Thinking globally, acting locally:

Thinking globally, acting locally:

Promoting employee ownership at the subnational level

Report on the COG Subnational Discussion Group

John Logue, Moderator

There are at least six reasons why we should be concerned with encouraging employee ownership at the subnational level: at the level of the state, the province, the region, the municipality, or other subnational governmental units or at the level of the industrial branch, cutting across governmental geographic units.

The first is that in many governmental systems, particularly federal systems, legislative measures beneath the national level may be effective in promoting broadened capital ownership. In many federal systems, the writ of the federal governmental does not extend beyond broad national agenda items; state and local legislation speaks to the local economic development questions.

Second, in larger nation states, be they federal or unitary in structure, the national government is not a very effective provider of technical assistance for companies, employee groups, retiring owners, unions, or community economic development groups. Subnational provision of technical assistance through state, provincial, or municipal programs, or through non profits—501(C)(3)’s in the United States, and their equivalents elsewhere—and industrial associations is far more efficient and appropriate.

Third, employee ownership is, in its nature, not only a strategy for broadening capital ownership at the national level, but also a strategy for anchoring capital and jobs where employee owners live. This localistic strategy is best implemented through subnational action.

Fourth, employee ownership is intrinsically a micro economic strategy, implemented at the level of the firm. As we will discuss below, many of the opportunities available for employee-owned companies are available at the local level where the companies are situated and where their employees live. These areas of activity include collaborative networks, training cooperatives, establishing employee-owned supplier networks, and other strategies for community involvement. The substantial multiplier effect that employee-owned companies can have in spreading employee ownership and increasing community economic activity takes place typically at the state or, more generally, municipal levels.

Fifth, employee ownership tends to stabilize local and state economies by anchoring capital and jobs. Moreover, its productivity enhancing effects “help to narrow the divide between those who favor and those who fear more growth in Hawaii by slowing workforce/population growth in future economic expansions which, in turn, could reduce the need for wage cuts and lay-offs in future recessions” (Tom Brandt, 4/4/2000; see also his “Impossible Dream for Hawaii’s Future?” 9/10/99).^[1]

Sixth, with economic globalization, the nation state gradually ceases to be the appropriate unit for economic policy, and the traditional national economic management tools—whether fiscal, monetary, or exchange rate policies, capital transfer restrictions, domestic content, requiring a controlling domestic ownership stake, domestic preference in the award of public contracts, etc.-- cease to be effective or are struck down by international trade rules. In this environment, employee ownership is a particularly attractive alternative, especially for high wage areas.

Thus, it makes sense to look at employee ownership at the subnational level as distinct from the promotion of employee ownership nationally and from the promotion of employee ownership at the transnational level. These levels impact promotion of employee ownership at the regional and local levels but that state and local implementation is also distinct from national action.^[2]

The goals of the COG subnational discussion group and of this paper have been to canvass existing subnational initiatives, to select best practices worthy of dissemination, and to propose innovations in order to promote the expansion of employee ownership through subnational initiatives by both governmental units and other organizations, including both non-profits and for-profits. Our overarching goal is to find mechanisms to expand the employee-owned sector that are within our scope of control.

We will look at what subnational actors—both public and private sector—can do to promote employee ownership through (1) stae legislation, (2) technical assistance, (3) local actions, (4) investment funds, (5) company networks, and (6) using the economic power of employee-owned firms within their communities.

Participants in the discussion appear to have sought to achieve two major goals with their proposals: (1) broadening ownership of productive assets through increasing the rate of formation of employee-owned firms, and (2) deepening existing (or future) employee ownership through encouraging greater employee participation.

This paper concludes by looking at issues and problems raised in the subnational discussion and by enumerating measures which can be taken by subnational actors to broaden ownership of productive assets.

1. Subnational public policy

Subnational political units can act to encourage employee ownership within their jurisdictions. From the subnational discussion on the COG website and during COG’s annual meeting, that seems to date to have been done primarily in the United States and Canada. There is, however, no particular reason why similar measures cannot be undertaken in other federal systems and in unitary political systems which give some latitude to subnational governmental bodies in economic development.

Employee ownership hit the state policy agenda in the United States shortly after Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 which legitimized ESOPs as a pension plan. In all, twenty-eight states have passed some sort of legislation encouraging employee ownership. Such measures run the gamut from policy declarations to substantial financial commitments. They include:

In the aftermath of ERISA, Minnesota and Michigan passed legislation supporting employee ownership in 1974. The big push for state legislation was between 1979 and the end of the 1980s as the one-two punch of the recession of 1979-80 and the overvalued dollar in the middle of the decade sent manufacturing into a long-term crisis. While no more than two or three percent of employee-owned companies have been set up to avert job loss, much of state legislation in this period focused on employee ownership as a defensive, job retention strategy. Between 1979 and 1990, twenty-three states passed legislation encouraging employee ownership in a variety of ways. These included all the states in the industrial heartland from Massachusetts and Connecticut through Illinois and Wisconsin as well as the Pacific Northwest. By contrast, state legislation in the 1990s focused primarily on employee ownership in privatization (Virginia 1995; North Carolina 1998).^[3]

There is one notable exception. In 2000, Maine, which had passed new legislation driven by job retention interest in 1997, established a commission to undertake a comprehensive study of ownership patterns in the state. “The commission is charged with recommending to the next legislature the specific eligibility criteria for accessing grants from the feasibility fund and which agency or organization should manage the outreach program.... The commission is charged with documenting current patterns of ownership of Maine businesses, the characteristics of those businesses (size, number and quality of jobs), and the impacts of changes of ownership on the state and local economies, and civic and environmental accountability. One area of particular interest is the patterns of small Maine‑owned growth companies, particularly technology firms, and their need for large infusions of capital as they grow: how many are bought out, do they continue to operate in Maine, does their growth take place in Maine? The commission will also look at policy options for broadening ownership through employee, consumer and community forms of ownership in firms operating in the state.” (Carla Dickstein, 4/4/2000; see also her discussion of 4/5/2000 and 4/7/2000 and “LR: 3751: An Act To Broaden Business Ownership in Maine” in the COG library).

Maine’s interest in keeping a high tech growth sector in local hands is similar to the perception in Manitoba that we will meet below in the discussion of the Crocus Fund.

Other initiatives proposed in the COG subnational discussion include: