The following article was featured in the February
2006 issue of Vermont Commons.
It was adapted with permission of the author from America
Beyond Capitalism: Reclaiming Our Wealth, Our Liberty,
and Our Democracy (John Wiley and Sons Publishers, 2005).
A Direct Stake in Economic Life: Worker-Owned
Firms
by Gar Alperovitz
That individuals
work harder, better and with greater enthusiasm when they have
a direct interest in the outcome is self-evident to most people.
The obvious question is: Why aren’t large numbers of businesses
organized on this principle?
The answer
is: In fact, thousands and thousands of them are. Indeed, more
Americans now work in firms which are partly or wholly-owned
by the employees than are members of unions in the private
sector!
Appleton (Co.)
in Appleton, Wisconsin (a world leader in specialty paper production)
became employee-owned when the company was put up for sale by
Arjo Wiggins Appleton, the multinational corporation which owned
it–and the 2,500 employees decided they had just as much
right to buy it as anyone else. Reflexite, an optics company
based in New Avon Connecticut, became employee-owned in 1985
after 3M made a strong bid for the company and the founding owners,
loyal to their workers and the town, preferred to sell to the
employees instead.
One factor which has contributed to the rise of employee-owned
firms is that multinational corporations often must seek the
very highest profit they can make on invested capital–whereas
workers living in a community are happy with substantial profits
(rather than the highest possible) since the other benefits of
keeping a plant in town far outweigh differences in profit rates. (Often, of course,
when employees take ownership, the change produces greater
efficiency–and
greater profits than those which the multinational registered.)
A major boost to employee-ownership came from passage in 1974
(and thereafter) of Federal legislation providing special tax
benefits to “Employee
Stock Ownership Plans” (ESOPs) –the legal structure
which most such firms now utilize. Technically an ESOP involves
a “Trust” which receives and holds stock in a given
corporation on behalf of its employees.
At the core
of the ESOP idea is the basic financing concept urged by Louis
Kelso for broadening the ownership of wealth–namely, if
some form of guarantee or collateral can be arranged to provide
loans for productive investment, new wealth ownership by diverse
groups (in this case employees of a firm) can be developed and
paid for by the profits which the investment itself generates.
Although ESOPs
based on this principle date from the 1950s, the modern Federal
legislation gave tax incentives to corporations contributing
stock to an employee trust–and, importantly, also provided
benefits to retiring owners of businesses who sell their corporation
to employees and reinvest the proceeds within a defined time
frame.
There are approximately
11,000 ESOPs now operating in communities in all regions of the
United States. Asset holdings total more than $400 billion. The
National Center for Employee Ownership (NCEO) estimates that
total worker holdings (of all forms of stock ownership and stock
options) reached approximately $800 billion in 2002–i.e.
roughly 8% of all U.S. corporate stock.
*
W.
L. Gore–the maker of Gore-Tex apparel–is one of the
most impressive modern ESOPs. The company, owned since 1974 by
(currently 6,000) worker-owners in 45 locations around the world,
has no ‘bosses’ or formal titles. To ensure communication
and innovation those working at any one site number no more than
200. Depending on their particular skills, workers may lead one
task one week and follow other leaders the next week; teams disband
after projects are completed, with team members moving on to
other teams. W. L. Gore revenues totaled $1.2 billion in 2002;
the firm regularly ranks on the Fortune “Best Companies
to Work For” list.
Another
impressive ESOP, Weston Solutions, Inc., is the second largest
environmental firm in the country. Its highly specialized
services range from forestry and urban planning to high-hazard
nuclear and chemical waste cleanups. The company has
helped rehabilitate "sick" (asbestos, lead paint)
school buildings from New York and Chicago to Decatur, Alabama.
It was the lead information technology contractor in recovery
operations after the space shuttle Columbia disaster. The
company is 100 percent owned by its 1,800 employees. In
recognition of its creative structure and its "consistent
record of profitability, growth, and financial stability," Weston
received the Environmental
Business Journal's top "gold" award for 2003.
ESOP
firms are also common in other non-specialized areas: Fetter
Printing Company in Louisville, Kentucky, is 100% owned by
its 200-plus workers. The firm has annual revenues of $17.5 million
and was recently ranked as one of the top 25 printers in the
United States. Fastener Industries in Berea, Ohio, is owned
by more than 100 worker-owners. Machinists who have participated
in the ESOP since 1980 commonly receive the equivalent of an
additional three-months pay in dividends each year and retire
with personal share-holding accounts of up to $350,000. Parametrix–100%
owned by over 350 employees–is an environmental engineering
firm headquartered in Sumner, Washington. The company was recently
selected as one of the best companies to work for in Washington
state–and was named 2001 national ESOP of the Year by the
ESOP Association. In Harrisonburg, Virginia, ComSonics–100%
owned by 160 employees–makes cable television (CATV) test
and analysis devices and boasts the largest CATV repair facility
in the U.S.
A 1998
survey of Washington state firms found that median hourly pay
in ESOP firms was 12% higher than pay for comparable work in
non-ESOP firms. Worker-owners of ESOPs also ended their careers
with almost three times the retirement benefits of others with
similar jobs. A 1990 study by the National Center for Employee
Ownership estimated that an employee making $20,000 a year in
a typical ESOP would accumulate $31,000 in stock over 10 years–no
small feat considering that the median financial wealth was just
$11,700 during this period. A 2000 Massachusetts survey found
ESOP accounts averaging just under $40,000.
It
is also clear that ESOPs–and worker ownership in general–have
broad political appeal for both practical and philosophical reasons.
The ESOP concept has been endorsed by (among others): Ronald
Reagan, Ralph Nader, Mario Cuomo, William F. Buckley, William
Greider, Jack Kemp, Richard Gephardt, Mikhail Gorbachev, and
Coretta Scott King. Both parties backed the tax legislation which
now provides over $2 billion in annual support to ESOPs. Other
forms of Federal help include loan guarantees and the financing
of worker-ownership feasibility studies in the event of plant
closures or major layoffs.
A
number of programs funded by states also provide support for
worker ownership. One of the most widely recognized, the Ohio
Employee Ownership Center, conducts feasibility studies for potential
independent worker buy-outs and for transition buy-outs from
retiring owners. The Michigan Workforce Transition Unit offers
employee ownership efforts feasibility assessment assistance.
Massachusetts funds the quasi-governmental Commonwealth Corporation
which provides technical and financial assistance to firms seeking
to establish an ESOP.
The
extraordinary growth of ESOPs over the last thirty years has
brought with it growing sophistication, the development of expert
advisory and technical assistance organizations, a group of advocates
and a group of critics, and–importantly–an expanding
and diverse constituency interested in next stage development
of the institution.
Critics
of ESOPs commonly decry the lack of democratic control offered
to workers in most trust arrangements. They point out that unlike
such a leader as W. L. Gore, many–indeed, most–ESOPs
do not involve real participation; they often function mainly
as a tax-favored legal mechanism to help employees accumulate
additional assets over time. (It is estimated that only between
a quarter and a third of ESOP companies pass through full voting
rights to worker shareholders.) Moreover, since ESOPs commonly
award stock in proportions related to wage and salary levels,
they do little to improve overall compensation ratios, and in
some cases actually increase internal firm disparities due to
compounding effects when stock values increase or dividends are
received.
Several
considerations suggest that greater democratic control of ESOPs
is likely to develop as time goes on–hence, also open the
way for broader support: First, a significant share of ESOP companies
(some 3,000 or nearly 30% of ESOPs in privately held companies)
are already majority-owned by workers. Of these, 40% already
pass voting rights through to plan participants. Second, as workers
within specific firms steadily accumulate stock they become majority
owners as time goes on. NCEO surveys reveal that the proportion
of privately held ESOPs which are majority-owned increased approximately
50% during the past decade.
It
is conceivable that as more and more ESOPs become majority-owned,
workers will simply ignore the fact that some have little power.
On the other hand, the more likely probability –as Business
Week observed in 1991–is that ultimately workers “who
own a significant share of their companies will want a voice
in corporate governance.” In Ohio (which has been closely
studied) asurvey completed in the mid-1990s
found that 53% of majority-owned ESOPs passed through voting
rights. It also found that employee ownership was becoming
more democratic over time, with three times as many closely
held companies passing through full voting rights to ESOP participants
as had occurred in a previous 1985-86 survey.
The
third–and perhaps most important–reason to expect
change is that several studies demonstrate that greater participation
leads to greater productivity, and thus greater competitiveness
in the marketplace. In general, ESOPs have been found to be as
productive or more productive than comparable non-ESOP firms.
Annual sales growth, on average, is also greater in ESOP than
non-ESOP firms. When ESOPs are structured to include greater
participation, however, the advantages of worker-ownership increase
substantially. Studies undertaken by NCEO, by several teams of
economists, and by the U.S. General Accounting Office all confirm
that combining worker ownership with employee participation commonly
produces greater productivity gains, in some cases over 50%.
*
The
number of ESOP-style worker-owned firms increased from 1,600
in 1975 to 4,000 in 1980, to 8,080 in 1990 and, as we have noted,
to roughly 11,000 in 2002.The number of worker
owners involved rose, correspondingly, from a mere 248,000 in
1975 to 8.8 million in 2002. There is no question that the feasibility
and efficiency of wealth-owning through worker institutions has
been demonstrated, and that the basic concept has great potential
for future expansion.
Likely
directions for next stage development have been suggested by
systematic proposals put forward on both left and right. During
the Clinton Administration one expert– Joseph Blasi–developed
a comprehensive package which included tax and other benefits,
and substantial support for state-based technical assistance
efforts. The Blasi plan also proposed restructuring tax benefits
to redress the greater concentration of ownership among higher
paid employees as a result of awarding stock in amounts related
to salary and wage level.
One
of the most conservative Republican members of Congress, Dana
Rohrbacher, has gone further. Rohrbacher has introduced legislation–The
Employee Ownership Act of 2001–the goal of which is to
have “30 percent of all United States corporations... owned
and controlled by employees of the corporations” by 2010.
The proposed legislation would define a new entity, the “Employee
Owned and Controlled Corporations” (EOCC, which Rohrbacher
calls “ESOP-plus-plus”), in which over 50% of stock
is held by employees, 90% of regular employees are enrolled in
the plan, and all employees vote their stock on a one person,
one vote basis. Various tax benefits would encourage adoption
of the ESOP-plus-plus form.
The
development in the 1970s and 1980s of broad Democratic and Republican
political backing for employee ownership ideas and supportive
state and Federal policies was in part related to the economic
difficulties experienced by many communities during this period:
Employee-owned firms not only embody new wealth-owning principles,
they help local economies.
With
the return of the increased economic uncertainties created
by globalization, additional support is likely to build upon,
and expand, the now well-developed and growing foundation of
accumulated experience with worker owned firms.
* * * * * * * * * * * * * * * * * *
The full text of this essay, together with extensive research
notes, can be found in America Beyond Capitalism from
John Wiley and Sons, 2005. www.americabeyondcapitalism.com
Gar Alperovitz is the Lionel R. Bauman Professor of Political
Economy at the University of Maryland and a former Fellow of
the Institute of Politics at Harvard and of King's College, Cambridge
University. His previous books include The Decision
to Use the Atomic Bomb. His articles have appeared
in the New York Times, the Washington Post,
the Los Angeles Times, the New Republic, the Nation,
and the Atlantic Monthly. He comments regularly on television
news programs. Alperovitz is a founding principal of the Democracy
Collaborative.
The Vermont Employee Ownership Center is a statewide non-profit
whose mission is to promote and foster employee ownership in
order to broaden capital ownership, deepen employee participation,
retain jobs, increase living standards for working families,
and stabilize communities. The Center organizes seminars and
conferences. It also works directly with owners, employee
groups, and entrepreneurs wishing to bring about broadly-shared
ownership of businesses.
Vermont Employee Ownership Center
P. O. Box 546
Burlington, VT 05402
802-861-6611
www.veoc.org
