RE: Olson response to Harrington on SQPQ and Markus with comments re: Kelso and Turnbull ideas and a proposal to develop an Experimentation Agenda

[Deborah Groban Olson <dgo@esoplaw.com>]

Michael:

        For implementation of  any of the changes proposed by all the proponents
in this group it will be necessary to go into the political arena. We
practitioners already use the voluntary mechanisms permitted under existing
laws to continue to create employee ownership and other forms of community
based ownership. However, the Kelso proposals require opening the Federal
Reserve discount window and further tax legislation. The Turnbull proposals
call for a radical change in property ownership rights and state laws on
unitary boards. 

        I understand the critique of SQPQ that it injects the law into the
marketplace in an intrusive way. An alternative would be to create a more
voluntary form of it. I've thought about several options. Julia Markus is
proposing something like this on a voluntary basis in Canada and I still
await her draft. I've considered ideas such as letting companies pay part
of their taxes in stock for inclusion in funds such as labor venture funds.
Such stock tax payments would require that the fund be willing to take the
stock upon valuing it using IRS approved valuation standards. 

        Sen. Weyden of Ore. is currently proposing stock option trade bonuses 
for
companies involved in international trade. His logic is to make US workers
feel that international trade is good for them. I am unimpressed with this
idea, but it does point out that policy makers are looking for direction in
this area.

        I also want to respond to your comment about involvement of labor 
leaders
in pursuit of broad ownership agendas.  I have spent the last 20 years
working with the labor movement on employee ownership projects.  Employee
ownership is used grudgingly as a tactic, but is generally not seen as a
valuable strategy. It is interesting that in our privatization discussion
many people who have little involvement with labor have promoted labor's
greater involvement in employee ownership. While those from labor have
expressed much more reluctance. (Note the recent piece by Dave Wheatcroft
stating that privatizations have been a very negative experience for labor
and workers generally. Note also Per Ahlstrom's piece in this discussion,
in which he states that there is no single fix for the problems in the world.)

         Per is a pragmatist, as are most labor leaders. He sees the need to 
use a
variety of strategies to address a variety of problems. In my recent
correspondence about COG with Lynn Agee, General Counsel for PACE, the
Paper, Chemical and Energy Workers union in the US, who has just been
involved in a large employee buyout, he was less intersted in empirical
data showing that wages and benefits are higher in employee owned companies
and that unionized employee owned companies are more successful in some
areas than there non-employee owned counterparts. He wrote
> "Actually my interest is more in demonstrating that a Unionized
Partnering work place is more successful than a nonunion adversarial
workplace."

        We are not in a position to tell labor what they should be promoting
regarding broadened ownership. Instead, we need to lead with ideas and
examples that interest them as pragmatists. Furthermore, they are generally
very concerned about what is immediately politically possible. Much of what
we are discussing is aimed at a longer time horizon than that with which
they usually concern themselves. They have to deal with their members
immediate needs. That is why we do not have much active participation from
the labor leaders who are on this network. Yet, if we are able to develop
programs that are coherent, useful and communicable in clear, simple
language, devoid of religious intensity, we can have an impact. We have
labor leaders in the US, Canada, the UK, Australia, Austria, Beligum, South
Africa, Sweden, Germany, Poland, Egypt and a variety of other countries
(please excuse me if I have unintentionally left out the country of any
participants). 

        Our job is to create policy proposals that can fix what is broken 
without
breaking what is not. For example, perhaps SQPQ should only be attached to
licenses to use the airwaves, pollute the environment and other areas where
the people are giving up some exclusive general benefit, and should be
developed as a voluntary partial tax payment method. This could be
additional to, and not exclusive of, experiments with the opening of the
Federal Reserve discount window in certain areas to see if the Kelsonian
outcomes happen. I am also impressed with the Turnbull governance ideas as
something that could be proposed as a voluntary mechanism. In the US
enabling legislation would be necessary to permit these types of boards,
without requiring them. There would probably need to be anti-trust waivers
for these activities as well. I am very nervous about what the outcomes
might be in all areas of property management if we created the time limits
on property ownership Shann proposes. I would like to have further
discussion of that issue, and consider entertain proposals to experiment
with that concept as well.

        I would like to see some way for us to offer a variety of mechanisms for
experimentation, rather than spending our time fighting over the absolute
correctness of one and only one method. I also believe that if we come up
with an experimentation package, we are much more likely to obtain
resources to do the experimentation. From the experimentation we will have
better data to continue on.

Best regards,
Deb
>Yes, I do believe that the most viable long-term solution is for all people
>to own a diversified portfolio of productive assets, which could include
>land, real estate, private partnerships, debt contracts, etc. but most
>typically would be stock in public corporations. This way one is protected
>from economic shocks that adversely affect one company, one region, one
>industry etc. I concur with the biological analogy for the economy and I had
>often thought of my appraoch as a wholistic one. But the basic idea is that
>the economy develops naturally over time with constant feedback and
>endogeneous effects - endogenous meaning generated from within the workings
>of the system.
>This is why models that are rigid and based on linear equations work best on
>isolated problems in the economy - like a specific market or industry or
>firm. Such equilibrium models cannot deal with the biological, wholistic,
>feedback analogy very easily.
>
>To get to the SQPQ issue, it is my feeling that ESOPs were a mechanism to
>get to broader ownership, not to serve an end such as a cooperative utopia.
>I believe the Kelsos argue this as well. ESOPs were conceived as a tool to
>work within the prevailing paradigms of finance and organizational
>structure.
>Employment is a means by which to accumulate income that can be capitalized
>into assets which is the wealth that then needs to be diversified. Employee
>ownership does this at the firm level whereby workers can capture some of
>their surplus labor value by using credit to buy out previous owners. Tax
>policies favor borrowing for productive investments, so why not use such
>policies to provide greater economic security to the large proportion of
>taxpayers who are employed?
>The ultimate goal is to sever the employment relationship so that we don't
>have to be wage slaves and can actually choose other ways to spend our time.
>
>ESOPs do not redistribute wealth because owners are paid fair market value
>for their stock. This adheres to the private property maxim which Kelso
>wanted to follow.
>I think the problem with SQPQ from Norm or Shann's POV is that it introduces
>politics into the business arena and therefore invites all kinds of
>political infighting (not that it's not already there but the idea is to get
>it out). The idea of an ESOP is that no one should have any strong
>objections if the transaction is voluntary and not coerced. The same
>objection probably applies to using state charters over corporations.
>
>In general, getting from here to there on policy in economics is usually a
>fairly straightforward theoretical problem, but when the actual politics
>gets going the process loses all semblance of rationality. I think this is a
>legitimate fear for proponents of ESOPs and explains why few rational minds
>wanted to tackle the issue of international trade on the ground in Seattle.
>But of course I am biased as more of a scientist than an activist.
>
>I would like to see policies or strategies that encourage labor leaders to
>demand equity participation in wage bargaining - this entails also accepting
>undiversified risk, so this must be managed some way through participation
>in voting control or reinsurance. I think a viable role for labor reps is to
>represent workers as shareholders and employees within the corporate
>governance structure. Outside shareholders could use representation as well
>to overcome the collective action problem for diversified minority
>shareholders. I would hope that enlightened labor leaders would contribute
>to this discussion so that we can reconcile the idea of broadened ownership
>with organized labor interests.
>
>Those are my thoughts for now...
>regards,
>Michael
>
>-----Original Message-----
>From: Deborah Groban Olson [mailto:dgo@esoplaw.com]
>Sent: Wednesday, January 05, 2000 2:05 PM
>To: Michael Harrington; Homestead
>Subject: RE:reply to Harrington re: Globalization as Social Darwinism,
>Workers' risk aversion, good policy and personal greed
>
>
>Michael:
>
>        Your reply raises a number of questions, some of which I would like
>to
>lead back to my Stock Quid Pro Quo (SQPQ) proposal in the earlier Homestead
>discussion.  If I understand you correctly, you believe that the best type
>of ownership broadening policy would provide every person with a wide
>variety of stock in many companies, whether or not he or she were and
>employee owner. I favor that idea. The SQPQ proposal offers a method of
>getting to that position, that differs from the Kelsonian method of getting
>there. It also provides a more collective solution to handling the assets,
>by providing funds such as the Canadian labor venture funds, to handle
>them. Both Shann and Norm Kurland have critiqued the SQPQ idea, as has
>Robert Stumberg of the Georgetown Law Center and author of " Investor
>Rights and Local Economic Development. I have already published some other
>verbal critiques of the idea I received from labor attorneys. I have not
>come up with a synthesis of these critiques and the original idea.
>
>        However, I am asking your thoughts on this again in order to spur
>further
>disucssion about the parameters necessary to achieve a workable capital
>broadening mechanism. I am trying to open our discussion beyond the pro and
>con on the Kelsonian paradigm.
>
>        I am intrigued by David Korten's idea that the economy operates less
>mechanically and more biologically. I have not gotten far enough into his
>second book to say more than that. I know he is one of those who believes
>that we should use the power of the state to charter corporations as a
>means to exercise more social control over them.  I, personally, like the
>aspect of employee ownership and the other Kelsonian ideas that are market
>driven, and less dependent on regulation. However, I fear that they lack
>the necessary social safety net.
>
>Deb
> At 09:39 AM 1/5/00 -0800, you wrote:
>>Deb,
>>I would like to respond to your first set of questions as this is my
>primary
>>area of research.
>>Years ago I asked myself the basic question: if everybody basically KNOWS
>>that accumulation and ownership of capital is the secret to wealth in a
>>capitalist society, why do we persistently gravitate to employment
>contracts
>>(and we have known this for well over a century, since the days of
>Carnegie,
>>Morgan, and Rockefeller, through every 'get rich' book written since)?
>>One can and many do gravitate toward entrepreneurial activities - starting
>>with the first paper route and evidenced by many asset-poor immigrant
>>groups.
>>
>>Well, finance theory says that people are risk averse, economics prefers to
>>say people are utility maximizers - from clinical and empirical observation
>>I go with the bias of finance (they're not exclusive assumptions - it's a
>>matter of emphasis).
>>Starting with this premise that risk aversion determines much of human
>>economic behavior and that people have different propensities for risk, I
>>set out to test the implications and look for supporting research - there
>is
>>a overwhelming wealth of it.
>>
>>Decision-making theorists like David Kahneman and Amos Tversky have run
>many
>>experiments to show how poorly humans calculate probabilities in order to
>>maximize utility under uncertainty - they're often wrong. However,
>>evolutionary psychologists John Tooby and Leda Cosmides have shown that
>>humans can't intuitively calculate probabilities but they are very astute
>>with frequency counts. And they are most accurate with frequency counts and
>>evaluations of decisions that affect their survival - in other words, risky
>>situations. Humans seem to be very sensitive and keen when it comes to
>>survival risks and this certainly makes sense given natural instincts.
>>
>>What this means is that humans think about risks first and returns or
>>payoffs later - they display a minimum tolerance for risk that varies
>across
>>individuals and also varies over time. When the world becomes more
>>uncertain, people become more careful. Many studies have also shown that
>>people are risk averse in the domain of gains and risk seeking in the
>domain
>>of losses. So, when survival is acutely threatened then it usually makes
>>sense to take a gamble. This confusion over risky behavior can be cleared
>up
>>by further defining the behavior not as risk averse, but loss averse. It's
>>not actually risks we avoid, but the possibility of a loss. Thus nobody
>>loses sleep after buying a lottery ticket and not winning $1 million, but
>>after one has the million, they will really sweat about losing it all.
>>
>>The implications for investment risk-taking, employment and economic
>>security are many.
>>Natural inclinations reinforced by socialization discourages people from
>>taking the risk of ownership.
>>We don't have schools for capitalists, only labor training.  The problems
>of
>>capital financing are considerable.
>>
>>The desire for economic security by a citizenry dependent on employment
>>creates political pressures for ever-expanding social insurance programs
>>like SS and Medicare, and outright transfer programs.
>>These are paid for by onerous tax rates on labor incomes. The result is
>that
>>there are many impediments to employee ownership that are rooted in the
>risk
>>dilemma.
>>
>>The positive take is that economic security and risk management in a fast
>>changing world is probably achieved more efficiently with a diversified
>>portfolio of assets than with cumbersome national insurance pools and
>>questionable employment guarantees. Thus ESOPs and employee ownership
>>schemes, as long as they don't violate the loss averse theory of behavior,
>>can achieve economic security with freedom of choice better than the
>>promises of the government. The emphasis should be on internationally
>>diversified portfolios of assets for every citizen, which would cover all
>>those people who don't choose to be employee owners of business - but
>>artists and social workers and academic researchers! (This would also
>>require functioning private and social insurance markets to cover the
>>contingencies of bad luck - paid for out of premiums, not necessarily
>>govt-subsidized. Society still needs to provide a social safety net.)
>>
>>There is much more to be said on these issues...
>>
>>Regards,
>>Michael Harrington
>>The Milken Institute
>>1250 Fourth Street
>>Santa Monica, CA 90401
>>mharrington@milken-inst.org
>>TEL: (310) 998-2699
>>FAX: (310) 998-2625
>>
>>-----Original Message-----
>>From: Deborah Groban Olson [mailto:dgo@esoplaw.com]
>>Sent: Tuesday, January 04, 2000 11:07 PM
>>To: Homestead; Richard Ferlauto; Per Ahlstrom; Lynn Williams; Leo Gerard;
>>David Imbroscio; David Wheatcroft; Damon Silvers
>>Subject: Globalization as Social Darwinism, Workers' risk aversion, good
>>policy and personal greed
>>
>>
>>Dear Homesteaders:
>>
>>        I receive a lot books and articles related to our mission and our
>>efforts to develop policy. I want to share with you my questions arising
>>from a law review article given me by Ted St. Antoine, a distinguished
>labor
>>law professor at the University of Michigan, and from David Korten's book,
>>When Corporations Rule the World. Both of these authors seem to share much
>>of the world view stated in the COG mission. Yet each of them raises issues
>>that  have not been discussed to date in the COG discussions. I am
>currently
>>reading Korten's book The Post-Corporate World, and would like any thoughts
>>you may have about that as well.
>>
>>Theoretical Questions:
>>
>>Based on Duke Law Professor Paul Carrington's, 3 The Green Bag Law
>>Journal1998 article "The New Social Darwinism" in which he equates
>>globalization with a resurgence of the Social Darwinist views of the
>>pre-progressive era:
>>
>>********Is it unrealistic to propose that workers undertake the risk of
>>being capitalists, because human nature amongst the working class is
>>generally too risk averse?
>>********Is it wise for society to focus on a risky proposition such a
>>ownership, as a major social underpinning? Will it create greater social
>>unrest?
>>********Is the risk of ownership any greater than the current periodic
>>unemployment risk to the average worker?
>>********Is risk the  normal state of affairs for workers and humanity, so
>>why postulate life-long jobs as a serious option (especially when they are
>>disappearing in Japan)?
>>********
>>
>>David Korten's book When Corporations Rule the World, lays out an agenda
>for
>>social change aimed at meeting the basic COG goals of a sustaniable and
>just
>>civil society which includes:
>>
>>********a world-wide economic accounting system that counts all the
>>environmental and social costs of production,
>>********a tax system which actively encourages stewardship of resources and
>>communities and removes taxes on productive work and basic consumption, 
>>********a legal system which eliminates corporate political contributions,
>>requires the media to provide free air time for political debates, bans
>>political advertising, replaces the IMF and WTO with a UN agency that will
>>encourage more self-reliance and less debt by current debtor nations, and
>>seriously limits the rights of corporations by removing their status as
>>"legal persons" for some purposes and exercising the right to grant or
>>revoke corporate charters and thereby set standards for corporate behavior
>>in civil society.
>>
>>
>>I like a lot of what Korten is trying to accomplish. However, much of it
>>runs contrary to the narrow short-term self-interest motivations of many
>>current players who have the power to make these changes.
>>
>>Is there anything  about what we in the employee ownership community do or
>>are proposing, that is any more likely to accomplish these ends than what
>>Korten proposes?
>>
>> Does employee or broadened ownership provide more room for accommodation
>>between greed and accomplishing our mission?
>>
>>Best regards,
>>Deb Olson
>>
>>
>>Deborah Groban Olson
>>Project Co-ordinator
>>Capital Ownership Group Project
>>Ohio Employee Ownership Center
>>Kent State University
>>c/o Shared Equity Strategies, Inc.
>>3163 Penobscot Building
>>Detroit, MI 48226
>>(313) 331-7821 or (313) 964-2460
>>(f) (313) 331-2567
>>email: dgo@esoplaw.com
>>web site: http://cog.kent.edu <http://cog.kent.edu/> 
>>
>

Deborah Groban Olson
Project Co-ordinator
Capital Ownership Group Project
Ohio Employee Ownership Center
Kent State University
c/o Shared Equity Strategies, Inc.
3163 Penobscot Building 
Detroit, MI 48226
(313) 331-7821 or (313) 964-2460
(f) (313) 331-2567
email: dgo@esoplaw.com
web site: http://cog.kent.edu