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 geographiunits.
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 economidevelopment 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 economidevelopment groups. Subnational provision of technical
assistance through state, provincial, or municipal programs, or through non
profits -- 501()(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 localististrategy is best implemented
through subnational action.
Fourth, employee ownership is intrinsically a
micro economistrategy, 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 economiactivity 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
Ahelp to narrow the divide between those who
favor and those who fear more growth in Hawaii by slowing workforce/population
growth in future economiexpansions which, in turn, could reduce the need for
wage cuts and lay-offs in future recessions@
(Tom Brandt, 4/4/2000; see also his AImpossible
Dream for Hawaii's Future? 9/10/99).[1]
Sixth, with economiglobalization, the
nation state gradually ceases to be the appropriate unit for economipolicy,
and the traditional national economimanagement tools -- whether fiscal, monetary,
or exchange rate policies, capital transfer restrictions, domesticontent,
requiring a controlling domestiownership stake, domestipreference in the
award of publicontracts, et.-- 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 publiand 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 economipower 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 publipolicy
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 economidevelopment.
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 PacifiNorthwest. 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. AThe
commission is charged with recommending to the next legislature the specifieligibility 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 civiand 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 ALR: 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:
Preferential bidding arrangements for government
contracts
We have a variety of set asides in government
contracting varying from state to state.
These include set asides based on ownership by minorities and women.
Why not set asides or preferences for employee-owned firms?
Carla Dickstein (email to Deb Olson, 4/18/2000)
notes that both the French and Italian governments provided preferences to
cooperatives in bidding on government contracts.
State and local privatization
With the hegemony of neo-liberal ideology reaching
the local level in the 1990s, subnational governmental units joined nation
states in divesting themselves of ownership of publiutilities and services,
from hospitals through water works. Since
privatization is handled in a separate paper, suffice it to say here that
subnational privatization of municipal and state enterprises has represented
a major missed opportunity to broaden ownership in the West. In general privatization has occurred through
sale of locally owned publienterprises to conventionally owned corporations,
not to employees, with revenues flowing into general coffers for current spending,
rather than into trusts or other funds which provide a lasting benefit for
citizens.
In effect, the publisector has liquidated
long-term assets to finance current consumption. While this procedure has been justified by the unsubstantiated ideological
assumption that private markets are always superior to publiprovision of
goods and services, in fact much of the political motivation for local privatization
has been covering revenue shortfalls or paying for tax cuts, usually for the
well to do, quickly consuming the value of publiassets.
At least in the United States, this has been Afree@
funding for the governmental unit, because publisector accounting practices
do not provide balance sheets to citizens charting asset liquidations.
Given the fact that these assets were typically
built through publieffort, achieving some publipurpose (beyond raising
funds) would seem desirable. The Virginia
and North Carolina legislation consider sale to employees as a means of privatization.
Russian and Eastern European privatization at the local level on occasion
has also given preference to employees, as did Mrs. Thatcher’s privatization
of bus lines (carried out in the unitary United Kingdom through national governmental
action).
As is clear from Dan Bell’s report on the
discussion group on employee ownership in privatization, one primary motivation
for an employee share has been getting publiemployee unions’ acquiescence in
privatization. However, one can
conceive of a privatization policy designed to create lasting employee
ownership of privatized assets.
Another interesting idea is to create partial
employee ownership of some or most publienterprises by simply paying
employees a small capital wage in stock, underpinning what otherwise would be
purely theoretical ownership rights with dividends -- when the enterprise was profitable.
Distribution of subnational publiownership
rights to citizens
The Alaska Permanent Fund constitutes a unique
case in the United States of using publiownership rights of subsoil resources
(in this case, oil) to convey quasi ownership rights to citizens.
Since 1982, a portion of state oil royalties have been distributed
to every man, woman, and child resident in Alaska for all of the previous
year. Every resident who qualifies gets an equal share. These rights are not tradeable (i.e., cannot
be sold), cannot be inherited, and cannot be taken with you if you move out
of Alaska. In effect, Alaska treats
its residents as beneficial owners of royalty rights. In 2000, dividend checks from the Permanent Fund were almost $2000
for each of the state's 585,000
qualifying residents. The state retains
the formal ownership right but chooses to pass-through the economibenefit
to its citizens.[4]
It is not difficult to imagine a similar
treatment for other profitable publiownership rights at the state or local
levels when those streams of income are sufficient to be divided. Publiincome from royalties, easement and
concession income, fees for private use of publiproperty, and the like are
often consigned to general revenues and not as jealously protected as they
might be if citizens derived a more direct benefit from publiownership. Of course, most of these publiownership
income rights are already committed to other worthy publiends, especially
publieducation as is the case for Texas oil royalties and for most state
lottery profits.
Is there any reason why profitable, publicly
owned electrical utilities, parking garages, et., could not pay dividends to
citizens?
Thinking more broadly, what Alaska has done
is to conceive of ownership as a bundle of rights. The right of ownership itself remains in the hands of the state,
but the right to dividends on that
ownership is accorded to citizens.
2. Providing
technical assistance
One promising mechanism for encouraging
employee ownership at the subnational level is the establishment of
organizations which provide information, technical assistance, training, and
the like for employees seeking to purchase companies or to establish
cooperatives. This can be done by
governmental units (as has been done in several American states), by
not-for-profits organizations (again there are several American examples), by
unions, by labor-sponsored investment funds, or, conceivably, by for-profit
groups.
State employee ownership programs
During the latter part of the 1980s and early
1990s, seven state employee ownership programs (Hawaii, Massachusetts,
Michigan, New York, Ohio, Oregon, and Washington) were established. A quasi-state entity -- the Steel Valley
Authority -- provides similar services on a regional basis in Southwest
Pennsylvania. More than anything else,
these programs focused on outreach and assistance to union locals in plants
facing shutdown and to retiring owners who might be interested in selling their
companies to their employees.
A study of three of these programs -- New
York, Ohio, and Washington -- in 1990-91 by the National Center for Employee
Ownership found all of those studied to be efficacious in increasing the rates
of ESOP formation in the states in question.[5]
Practically all we know about the impact of
employee ownership at the state level is a consequence of studies done by those
state programs (Michigan, Ohio, and Washington[6])
or supported by them.[7] In addition, a number of foreign scholars
have reported on American state programs and their results.[8]
Despite the apparent success of these
programs, their political support ebbed with improved economiconditions in
the 1990s and party transitions in a number of state governments. The consequence was the defunding of state
employee ownership programs in Hawaii, Massachusetts, Michigan, New York,
Oregon and Washington, although state personnel continued to provide support
and technical assistance for employee ownership in Massachusetts, Michigan and
Washington.
Why were clearly successful programs dismantled?
They were largely anchored in state governments; only Ohio's
and Oregon's were contracted out by those states to, respectively,
a state university and a non-profit organization. This made them susceptible to the slings and
arrows of state politics, especially because several state programs had clear
partisan backing at the time of their establishment. Placement outside of state government was no panacea, however:
while the Ohio program has continued
to grow despite reductions in state support, loss of state funding terminated
the Oregon program.
Jim Houck, who ran the Michigan program while
it existed and who continues to promote employee ownership in that state
reflected in the COG discussion that Awhy
many of the earlier state programs have disappeared probably relates to changes
in priority in succeeding administrations and the loss of an employee ownership
champion either in state government, the legislature or in the Governor's
office of these respective states.
State programs are inevitably vulnerable and most have a somewhat
limited life expectance. There is
always the temptation to try something new and programs are constantly being
scrapped, merged with others and replaced by the latest fad incentive.@
AEmployee ownership must compete with a lot of
other program applications in government,@
says Houck. AIt must constantly evolve its marketing
appeal (attracting and retaining employees is a major concern to most all
states in today's economy) and specifiapplications if it is to retain its
support by state government officials@
(Houck, 3/27/2000).
One aspect of state programs is particularly
important to note: most got their bang for the buck by targeting retiring
owners to encourage them to sell their businesses to their employees when there
was no heir eager to continue the family business. For the seller, the employees constitute an often enthusiastibuyer that is willing to pay a market price for the company, rather than bottom
fishing. For the employees, buying the
company averts uncertainty and avoids the dubious aims of outside owners. Additionally, in the United States, special
Federal tax incentives encourage the sale of closely held businesses to
employees.[9]
A number of subnational programs have this focus.
In the early 1990s, Hawaii's employee ownership program was funded to identify
owners within 5 years of retirement and to let them know about the advantages
of employee ownership (Tom Brandt 4/4/2000). The New York state program actively promoted
employee ownership in retiring ownership situations by funding preliminary
feasibility studies. The Ohio Employee
Ownership Center, which always stressed outreach to retiring owners, has run
a broader ownership and management succession planning program successfully
since 1996 in the Cleveland area; between 1996 and spring 2001, 347 business
owners from 276 area companies employing more than 25,000 participated in
the program.[10] Massachusetts recently funded a state-wide
succession planning program patterned on the Ohio model.
This retiring owner focus pays off in
broadening ownership. A 1991 NCEO study
of several state employee ownership programs found a startling impact on the
rate of ESOP creation in closely held companies; in Ohio, for example, where
the state program targeted small business, the rate of ESOP creation in closely
held firms rose 45% faster than the national average.[11]
Have these state programs made a difference?
The answer is overwhelmingly “yes!” The
question is how best to maintain them.
Michigan’s Houck argues that it is Avery
important to have legislation which more or less permanently supports the
establishment of some sort of government response encouraging employee
ownership. Ideally, that legislation will also establish a modest funding level
to support staff and program initiatives. It does not have to cost a lot of money. From $100,000 to $200,000 annually will
provide a substantial administrative effort.
Legislation will help a state to override inevitable political shifts@ (Houck, 3/27/2000).
Non-profit employee ownership organizations
In addition to publisector employee
ownership assistance organizations, there are a handful of regional
not-for-profits which promote employee ownership in the United States. These include the Industrial Cooperative
Association (now ICA Group) in Boston, the Center for DemocratiSolutions in
San Francisco, and the Southern Appalachian Center for Cooperative Ownership in
North Carolina.[12]
A number of local non-profits have been set
up to encourage employee ownership. In
Ohio alone there have been three: Commonwealth in Youngstown, Worker-Owned
Network in Athens (now ACENet), and Jobs for People in Cincinnati. Generally speaking the catchment area for
such local organizations is simply too small for them to focus exclusively on
employee ownership and, over time, they have come to broaden their scope to
include such other admirable goals as low and middle income housing development
(Common Wealth) and flexible manufacturing (ACENet).
Employee ownership as a tool for general
economidevelopment organizations
A handful of general purpose economidevelopment organizations have developed special employee ownership
competence. These include Coastal
Enterprises, a community development corporation in Maine; Social Action for a
Just Economy (SAJE), a 501()(3) Hispanicommunity organization in Los
Angeles; the Center for Community and Labor Research, a labor-related economidevelopment and research program in Chicago; and the Steel Valley Authority, a
quasi-governmental economidevelopment agency established by a number of
municipalities in the Pittsburgh area.
These organizations use employee ownership as
one of their tools for economidevelopment.
While their regional catchment areas are not sufficient to focus on
employee ownership alone, through their economidevelopment activities they
screen enough firms that some individual firms are identified as appropriate
candidates for employee ownership.
Given the successful experience of these
organizations in using employee ownership in their regions, it would be
worthwhile to train additional economidevelopment organization personnel in
the appropriate uses of employee ownership.
Industrial sector strategies
An alternative to the regional geographifocus
of the previous organizations is a sectoral strategy. Several organizations have undertaken to promote
employee ownership nationally within particular economisectors. These include Childspace Cooperative Development,
a national cooperative daycare developer; Cooperative Homecare Training Institute,
which seeks to replicate in other urban areas the outstanding success of Cooperative
Home Care Associates in New York City; and the Industrial Cooperative Association's
temporary service cooperative initiative.
The first two of these cases build off the
success of single cooperative enterprises.
Childspace, a parent-teacher cooperative daycare program, originated in
Philadelphia where it developed an enviable track record of providing high
quality daycare services in a low income community. Cooperative Home Care Associates (CHCA) in New York is an
outstanding example of how a cooperatively organized and well led company can
provide higher wages and benefits as well as ownership in a low income, female
service sector branch. In both cases,
national replication projects have been funded by foundations.
The ICA's
employee-owned temporary employment agency initiative similarly attempts to
improve employee's economiconditions in what is usually a benefit-less
service branch while also providing ownership. It uses the strength of an existing employee
ownership organization to seek to spread the model nationally.
All of these initiatives seek to improve
economiconditions for low wage or contingent workers while improving services
to children and the elderly. As such,
they have received foundation support.
To have large scale consequence, however, they need linkages to other
large organizations with the purchasing power to take these attractive models
to scale.
Private sector consultants
Private sector consultants specializing in
employee ownership in the United States outnumber publiand non-profit staff
by a factor of 25 - 50 : 1. Indeed, the
rapid growth of employee ownership in the United States stems from its
promotion by private sector consultants who are paid on a fee-for-service basis
for providing professional services.
This appears to be a substantially more lucrative area of endeavor in
the United States than in other countries, possibly because of the fact that
the most common form of employee ownership in the United States is the ESOP, a
government-regulated pension plan.
As a consequence, most of the outreach done
to the business community to encourage the creation of more employee-owned
companies is done by the professional community. This has been successful in spreading ESOPs (but not cooperatives,
which provide few fees for professionals) in the United States, but it is
driven almost exclusively by the tax breaks provided by the Federal government.
A reduction in tax expenditures or in the regulations which encourage
the professionalization of ESOP services would reduce the private consulting
sector's interest in promoting ESOPs.
Moreover, because the tax breaks are equal
for democratiand non-democratiESOPs, private sector consultants do less to
promote democratiemployee ownership than is warranted by its performance.
Maximizing leverage
In the United States, Federal tax advantages
are accorded to good, bad, and indifferent ESOPs alike. In fact, in terms of the total dollars in
tax expenditures, the bad and indifferent ESOPs -- those with little employee
participation, communication, or training -- account for the lion's share of tax incentives. An Ohio study found that the bottom
two-fifths of firms in these areas accounted for just over 90 percent of the
corporate tax expenditures for ESOPs in Ohio. By contrast, the roughly
three-fifths of firms which provided more opportunity for employee owners in
these areas got under 10 percent of the corporate tax dollars.[13]
Ironically, it is the latter category of
companies that outperforms conventionally owned firms, not the former.
Although compelling for corporations, Federal
tax incentives are expensive. They
probably exceeded $3 billion annually in the 1990s. By contrast, publisector funding for all employee ownership
support organizations did not exceed $2 million annually at any point in the
1990s.
A modest Federal program to provide matching
funds for state and regional publiand non-profit sector employee ownership
assistance programs would be highly cost effective in generating both more
employee-owned companies and in improving their performance. Recipients might
also include sectoral employee ownership assistance programs, such as the
Steelworkers’ Worker Ownership Institute (which became a casualty of the steel
crisis). Only $5 million annually in
Federal matching funds -- less than 2/10s of 1% of the tax expenditure for
ESOPs would probably lead to the establishment of 20 to 30 state, regional and
sectoral employee ownership programs that would effectively cover the country.
In addition to matching funds, a $1 million
marketing budget annually to promote the idea of employee ownership nationally
would be valuable (COG meeting, 4/2000).
Replicating the agricultural extension
service for employee-owned companies
One of the most successful American
innovations in economidevelopment is the Agricultural Extension Service. For decades it has been transferring
research results from the lab to the farm, bringing knowledge and technology to
the family farm. The Extension Service
has helped keep American family farms competitive with corporate farming and
promoted a continual process of intellectual renewal in agriculture.
Creating an employee ownership extension service
could be done at the state level to supply a variety of technical and organizational
development assistance to smaller firms without Federal support; once in place
in a couple of states and successfully field-tested there, an employee-ownership
extension service could be spread by Federal matching funds.
The Department of Agriculture’s new Rural Cooperative
Development Program has put cooperative development specialists into nearly
all states. Their mandate includes
aiding the establishment of worker cooperatives, but little has been done
in its area to date. This program,
however, has substantial potential to expand employee ownership in small towns
in rural areas as a means to stabilize their economibase.
While the preceding discussion is couched in
terms of the United States, the same principles could easily be applied in
other countries as well.
3. Action at
the local level
Why should we limit ourselves to actions by
state, provincial, or regional governmental entities? Once we move out of Washington and turn to state and local initiatives,
the possibilities are legion. Much
can be done to encourage broader employee ownership by municipalities, by
charitable and religious organizations, by unions and universities, and by
employee-owned companies themselves.
Little has been done to promote employee ownership
by local government outside of using local revolving loan funds to save jobs
in employee buyouts. This probably
reflects a lack of imagination rather than a lack of ability.
Among the proposals which have come to our attention
during the COG process are
Further, individual employee-owned firms can
act to grow capital stakes for their employee owners by simple leverage strategies.
One interesting outgrowth of the discussion of opening the Federal
Reserve's
discount window for lending for employee ownership (which is clearly a national
level issue, rather than a subnational one) was the proposal that ESOP firms
borrow to purchase a diversified portfolio of securities held in the
Aother securities@ portion of employee ESOP accounts (Dan Bell
4/6/2000). Company securities already
held by the ESOP can collateralize the loan. Annual company ESOP contributions
can then be used to pay off the loan. Portions
of the portfolio of other securities can, from time to time, be sold to cover
repurchase obligations. While the
leverage required for this strategy increases its risk, the diversification
reduces risk. (See also Michael Harrington
4/12/2000.)
ESOP companies can themselves become cornerstones
of local employee ownership efforts by building networks of employee-owned
suppliers. They can serve as incubators
for new employee-owned companies, providing an initial base market in addition
to the physical space, telephone answering and accounting services provided by other business
incubators. Employee-owned companies can -- and should -- examine which of
the goods and services they currently purchase externally can be better provided
(in terms of quality and reliability as well as cost) by local employee-owned
suppliers. ESOP firms can also go
beyond the individual enterprise to build cooperative networks, including
export cooperatives and cooperatives providing services to ESOP firms. These
possibilities will be explored in Section 6 below.
It would be useful to build coalitions at the
state or regional level between traditional cooperatives (agricultural, rural
electri, mutual insurance companies, credit unions, consumer co-ops, et.)
and the growing employee-owned sector. The
Province of Quebeoffers a dramatidemonstration of the possibilities that
such a critical mass could create.[14] Substantial synergies are possible, including
developing hybrid consumer-employee cooperatives.
4. Employee ownership funds
Should there be special financing institutions
for employee ownership?
Opinion is divided. Some feel that it is salutary for employee-owned firms to utilize
the standard market financing sources: commercial banks, asset-based lenders,
venture capital funds, and bond market. Others
argue for at least a partially separate financing stream for the employee-owned
sector.
Over the years, a variety of publiand private
financing mechanisms for the employee- owned sector have been launched with
mixed success. These include
Some of these funds do only debt financing
while others provide a source of friendly equity financing as well.
Revolving loan funds with preference for
employee ownership
There are several revolving loan fund which
have a preference for employee ownership or are exclusively employee-ownership
lenders. These include A New Beginning/ANB Fund in the Shenango Valley of
Pennsylvania; Commonwealth Revolving Loan Fund in the Youngstown, Ohio, area;
LEAF - the Industrial Cooperative Association's
revolving loan fund in Boston; and Northcountry Cooperative Development Fund in
Minnesota. Some of these funds, like
ANB and Commonwealth, are community-based and make loans only in a limited
geographiarea. Northcountry, the
biggest of them, is a regional lender, covering the Great Plains and
Midwest. LEAF lends nationally.
Specialized lenders nationally
Since the New Deal, the agricultural
cooperative sector has been underpinned by specialized Federal lending
institutions. Similarly, the expansion
of home ownership from a third of American families to two-thirds of American
families since the New Deal has been fueled by Federal home-ownership financing
institutions. As described in the COG
national paper, during the Carter administration, the National Cooperative Bank
(NCB) was established as a specialty lender for housing, consumer, and worker
cooperatives. Privatized during the
Reagan administration, the NCB has become a preferred lender for many
worker-owned businesses because it is in itself a cooperative owned by its
customers.
While the NCB and its Development Corporation
(the soft-loan window) are more appropriately a subject for the national level
paper, they have undertaken a policy of supporting regional cooperative lending
funds, like the Northcountry Cooperative Development Fund. These serve as regional intermediaries for
the NCB, working hand-in-glove with local borrowers who are too small to be
serviced efficiently from Washington.
This model of decentralization is potentially
very valuable both in employee ownership lending and employee ownership venture
capital in the United States and elsewhere.
State employee ownership financing programs
Establishing special state credit facilities
for employee ownership -- particularly to avert shutdowns -- was a relatively
popular initiative in the 1980s as the one-two punch of the 1979-81 recession
and the overvalued dollar in the mid 1980s clobbered American manufacturing.
Few have been established since then. These credit facilities came in four
primarily varieties:
A number of other states, including Ohio, used
existing state lending programs to support employee buyouts.
The effectiveness of such programs varied.
Earmarked employee ownership lending funds have generally been rolled
into other economidevelopment loan funds as small pots of money were either
underutilized or overdrawn. (Jim Houck also notes that Michigan's threshold
requirement of 75% employee ownership was too high to attract a sufficient
number of borrowers [3/27/2000].) On the other hand, both below market interest
rates and publisector lenders willingness to subordinate their loans to
commercial lenders seems to have played a significant role in supporting employee
purchases of troubled and/or divested plants and firms.
Loan guarantees -- which are very cheap for the publisector -- seem
to have been underutilized.[15]
None of these programs, however, addressed the
systematilack of friendly equity investment which has hampered the growth
of the employee-owned sector. There
are exceptions, however. New Hampshire
and Maine have created publisector venture capital funds. While the Maine fund has taken no equity positions
in employee-owned companies (personal communication, John Burns, Finance Authority
of Maine, 4/13/01), the New Hampshire Community Development Finance Authority
has made two placements in cooperatives (personal communication, Robb Nichols,
NHCDF). Other than this limited state effort and some near equity placements
by revolving loan funds, equity has been left to private venture capital which
sought a much higher rate of return than most employee-owned firms found pleasing.
Raising venture capital on Wall Street for
ESOPs
Five national venture capital funds have been
created in the United States that have special preference for employee
ownership.[16] The first was Minneapolis-based Churchill
Capital's Churchill ESOP Capital Partners
which raised $188 million in a private capital partnership in 1995 in
cooperation with Houlihan Lokey, a law firm with special expertise in ESOP
transactions. It was designed to provide
subordinate debt, preferred stock, and minority or majority equity stakes in
mid-market companies in placement of $5 to $25 million in management-owned or
employee-owned companies. Among its first eleven companies financed were four
ESOP acquisitions and one recapitalization.
It is our understanding, however, that after
the investment of this initial pool, Churchill decided against raising a second
ESOP fund; the market was too limited.