RE: BOUNCE homestead@cog.kent.edu: Non-member submission from ["Dave Wheatcroft" <dwheatcroft@lineone.net>]

[Michael Harrington <mharrington@milken-inst.org>]

Dear Homestead Group,

There seems to be a lot of understandable misinterpretations of what role
risk plays in human behavior and how that applies to the issue of employee
ownership. Humans are risk averse, this applies to capitalists and workers
alike. The theory of finance has adequately proven that return is positively
related to risk, so as risk goes up so does the expected return AND
vice-versa. This means that at the margin, assuming more risk demands more
return AND demanding more return assumes more risk. These are a priori
principles, which means the actual outcome may be different - one can
actually get an excess return by chance. But if it becomes clear that more
than chance is involved, arbitrage will drive the risk-adjusted rate of
return down to the mean. This relationship can be shown conclusively by
empirical evidence as well as theory. So, if workers want a bigger piece of
the pie they will have to assume more business risk or at least devise an
ownership mechanism where they can get paid for the risks they're already
taking. This is not as onerous as it sounds as overall risk could be reduced
with efficient risk management or insurance pooling. This is the essential
difference between ownership and employment.

What does this mean for employee ownership? On any one particular deal,
perhaps nothing. But in general it means that all parties - owners,
creditors and employees - are acutely aware of the risks they are assuming
and if they are getting paid for assuming them. As Dave Wheatcroft argues
below, awareness of risks may be partly a function of education and
acculturation as some people learn that judicious risk-taking actually
increases overall security. But considerable research in evolutionary
psychology suggests that humans are intuitively very astute in understanding
threats to survival - much more astute than in trying to calculate utility
or profit maximization - but this, as nature has determined, is a short-term
perception. People also vary in risk preferences according to their frames
of reference. This means that people are sometimes more risk averse than at
other times or than other people, depending on their endowment positions and
their perceptions of an uncertain environment. This explains Dave's point
below about risk preferences. Risky gambles have 2 dimensions - how much you
gamble from your wealth and how risky the gamble is in terms of variance of
returns. People without disposable income take very risky gambles with very
low stakes - i.e. lottery tickets and the horses, trying to hit the big one.
But rich people interested in preserving their capital take low risk gambles
with high stakes and end up safely making more money than they can spend.
(Barriers to entry in investment markets also present the perverse outcome
that those with lots of money get access to better returns at lower risks
than the market at large - venture capital partners, for instance) Both of
these strategies favor survival but we can easily see the better strategy
for the long haul. 

The point for employee ownership is that ESOP dealmakers should be sensitive
to the risk perceptions of all participants involved - business owners, bank
lenders, employees AND outside shareholders: 

--If lenders are not confidant of the valuation of the employee-owned firm
relative to the previous capitalist-owned firm, they will demand that
someone else - the business seller or the employees -- assume this risk.
This breaks the deal in many cases as business owners are trying to divest
this risk at fair market value. 
        
--Employees should also be reticent to assume risk that they cannot insure
or diversify away. 
--Outside shareholders' concerns about control over their paid-in capital
will withdraw or refuse to provide it. 

Policy measures can strongly effect the risk-return ratio on the margin -
the tax break for ESOPs does this and other tax measures that reward equity
investments like dividends and cap gains would do this as well. The pooling
of creditor loans for employee buyouts in a secondary market may also mean
all the difference for the lack of information about post-buyout valuations,
though this may sound a bit farfetched at the moment. 

In general, financial markets manage risk and they were created because
suppliers and users of capital demand it in order to do business. And it
seems to work out very well given the wealth created (but not yet adequately
distributed...)


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: Monday, January 10, 2000 9:27 AM
To: Homestead
Subject: Fwd: BOUNCE homestead@cog.kent.edu: Non-member submission from
["Dave Wheatcroft" <dwheatcroft@lineone.net>] 


>>From dbell@kent.edu  Mon Jan 10 11:31:46 2000
>X-Sender: dbell@pop.kent.edu
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>Date: Mon, 10 Jan 2000 11:30:57 -0500
>To: dgo@esoplaw.com
>From: Dan Bell <dbell@kent.edu>
>Subject: BOUNCE homestead@cog.kent.edu:    Non-member submission from
>  ["Dave Wheatcroft" <dwheatcroft@lineone.net>]   
>
>Deb,
>
>This message from Dave Wheatcroft did not get relayed
>becaused he is not subscribed to the homestead list.
>
>Dan
>
>>From: owner-homestead@cog.kent.edu
>>Date: Sat, 8 Jan 2000 13:44:25 -0500
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>owner-homestead@cog.kent.edu using -f
>>To: owner-homestead@cog.kent.edu
>>Subject: BOUNCE homestead@cog.kent.edu:    Non-member submission from
>["Dave Wheatcroft" <dwheatcroft@lineone.net>]   
>>
>>>From cogowners@cog.kent.edu  Sat Jan  8 13:44:25 2000
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>>Message-ID: <001901bf5a07$8ea1c2e0$ad1c063e@default>
>>From: "Dave Wheatcroft" <dwheatcroft@lineone.net>
>>To: "Homestead COG" <Homestead@cog.kent.edu>
>>Subject: Comments to Deb 5.1.2000
>>Date: Sat, 8 Jan 2000 18:36:13 -0000
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>>Dear Homesteaders
>>On the risk factor can I just make the following comments.
>>As a worker the things that dominates how you spend your money depends =
>>on disposable income.
>>I don't take the view that workers don't invest in ownership (Shares) =
>>because of the risk factor. More likely there are other forms of =
>>competition for the money that are more attractive to the worker, =
>>betting on the horses and the lottery to name just two of the most =
>>popular but far more risky, the reason for this, in the UK at least is =
>>the fact that the workers were not brought up in a shareholder =
>>environment and they don't understand it, they are far more familiar =
>>with  betting as it is straightforward and easily accessible to them =
>>even though it is almost certain they will lose their money.
>>So this is the challenge for us, how do we convince them that "Betting" =
>>on shares particularly in the company where they work is better?
>>The answer is publicity, education and accessibility.
>>For one thing it can be as secure as banks, take the record and returns =
>>of the share markets over the past few decades.=20
>>For another it can just as exiting as horses (although a little slower =
>>tracing the movement of your shares every day or hour if you are that =
>>keen.
>>Finally if you pick the right investment you can be on a real winner, =
>>which is especially rewarding if you are involved and have contributed =
>>to it yourself.
>>These are the points we are not getting across to the workers.
>>I read in a book once that the test of how good a company thinks it is  =
>>to offer some of it's shares to the workers to buy and watch the take =
>>up.
>>If the workings of the company is transparent the workers would be more =
>>likely to invest in it, it's the secrecy of the Board Room that puts =
>>workers off and the feeling that they are just a number and not a valued =
>>person, even if that converts to a valued asset.
>>
>>Spreading the ownership and sharing the wealth, even in some small way, =
>>can only be good for the company, community, nation and world. =
>>unfortunately in the past few decades things have been moving the other =
>>way and although EO has slowed it down a little there is still a =
>>mountain to climb to even stop the trend let alone reverse it, but that =
>>shouldn't stop us from keeping on trying
>>  =20
>>
>>Dave Wheatcroft
>>01246 233438 -Tel
>>
>>------=_NextPart_000_0016_01BF5A07.3DF68420
>>Content-Type: text/html;
>>      charset="iso-8859-1"
>>Content-Transfer-Encoding: quoted-printable
>>
>><!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
>> >>>http-equiv=3DContent-Type> >> >> >> >> >>
Dear Homesteaders
>>
On the risk factor can I just make the following = >> >>comments.
>>
As a worker the things that dominates how you = >>spend your=20 >>money
depends on disposable income.
>>
I don't take the view that workers don't invest = >>in=20 >>ownership
(Shares) because of the risk factor. More likely there are = >>other
forms=20 >>of competition for the money that are more attractive to the
worker, = >>betting on=20 >>the horses and the lottery to name just two of
the most popular but far = >>more=20 >>risky, the reason for this, in the
UK at least is the fact that the = >>workers were=20 >>not brought up in a
shareholder environment and they don't understand = >>it, they=20 >>are far
more familiar with betting as it is straightforward and easily=20
>>accessible to them even though it is almost certain they will lose their
= >> >>money.
>>
So this is the challenge for us, how do we = >>convince them=20 >>that
"Betting" on shares particularly in the company where they work is=20
>>better?
>>
The answer is publicity, education and=20 >>accessibility.
>>
For one thing it can be as secure as banks, = >>take the=20 >>record and
returns of the share markets over the past few decades.=20 >>
>>
For another it can just as exiting as horses = >>(although a=20 >>little
slower tracing the movement of your shares every day or hour if = >>you
are=20 >>that keen.
>>
Finally if you pick the right investment you can = >>be on a=20 >>real
winner, which is especially rewarding if you are involved and have=20
>>contributed to it yourself.
>>
These are the points we are not getting across = >>to the=20 >>workers.
>>
I read in a book once that the test of how good = >>a company=20 >>thinks
it is to offer some of it's shares to the workers to buy = >>and watch=20
>>the take up.
>>
If the workings of the company is transparent = >>the workers=20 >>would be
more likely to invest in it, it's the secrecy of the Board Room = >>that=20
>>puts workers off and the feeling that they are just a number and not a =
>>valued=20 >>person, even if that converts to a valued asset.
>>
 
>>
Spreading the ownership and sharing the wealth, = >>even in=20 >>some small
way, can only be good for the company, community, nation and = >>world.=20
>>unfortunately in the past few decades things have been moving the other =
>>way and=20 >>although EO has slowed it down a little there is still a
mountain to = >>climb to=20 >>even stop the trend let alone reverse it, but
that shouldn't stop us=20 >>from keeping on trying
>>
   
>>
 
>>
Dave Wheatcroft
01246 233438=20 >>-Tel

>>
>>------=_NextPart_000_0016_01BF5A07.3DF68420--
>>
>>
>--
>Dan Bell
>International Program Coordinator
>Ohio Employee Ownership Center
>Kent State University
>Kent, OH 44242
>(330) 672-3028
>(330) 672-4063 fax
>dbell@kent.edu
>http://www.kent.edu/oeoc/
>