To unlock regenerative business, we need new models of business ownership – here's how

Starting and running a business is hard. And it’s especially tough when the business is also focused on social and ecological goals. There’s the reality of commercial and operating pressures, pushing you to grow sales, manage costs, improve products and services, and innovate.

Meanwhile, your mission demands that you pay your workers equitably, design out waste, reduce carbon emissions and influence your suppliers, clients and broader industry to improve their impacts – even where doing so can sometimes cost more than it brings back in commercial benefits. This is a dance between priorities that compete for time and money.

When you add investors to the mix, this dance becomes even harder. While investors may like the social and ecological benefits that you generate, they will typically focus on the growth of sales, margins, and return on their investment. They might support your mission when it helps those financial parameters, but challenge it where returns are below expected benchmarks.

To manage this tension, a growing number of founders and business leaders are turning to emerging models of enterprise design – what we call Alternative Ownership Enterprises (AOEs). These are businesses that significantly shift economic value and decision-making power toward the non-investor stakeholders they impact, such as workers, producers, consumers, community members, or even a non-financial purpose. In other words, these are businesses embodying an ownership model that is better suited to prioritising social and ecological benefits.

Investors... might support your mission when it helps those financial parameters, but challenge it where returns are below expected benchmarks

Transform Finance, in collaboration with a range of organisations from across the world of investment, business and civil society, created a report to dive into the AOE models that are emerging. These can be broadly categorised based on what they primarily focus on: workers, other stakeholders or a specific purpose.

Many of these will be familiar to people working on impact. From employee ownership (with its multiple variations) to cooperatives, and social enterprise models, these are not necessarily new. However, models are evolving, encompassing mechanisms like Golden Shares or Perpetual Purpose Trusts, as a way to protect the mission or purpose of a company in the event of investors or others pulling the business in a different direction. Business leaders are increasingly drawn to models like Steward Ownership, which seeks to hold the business’s structure in perpetuity shifting governance rights to Purpose Stewards in order to protect the company from internal or external changes that might undermine its social or ecological mission.

AOEs have demonstrated better financial performance, lower turnover, improved job quality, and higher wages, while expanding wealth-building opportunities to more people and reducing gender and racial inequality. Additionally, they create positive effects on communities and the environment. In smaller communities, turning companies into AOEs helps retain local jobs and prevents shutdowns when owners exit or sell their businesses. By fostering a more inclusive and sustainable economic model, AOEs contribute to broader social and economic stability.

AOEs have demonstrated better financial performance, lower turnover, improved job quality, and higher wages, while expanding wealth-building opportunities to more people and reducing gender and racial inequality

AOEs achieve this in four different and complementary, ways:

1. Shifting who owns the enterprise: for example, in community-owned renewable energy companies (such as REScoop), outside investors cannot own voting shares, and the member-owners collectively govern the firm and share the profits.
2. Splitting economic and governance rights into different share classes: for example, in steward owned companies, often a trust (such as Perpetual Purpose Trust) or foundations control the governance rights (by controlling the voting shares) without the economic rights (receiving no dividends). Meanwhile, stakeholders such as investors, workers or charities can hold the economic rights (receiving the financial surplus as dividends), without having governance rights. Examples include Organically Grown Company which is owned by a Perpetual Purpose Trust and Tony's Chocolonely which implemented a mission lock via a Golden Share. This ensures that the governance of the business is not exclusively shaped by the desire for increasing dividends, but instead is focused on the social or ecological mission or purpose of the business.
3. Providing rights to non-owners: for example, a trust might own the shares of a company but formally delegate governance rights to employees, as with many Employee Ownership Trusts such as Codeweavers and Mētis Construction. In addition, workers or other stakeholders may hold a percentage of board seats or get a share of profits, regardless of whether they own shares.
4. Choosing a legal form that limits rights for outside investors: there are many jurisdictions where companies can incorporate as, for instance, Low-Profit Limited Liability Corporation (US) (such as Verde) or Community Interest Company (UK) (such as City to See and Mydex) in order to pursue a purpose in addition to profits. 

For entrepreneurs, business leaders and investors, the emergence of diverse models of AOEs is an opportunity to shape their possibilities. Designing ownership with specific social or ecological goals in mind can ensure the business is truly aligned to deliver on those goals. When workers co-own or co-govern a business for instance, major investment decisions can be shaped around the commitment to worker rights, wellbeing and the interests of local communities. When an ecologically-focused foundation has controlling shares in a business, this can ensure that staff in that business know that product development, marketing and supply chain management can seek more ambitious ecological benefits. The design of ownership can both lock-in the purpose and shape management and decision-making in line with that purpose.

Evolving the role of capital 

Critically, the question that faces us now is not whether AOEs are desirable (socially, ecologically and economically), but how to ensure they are financed. This requires innovation and ambition not just among entrepreneurs, but among investors as well.

There is a growing ecosystem of funders that provide capital for cooperative startups (for example, Start.Coop, Seed Commons). More broadly, many entrepreneurs who are seeking a different relationship between entrepreneur and investors have banded together under the umbrella of Zebras Unite for example. More recently, seen conventional VC-backed startups using AOE models such as non-profit ownership (OpenAI) and golden share (Anthropic) to try to ensure their technology benefits humanity as it quickly scales. Some startups have successfully looked beyond accredited investors to raise capital from the public (for example, Drivers Coop, Equal Exchange). 

Critically, the question that faces us now is not whether AOEs are desirable (socially, ecologically and economically), but how to ensure they are financed. This requires innovation and ambition not just among entrepreneurs, but among investors as well

Another way AOEs are ‘born’ is through conversion. This is when a conventional company changes their structure after they are established. Some models don’t require dedicated financing to convert (such as the L3C) but others must find ways to buy the ownership stake of the current owner(s). Outside investors can provide the necessary capital to the company, which uses it to buy-out the current owner(s). The company pays back the investor over time from its revenues, and grants the ownership of the company to its stakeholders, such as its workers. The type of capital and repayment terms vary depending on the company and the investor but is typically structured as debt. Conversions are a growing field of investment as the financial track record, demonstrated profitability or potentially some assets that could serve as collateral make the transactions easier than with startups.

Standard investment terms often are not a fit for AOEs, and investors will need to challenge their habits to finance AOEs.  For example, investors might not be able to claim the governance rights that they are used to or will have to evaluate the creditworthiness of a business without relying on a personal guarantee or background check.

In the employee ownership space (EO), a subset of AOEs, new, specialised EO funds play a critical role by sourcing deals, working with the business owners to structure the transaction, securing any additional capital needed to execute the deal, and even providing technical assistance after the transaction to embed an ownership culture at the newly employee-owned business. These funds, some implementing proven models while others are experimenting with new ones, are working to bring employee ownership to a broader range of businesses than have historically been able to convert in terms of size, industry, profitability, and more. A newly released briefing by Transform Finance provides an in-depth analysis of this emerging landscape and guidance for investors on how to deploy capital.

Reminding ourselves about why we need more AOEs

If we take a step back, we can consider the Doughnut (see illustrations below) as a helpful compass for navigating away from our current social and ecological crises. It consists of two concentric rings: a social foundation, to ensure that no one is left falling short on life’s essentials, and an ecological ceiling, to ensure that humanity does not collectively overshoot the planetary boundaries that protect Earth’s life-supporting systems. Between these two sets of boundaries lies a doughnut-shaped space that is both ecologically safe and socially just: a space in which humanity can thrive. Collectively, we are both overshooting the ecological ceiling and falling short on the social foundation - leaving millions short on life’s essentials.

Business has a central role to play in driving the transition of entire sectors, away from the ecological overshoot and social shortfall depicted above, toward meeting the needs of all within the means of the living planet. Their own deep design – particularly their ownership model – is holding this back. If humanity is to ‘get into the Doughnut’, businesses will need to go beyond the parameters set by the current design of business and of finance.

Get engaged

We are at the cusp of a significant demographic shift that some have dubbed the ‘Silver Tsunami’, where over $10tn in assets are expected to change hands as baby boomers retire, including 2.34m businesses in the US alone. At the same time, we are seeing an increase in activity in the space from large private equity funds, billionaires such as Patagonia’s Yvon Chouinard who recently converted his company to a Perpetual Purpose Trust-owned company with a sister non-profit, and policymakers with bipartisan support for the proposed Employee Equity Investment Act in the United States. The increased attention on the space has opened up newfound momentum and support.

What does this mean for investors

To unlock the potential of AOEs, investors could begin by: 

1. Getting comfortable with the diverse models across AOEs and the idea of enterprise design.
2. Connecting with asset owners and advisors with direct experience.Reconsidering assumptions around risk and adjusting your investment terms to match the needs of AOEs. Considering creating a carveout for AOEs specifically.
3. Identifying funds that focus on financing AOEs, which is generally easier, less risky, and provides portfolio diversification compared to sourcing deals directly. 
4. Raising the idea of AOE models with entrepreneurs and fund managers who may not be aware of the options or of your interest in them as a way to drive impact.
5. Spreading the word about AOEs to fellow investors and to investment advisors. Actively talking about the effectiveness of AOEs in achieving your impact goals and locking in the mission.
6. Making the case to policy-makers for the role of AOEs in the economic transitions needed, and advocate for policies that will support the take-up of AOEs.
7. Using philanthropic funds to support the ecosystem and support organisations around AOEs.

What does this mean for business leaders

Business leaders have the opportunity to redesign the ownership of businesses by:

1. Exploring the broad range of AOEs available, and the broad possibilities of enterprise design (including the potential to keep evolving that design). Considering AOE features to get started such as allocating stock options to all employees, not just senior management or including worker representation on your Board.
2. Seeking out investors with the most potential to invest into AOEs (for example, Transform Finance identified 53 funds in the US and Canada which could collectively deploy close to $4B).
3. Talking to investors openly about why and how they would like to deploy AOEs as part of their vision. Actively talking about the effectiveness of AOEs in achieving your impact goals and locking in the mission.
4. Spreading the word about AOEs to fellow business leaders and with your investors.
5. Making the case to policy-makers for the role of AOEs in the economic transitions needed, and advocate for policies that will support the take-up of AOEs.

Business leaders, investors, and anyone with an interest in shifting business practices, have the opportunity to stand at the forefront of a growing movement in support of Alternative Ownership Enterprises, and in turn contribute to getting our economy ‘into the Doughnut’. 

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