New business models that create employee ownership in Africa are centering the “economics” in economic development.
The term “economics” in private capital markets typically refers to the distribution waterfall, or essentially who gets what return for what level of risk taken in a transaction. Typically, the distribution waterfall primarily includes investors, since they put capital at risk.
Workers take significant risk and create significant value and do not participate in the economics of a deal. They are typically considered costs which reduce returns to providers of capital. This helps explain why returns to capital have been growing at a faster rate than returns to labor, resulting in growing inequality that is leading to polarization and mistrust of institutions globally. Tensions between labor and management can also inhibit business efficiency and productivity.
This dynamic, present in developed markets, is largely being replicated in developing markets – unintentionally – through the models that we use in impact investing and development finance.
Many of us have worked on transactions where most of the return has benefitted foreign investors, potentially contributing to growing inequality between groups in different geographies and reflecting a magnified version of trickle down economics. Meanwhile, the incentives of workers relative to management and investors are not aligned.
What can we do differently? Employee ownership and profit-sharing in companies, and community ownership in real assets, have the potential to support emerging economies in overcoming the pitfalls of capitalism that we are seeing in mature markets, while also untapping inclusive and regenerative investment opportunities.
These shared ownership opportunities are foundational elements of re-centering the “economics” in economic development and are gaining interest as a way to create a more equitable distribution of wealth and foster inclusive economic growth, especially in emerging economies. As the Southern Centre for Inequality Studies notes, such predistributive approaches can help ensure wealth from the value creation process is broadly distributed, especially when, “purely redistributive and other fiscal policies have been insufficient in addressing growing within-country wealth and income inequality.”
Investor playbook
Fenix International, for example, was a clean energy company in East Africa that structured a broad based employee ownership program given interest from employees. After a successful exit to Engie, many of the employees are still employed, while several others are reinvesting the profits in their own businesses.
The founder and CEO of Fenix is continuing her work to advocate for employee ownership through the venture studio, Delta40. Delta40 is playing a crucial role in advancing employee ownership practices in Africa as an early-stage venture capital fund that supports portfolio companies in structuring broad-based employee ownership programs.
This week, the Predistribution Initiative is releasing a guide for investors and other stakeholders on opportunities related to employee ownership in Africa. The African continent has only 1.2% of global wealth, but 16.7% of global population. Moreover, the richest 0.0001% in the continent own 40% of the continent’s wealth. The largest and strongest economies in Africa are also the most unequal.
The Investor Playbook for Employee Ownership highlights the potential of employee ownership to help build more inclusive and resilient economies, particularly in emerging economies, highlighting numerous positive impacts:
- Reversing and preventing inequality: employee ownership enables workers to build wealth through direct or indirect ownership stakes – including profit sharing – in the companies they help grow alongside executives and investors.
- Increasing community reinvestment: Employees have stronger potential to reinvest their earnings in their local communities, stimulating further economic growth.
- Alignment with inclusivity goals: employee ownership directly contributes to social and governance objectives by fostering inclusive ownership and participatory decision-making.
- Long-term stability: employee ownership structures create ownership models that are more resistant to short-term profit-seeking behaviors that can erode long-term value.
Business case
As highlighted in ImpactAlpha, there is a compelling business and investment case for employee ownership. This is also true in Africa, where employee ownership can:
- Incentivize local talent: Talent retention is a major challenge in many African economies, where skilled workers frequently migrate in search of better opportunities. By offering equity in a company, businesses can better attract and retain top talent, ensuring that economic growth is driven by local expertise.
- Enhanced business performance: Enhanced business performance: Employee-owned businesses with high workforce engagement tend to have lower turnover rates, higher productivity, and greater resilience in economic downturns. Employee ownership can support building stronger companies by leading to faster revenue growth, higher profitability, improved workforce productivity and more retained talent.
- Stronger risk mitigation: By aligning the interests of employees and shareholders, employee ownership reduces the risks associated with workforce disengagement and labor disputes.
- Deepening capital markets: The introduction of broad-based employee ownership programs can encourage greater financial inclusion, creating new opportunities for capital markets to evolve in ways that benefit a larger portion of the population and foster stability and liquidity.
The Investor Playbook contains a legal and regulatory review performed by Norton Rose Fulbright in partnership with local law firms across seven countries within Africa, as well as a review of opportunities, challenges, emerging best practices, and recommendations. In addition to Fenix International and Delta40, it includes several case studies highlighting employee ownership strategies implemented throughout those countries by organizations such as Kinvest, fairafric, Fenix International and Delta40.
Employee ownership in action
Kinvest Venture Partners is currently raising the Capstone Kinvest Impact Fund which seeks to build and operate farms with a focus on sustainable agriculture and local ownership. They have used the proceeds from their first close to purchase land and begin developing three farms, totaling 605 hectares of coffee, avocado, banana, and multiple varieties of chili peppers and beans. Unique to Kinvest‘s strategy is a predetermined exit to local workers through an employee ownership trust, which is designed to help workers build capital assets over time.
Fairafric, a German-Ghanaian social enterprise producing organic chocolate, is also an example of employee-profit sharing with a newly rolled out employee ownership program. It has been positively received by employees and is coupled with significant capacity-building and education. An investee of ThirdWay Capital, an investment manager that invests throughout Africa and advocates for broad-based employee ownership, fairafric also aligns with the FairChain movement, which promotes keeping the entire production process in the country of origin, in this case cocoa.
The Investor Playbook is just the beginning of an ongoing effort between PDI and other organizations highlighted in the playbook to build awareness, share resources, develop best practices, promote enabling policies, and mobilize capital for employee ownership initiatives.
We invite diverse stakeholders including investors, policymakers, regulators, business leaders, development finance institutions, and labor and community organizations to join the conversation and contribute to the growing movement for employee ownership in emerging economies.
As next steps, we will be organizing roundtables and convenings around this topic to fine-tune recommendations, advance best practices, and build momentum for uptake. This includes engagement with labor representatives and academics in South Africa and beyond in partnership with PDI’s board director, Makhubalo Ndaba, as well as Arabo Ewinyu from Southern Centre for Inequality Studies. PDI is also preparing the foundations of expanding this work to other geographies and to look into opportunities for community ownership of real assets.
By developing a community of practice around this topic, we can collectively unlock the full potential of shared ownership to drive economic transformation to share more wealth and influence with workers and communities. We hope you will join us. Let’s build an economy that works for everyone and re-center the economics in economic development.
For more information on employee ownership in Africa, check out Delta40’s website. You can also read PDI’s full report and contact either organization to express interest in joining an emerging community of practice.
Delilah Rothenberg is Co-founder and Executive Director of the Predistribution Initiative. Juan Jardon-Pina is an Associate Program Director.
