad earned an hourly wage, and he went out of his way to make sure my sister and I understood what it was like to be an hourly worker. There was a lot of dinner table conversations about, you know, “Workers don’t have a voice, management doesn’t listen to us, there’s no incentive. We have no reason to care about things like on-time delivery of the job or doing the job well.” It’s kind of like that movie Office Space, where you want to work just hard enough to not get fired. My dad’s saying was “working steady.” You know, “If I work too fast and I’m too productive, I have fewer hours, and so my pay goes down. I don’t want to work so slow that I get in trouble. But I just want to work steady.” All of this stuff kind of drove my dad insane.

DUBNER: Is he still alive, your dad?

STAVROS: Yeah, he’s 85 next month.

DUBNER: And what does he think of your career, getting on the ownership side versus the worker side?

STAVROS: You know, neither of my folks went to college, so there was not a lot of career guidance. It wasn’t like, “Do this, don’t do that.” It was, “We want you to go to the best school you can get into and then have as good a life as you can and don’t struggle as much as we did financially. My dad used to talk about — he didn’t say the word “ownership,” but it was, you know, “profit-sharing” or how could we get everyone aligned where I, as a worker, have a reason to care, and with the right incentives in place, management would have a reason to listen to me.

DUBNER: So your dad’s job was a union job. In the U.S., unions have never had as much public support as they do today. At the same time, they’ve got the lowest participation rates ever, which is an interesting paradox. When you look back at your dad’s career in the union, when you look at union labor currently in the U.S. and elsewhere, how do you think about the union-labor model, especially from the P.E side of things? Do you think it’s failed, in other words, I guess is what I’m asking?

STAVROS: Well, I’m not an expert in unions. I can tell you our personal family experience. My mom always used to say, if it weren’t for the union, your father would be shining the shoes of the owner. It was just not a kind workplace. They took advantage of labor. My dad felt badly mistreated. And that was with the union. So, I’m aware of the decline of union participation in the private sector. I’m not an expert on all the factors that led to that.

DUBNER: Some critics, of course, like to attribute some of the decline to private equity itself. What’s your thought on that?

STAVROS: I don’t know about the decline of union activity being tied to private equity. I think in capitalism in general — certainly C.E.O.s are terrified of unions. That’s a fact, I can tell you that for sure. Anytime there is a unionization effort, any C.E.O. — whether it’s owned as a public company, a private-equity company, a family business — is scared. One of the roles I am trying to play is, be a little bit of a bridge. Yes, I work in finance, but I spend a lot of time with people like Mary Kay Henry, who run the S.E.I.U., and there’s a lot of very smart, forward-thinking union leaders who want a different model, for everybody. Some of the things that might have gone wrong over time were, as the pendulum swings back and forth, often it swings too far. And maybe for a period of time, work rules — if you’re familiar with those — got too extreme. I’ve certainly been in some work environments in a manufacturing facility where a fork truck driver can only drive a fork truck, you cannot cross-train that driver to work on a manufacturing line. Period. Full stop. Which is not really good for that person, and it’s certainly not good for productivity. Now there’s a reason why this happened, right? Workers were abused. But maybe the pendulum swung too far.

DUBNER: So the stories you’ve been telling me today about giving ownership stakes to employees are compelling. However, I always want to be — not skeptical, necessarily, but, you know, figure out how representative this is, and how meaningful it is. Want to make sure it’s not just cherry-picking or window-dressing. So let me ask you about some of the criticism of this project, of Ownership Works, particularly. There’s a fellow named Jim Bonham, head of the Employee Stock Ownership Plan Association, ESOP Association. I don’t know if you know Jim?

STAVROS: I do. I know him well. 

DUBNER: He called your model, “A cheap way to diffuse heat on the private equity field,” and that it’s “very dangerous for those already providing true employee ownership.” What’s your response to that criticism? 

STAVROS: Look, I think ESOPs are great. It’s different than what we’re doing. I’m not trying to diminish it, but we need more. We’re not going to really change the economy with what any of us is doing right now. The whole term “inclusive capitalism” drives me bananas, because everyone talks about it and like, isn’t this it? Like, if we want an inclusive form of capitalism, isn’t it that they participate in the upside?

DUBNER: How significant do you think what we’re talking about today — Ownership Works or some general remuneration program like that — how important do you think that is to the overall reform? Is it one of many, many, many tools, or do you see it at sort of the core?

STAVROS: One of many, many, many tools. We haven’t talked about taxes. I’m not a tax expert, but there’s going to have to be lots of changes. And I think employee ownership could fit into a broader program to make the economy more fair and give people more opportunity. And I think on the employee ownership side, ESOPs are going to be it. That’s how we’re going to get this to be massive. We’re going to need supportive government policy. You know, we’re working so hard at Ownership Works. That’s going to be amazing for those couple of million workers. It’s not going to change the economy. The economy is going to be changed by the government coming in and saying, “We and business together are going to find a different way of distributing rewards of capitalism.”

DUBNER: What would you do about the carried-interest loophole for private equity investors?

STAVROS: So I have personal feelings about all of this. I’m always a representative of, a member of the private-equity industry. So maybe I’ll make a generic comment about my view of capital gains, forget whether it’s carried interest or not, so you don’t get me in trouble. The tax code is, I think, meant to encourage things that are good for society. And it’s just not clear to me that the preferential capital gains rate makes so much sense unless that capital gain is broadly distributed. So if you have a very wealthy family that’s investing their money — and we know very wealthy people tend to invest and save and not spend, which is one of the reasons all the concentration of wealth maybe hurts the productivity of the economy — why would we be encouraging more and more build-up of that wealth unless the gains in the end were broadly distributed. So that’s one thing I would say is, looking at the tax code, it’s supposed to be promoting things that are good for society, and I’m not sure it always does. 

DUBNER: So if I wanted to be a cynic, I could say that KKR holding up Ownership Works as a better model might be a way to take some heat off the debate over carried interest because the gains are being distributed more evenly.

STAVROS: Yeah. Look, there’s two criticisms I hear a lot. Either, “There’s no substance to what you’re doing, this is a cheap trick,” or whatever. And then the other one is the underlying motive, like, “Why are you doing this?” On the substance, I think people have given up on that. I’ve offered to have them come see our companies, walk the shop floors, talk to workers. You wouldn’t have the caliber of labor advocates and labor professionals getting involved with this if this weren’t genuine. You could say the videos are highly produced. It’s not us saying it. It’s hundreds and thousands of workers that are saying my life’s been impacted not just through money, but all of these other things The other part that’s harder is, like, well, why are you doing it? I can only tell you why I am doing it, and I can only tell you internally there is nobody sitting there going — and I swear to God — no one is saying, “If we do this, like, carried interest won’t get touched.” That’s just not happening. Now, you can choose not to believe me. I don’t know what to say beyond that.

KELLY: I think Pete’s a good guy. He comes from a working-class family. I think his interest in helping workers is sincere. And everyone I’ve talked to says the same about Pete.

That is Marjorie Kelly.

KELLY: Yeah, and I am a distinguished senior fellow at The Democracy Collaborative. The Democracy Collaborative is a think-and-do tank, and we’re in the business of helping people envision a more democratic economy. And employee ownership has been a key piece of what we’ve done. We think it’s the model that’s most ready for scale, and we’re super-excited about it.

Kelly is also the author of a book called Wealth Supremacy: How the Extractive Economy and the Biased Rules of Capitalism Drive Today’s Crises. When Kelly says, “extractive economy,” she’s talking about the private-equity industry.

KELLY: When you look at what private equity is doing, it is — let me choose my word carefully here — I want to say “rapacious.” I think it is the most extractive part of the economy. Many, many retail firms have been driven into bankruptcy by private equity. Toys ‘R Us, driven into bankruptcy by KKR and other private equity firms. Thirty-three thousand workers lost their jobs.

Kelly also disapproves of the private equity trick known as dividend recapitalization.

KELLY: It’s a really nefarious tactic that all private equity, as far as I can tell, the industry in general, uses. For example, with Gibson Guitars, KKR owns that firm. There was a debt of $250 million placed on that firm, and then they used $225 million of that to write a big check to KKR. That’s called a dividend recapitalization. And in another context, we would call it extortion. I came to see over time that the problems are really systemic. It’s ownership institutions, it’s practices of investing. I saw so many socially responsible businesses see their mission be driven out over time when big capital took over, when they went public, and their metric became maximize returns to shareholders. I saw this happen again and again and again. There were companies that I had given business ethics awards to that became really extractive, demanding tax incentives simply to stay in a community where they’ve been for 100 years.

So what does Marjorie Kelly think of KKR offering employees at some of their firms a piece of ownership?

KELLY: The first thing is, what KKR is doing is not real employee ownership. It’s basically a one-time bonus of cash. It has no voice for workers. It has no long-term security for workers. My second criticism is that, while it is a step forward — workers can get maybe $25,000 in an equity bonus, and that’s real money — it’s a step up on an escalator that’s moving rapidly down. So, private equity gives workers this little hit of money, but then it sells the firm and they’re highly likely to be laid off. So, the losses can vastly outweigh the gains. And the third thing I am concerned about is that the KKR model could eclipse authentic employee ownership. It already has attracted tens of millions in philanthropic funding. I did a back-of-the-envelope calculation, and the amount of philanthropic funding they’ve received at Ownership Works is larger than all three major employee-ownership membership organizations combined. So I’m afraid that they’re going to eclipse the real thing.

And what does Kelly think of Pete Stavros himself, his efforts at both KKR and Ownership Works?

KELLY: This is really not personal. It’s really not about an individual. Pete works inside a massive industry, which is private equity. And that massive industry is a negative force today, on so many fronts. That’s what I’m concerned about. It’s not Pete. I think Pete is a good man trying to do good things inside a very difficult industry. You have to look at private equity overall and say, is this a force for good for workers? And it’s massively not. And so the fact that it’s doing a tiny little bit of good for workers, you have to weigh that against all the harm that it’s doing. 

Here is Pete Stavros again; he knows Marjorie Kelly.

STAVROS: She wrote an op-ed about Ownership Works that was pretty scathing. And I reached out to her and I said, “I totally understand your perspective. I know you’re a huge ESOP fan. I’m not trying to take anything away from ESOPs. But let me just explain what we’re trying to do.” And she said, “Great, I’d be happy to meet.” So I flew out to see her in Massachusetts, and we had a multi-hour conversation — what we’re doing, what it could mean for workers, ESOPs, her complaints. We talked a lot about Toys ’R Us.

DUBNER: Are you sick of having Toys ’R Us held up as the quintessential example of private equity failure?

STAVROS: No, no, I’m not. We’re not going to get anywhere if we’re not willing to talk about things. Look, Toys ‘R Us — definitely, many mistakes were made. There’s no way around that. Having said that, I hope we can have an intellectually honest conversation about: Okay, retail’s been decimated. Sears went bankrupt. Kmart went bankrupt. J.C. Penney went bankrupt. Bed Bath and Beyond went bankrupt. Every toy company in America of any size went bankrupt. Did KKR kill retail? Jeff Bezos was at an event where we had an opportunity to speak with him. And he said, “I couldn’t believe it when you guys invested in Toys ‘R Us. I killed the company five years before you bought it.” When people throw stones at Ownership Works, I get it. It’s not as good as an ESOP. Got it. I hear that all the time. “Pete doesn’t like ESOPs.” I’m like, “You’ve got to be crazy.” Like, my dissertation at business school was on this whole thing. I spent so much time and energy with the ESOP community. I want to see more ESOPs. I’m spending a lot of time, money, energy trying to make that happen.

DUBNER: Since you are such a believer in this ownership idea, on many dimensions, why not go all in and make the movement your core rather than have it be an add-on to your private equity work? I’m guessing you’ve made enough money by now at KKR for at least a couple of lifetimes. Do you ever think about just making this your cause? 

STAVROS: I think about that question a lot. Not just for me, but in general, like, why is there not more change? I have now spent more time in the nonprofit world, with labor, with government, than I’ve ever spent in my life. There are so many well-intentioned people. Why are things not changing? One of the conclusions I’ve come to is we need people that are, for lack of a better term, inside the system to help, and to say things need to change, because we’ve got plenty of people from the sidelines yelling for change. We talked about some of them: Marjorie Kelly, Democracy Collaborative, and they’re great people and they are so well-intentioned. But I don’t think we’re going to get anywhere unless we get everybody saying, all right, enough’s enough. We need to tweak this system. This is not working.

But Marjorie Kelly, from the sidelines, does think that a firm like KKR could do a lot more.

KELLY: I would love to see KKR exit some of its investments to ESOPs. You know, not every investment they make is a home run. There are some that are kind of mediocre returns but are still very viable, good companies. Sell those to ESOPs on favorable terms. I would love to see that. I would also love to see Pete help develop a fund that could invest in ESOPs. I know he’s talked about the difficulties of large institutional investors investing in ESOPs, but I think there’s got to be a way to do it. And I would love to see him say, “We’re going to create some worker-owned firms that are long-term employee ownership, that are not burdened with excess debt, and that have real worker voice and stability.” I think that Pete could figure it out. And I’d love to see him do it. 

And, we went back to Corey Rosen, with the National Center for Employee Ownership.

ROSEN: It’s no surprise that people see the economy as distinctly unfair and getting unfairer. Because wealth and income are increasingly concentrated in the hands of a small number of people. When three families own 40 percent of the privately held productive wealth in the country, it’s a little bit hard to say, “Oh, the system works, it’s fair.”

Those three families are the Warren Buffett, Bill Gates, and Jeff Bezos families.

ROSEN: When 50 percent of the population can’t put its hands on $1,000 in an emergency, and 50 percent of the private workforce has retirement assets of zero, wealth insecurity is a severe problem in this country, and we need a way to build wealth.

What do you think are good ways to build wealth in the U.S., or elsewhere? And what do you think of Pete Stavros’s efforts to redistribute some wealth from within the very wealthy private-equity ecosystem? I’d love to hear your thoughts. Our email is

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Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Zack Lapinski, with help from Ryan Kelley. Our staff also includes Alina Kulman, Augusta Chapman, Dalvin Aboagye, Eleanor Osborne, Elsa Hernandez, Gabriel Roth, Greg Rippin, Jasmin Klinger, Jeremy Johnston, Julie Kanfer, Lyric Bowditch, Morgan Levey, Neal Carruth, Rebecca Lee Douglas, and Sarah Lilley. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music this week was composed by Luis Guerra. You can follow Freakonomics Radio on Apple PodcastsSpotify, or wherever you get your podcasts.

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  • Marjorie Kelly, distinguished senior fellow at The Democracy Collaborative.
  • Corey Rosen, founder and senior staff member of the National Center for Employee Ownership.
  • Pete Stavros, co-head of Global Private Equity at KKR.



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