National Practices in Employee Ownership
Report on COG “National Practices in
Employee Ownership” Discussion Group
Jacquelyn S. Yates, moderator[1]
The
purpose of this paper is to survey and briefly describe employee ownership as
practiced in national policy. It is based on materials and references supplied
by participants in the ongoing virtual think tank online discussion group on
national employee ownership policy sponsored by the Ford Foundation and
organized by the Capital Ownership Group at www.cog.kent.edu. Participants’
contributions have been supplemented by the author’s research. This paper will
focus on the extent and general structure of employee ownership as practiced in
the countries of the world.
The
author sincerely welcomes comments and corrections. The literature is vast, the
subject matter is fluid and a solitary human, pecking at a computer keyboard
into the dark, dark night, is humbled by the assignment, even while offering
silent alleluias to the inventiveness and resourcefulness of human beings the
world over.
1. Employee ownership is on the increase
The appeal of employee ownership as a means of
spreading wealth is an idea that refuses to die. Despite hysterical Cold War
propaganda classifying all forms of collective ownership as spawn of the evil
empire and despite state socialists’ rejection of collective enterprises as
dangerous associations of citizens, collectively-owned enterprises of
residents, workers, colleagues, or co-religionists have spread throughout the
world. Most cooperatives are small, although some have joined together to form
large firms, such as the Mondragon Cooperative Corporation in Spanish Basque
country and, in Europe, construction cooperatives, which bring together various
tradesmen, artisans and technicians. In just 25 years, over 11,000
employee-owned companies have been established in the U.S., employing more than
1.5 million workers.(National Center for Employee Ownership, 1995) The number
of producer cooperatives in Italy grew rapidly in 1973-1982 and includes
enterprises in all sectors of the economy. (Bartlett, 106) Guatemala is
reviving its housing cooperatives. Tens of thousands of employee-owned
enterprises have been created in the former Soviet Union and its satellites,
giving Russia the largest employee-owned sector in the world.
Members of the European Union are undertaking a
vast experiment in employee share ownership and financial participation, each
within its own framework of national law and politics. As it struggles to
develop its economy through decentralization and privatization, China’s
collectively owned and operated township and village enterprises (TVEs) are
growing rapidly while state-owned enterprises (SOEs) stagnate with overstaffing
and inflexible organizational practices. U.S. foreign aid policy since the
1980’s has emphasized cooperatives for bootstrap development, and with the
emergence of democracy in many parts of South America, successful cooperatives
are developing (Wasserstrom). A quarter of the world’s largest global corporations
are extending opportunities for share ownership to their employees worldwide.
There is no worldwide estimate of the extent of employee ownership, but it is
clearly on the increase, a countertrend to the widening gap between rich and
poor.
Employee ownership is an idea that has been around
for a long time. Its roots can be traced to the medieval guild system, communal
self-help associations, utopian movements of the late 19th century
and Socialism outside of Marxism-Leninism. Leaders with communalist values and
small numbers of followers, captured by the appeal of using collective and
cooperative effort to build a better way of life, have been creating
recognizable employee-owned economic associations in many forms almost two
centuries.
Some of those associations still exist today,
although they might be unrecognizable to their community-minded founders.
Examples are the Shaker community at Sabbathday Lake in Maine, U.S.A.;
Mennonite enterprises in Belize and Guatemala; and Ambridge Steel, which purchased
real estate and enterprises created by members of the Harmony society around
1824 (after they had moved back to Pennsylvania from Robert Owen’s New Harmony
in Indiana). In the 20th century, there are examples like Publix
supermarkets, with 119,000 employees, currently the largest employee-owned firm
in the U.S., and Journal Communications, publisher of the Milwaukee (Wisconsin)
Journal, where 3300 current and retired employees are owners of a wide
array of firms in the communication business. A recent report from Trinidad
indicated the existence of 25 companies offering stock ownership plans approved
by government rulings on a case-by-case basis without any supporting
legislation at all. (Employee Ownership Report 1999. 19:3, 13) All
of these enterprises were and are owned by their employees and were created
without any specific policy support from government. They are testimony to the
appeal of employee ownership and labor cooperation. More recently, when
employees were offered 20% of equity in some state-owned companies at a
state-set price, the shares were swiftly subscribed, and economic performance
vastly improved. (Wu, [ ]) Most states where private enterprise is supported by
rule of law probably have at least a few precursor firms or organizations that
practice employee ownership, even without supportive national policy.
2. Reality Beats Theory: Employee Owned Firms
Don’t Die of Internal Contradictions
The real survival and growth of collectively owned
enterprises has put to rest many of the theoretical criticisms raised by
economists and others over the years. A paper on the success of the enterprises
is no place for an extensive catalog of criticism, but a brief acknowledgement
seems in order. One of the earliest critics was a friend of the working man,
Socialist Beatrix Potter, whose dark assessment of human greed led her to argue
that collective ownership would always be undermined by the greed of the
owners, who would be unable to resist dividing up the enterprise capital among
themselves to the detriment of business development. An extensive and lively
literature beginning in the mid 1970’s leads to the conclusion that
collectively owned enterprises are as productive and profitable as enterprises
owned by private individuals, even though they present a distinctive profile in
their labor and management practices. (Bartlett 1992, Hansmann, Vanek, Jensen
and Meckling, Prasnikar, et.al. 1994)
Governments enact policy on employee ownership for
many reasons. Part of variation in policy and practice is attributable to the
goals sought. Such objectives include:
•
Encouraging economic development: Bolivia, China,
Israel, Jamaica, Peru, Zimbabwe
•
Keeping labor peace with an incomes (wage control)
policy:Sweden
•
Saving floundering firms: U.S., U.K., Ireland,
Israel
•
Privatizing government-owned enterprises:
Bulgaria, Chile, Czechoslovakia, Hungary, Kazakhstan, Poland, Germany, Puerto
Rico, Romania, Russia, U.K., U.S., Zimbabwe
•
Preventing buyouts and closings of smaller firms:
U.K.. U.S.
•
Spreading ownership of wealth: France, U.S.
•
Encouraging employee loyalty in a tight labor
market: Ireland, U.K., U.S.
•
Improving employee compensation packages: Germany,
Netherlands, Belgium
•
Motivating higher productivity through individual
employee efforts: Ireland, U.K., U.S.
•
Generating higher overall economic productivity
through capital investment (deferred consumption through deferred profit
sharing creates funds for capital investment): Sweden, Denmark
•
Promoting ownership by indigenous people
(native-born nonwhites) in a former colonial state where most of the productive
assets are owned by former citizens of the imperial power (whites): Zimbabwe,
Egypt
•
Attracting population: Israel
•
Ameliorating problems of unemployment by allowing
for a variable wage: European Union
•
Saving jobs: Czechoslovakia, Hungary, Israel,
U.K., U.S.
•
3. Employee ownership takes many and varied forms
The idea of employee ownership is simple, but its
application is complex. With so many possible combinations of motives on the
part of government, business, and labor, it is not surprising that governments
have tried many different types of employee ownership, and that a state’s
approach to employee ownership is best predicted by its culture. (Poutsma,
1999a, 1999b, 2000) There appears to be no limit to the inventiveness of humans
in constructing formal institutional arrangements for collective ownership. Nor
do they hesitate to adopt confusing terminology, calling the same idea by
different names, or different structures by the same name. As Scott Rodrick
writes on the NCEO (National Center for Employee Ownership) webpage, “Each
country has its own legal framework (or a lack of one) for employee ownership.”
(www.nceo.org/columns/sr7.html)
The techniques, approaches and strategies that have
been adopted in national governmental policy and implemented by enterprises
include cooperatives, profit-sharing, ownership and management of firms by
labor unions, collective share ownership through workingmen’s (share-owning
funds), employee stock purchases (with or without assistance from the firm),
employee share ownership trusts, employee share ownership [pension] plans,
employee-directed stock ownership pension accounts and stock options.
Cooperatives
Any country where private ownership is permitted
by law may use the cooperative, and worldwide, cooperatives are on the
increase. The cooperative is a kind of partnership with many partners who need
a governance structure to manage relations among them. Typically, cooperatives
are formed with many small craftsmen or producers who own their own tools but
need help with specific problems like purchasing or marketing. Typically, each
owner has one vote. Even where national policy offers no particular protections
or support, cooperatives can be formed around shared financial goals.
Where national law does exist, there is often
different law for the different types of cooperatives. Most cooperatives are
consumer- or credit-based, and there are many agricultural cooperatives for
farmers. Less numerous are producer cooperatives, which are associations of
workers making a manufactured product or providing a service. But these too,
are on the increase. While many producer cooperatives have sustained success
over many years, they have historically had difficulty getting access to
capital and have sometimes foundered on the rocks of opportunism from within or
competition from better capitalized conventional firms. However, research from
Quebec suggests that they are more likely to survive the first few years in business
than are conventional firms, and Italian cooperatives have long existed in
spite of chronic shortage of capital.
Cooperatives probably exist in some form in all
states. However, formal, legally constituted coops appear to be concentrated in
the more developed nations. North America, Europe and Australia account for
almost half of the country listings on the website of the International
Cooperative Information Center. In Europe, Italy is reported to have the
largest concentration of producer cooperatives in the western world, more than
in all the other Organization for Economic Cooperation and Development (OECD)
countries combined. In 1986, the population of producer cooperative sin Italy
was estimated at 16,000, employing over 300,000 workers. (Bartlett, 104) In
North America, Canada is particularly rich in cooperatives, claiming around
5,000 cooperatives of various kinds, including credit unions and consumer
cooperatives, with 151,000 employees for 14.8 million members, and assets of
$167 billion in 1996. In some poorer nations, extralegal cooperatives are
reported to be numerous, but there does not appear to be any documentation of
their numbers.
Cooperatives have been especially successful as
farmers’ organizations. Farmers organize to efficiently purchase supplies or
services and to process and market their products. Agricultural cooperatives
seem to be an indispensable element of economic success in the highly
competitive worldwide agricultural market. In the U.S. they were fostered by
national policy, and helped to provide farmers with rural electricity,
agricultural research and training, purchasing and marketing services.
Credit unions and mutual savings associations may
be the second most common kind of cooperative. They are owned by their depositors,
who can receive loans at preferred rates and benefit from dividends as well as
interest. Whether there is supporting law or not, some traditional societies in
Asia and South America are known to use this cooperative form on a small scale
to accumulate micro investment pools. At the other end of the spectrum are
giant credit union cooperatives like the Desjardins Credit Union of Quebec,
with more than 15,000 employees and $83 billion in assets (Globe and Mail,
B1)
Producer cooperatives have at least a century of
history in Europe. Italy is the European country most identified with
cooperatives. Its 11,000 producer cooperatives employed 2.5% of its
nonagricultural workforce was in cooperatives in 1981. (Bonin,. Jones and
Putterman, 1291) Typically, European law on cooperatives restricts the use of
the enterprise profits. France for example, mandates that at least 25% of
profits must be distributed to workers, whether or not they are members of the
cooperative, and also mandates a minimum percentage allocation to the
cooperative’s reserve. European law often requires that members cannot benefit
from any appreciation in value of their shares over time: the cooperative’s
assets and cash reserves cannot be distributed to departing members, who
receive only the cash they originally deposited in their account, sometimes
with a modest interest rate. (Estrin and Jones, 1992, 325)
France had over 1300 producer cooperatives in
1984, employing more than 40,000 workers. According to Defourney, et.al., this
was the second largest cooperative sector in the Western world (p. 199). They
were regulated by national law requiring them to distribute at least 25% of
their profit as bonuses and set aside at least 15% as a reserve. Members could
own varying amounts of shares in the coop, but each member had just one vote in
corporate governance. Traditionally concentrated in construction, printing and
mechanical engineeering, cooperatives are also found especially in consulting,
electrical firms, woodworking and food processing (Defourney, Estrin and Jones,
1985). French law forbids sale and distribution of the cooperative’s
assets to its individual members, which is a protection for their continued
existence.
Spain, among the countries of the European Union,
is the only member reported to have adopted major new legislation on
cooperatives. The government adopted a General Law on Cooperatives in 1999,
making it easier to form cooperatives and imposing less regulation.
Cooperatives are seen as a stabilizing factor: they stabilize employment,
provide more training, reinvest more profits and have higher labor
productivity. In Spain, they receive favorable tax treatment. (Poutsma, 72) It
is reported that worker cooperatives employ more than 300,000 in Spain. (Employee
Ownership Report, 1999, 19:2, 10). Spain is home to 11,079 large and small
labor firms, employing 62,567 as well as the large and diversified Mondragon
Cooperative, formed in the impoverished Basque area in 1956. Today Mondragon is
an industrial, banking, management and marketing giant in Spain, with 34,400
employees, 70% of them members of the cooperative, exporting 46% of its
industrial production in 1997. (Whyte, 1999:478) In governance, Mondragon has
become more centralized, and governance is more concerned with money than ever
before. (Cheney, 1999, Chapter 3) It is natural that a large firm must
concentrate on organization and control through finances, but ordinary workers
feel remote and out of touch as management relies ever more heavily on this
traditional management tool.
Even under conditions of state central planning,
cooperatives can flourish if conditions are right. Derek Jones, studying
producer cooperatives in three Polish industries during 1976-1978, when Poland
was still a centrally-planned economy, found that increasing worker
participation in enterprise management or increasing economic incentives had
positive effects on productivity. (Jones, 1993)
Poland had extensive experience with producer
cooperatives even before the Soviet Union collapsed in 1990.(Jones 1993a) In
1976, there were about 1500 cooperatives, employing about 800,000 workers and
accounting for about 10% of Polish industrial output. This represents “by far”
the largest producer cooperative sector in Europe, Jones points out. In
establishing their management and governance structures and practices, the
cooperatives were somewhat sheltered from directives of the state planning
agency by their affiliation with non-communist parties (which were permitted to
exist in Poland but in no other country of the Soviet bloc). Legislation
established the basic principles: one vote for each member, voluntary
membership open to all and limited return on capital. Typically the firm was
governed by a General Assembly of Members which included an average of 80% of
the workers, and a council, comparable to a board of directors, with a majority
of non-managerial workers. The distribution of the annual surplus was partly
set aside for investment and reserves and partly distributed to the workers in
the form of an annual bonus and deposits to a savings account with limited
withdrawal rights. Workers contributed to the capital of the cooperative when
they joined. When they left, they received their capital back with interest.
However, there was considerable variation among the firms in the extent of
participation in governance and profits. (Jones, 477-78) Among Jones’ sample of
63 cooperatives, cooperatives with participation and financial
incentives outperformed cooperatives lacking those characteristics. (Jones, 480)
In the 1980s, after the failure of large-scale aid
projects and disastrously rapid urbanization without rapid economic growth,
cooperatives in Latin America were heavily promoted by U.S. foreign policy and
international NGOs.(Wasserstrom, 8) And within the Roman Catholic Church there
seems to be a strain of sympathy for cooperatives.
However, cooperatives may be over-regulated in at
least some Latin American countries, where organizers complain of onerous, even
prohibitive, governmental requirements for forming cooperatives. (Wasserstrom,
22) Anecdotal evidence from Wasserstrom suggests that coops of poor people may
not register with the authorities in order to avoid regulation. A recent U.N.
paper made available through the Committee for Advance of Cooperatives observes
that governments have in the past often viewed cooperatives as parastatal --
extensions of state enterprises, but that notion has been replaced by the idea
that cooperatives are independent entities having no connection with the state.
(Cited in May, 1998)
In the Middle East, Israel is an experienced state
in the matter of cooperatives (kibbutzim). Hundreds of cooperatives were formed
in connection with the Zionist movement and the establishment of the state of
Israel. The leaders of Zionism were products of Socialist politics in their
homelands, and they idealistically saw cooperatives as the road to a better
economic life. Agricultural cooperatives were established to “make the desert
bloom,” and amid some failures, many succeeded, built on the devotion and
backbreaking labor of immigrants. Then came industrial cooperatives, some
fostered on the agrarian cooperatives and others formed in the cities. There
were over 1000 agricultural and industrial kibbutzim in 1970. Today, most
Israeli cooperatives are organized in two divisions of the trade union
organization, Histadrut (General Labor Council). However, Histadrut has come
under increasing criticism for using the cooperatives for national and
political reasons rather than protecting and fostering them. In 1991, Raymond
Russell found that while Histadrut’s announced intention was to support the
cooperatives, in fact its control “may have caused irreparable harm to the
Israeli urban cooperative sector.” (Russell, 1991) The reasons for the decline
include too-hasty and ill considered formation of cooperatives to give
employment to waves of new immigrants, a financial structure which makes it
nearly impossible for new members to buy into the coop, the increasing use of
hired labor (as a result of the high cost of membership), a lack of financing
and business planning. Histadrut made efforts to reverse the harm done by its
policies, but their efforts seem to have been too little, too late. (Russell,
400) Under Histadrut’s stewardship, there has been substantial erosion in the
numbers and prosperity of the kibbutzim, the cherished economic symbol of
Israel, and the only form of labor enterprise directly owned by the people who
work in it. By 1988, there were 75 organizations employing a total of 16,562
(1.5% of the labor force), down from 393 enterprises in 1953, and 21,352
employees in 1980-81. (Russell, 390-1) Today, however, Histadrut no longer runs
industrial complexes. (Raanen Katzir, personal communication)
Afghanistan had cooperative law from 1974. Iran,
from 1925, with latest amendments in 1971. After its Islamic fundamentalist
revolution, Iran set forth guidelines for government non-interference in
cooperatives and general rules for distribution of profits.. International
Cooperative Information Center, University of Wisconsin
A type of cooperative is forming in China around
the township and village enterprises (TVEs) created in the country’s wave of
privatization. The Chinese national government and its local communities are
experimenting with home grown varieties of employee ownership as they attempt
the gradual revitalization of their economy through decentralization and
privatization. Whether the TVEs will succeed under a burden of heavy local government
taxation and corruption is an outstanding question.
The International Cooperative Alliance (ICA) has
listings for African cooperatives in Cape Verde, Cote d’Ivoire, Namibia,
Senegal and Zimbabwe. Of course, many of these are agricultural cooperatives. A
1996 report on Cote d’Ivoire focuses on cotton production coops in URECOS-CI,
with 300 cooperatives in 34 unions, and 459 primary cooperatives, organizing
115,879 families. The cotton cooperatives produced 91% of national production
of cotton in 1993-94 (“Cote d’Ivoire: URECOS-CI,” INFO-COOP, 1996). A
report from Cape Verde states that many consumer cooperatives were destroyed in
the process of economic liberalization, because they could not compete with
private firms. But the same source also reports that a dramatic rise in
production cooperatives is developing. From 1991 to 1995, sixty-two new
cooperatives were set up: 11 in agriculture, 18 in semi-industrial sector, 22
in fishery, 4 housing cooperatives and 7 consumer cooperatives. (Mendoca, 1996)
Farmers’ coops from South Africa have penetrated into Namibia to offer
insurance, loans and irrigation to about 1500 Namibian farmers, who appear to
be all or mostly white. The ICA estimates that 37 small cooperatives had
developed by 1991 to serve black citizens, but that so far they had remained
unregistered because of the complexity of the cooperative legislation. Ten of
the cooperatives were known to be credit unions. Cooperative members are mostly
women. NGOs were encouraging and supporting many of these unions. (ICA, 1991)
With so much of the world still underdeveloped,
surely the cooperative organization has a long future. Currently, the
International Cooperative Alliance (ICA) lists connections in the Caribbean,
Central and Latin America, to cooperatives in Argentina, Benin, Brazil,
Colombia, Haiti, Nicaragua, Puerto Rico, and Uruguay. Argentina appears to have
with most developed cooperative sector, with nine cooperatives (at least four
of which appear to be credit cooperatives or mutual savings societies) listed
on the ICA website. Successful housing cooperatives were established in Uruguay
in 1966 but, under military rule, nearly extinguished by 1980. Efforts are now
underway to re-establish that movement.
The flexibility, simplicity and low start-up costs
of the cooperative provide a means for millions to take the first steps in
climbing out of poverty. The ability of cooperatives to market their products
directly on the Internet has generated dozens of success stories in the past
two years The organizational forms and processes are well understood,
and national and international governmental organizations seem to have
identified the cooperative as a good avenue for fostering development. The
existence of many cooperatives which sprung up outside a cumbersome legal
system suggests that there is a need for simplified regulation to foster the
growth of this enterprise form. These “co-op irregulars” are likely in
particular need of institutional support.
Shortage of capital for modernization and expansion
is a problem that plagues many cooperatives. Traditional banking institutions
are not very interested in investing in collectively owned firms. In Italy,
members make loans to the cooperative from their personal funds. (Bartlett,
113) In the Mondragon Cooperative Corporation (MCC), part of the requirements
of membership are saving profit-sharing income in various personal and
collective internal accounts. These funds can be pooled for loans to
cooperatives wishing to develop, loans for creating new cooperatives or loans
to acquire existing businesses for conversion to cooperatives. The funds are
also used at time to bail out troubled cooperatives. They generally supply the
capital needs of individual cooperatives in the MCC in an orderly and rational process.
Scholarship on the cooperative tends to blend into
scholarship on other kinds of employee ownership. Not all cooperatives use the
formula of one-member, one-vote. Some allow voting based on share ownership,
though there is often a restriction on how much stock one member can own or how
much stock one member can vote. Most, but not all, cooperatives are wholly
owned by their employees. But not all cooperative workers are members.
Beyond the cooperative are more flexible forms of
employee ownership suited to ownership or partial ownership of large and
complex enterprises. These arrangements are constructed and maintained by
complex trust agreements, which require economic stability to protect
enterprise value and the rule of law to protect property interests over many
years.
There are some intermediate possibilities, already
underway in some form in perhaps 25 of the world’s states, which could spread
capital ownership more broadly without threatening the desirable values and
arrangements which support today’s political and economic order.
Their story is told in the pages that follow.
Profit-sharing
Strictly speaking cash-based profit sharing or
schemes where stocks can be sold as soon as received do not qualify as any
redistribution of ownership, because income from profit sharing can be
immediately consumed and does not necessarily lead to any long-term
deconcentration of capital ownership. However, it does distribute wealth and it
is a form of variable wage. Even this kind of profit sharing sometimes seems to
be a “step on the way” to policies promoting ownership. The experience of
profit sharing can turn employees’ thoughts and understanding to the benefits
of ownership, because they can make a connection between the quality and
quantity of their work and the pay they receive. Of course, it may be more
difficult for them to understand how outside factors can reduce their profit
sharing when they are making the same efforts or even efforts improved over
what succeeded in the past. On the other hand, the experience of reduced profit
sharing can be a motivator for making the effort to understand and respond
inventively to the more remote events of global economic life.
Profit sharing can be in cash or in company shares
and it may be available to employees immediately or it may be deferred.
Although profit sharing has been bitterly opposed by unions as a risky form of
variable wage, dependent on what management says is in the accounts, employers
believe it can be a useful motivator for production and a sweetener of
relations between labor and management. There seems to be some basis for a
meeting of these two views if profit sharing is discussed with employees,
offered broadly as an additional benefit and not a substitute for basic wages
or benefits, formulated in advance and in writing, and accompanied with
feedback as to how the firm is doing. (D’Art, 29)
In the U.S., profit sharing is tax-advantaged.
Contributions up to 15% of covered compensation are tax deductible to the
employer, and there are other tax benefits as well.
Likewise in Europe, profit sharing is tax
advantaged. U.S. law also permits deferred profit sharing as a pension plan
through the 401k, which is discussed later in this paper.
In some countries, however, national policy
supports deferred profit sharing. The employer contributes stock or funds which
are used to purchase company shares or other shares of companies listed on the
stock market. The account is blocked (cannot be withdrawn) for a specified
number of years, and receives favorable tax treatment.
Deferred profit-sharing is practiced in 14 of 15
European Union countries surveyed by Erik Poutsma in 1996 (Poutsma, 1999). The
percentage of firms using profit sharing ranged from 57% of companies reporting
on the European Participation in Organizational Change (EPOC) survey in France,
where it is mandatory for all but small companies, to 3% in Italy. The median
was 13%.
Since 1959, France has had compulsory cash-based
deferred profit sharing for all firms with more than 50 employees. The accounts
are wholly blocked for 3 years, and partially blocked for 5 years. In addition,
employers may collectively bargain to establish accounts for each employee to
receive shares and payroll deductions to be invested, along with the compulsory
profit sharing. Both employees and employers receive tax advantages. Compulsory
deferred profit sharing covered 19,000 firms and 5.15 million employees in
1993. (Poutsma, 1999, 61-65).
Finland has had a small program in deferred profit
sharing since 1990 (Poutsma, 65).
Share based profit sharing is more encouraging for
long-term ownership. Three European countries (Denmark, Ireland, U.K.) report
that share-based profit sharing is in use. In the U.K., share based profit
sharing is paid into a trust and the shares are not taxable as income if they
are held for a specified number of years. (Poutsma, 89)
Ireland has had law supporting deferred profit
sharing since 1982. Their law is modeled on United Kingdom law. Companies file
approved schemes with the revenue office and establish trusts which acquire
shares for employees. All full and part-time (since 1997) employees must be
eligible to participate. The trust receives shares or money to purchase shares
for employees. Employee accounts are credited with the shares, but for a
minimum of two years, the accounts are blocked, meaning that employees cannot
withdraw from them. Shares are tax free to individuals if held for three years,
and companies avoid paying any taxes on their contributions to the trust. The
maximum amount that can be contributed has increased over time, to ,10,000 per
employee. Today, there are 292 approved schemes, coving 141,350 participants
(Poutsma, 91-93) Eight percent of respondents to the EPOC survey reporting
profit sharing.
What Spain had traditionally called “profit
sharing” was in fact a 13th month of wages, usually paid sometime in
the spring. This was a wage and not true profit-sharing since it was not
variable and did not depend on the success of the enterprise, but was simply
paid like wages. Spain has some law for share-based profit sharing since 1996.
If shares are held for three to five years, the share value and income receives
favorable tax treatment, as long as firms offer the shares to all workers not
owning more than 5% of the firm. Share income must not amount to more than 30%
of wages (Poutsma, 1999, 56). Only 8% of Spanish firms in the EPOC survey
report that they have some kind of profit sharing. Poutsma points out that
Spain’s relative neglect of share-based compensation is probably a reflection
of its focus on higher priorities, especially creating and building up pension
funds.
Denmark has had legislation for share-based profit
sharing since 1958, but it was used by only 16 firms in 1993 (COG website,
matrix of state characteristics). In the spring of 1999, Finland was reported
to be considering legalizing profit sharing plans which invest primarily in
company stock. (AFinland and Sweden Moving Quickly on Employee Ownership, 1999,
EOR May/June 1999)
Ownership of firms by labor unions
Undoubtedly, the Histadrut (General Labor Council)
of Israel has the most extensive experience of labor unions’ direct ownership
of enterprises. Its holding company Hevrat Ovdim was established in 1923 by
Histadrut to provide support for a pluralistic cooperative sector in the
Mandate of Palestine. Hevrat Ovdim was organized into several large divisions,
some with hundreds of enterprises within them. One of its main divisions is
comprised of agricultural cooperatives, and another contains industrial
kibbutzim and other types of cooperative enterprises mentioned earlier, but
many larger enterprises are owned and administered directly by Hevrat Ovdim.
Some had a hierarchical management style, and some allowed for participation
from employees. Histadrut’s direct ownership of firms began with the purchase
of bankrupt and closing privately owned firms B a glass factory and a forge in
Jaffa. (Almogi, 133). Holdings of Hevrat Ovdim included a workers’ bank, an
insurance company, a consumers’ cooperative, a medical insurance enterprise
that provides care as well as insurance, a public works construction holding
company with hundred of construction firms and firms that supply them, a
housing construction holding company. The labor-owned sector of the economy is
so large that it is called by its own name, “the labor economy.” In 1970, it
counted for almost 20% of the entire Israeli economy and a little more than 20%
of workers in that economy. Today, however, the report is that this labor-owned
sector has collapsed.
There was always been a great deal of tension
within and around Histadrut’s ownership of firms. Should a labor union be an
owner? Should a labor union have hired employees working in its enterprises?
The tension has been managed by explaining that Israel, and Histadrut within
it, are exceptional. Histadrut began in 1922 as a labor organization
campaigning for the rights of Jewish workers in the Mandate of Palestine and
became the organizational home for much of Zionist political leadership during
the struggle and war for Independence. Histadrut has taken the approach that
its first duty was to support the creation and protection of the Jewish state
of Israel, (Almogi, 132) and only secondarily was it a workers’ protection
organization.
The ownership of many and varied firms has not
always been easy for Histadrut. From within Histadrut, there has been fulsome
criticism on grounds of ideological impurity and betrayal of the working class.
Most of the enterprises directly under Histadrut’s wing were wholly owned by
Histadrut or one of its holding companies, and the workers had no ownership
stake. When this practice originated, common ownership through Histadrut with
central control was seen as being closer to the ideal of labor control.
(Daniel, 34) These “administered” enterprises generally outperformed the
kibbutzim economically, adding to the confusion of the dialogue within
Histadrut. (Daniel, 16) Histadrut had also undertaken ownership in a few
“mixed” enterprises with private investors, but it imposed such strict
requirements for ownership (at least 50%) and control (right to appoint
management and be immune from any losses), that few were actually created
(Daniel, 65).
Under United States law, labor unions are not
permitted to own enterprises. A few union-owned banks survive from a 1920's
movement. These include the Amalgamated Bank in WDC, which was established by
the amalgamated clothing workers. The Union Labor Life Insurance Company was
established by the Knights of Labor. Daniel Abraham mentions that there were
labor banks in Germany and Austria.
Collective share ownership through workingmen’s
(share-owning) funds
The most extensive experience with workingmen’s
funds appears to be in Scandinavia, where a Swedish Labor government, seeking to
reduce windfall profits in efficient companies which benefitted from solidary
(collectively bargained, sector-wide) wage policies, required firms to deposit
40% of annual profits into a blocked account at the national bank. The deposits
were tax-exempt, and were used for investment and a cash reserve in case of
economic downturn, when the accounts could be unblocked. (D’Art, 151-155)
Nonetheless, there were economic problems with international competition which
increased pressure for production with no increase in wages, erosion of wage
values by inflation and a growing sense among workers that they ought to have
more of a say in the management of their firms. (D’Art 155) In 1972-78, the
Labor government passed a series of laws giving workers in all firms with more
than 25 employees rights to representation on the firm’s board, more employment
security and requirements to justify dismissals, rights to halt dangerous work
processes, and in general the right to be consulted on any major business
change. (D’Art, 156-158) While this satisfied the desire for more consultation
and participation, economic problems remained, particularly a lack of
investment needed to keep up with foreign competition.(D’Art, 160) There was
also an anticipated shortfall in the National Pension Plan.
In 1971, labor economist Rudolph Meidner was given
the assignment of coming up with a plan to address the problem without
increasing taxes, unemployment or inflation. His proposal was to transfer
shares to employees, to be administered centrally and collectively, but with
the shares to be voted by the local union leadership for the firm’s employees.
Dividend income would be used to purchase additional shares and fund research
and education services for local unions and union representatives on boards.
Ultimately the fund would benefit all workers upon retirement, and immediately,
it would create an investment pool to boost the Swedish economy. The Meidner
Plan provoked active opposition and criticism from business at a time when the
long-lived Social Democratic government was under fire for scandal and nuclear
energy policy, and the Social Democrats were unable to pass the plan before
they lost the government in the 1976 election. Nor did the plan enjoy
widespread public support. (D’Art, 190)
In 1982, the Social Democrats were returned to
power, and in 1983, they passed a modest variation of the Meidner Plan, the Act
on Employee Investment funds, which created five regional investment funds for
the support of national supplementary pensions. The funds were financed by
profit-sharing and a payroll tax, to be levied through 1990. After 1990,
contributions would cease and the policy would be reviewed. Enterprises whose
stock was owned by the funds would have some board members appointed by government.
The funds could buy shares and make loans to co-ops, but they were prohibited
from making foreign investments. The funds were required to return 3% on
capital to the National Pension Funds. One-half of share voting rights were to
be transferred to the local union. The funds were liquidated after the
Conservative government came to power in 1991 under Carl Bildt. None of this
had any success in deconcentrating wealth, which was highly concentrated under
the Social Democratic governments through the early 1970's and remains so to
this day, even more than in the U.S. or West Germany. In the late 80's, one to
three people controlled a majority of the shares at three-quarters of publicly
traded firms.
In about the same time framework as Sweden,
Denmark also considered creating a workingmen’s investment fund, mainly out of
concern about lagging investment in an economy which had relied heavily on
agricultural exports well into the postwar period. (D’Art, 203) In 1973, the
Social Democrats launched a proposal to create a Danish investment fund
supported by a payroll tax. A 60-member board including representatives of
government, labor, and professional associations would have governed the fund.
There were detailed provisions covering large firms, small firms and firms in
the private sector. Voting rights for shares in individual firms would be
exercised by the firm’s employees, and all workers contributing to the National
Pension Plan would receive shares in the fund. This experiment was strongly
criticized by the employers’ association and was never enacted into law, not
only because of opposition from the employers, but also because of opposition
from the Communists, who saw the program as a sellout to capitalism.
In 1980, the Danish Parliament created the Employees’
Capital Pension Fund. (D’Art, ca. 232-236) It was governed by a board
constituted from the government and the labor unions. Twenty percent of the
fund could be used to acquire shares in Danish companies traded on the stock
market, and the rest was to be invested in bonds and loans. The Fund could own
no more than 20% of any firm. Where the fund owned 10% or more of a firm, a
representative from the board should attend meetings and vote the Fund’s
shares, or voting rights could be requested by the firm’s employees. All those
employed between 1977 and 1980 were eligible to participate in the fund, and
each year, profits are transferred to individual accounts of 2.5 million
participants. Withdrawals from the account are frozen until retirement, and when
all the participants retire, the fund will dissolve.
In the U.S., the Scanlon Plan was proposed by
Joseph Scanlon, a Steelworkers’ local president in the 1930s. This plan
created a bonus pool based on increases in productivity. Seventy-five percent
of the pool went to the workers, and 25% to the company. A network of
departmental production committees of management and workers would create and
implement steps for productivity improvements. (D’Art, 1992:35) The plan was
tried in a few settings, and some have been in existence since the 1940's.
Since the Scanlon Plan was never copyrighted, it has been adopted and adapted
for many enterprises. McAdams and Hawk estimate 2200 gainsharing programs in
existence. The 663 they surveyed report 1.3 million employees (1994).
Collective ownership of stocks through union
pension plans
Enormous wealth accumulated in pension plans (25%
of all U.S. business was owned by pension plans) led Peter Drucker to predict
in 1976 that by 1985, the unions would own 50-60% of the U.S. economy (Drucker,
3) and indeed union and other employee pension plans are enormous investors in
the U.S. stock market.
However, U.S. fiduciary law increases the risk of
liability for trustees of these funds if they deviate from accepted values and
judgments for investments, so they tend to avoid unconventional investments
like cooperatives and employee-owned firms. Union pension plans, while
increasing the wealth and security of unionized workers, do little to promote a
wider ownership of wealth among union and nonunion workers. But there are
exceptions.
Canada is the home of the Manitoba-based Crocus
Fund, established in 1993 by the Manitoba Federation of Labor. 22,000
Manitobans have invested some pension savings in the fund, and the fund
reinvests with an emphasis on employee ownership and regional economic
development. The fund anchor jobs and capital in the province. For details on
Crocus, see John Logue, 2000. “Thinking Globally, Acting Locally: Promoting
Employee Ownership at the Subnational Level” and Alan Zundel and Deborah Olson,
“Ownership for Everyone: Report on COG Industrial Homestead Policy Discussion
Group.” Both papers are available at http://cog.kent.edu.
Employee stock purchase through the stock market
or employer-sponsored savings plans
Direct stock purchase by employees or grants of
stock by employers is possible wherever there is a public stock market. The
availability of this opportunity has not resulted in noticeable increases in
wealth held by the working and middle class despite more than 100 years of near
continuous public stock market activity in the U.S.and U.K. Most employees
simply do not receive sufficient income to feel that they can risk their
savings in the stock market. Historically, market crashes have annihilated the savings
of small investors on more than one occasion. Savings accounts and home
ownership are viewed as safer investments for those who can afford to risk
little.
In all 13 of 15 members of the European Union are
confirmed to have some policy for employee share ownership through purchase of
stock. In Germany, France, the Netherlands, and the U.K., stock purchases are
supported by employees’ savings plans which may be set up and matched by the
employer. In Germany, there is a good deal of law on employee share holding and
investment accounts. Employers may establish savings accounts for share
ownership. (Poutsma,77) Almost 22 million employees had savings accounts in
1996, and 2 million owned stock. French law dating to 1967 supports savings for
investments by making them exempt from social security tax if the account is
blocked for five years. Employees may channel their profit sharing income into
these accounts (Poutsma, 63). If the employer supplements the basic amount, it
is tax deductible and the employer receives a tax exemption on investments up
to one-half the supplement. 2,000 of 26,000 firms with financial participation
have savings plans for share ownership. The Netherlands has had tax benefits
for investment savings accounts for shares since 1994, and if employers
contribute stock to these accounts, it is tax free. Poutsma reports that 11.5%
of employees have cash based profit sharing (27% of companies with 10 or more
employees), more often than not in connection with a savings account (Poutsma,
81). United Kingdom legislation dates to 1978, when the Save as You Earn
program encouraged a payroll deduction plan for the exercise stock options. In
1998, about 1200 savings plan schemes covered about 1.25 million participants.
Sweden has been particularly slow to come to
employee ownership. Most of what exists has occurred through employee buyouts
of failing companies. Until 2000, LO, the Swedish trade union confederation,
opposed buyouts and employee ownership in general, preferring to successfully
seek other means of influence in companies, including requirements for
consultation and participation. Acceptance of ownership was driven by a desire
to expand Sweden’s internet technology sector, the growing use of stock options
as part of a compensation plan and for the privatization of some public
services. Per Ahlstrom, personal communication to John Logue, 9/8/2000
Canada has no national legislation providing tax
incentives for employee stock purchases, but the province of British Columbia
does, and there is continuing pressure for a federal law. As a result, Canada
has few employee-owned firms. (Phillips,8)
The states of the former Soviet Union and the
Soviet satellite states of Central and Eastern Europe embraced the idea of
“voucher privatization” to transfer state assets into private ownership.
Voucher privatization was an untested idea, advocated by some Western economic
thinkers. Vouchers were issued to each citizen, which could be exchanged for
shares. The details and practice varied from state to state, but in general,
the approach left employees and citizens with no asset ownership or ownership
of assets with no value. As states attempted to pick up the pieces after the
catastrophe, some fell back onto employee ownership or management-employee buyouts,
most of which were, in practice, management buyouts, particularly of good firms
which were not known to outside investors or which received offers from buyers
intending to close them down and take over their markets. This has created a
number of firms with some employee ownership, but without access to financial
services or management consulting services which could promote their success.
A long-planned sale of Hungarian state assets was
modeled on U.S. law. By 1998, almost 300 of the 404 privatized companies
include a measure of employee ownership. (NCEO, 1996, online) (cited in May,
1998).
In Russia, direct stock purchase and grants
connected with privatization have been a disaster in the face of economic
collapse. Seven thousand state enterprises were sold in about two years, (NCEO,
1996) but employee ownership and democratic management have not been supported
by the Russian government. In Russia, many employees who were granted stock in
connection with privatization sold it quickly, and many others, desperate for
funds in the face of a general economic collapse, sold later. Employee
ownership declined from 48% in 1994 to 39% in 1997. (Buck, et.al., 460)
Employees who held their shares of valuable companies were often forced to sell
them later to survive. For most employee share-holders, economic collapse has
meant there is no market for their shares. Those who held onto their stocks may
have them now because the stocks have little or no market value. In cases where
companies did retain value, employees’ stocks were willingly acquired at
bargain prices by investors with large amounts of capital. National economic
policy allowed a flood of foreign-made goods that reduced the demand for
domestic products to near zero and forced many firms into massive layoffs.
Employee-owned firms were no more resistant to workforce reductions than any
other firms. (Buck, et.al., 471) The flood of imports has now been
checked, and import substitution is driving a modest recovery. It is doubtful
that most of the unemployed workers will go back to work at their old firms,
however.
In Khrgyzstan, the law requires one-stock one-vote
ownership, notes Kleinbach in his report on two employee owned firms there.
(1999) In its main elements, the situation for employee ownership in Khrgystan
resembles Russia, as Kleinbach’s two case studies reveal. Employees purchased
Kyzyl-Kiya Komur, a state owned coal company (100% employee owned, with an
annual stockholder General Assembly, electing a board of directors, who appoint
a management committee.) Of the former 3500 employees, 400 are still employed.
Some of the former employees own stock. The mine’s easily accessible coal
deposits are nearly exhausted, and it needs capital to develop deeper pits. In
addition, it is having difficulty selling its coal, since former customers in
Uzbekistan and Kazakhstan are emphasizing protectionism. At Kyzyl Kia Nan, an
87% worker-owned bakery and cannery in Khrgyzstan, price regulations make bread
baking unprofitable, and there is no market for the shares of departing
workers. There are no credit institutions within Khyryzstan to assist
employee-owned firms with development. Kleinbach reports, “The Soviet period
left the people with cultural values and habits for cooperatively working
together but it did not teach them the techniques of local self-management.
They have the will and values to survive and develop an economic as well as
political democracy. Whether they will gain the technology and the capital to
do so remains to be seen.”
In Argentina, employees can receive loans to
purchase shares of privatizing state enterprises. (May 1998) In Jamaica,
legislation allowed stock to be bought with pre-tax dollars, but economic
setbacks kept workers too close to survival to think about stock purchases.
In Nicaragua, the Chamorro government announced
plans to promote employee ownership in its privatization program, but so far
only one firm has been privatized. That is the local Pepsi plant, which is 45%
owned by the government and 55% owned by the Sandinista political party. (NCEO,
1996) One question is whether the socialist Sandinistas will use their
ownership share to promote employee ownership and employee participation. (May,
1998)
China calls its employee ownership “social
ownership.” In Shandong province, 250 firms were sold to their employees. (NCEO
1997, quoted in May, 1998) In large firms, employees can receive stock
ownership. In township/village enterprises (TVEs), ownership is shared by the
village and the workers. (We know of one firm in China which planned to issue
stock to its employees in 1999.) It was recently reported that Chinese local
governments are selling off businesses they owned, and that employee ownership
is the most popular policy option. Little is reported about details and
specifics of this trend, except that long-term employee ownership is part of
the plan. (Employee Ownership Report, 2000, 20:5, 15) However, a report
from a year prior stated that the State Economic and Trade Commission found
that sales of enterprises by local governments were causing too many layoffs
and worker relocations. (Employee Ownership Report 1999, 9:2, 10) Latest
news on China by private communication is that the township/village
enterprises, (TVs) are being converted to “stock cooperatives,” which may
resemble ESOPs. The initiative for the conversion is local and provincial,
rather than national. Hainan Island, an enterprise zone, is considered a
center of this activity. If the new cooperatives are to have access to
financial and managerial consulting services, these, too will have to be
developed at the local and provincial level, as Beijing appears uninterested in
the idea of employee ownership, and even less interested in building support
organizations for it.
Stock options
Stock options represent a variation on outright
purchase. The options provide employees with a window of opportunity to
purchase employer stock at a preferred price. Employees may be required to hold
the stock for a specified period of time. Stock options are an increasingly
popular form of compensation in these days of fast-moving computer and Internet
technology and rising stock market values and high demand for technical skills
and knowledge. Although their popularity with employees waned with the collapse
of the stock market in 2000. Options have long been popular as a means of
executive compensation in the U.S., and they have been spectacularly reported
among Internet startup companies. Options have been extended to more
nonmanagerial workers in the U.S. and they are spreading overseas as well. It
appears that EU members are beginning to permit the practice, for ordinary
employees as well as for executives. A growing number of U.S. and U.K.
multinationals are offering stock options to their overseas employees (Employee
Ownership Report, 2000, 20:5, 15). Many countries have law preventing more
than a specific percentage of wages to be paid in stock, reflecting historical
experience with recession and depression. In the U.S., Lawler, et.al. reported
that 18% of Fortune 1000 companies (The 1000 largest companies in the U.S.),
provided stock options to at least 60% of the employees. This compares to a
1999 study by William Mercer reporting 17% of the 350 largest U.S. companies
granted options to most employees, up from 5.7% in 1993. (Employee Ownership
Report, 2000, 20:2, 9)
In Finland, where 127 companies are covered,
options are taxed only when they are exercised, and at ordinary income tax
rates. There is no tax deduction for the company. Sweden recently abolished a
tax on the grant of options (Employee Ownership Report, 1999, 19:3, 13).
The French legislature is reported close to increasing taxation of large gains
on stock options while limiting the tax on new companies (15 years old or less)
options to just 26%. The normal tax for gains on options is 40%. (Employee
Ownership Report, 2000, 20:4, 12.
In Jamaica, stock option offers and purchases were
supported with tax expenditures. (E)R May/June 1999), but few were able to take
advantage of them in a generally bad economy.
Even though they have had substantial ESOPs since
the mid-seventies (Jones and Kato, 1993), Japan legalized stock options only in
1998, and some companies said they were considering them for executives. (Employee
Ownership Report, 1998 March/April, 14.)
It is reported that the rapidly growing Indian
technology sector is now offering stock options to most or all employees. (Employee
Ownership Report, 2000, 20:5, 15)
A recent study by Joseph Blasi and others has
found that stock options are an additional benefit rather than a substitute for
wages. (Reported in 2000. “The Impact of Stock Options on Workers
Compensation,” Employee Ownership Report, 20:4, 9)
Employee Stock Ownership Trusts (ESOTs)
A more financially sophisticated and effective
approach to employee ownership is the ESOT, employee share ownership trust.
ESOTs can receive direct grants of stock or they can take out loans to purchase
stock. In the U.K. and Ireland (since 1982), where they are just beginning to
take root, these plans are not conceived as pension plans but as stock
ownership plans with a requirement to hold the stock for a limited period They
are established on a voluntary basis by employers, but enjoy support from the
national treasury in the form of tax expenditures.
Law supporting direct grants and ESOTs have been
adopted in Canada, Denmark (10 firms with employee ownership in 1993, and 6% of
EPOC respondents reported employee ownership), and Jamaica. Each country has a
peculiar and distinctive mix of legal provisions, yet there are typical patterns.
Typically shares are granted outright by the
employer or bought with loans to the trust
Typically, the cost of shares, administration of
the plan and interest are tax-deductible for the employers, and employees may
also receive a tax break if they hold the shares. It is quite common to do this
on a sliding scale, where the longer the shares are held, the greater the
percentage of tax deductibility, up to 100%. Typically an eligibility threshold
is set in law, requiring that a minimum percentage of long-term or “regular”
employees participate before the firm can benefit. Often, a rule of
distribution is applied, allowing a maximum ratio of stock ownership between
the largest and smallest annual stock purchases in the plan.
There is much variation in the details of these
plans, in terms of who, if anyone, must approve a plan, who must be eligible
for the plan, what tax advantages are granted to employers and employees, the
terms for receiving or purchasing shares, requirements for holding the stock and
so on.
In the U.K. and Ireland, since 1989, ESOTs may be
structured by statute or approved by the Inland Revenue tax agency. A firm may
contribute stock to the ESOT and so shelter income from capital gains tax.
Costs of setting up the ESOT are tax deductible. ESOTs may borrow money to
acquire shares, and the shares must be held for three years to qualify for
favorable tax treatment. In 1997, the U.K. provided tax incentives for its
ESOTs similar to U.S. ESOP law. In spite of law, only a maximum of 100 ESOTs
have been established in the U.K. since 1989, because employers don’t like
them, banks won’t finance them and the tax office is too inflexible. (Poutsma,
89). Nonetheless, there is considerable share ownership in the U.K. through
other schemes. Poutsma reports 23% of U.K. firms responding to the EPOC survey
have some form of share ownership. (1999:57) Ireland has had similar law for
ESOTs since the Finance Act of 1997, and Poutsma reports 4% of EPOC firms offer
share ownership. The British Labour government plans to introduce new, more
favorable legislation in 2000, which will expand the tax deductible amount
which can be contributed to the trust.(Wheatcroft, 2000) The firms have been in
existence long enough in the U.K. that their performance in comparison to the
stock exchange can be charted. In the U.K., firms where at least 10% is owned
with broad employee ownership grew faster than the FTSE All Share Index (26%
vs. 21%) in 1997. The five year record showed a 2:1 advantage for investors in
firms with employee ownership. (“U.K. Employee Ownership Index Results,” 1998,
EOR (May/June), p. 13)
In Denmark, ESOTs have been little used. In
Canada, there are some employee owned firms like (Algoma Steel), and there is a
rich cooperative sector.
By contrast in Jamaica, a $1.8 million grant from
the International Development Bank in 1992 funded a large effort to enact
appropriate legislation but had little success in establishing employee
ownership in a climate of economic tailspin (1999. Employee Ownership Report
May/June, 1, 8) The idea of stock ownership was foreign to most workers.
Inflation and rising interest rates made ownership seem like a poor investment.
Unions became more interested in using ownership to gain control of wage
increases than in long-term survival of the firms, and employee involvement was
not a good fit with the dominant cultural model of hierarchical authority.
Another problem was that the distribution rules made it difficult to qualify as
a stock purchase plan, the plan preferred by most employers, even those who
were willing to offer shares at a preferred price. Lastly, the annual stock
purchases of the least shareholder limited the amounts that could be bought by
any of the rest.
In Zimbabwe, where the government is eager to use
employee stock ownership as a means of spreading ownership of wealth to the
indigenous people who were largely excluded from economic and political power
before independence, the stock exchange has policies encouraging employee
ownership, and 75 firms listed on the stock exchange have established employee
stock ownership, mostly in the form of ESOTs. Half of the plans are less than
two years old, and the average ownership share is around 4%. The government is
encouraging employee stock ownership in state enterprises now being privatized.
The Foundation for Enterprise development is managing a USAID project of
support and technical advice for the employee-owned firms. (1999)
Shares were distributed and sold for privatizing
the economy in Poland, Hungary, Czechoslovakia, Romania. In these plans,
worker ownership was encouraged by giving employees preferential treatment in
the purchase of stock in their companies, but the privatization did not require
the employees to hold the stock, and many sold in the recession that followed
in the collapse of the Soviet Union. Negotiated sales to groups of management
and employees have been more successful, but the require governmental loans and
support.
In Hungary, a stock ownership plan distributed
coupons to all citizens for the purchase of stock in privatized state
enterprises. Employees were able to buy stock for coupons as early as 1990. A
1992 law allowed for the creation of an Employee Stock Ownership Plan (in
Hungarian, MRP) which could borrow money to buy shares for employees, and held
the shares until the credits were repaid, at which time the MRP was dissolved.
To use this method, at least 25% of employees had to apply for it in writing;
40% of employees had to vote in favor, and employees had to provide at least 2%
of capital. Employees had to have been with the company for at least six
months, and only firms incorporated in Hungary were eligible (Galgóczi and
Hovorka, undated: 4-5) Government loans at low rates were available to help
employees buy shares. A 1995 Law on Privatization further established
preferential rights for employees to acquire property in their firms. Workers
often bought shares in hope of preserving their jobs. Under these arrangements
202 MRPs had been formed by mid-1995. However, Galgóczi and Hovorka report,
“almost all ESOP buy-outs are in practice management buy-outs.”
Because of the need to begin loan repayment
already, immediate profitability is a concern, and firms lacked capital for
modernization. Many MRPs had a mortgage on their property from a private bank
as well as a government loan, further limiting their ability to modernize. Most
often, workers were selling their shares by 1992, and the firms had reduced the
workforce by one-half or two-thirds. Galgóczi and Hovorka report a variety of
experiences in brief case studies, but among their cases, it is rare for the
employees to end up as owners still employed by the firm. Buyouts were common,
either by management or by outside purchasers, interested in Hungary’s market
but not the production facilities. Employees were generally happy to sell their
shares, for which there was often no other market. Elected MRP leaders were
typically members of management, and sometimes encouraged the MRP so that the
firm would be eligible for a low-cost loan. They then gained a controlling
interest by purchasing employees’ shares. Galgóczi and Hovorka anticipate that
few new MRPs will be formed after privatization is completed, and urge more
education and support to the ones that remain.
In Poland, more than two thousand state-owned
enterprises were sold to their employees through “privatization by
liquidation”(Thompson and Valsan, 38) The old firm is sold to the employees,
who receive loans from the government to buy the assets. This includes more
than one thousand small and medium-sized enterprises. It is reported that the
employees are holding on to their shares longer than in the other former
centrally-planned economies. (2000. “The World of Employee Ownership: Former
Communist States” Employee Ownership Report 20:5, 15) These
“insider-owned firms appear to be performing better than firms privatized by
other means. (Thompson and Valsan, 38)
Data collected from 71 firms in Brasov, Rumania
revealed that privatized firms, which were mostly owned by workers and their
managers, were more adaptable and better performers than state-owned
enterprises. (Brouthers, 55) Lacking outside investors, current governments
will promote a better economic outcome by breaking up large enterprises and
selling to managers and workers, Brouthers argues (57). Reviewing the history
of Romanian privatization, Thompson and Valson (1999) report that after the
original voucher plan collapsed because of declining value of the vouchers
(Certificates of Ownership) and trading of the vouchers on the street,
management and employee buyouts became the preferred method of privatization in
Romania, with each sale negotiated through the State Ownership Fund. The
“preference” for this method was usually because no other buyers were
interested. By early 1996, more than 1500 companies had been privatized, more
than 1000 through through insider privatization, and another 1600 small and
medium sized firms were sold between 1996 and 1998 (51). Thompson and Valsan
find that the firms that were bought by their employees between 1991 and 1995
were mostly smaller and medium sized firms, with a median of 560 employees. In
their sample of 107 companies, 72 percent are entirely management and
employee-owned, and they were mostly the better firms which did not have any
international reputation. However, these firms are handicapped by a lack of
investment capital. The firms bought by outsiders were planning far greater
investment. Sale to employees was the primary means of privatization in
Slovenia. (Employee Ownership Report, 2000, 20:5, 15)
The Ukraine lagged behind most of Central Europe in privatization. Their privatization permitted the state to remain as an owner, in some cases, even a majority owner. (Estrin and Rosevear, 1128) Reporting on a sample of 150 firms in eight regions of Ukraine, Estrin and Rosevear find that privatization is not associated with better performance , but that firms owned by workers are among the better performers i