Re: HOMESTEAD: Do trusts make workers second class owners?

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Thanks to Mike Bindner for his comments.

I am still looking for answers to my three questions.

In answer to your query, trustees are normally appointed by management in 
Australia although there are some examples of  employee nominated/elected 
representatives.  I know of no union involvement with employee share 
ownership trusts but the appointment of employees and/or union 
representatives to make up half the trustees of pension funds is 
requirement for compulsory "industry funds".

You have misunderstood my reference to voting.  Voting for directors and at 
any meeting of shareholders would remain on the basis of one vote per 
share.  It is only the Watchdog board that is elected on a one vote per 
member basis and I this would be done by a secret postal vote before the AGM.

Regards

Shann Turnbull

At 11:38 PM 30/7/2001, you wrote:
>Very good paper.
>
>I heartily agree with each worker shareholder having a direct voice, 
>though I am not sure the one vote per share system is bad - although 
>shares may be counted differently up here.  I would think that the worker 
>trusts have quite a few shares, especially if dividends are reinvested.
>
>I have a question.  Is the trustee appointed by the Union, by the 
>government or by management?  I would hope the union appoints, or does so 
>eventually, and that eventually the union trustee can count each share 
>controlled for the workers as a vote to call a meeting.
>
>With time, if social insurance contributions are invested in the trust (as 
>I am advocating here in the States) the workers should hold a majority of 
>shares.  When that is the case, they can demand that profits be 
>distributed by cost element - with profits attributable to plant and 
>equipment distributed to the share holders (inclunding labor shareholders) 
>and the profit attributable to labor and fringe costs distributed directly 
>to workers - either in cash or to purchase additional shares.
>
>Eventually, the workers could by out the capitalists, and hire management 
>who will flatten wage scales and increase innovation.  Of course, this 
>would also lead to a massive revision in work rules which protect worker 
>jobs but hinder profit - though this is not necessarily a bad thing.  It 
>would also lead to a lessening of the need for government regulation of 
>both product safety and worker safety - as workers could be counted on to 
>build a safer product and have a safer workplace.  Capitalists can damage 
>the environment and put out bad products because they are diversified.  If 
>your entire retirement is in one firm, you will make sure that firm is 
>profitable, innovative and has a safe product.
>
>Finally, the other reason to stick to one share one vote  is for the 
>management of firms after the capitalists have been bought out.  Because 
>of dividend reinvestment and the fact that shares would accumulate for 
>older workers more than younger workers, older workers and retired workers 
>(whose heirs would have to sell back their shares when the worker member 
>dies) would control more shares.  This is good, as they are more 
>experienced and with experience comes some measure of wisdom.  I know the 
>young believe they have a monopoly on innovation - however it ain't 
>necessarily so.
>
>Peace out,
>
>Mike Bindner
>
>
>In a message dated Sun, 29 Jul 2001 10:43:22 PM Eastern Daylight Time, 
>Shann Turnbull <sturnbull@mba1963.hbs.edu> writes:
>
> >   My 1253 word article below argues that the use of share plan trusts 
> in  Australia makes workers second class owners.
> >
> >   This raises three questions that I seek answers:
> >   1. Is this the case in the USA and the UK?
> >   2. Can leverage ESOPs be designed without a trust in the USA and  the UK?
> >   3. Are there examples of leveraged share plans without  trust?
> >
> >   Reforming capitalism with worker owners
> >
> >   Shann Turnbull*
> >
> >     Worker ownership has the potential to tame the forces 
> of  globalisation. However, worker ownership established through  shares 
> held in a trust can exacerbate the alienation introduced 
> by  globalisation. Beneficiaries of any trust are not recognised 
> by  either the constitution of their employer as one of its owners or 
> by  corporation law as a member of the company. Share trusts 
> increase  the alienation of small owners.
> >
> >   Big shareholders can use trusts and nominee companies to hide 
> their  identity without loosing their ability to appoint directors and 
> control  corporations. Both stock exchange rules and the law condone 
> this  practice that creates covert capitalism. It means that the 
> public  may not know who is most accountable for appointing or not 
> retiring  directors and so the behaviour of corporations.
> >
> >   This undermines democracy because publicly traded corporations 
> control so  much of the economic, political, social and environmental 
> agenda.  The problem with globalisation is that democracy is made even 
> less  relevant with alien agendas being introduced by foreign  interests.
> >
> >   To eliminate covert capitalism, corporate law should require all 
> public  companies to publish on their web site the names of all 
> individuals  participating in the ownership and control of their shares. 
> Worker  owners should insist that share plans record them as direct 
> owners with  their name on the share register and not as beneficiaries 
> of  trust.
> >
> >   As beneficiaries of a trust, the ownership and control rights of 
> workers  depend upon how the trust is managed and administrated. With 
> share  plan trusts, the trustee may be a company or one or 
> more  individuals. Their appointment and pay is mostly at the grace  and 
> favour of management. So any discretions of the trustee will  favour 
> management. Trustees may adopt procedures that can deny the  rights of 
> workers to have their views heard as an owner.
> >
> >   For workers to requisition a meeting of shareholders the Corporation 
> Law  requires at least 100 shareholders to petition the company. If 
> the  shares are held in trust, then the law only recognises the trustee 
> as a  single shareholder to deny workers using their numbers to make 
> directors  accountable. So the belief that workers can obtain 
> "substantially  the same rights as if they own the shares directly" as 
> may be required by  the Corporate Regulator is not practical.
> >
> >   Even if workers were direct owners with their name on the register 
> of  shareholders their voice may not heard at shareholder Meetings.  This 
> is because directors control the conduct of meetings and so who 
> is  recognised to speak and for how long. Chairpersons commonly 
> act  unethically by entering into debate before the chair that it is 
> their job  to adjudicate.
> >
> >   While the corporation law allows this unethical behaviour it 
> does  requires "reasonable opportunity for members as whole" to be heard 
> at  meetings. However, this provides the chairman discretion to 
> avoid  worker members and their union representatives. In any event the 
> legal  obligation of the chair is so vague that it would be pointless to 
> try and  rectify the matter after the meeting by spending money on lawyers.
> >
> >   Trustees who have undertaken to vote at shareholder meetings 
> as  instructed by their worker beneficiaries may take the same sort 
> of  approach. For example, the Trustee may not cast votes for the  worker 
> owners in a valid manner and when they are counted it is  management who 
> determines how they are counted.
> >
> >   To tame the forces of globalisation and remove neglect, abuse and 
> even  exploitation of workers and other small shareholders by directors 
> and  management, the conduct of shareholder meetings needs to be removed 
> from  management. The fundamental reason for having an annual 
> statutory  meeting of shareholders is for directors to present the 
> accounts, become  accountable and stand for election. However, the 
> procedures adopted  to make directors accountable are determined by 
> themselves rather than by  the shareholders. This is an intolerable 
> unethical conflict of  interest and an operational nonsense condoned by 
> company law.
> >
> >   Its time to revisit the motion put forward in 
> the  Australian  Parliament in 1997 to require all publicly traded 
> corporations to  appoint a Corporate Governance Board appointed on a 
> democratic basis of  one vote per shareholder rather than the plutocratic 
> basis of electing  directors on one vote per share. It would be a member 
> of this  "Watchdog" board that would chair meetings of shareholders to 
> allow  directors to become properly accountable to investors.
> >
> >   The need for two or more boards is a fundamental requirement for 
> any  significantly worker owned company to be competitive 
> and  sustainable. World surveys have revealed that no non-trivial 
> worker  owned industrial firm is sustainable with a single board. 
> One  reason why unitary boards are not viable is the instability created 
> by  the conflicts of interest that arise when directors can hire and fire 
> the  workers that elect them.
> >
> >   Trustees of share plans carry out quite a different role to 
> watchdog  board. Even if workers democratically elect the trustees it 
> can  still result in worker owners being second class owners. One 
> reason  is that trustees can be sued if they do not carry out their 
> fiduciary  duties to maximise economic benefits rather than political, 
> social and  environmental concerns which may have a higher priority with 
> some worker  owners. If an offer is received to take over the workers 
> company at  a price directors recommend then the Trustee could be legally 
> obligated  to accept the offer even if the workers wanted it rejected to 
> secure  their jobs.
> >
> >   The preservation of local ownership and control is an 
> important  contribution that worker ownership can make to tame the forces 
> of  globalisation provided that direct name on the register is used in 
> share  plans. Share plans provide a basis to "buy back the farm"  and 
> allow Australians to regain control of their economy and our 
> unique  lifestyle, which is the envy of the world.
> >
> >   Direct participation by ordinary Australians in the ownership and 
> control  of business provides a way to reduce the growing alienation in 
> society  that is disenchanting voters and providing support for the minor 
> parties.
> >
> >   Direct ownership of business by workers also provides a way to 
> reform  capitalism by:
> >
> >   1. Providing a basis for workers to call shareholder meetings to 
> expose  and control share plan abuses practiced by some executives.
> >
> >   2. Providing unions a compelling basis to represent their share 
> holding  members to counter the excessive payments that directors pay 
> executives  and themselves.
> >
> >   3. Workers obtaining the right to resist directors entrenching their 
> own  interests by nominating and electing directors, auditors and making 
> other  changes in the way corporations are governed.
> >
> >   4. Avoiding trustee ownership with the obligation of trustees 
> to  over-ride the social, political and operational interest of worker  
>owners.
> >
> >   5. Providing a role model to counter the current covert forms 
> of  capitalism with many owners hiding their identity and share 
> trading  dealings behind trustees or nominee companies.
> >
> >   6. Creating shareholders that are much more informed and committed 
> to  support the operations of a company than institutional investors and 
> day  traders who are only interested in financial results and mostly 
> neglect  to participate in corporate governance.
> >
> >   7. Creating shareholders that can contribute to making businesses 
> more  productive and responsible than many institutional investors who 
> are have  conflicts of interest in making corporations accountable 
> when  corporations provide a valuable source of income.
> >
> >   8. Providing a supplementary tax-free dividend income that can 
> continue  even if workers become incapacitated or retire.
> >
> >   9. Widely distributing ownership to provide a third way to work 
> or  welfare for distributing the wealth of nations.
> >
> >   10. Distributing national income to avoid the dead weight cost 
> of  government in re-distributing income through taxes and welfare and 
> the  associated social alienation that this produces.
> >
> >   oooOOOooo
> >   1253/30072001
> >
> >     *Shann Turnbull introduced ESOPs to Australia in 1975 when he 
> wrote  Democratising  the Wealth of Nations and organised their US 
> inventor, Louis  Kelso to visit. He is a founding member and former 
> President of the  Australian Employee Ownership Association.
> >
> >   Shann Turnbull Ph.D.  P.O. Box 266 Woollahra, Sydney, Australia, 
> 1350  Ph: +612 9328 7466 office; +612 9327 8487 home; Fax: +612 9327 
> 1497;    Life long E-mail: 
> sturnbull@mba1963.hbs.edu  Alternate:sturnbull@optusnet.com.au 
> http://members.optusnet.com.au/~sturnbull/index.html  Papers 
> at:  http://papers.ssrn.com/sol3/cf dev/AbsByAuth.cfm?per id=26239  with 
> other papers & book at  http://cog.kent.edu/library.html

Shann Turnbull  Ph.D.
P.O. Box 266 Woollahra, Sydney, Australia, 1350
Ph: +612 9328 7466 office; +612 9327 8487 home; Fax: +612 9327 1497;
Life long E-mail: 
sturnbull@mba1963.hbs.edu  Alternate:sturnbull@optusnet.com.au
http://members.optusnet.com.au/~sturnbull/index.html
Papers at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=26239
with other papers & book at http://cog.kent.edu/library.html