The introduction of stakeholders to the ownership and control of enterprises in a way recommended by Professor Michael Porter (1992: 16–17) . (Porter 1992, Porter, M.E. 1992, Capital choices: Changing the way America invests in industry, A research report presented to the Council on Competitiveness and co-sponsored by The Harvard Business School, Boston)would increase the competitiveness of corporations. OTCs would establish independently elected but separate advisory “Stakeholder Councils” (Like Citizen Utility Boards) for customers, employees and suppliers. Each council would to create a “loyal opposition” to the self-interest of other stakeholders to formulate and negotiate win-win outcomes for all concerned rather than just for management and investor elites as occurs at present.3
OTCs could also be created in other situations, such as with the privatization of state-owned industries, or in place of local investor rules for foreign investment, as in the Zimbabwe example that follows.
A PROPOSAL FOR “FADE-OUT” OF FOREIGN INVESTORS IN THE RESERVED-INVESTMENT SECTOR IN FAVOR OF THEIR INDIGENOUS EMPLOYEES4
(Based on Turnbull OTC structure - as of March 14, 2000 this proposal has not been adopted, but is still under active consideration.)
The Zimbabwe Enterprise Development (ZED) project, under the auspices of the Minister for Indigenisation, is developing a number of legislative and regulatory proposals for enhancing indigenous economic empowerment through share ownership by the majority of employees. The following proposal could create in the longer-term significant employee share ownership in the context of foreign investment in both private sector and privatized enterprises, at no cost to the government or to the employees.
Summary of the proposal: In sectors where at present foreign investors are required to have a local partner own at least X% of the company shares, foreign investors will be allowed up to 100% ownership, if they agree in advance to a “fade out” arrangement by which they will gradually contribute shares without compensation to a trust representing their employees until the X% limit is reached. The contributions will start after a period of 100% ownership by the foreign investors, which will allow them to recuperate their investment with their projected rate of return.
Detailed proposal: In the services sector and the reserved investment sector, at present foreign investors must have a local partner for 30% or 65% of the total ownership respectively. In these sectors foreign investors will be allowed up to 100% ownership if they agree to a “fade-out” arrangement by which they will retain full ownership of the shares corresponding to their original investment during the payback period. (The payback period is defined here as the period necessary for the investor to recover his investment with his projected rate of return. It is expected that in most situations the payback period will be between 2 and 6 years). Starting with the year following the payback period, the investor will contribute annually e.g. 5% of his shares without compensation to a trust representing his employees, until the employees will own 30% of the company in the services sector, or 65% (or whatever is the percentage of local participation required) in the reserved investment sector.
Such contribution of shares to a trust will not be a taxable event. This provision will apply only to future investment agreements into which both sides enter willingly. The payback period during which investors are allowed to retain 100% ownership (before the “fade-out” begins) will be in general negotiated on a case-by-case basis according to the investor’s business plan. If the enterprise is sold before the “fade-out” period is completed, the new owners will inherit the “fade-out” obligations. Compliance will be assured by the Zimbabwe Investment Centre (ZIC) and by the Zimbabwe Reserve Bank, which will verify fulfillment of the “fade-out” conditions as one of the conditions to approve remittance of dividends or repatriation of capital. Thus the onus to prove compliance with the “fade-out” schedule will be on the investor.
This proposal is conceptually similar to the BOOT (build-own-operate-transfer) arrangements that exist in Zimbabwe, with the differences that (i) it will apply to the services sector and the reserved investment sector rather than to infrastructure, and (ii) the ultimate owners will be the employees rather than the government. It is recommended to attach this proposal to the suggestions for amendment of the Investment Code, which the ZIC is preparing to submit to the Cabinet Committee on Legislation.
Justification: At present, in various sectors the percentage of company shares that may be owned by foreigners is limited (70% in services, 35% in agriculture, forestry, transport, trade, milling and baking, sugar and tobacco processing, agencies, barber and photography shops, etc.). This is a constraint to many investors, who may not find a suitable local joint-venture partner with the necessary liquidity, or who prefer to maintain complete control of the enterprise during the start-up period. Such investors may agree to some variation of the arrangement outlined above. Investors generally make their investment decision on the basis of expected returns within a time horizon of 5 to 7 years. Therefore the obligation to contribute a part of their shares gradually after their payback period should make little difference to their decision whether or not to invest in Zimbabwe. (For example, if their expected rate of return is 20%, the present value of the obligation to contribute 30% of their shares gradually starting with year 7 amounts to only 6.7% of the value of their investment).
Similar obligations on foreign investors to transfer their shares to indigenous persons after the payback period have been applied in certain cases in Malaysia and Australia. Whereas at present the local partners of foreign investors are in many cases members of an ethnic minority who have funds for investment, under the proposed “fade-out” scheme the local partners will be large numbers of indigenous employees, thus enhancing economic empowerment. Moreover, this proposal will entail no loss of tax revenues. The proposal may even enhance tax revenues in case of an entrepreneur who would not invest in Zimbabwe under current limitations on foreign ownership would be ready to invest under the “fade-out” scheme.
Comments from Alan Zundel:
1. The version of the OTC proposal based on a reduction of corporate income taxes is dependent on there being an effective corporate income tax rate sufficient to make the proposal attractive to corporations. In cases where tax rates are low or corporations already have other tax breaks available this condition may not obtain.
2. Research to provide estimates of short-term and long-term tax effects (i.e., how government revenues would be affected) would be helpful in assessing the proposal.
3. Some have argued that OTCs represent an attenuation of property rights. Turnbull's counter-argument is that participation by corporations is voluntary; they will only agree to transfer equity if they find the tax incentive attractive. The discussion of residual claimancy (RC) in the Ownership discussion group is also pertinent to this issue. David Ellerman has raised the argument that once capital and other factor suppliers have been paid at market rates sufficient to induce participation in a productive opportunity, the assets (or liabilities) that remain should belong to the workers. I have argued that all stakeholders have some right to RC, but that foregoing RC could be considered implicit in contracts for services rendered. Harrington has argued that in designing the direction of contracts (e.g., whether capital owners hire workers or workers rent capital), it is more efficient that investors retain RC. No one has produced an argument that RC should by right belong exclusively to investor Turnbull describes the advantages of making strategic stakeholders “deferred residual claimants” through an OTC in ‘The competitive advantages of stakeholder mutuals’ available from the COG library at http://cog.kent.edu/lib/Turnbull7/StkMut.htm
1c. Corporate Taxes Adjusted on a Sliding Scale for Degree of Employee Ownership and Control and Labor Sponsored Investment Funds
Proposed by Deborah Groban Olson.
(This proposal was written for the US Congressional debate on amendment of ESOP law in 1993. Since then the US Internal Revenue Code (IRC) § 133 was repealed. The author thinks that Section 133 should be reinstated with the requirements stated below. The concepts could apply to any country, but is particularly aimed at developed countries that protect collective bargaining rights.)
ESOP law should be changed to reward long-term locally anchored investment and employee participation while providing modest incentives for more conservative companies to try employee ownership. Participative employee ownership is one of a small number of developments which has shown much promise as a means of increasing the competitiveness of U.S. companies and ensuring that companies remain domestically owned.
The federal government needs to encourage (1) more majority employee ownership and (2) more worker participation in decision-making. Companies providing employees with a larger portion of ownership should be rewarded more than those providing less ownership. Special incentives should be provided to companies in which employees receive controlling interest. Employee ownership subsidized by tax dollars should provide employees with substantial shareholder rights and aid them in operating as a shareholder group.
The following legislative proposals to peg ESOP tax incentives to provisions for greater employee rights are based on the above premises. They provide a floor for employee protection where there is no union to speak for employees. Where there is a union, it may negotiate different provisions to safeguard employee interests. For example, unionized employees may be better represented through union representation on some issues where individual employee rights are proposed herein.
Proposed Changes to Ensure Employee Rights in ESOPs
Reinstate the previously repealed ESOP lender deduction (IRC Section 133) contingent upon the following requirements, any or all of which may be waived if the ESOP is created through collective bargaining.
1. Either (a) more than 50% of the voting stock of the company must be allocated to ESOP participants; or (b) where the ESOP owns more than 30% but less than 50% plus, the plan must provide that the ESOP participants, through the ESOP committee, direct the trustee on how to vote unallocated shares (in proportion to how they vote their allocated stock or, as a block, the same as the majority of allocated).
2. The ESOP committee appoints the ESOP trustee.
3. The ESOP committee is either (a) elected by the ESOP participants on a one-participant/one-vote basis; or (b) appointed by management and representatives of all collective bargaining units whose members are or will be plan participants with proportional representation of each bargaining unit, and each non-represented group of employees covered by the plan, so that the ESOP committee membership corresponds to the different classes of participating employees.
4. Participants get either (a) voting pass-through on all shareholder issues, including voting for the board of directors; or (b) the right to direct the ESOP committee through their votes. This prerogative, however, may be deferred during the term of an ESOP loan pursuant to loan covenants.
5. Voting of ESOP stock shall be on the basis of (a) one participant, one vote or (b) one share, one vote.
6. ESOP appraisals are made available in the same manner as the ESOP plan, and the summary plan description states that copies are to be made available to plan participants upon request for copying cost.
These changes presume a corresponding exception be made in the Employee Retirement Income Security Act of 1974 (ERISA) to permit employee owners to direct trustees to vote allocated and unallocated shares as directed, without putting them in the fiduciary bind (created by current law) of having to override those directions if they do not believe them to be in the participants' best interests.
Make ESOP tax benefits for the corporation and selling shareholder available on a sliding scale based on the amount of voting stock meeting the above requirements, or contributed to the plan pursuant to a collective bargaining agreement. For example, if taxpayers sell or contribute 10% of their stock to an ESOP, they would receive 20% of the ESOP benefits for which they were otherwise eligible. (The term "taxpayers" is used to refer to any selling shareholders, estates, or corporate plan sponsors.) If taxpayers sell or contribute 20%, they would get 40% of the benefits, etc. The benefits would increase so that once taxpayers sell or contribute 50% or more, they would be eligible for 100% of the ESOP benefits.
If Congress is going to encourage employee ownership, employees should get enough control over investment, disinvestment, employment, and other significant corporate policies to make employee ownership a meaningful method of anchoring business in local communities.
Congress repealed the estate tax deduction (IRC Section 2057) that provided tax-advantaged means for a surviving family to turn over a business to employees by allowing a 50% estate tax deduction of proceeds from the sale of employer securities to an ESOP. Many family owned businesses cease to exist upon the death of the owner if there is no easy way to turn the business over to experienced employees. Partial employee ownership combined with the estate tax deduction is one avenue for allowing full employee ownership to evolve over time. Without benefit of the estate tax deduction repealed by Congress, employee ownership in ESOPs certainly is not furthered, and businesses that might otherwise continue to produce tax revenue are lost. The ESOP estate tax deduction should be restored on a sliding scale along the lines of the above-outlined proposal.
The requirement that the Section 133 lender interest exclusion is only available to plans where over 50% of voting stock is in an ESOP is a clumsy method for addressing Congressional concerns. This requirement, simultaneously, impedes the creation of some good employee-driven ESOPs, which need to attract senior equity partners to finance a deal, and encourages others who might set up ESOPs to turn to other vehicles, like stock purchase plans, that have fewer employee rights. The above-outlined sliding scale would better meet the country's needs for locally owned businesses and tax revenues.
Additionally, by inadvertence, Section 133(b)(7) was drafted so that it did not allow a Section 133 loan to a company providing one participant, one vote. This section should be amended in the next tax act to add a reference to IRC Section 409(e)(5). IRC Section 133(b)(7)(A) would then read:
"The employee stock ownership plan meets the requirements of Section 409(e)(2) or 409(e)(5) with respect to all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities), and . . ."
One participant, one vote is not generally used in the large tax-exemption driven deals that caused Congress to pass the restrictions on Section 133. In fact, few ESOPs use it. However, some people believe it is the fairest way to distribute voting rights. Whether or not this is best in all circumstances, people should have the right to choose a flatter and more egalitarian voting system.
The legislative proposals above attempt to create a more finely tuned instrument. They provide concrete employee rights and protections without narrowing the already limited financial ability of employee groups to structure deals. They also recognize the significant value of collective bargaining representation in protecting employee rights in structuring ESOPs.
The proposals give selling shareholders, corporations, and outside investors’ incentives to increase the percentage of employee ownership, without removing the incentives for partial employee ownership.
Initially, employee ownership legislation was driven by a theory that broadening the base of ownership was important, but that employees were not really capable of exercising their rights as shareholders without the paternalistic protection of a trustee who could be appointed and, therefore, actually (if not legally) controlled by the corporate board or selling shareholder. This theory is outdated as proven by General Accounting Office (GAO) studies. In addition, these studies have found that employee owned companies only surpass their traditional competitors in productivity and profitability when they include significant employee participation programs.
The future for employee ownership as a means of improving American competitiveness, increasing profitability, and generating jobs and greater tax revenues, is to release the full creativity and effort of employee owners by increasing their rights and voice in employee owned companies.
For further information on this concept see Olson, Deborah Groban “ESOPS for People, Not for Wall Street” on the COG Website http://cog.kent.edu/Author/Author.htm.
2. Leveraged Stock Ownership Plans
Proposed by Norm Kurland,5 Robert Ashford and Rodney Shakespeare,6 and others, and derived from the ideas of Louis Kelso.
The central idea in this set of proposals is that employees and other stakeholders can become owners by borrowing money to purchase stocks, and then repaying the loan with the returns on the investment. Kelso derived this idea from the way corporations use credit to expand their equity. Management will borrow money for new investment when it determines that there is a productive opportunity offering sufficient cashflow to pay for (in addition to the purchase of the new assets) interest on a loan, plus an additional income at a favorable rate of return. If they are correct in their projections, once the loan is repaid shareholders will have additional wealth (the new assets and the income generated by them) without having put up any additional funds.
The barriers to making employees and other stakeholders "new capitalists" through such "self-financing capital credit" are primarily that: (1) investments may not produce a cash flow sufficient to repay a loan, (2) the new capitalists have inadequate collateral to insure repayment (and cannot afford to risk what collateral they do have), and (3) the new capitalists cannot obtain credit at preferred rates. Kelso got around these barriers by inventing the leveraged Employee Stock Ownership Plan (ESOP), a tax-favored employee benefit trust that borrows money to purchase stock in the employing company, with the company guaranteeing repayment of the loan. The barriers are overcome by: (1) giving the company a tax deduction for loan repayments, increasing the cash flow available to repay the loan, (2) having the company guarantee repayment, and (3) using the company's credit, and giving the lender a tax break on the interest collected, to obtain credit at preferred rates.
Kelso and his followers have advanced proposals to expand the use of ESOPs and establish Stock Ownership Plans (SOPs) with other stakeholders as beneficiaries. The chief proposals are for governments to:
1. Provide tax protection for other types of SOPs (e.g. Consumer Stock Ownership Plans--CSOPs–and so forth). This would extend the self-financing capital credit concept to citizens who are not employees of companies with ESOPs.
2. Create a Capital Diffusion Insurance Corporation (CDIC) to provide re-insurance to facilitate the establishment of commercial capital credit insurance companies. The latter would insure loans to SOPs in return for a premium payment. This would eliminate the need for companies to guarantee repayment of the loans without obligating the new capitalists to put up collateral. The loans would instead be repaid by dividends to the trust. The company would be obliged to pay out net returns on the new investment as (tax deductible) dividends to the SOPS.
3. Have the central bank direct credit to SOPs through the banking system. For example, they could require banks to lend a percentage of total loans to SOPs, or to provide credit for new investments only through SOPs.
Comments from David Ellerman:
Leveraged ESOPs, as they currently exist under U.S. law, are not "self-financing" but paid for by a combination of tax breaks and the dilution of original shareholders' equity. This is because the company owned by these shareholders is obliged to issue shares to the ESOP in addition to repaying the loan that allowed the ESOP to purchase these shares. If the company had simply taken out a conventional loan, they would have repaid it and owned the new equity themselves.
Comments from Alan Zundel:
1. My response to Dr. Ellerman is that as long as the business plan is successful, the new capital purchased with the loan money is self-financing both in the conventional loan scenario and the ESOP scenario. But his comparison does raise the question of why a company would choose the ESOP scenario if a conventional loan were available. The answer seems to be reasons unrelated to the need to finance new investments, such as a desire to provide employee benefits, to create a market for closely held shares, or to protect a company from a hostile takeover. Are such reasons sufficient to inspire more companies to set up ESOPs, and to go beyond them to other SOPs?
2. The establishment of tax protections for other SOPs would require, at a minimum: (1) political will to forego potential tax revenue, (2) a large number of companies interested in using them, and (3) a constituency to support the concept.
3. The CDIC proposal would require the establishment of a large enough number of SOPs to create a viable insurance risk pool.
4. Directing credit to SOPs means constricting credit elsewhere, which is likely to meet political resistance. To finance a large proportion of new investment via SOPs also means redirecting savings to other types of investments, limiting the freedom of wealthy interest to invest where they choose; also likely to be resisted.
3. Labor Sponsored Investment Funds
Proposed by Deborah Groban Olson.
Create state and/or federal tax credits to encourage individual investment of IRA or 401(k) funds in state and labor sponsored venture capital funds that focus on employee ownership. In the current environment, it is difficult to obtain the highly leveraged financing needed to create majority employee owned companies. Employees frequently need equity partners to purchase companies. But traditional venture capitalists are primarily concerned with obtaining their profits and exiting target companies. (Which does not foster local ownership or stable capital investment.)
Several Canadian provinces, including Quebec, Manitoba , British Columbia, Saskatchewan, and Ontario have created labor-sponsored venture capital funds, which provide provincial and federal tax credits to individuals, who invest the equivalent of their IRA money in these funds. The Canadian funds are aimed at investing within their own provinces in companies with a proven track record and expected future long-range profitability. (See http://cog.kent.edu/lib/CroSum1999/CroSum1999.htm.) To the extent that they have an employee ownership focus, they particularly seek out retiring owner situations where there is no succession plan. Their primary focus is retaining jobs and control of businesses within the provinces. A national or provincial labor federation must sponsor these funds to obtain the tax credits, although they invest in non-union as well as in unionized companies.
Similar legislation in the U.S., or in a state, could provide employees with a much-needed source of capital for employee ownership.
Due to the extremely high fiduciary standards required for ERISA funds, US labor unions have, thus far, had no success in raising a U.S. venture capital fund using pension money. With some IRA or 401(k) funds (structured pursuant to new regulations under ERISA Sec. 404[c] or Participant-Directed Investments, 29 C.F.R. §2550.404), individuals can make personal investment decisions to place a portion of the IRA or 401(k) in a venture fund without creating fiduciary liability for plan trustees. It would be wise to restrict individual investors from investing more than 25% of their retirement savings in a venture fund.
Comments from Per Ahlström an update on the union sponsored regional venture capital company he is working with the Swedish labor unions to create in the north of Sweden:
(In Northern Sweden) we haven't gotten very far beyond creating a lot of praise
and local support for the project. But maybe that is as much as can be
expected in a year and a half. This is the current status:
1. The project now has backing from 50 local unions with 128.000 members
(this is in an area with just under one million inhabitants and about
350,000 union members. The locals backing the project belong to several
different unions, metal workers, paper workers, retailing workers, chemical
and general factory workers, communications workers, construction workers,
forestry and wood manufacturing workers, defense employees, teachers,
community salaried employees and industrial salaried employees.
It is unique for Sweden in breaking the barriers between blue and white
collar workers in a common project.
2. The financial status of the project is that we now have promises for SKR
25 million (about USD 3 million) from the Metal Workers National Union, SKR
5 million from a consortium of Metal Workers locals in the area, and SKR 3
million from Folksam, a union owned insurance company. We expect to get some
more money allocated from the Industrial Salaried Employees National Union
in May (the treasurer has been overheard saying that it looks like he cannot
get away from it, which is a measure of the enthusiasm felt at the national
level). And we have high hopes of money from the European Union structural
funds and from the Norrland fund (a regional fund created with profits from
the government owned mining industry in the north of Sweden) filling out the
gap to the SKR 100 million (USD 12 million) that we feel are needed to start
investing. If everything works out we should be able to have the fund up and
running by the end of the year.
3. The investment activities are planned to be blueprinted (as far as
possible) on the Crocus Fund in Manitoba, which we have found to have an
investment policy which is well suited to the needs of our area.
4. We no longer have money to employ a full time executive officer, and the
project is now run on a no pay basis.
5. Even though we haven't been able to raise enough money, we have raised
very important questions in the Swedish debate. The unions and the governing
party, the Social Democrats, and also business circles in the north and the
ex-communists, the Left Party, have shown great interest in the concepts of
employee ownership, the creation of regional financial markets and regional
venture capital companies, all of which have been virtually unknown issues
in Sweden up until John Logue came here to enlighten us in the fall of 1996.
Per explained the current Swedish Labor Party (LO) effort at creating labor venture funds modeled on the Canadian model in a report from the recent extra convention of the Swedish social democrats:
A motion to make "functioning regional financial markets" part of the program for improving the Swedish infrastructure was accepted by the convention without debate. This of course opens up the field for a variety of methods for anchoring capital in the different regions.
We are currently trying to set up a labour governed venture capital company in the north of Sweden. The investment activities of this company will be run along the same lines as the Canadian labour sponsored funds, but the financing will come from union strike funds, a labour owned insurance company and hopefully from the European Union structural funds. We are planning to sell off to employees once we have a workable model for employee ownership in Sweden. We think we can make this venture capital company fly late this fall.
There is also a motion from the LO itself to the convention this fall to investigate the introduction of Canadian style labour sponsored investment funds in Sweden, but this has met quite a lot of opposition within the labour movement.
The grounds for opposition are three:
1. The heavy tax subsidy, which is not necessary in Sweden with its large pools of capital and high rate of saving. There are also serious doubts that these subsidies can get broad enough political support to be stable over elections.
2. The high administration cost that the individual stock ownership incurs.
3. The fear that workers in their enthusiasm for the scheme will put too large a portion of their savings into these funds. This could either lead to a distortion of the fund policy or to unduly high-risk exposure for the individual.
The report also had a poor analysis of the need for this kind of fund.
The Swedish labour movement has traditionally been against individual workers owning stock in their employer company. There have been the same fears that the US trade unions traditionally have had, that the workers will become more loyal to the company than to the union ideals, that they will become too dependent on their employer (see the South Bend Lathe case). And yes, we are making progress. Today the government committee on regional policy called me up. They want to know more about what is going on in Canada and the US and have ordered my book on employee ownership. They also want me to join a subcommittee on regional venture capital. It is getting really interesting.
Comments from John Logue (Explaining the history of the Swedish Wage Earner Fund proposal of the 1970’s developed by Rudolph Meidner, a.k.a. the Meidner Plan. This was in response to proposals by Thomas Brandt and David Morris that this discussion group should discuss the Meidner Swedish Wage Earner Fund proposal of the 1970’s.):
The Meidner plan failed politically in the 1970s when the Swedish Social Democrats were defeated in 1976 and 1979. The issue was framed in such a way that the Social Democrats just got clobbered on it -- the Swedish business community even got people in the streets to demonstrate against it.
Meidner's Wage Earner Fund proposal was resuscitated in a much modified (and moderated) form around the establishment of five regional funds in 1982 and enacted subsequent to the Social Democratic election victory that year. These regional funds had less impact than they should have because they invested primarily in public companies. On the other hand, they were trying to build a track record that would make them less threatening to corporate Sweden.
We wrote the regional funds up in an article in Polity in 1984: Don Hancock and John Logue, "Sweden: The Quest for Economic Democracy," Polity, v. 17(2), pp. 248-270. This really covers the debate and the details of the regional funds.
Subsequently we persuaded Meidner to give his appraisal. See Rudolf Meidner, "Beyond Wage-Earner Funds," in Hancock/Logue/Bernt Schiller, eds., Managing Modern Capitalism (Greenwood/Praeger, 1991), pp. 291-312.
Carl Bildt’s conservative government liquidated the regional funds after its 1991 election victory. The Social Democrats avoided the issue until about 1998 -- too badly burned. Now in the EU, they need to find some way to anchor capital and jobs in Sweden. So it's on the agenda in some form for the Swedish trade unions' 2000 conference.
Comments from Prof. Erik Poutsma:
It may be good to have a look into Daryll d'Art's book: Economic Democracy and Financial Participation (London: Routledge, 1993). He compares the different (national) plans - wage earner and employee ownership and participation schemes and presents an comparative critical assessment of US, UK/Ireland and Scandinavian models of financial participation.
4. Templates for New Organizational Forms
Provide "boiler plate" charter and by-laws and/or government incentives for new businesses to organize, or existing businesses to re-organize, so as to give greater worker or other stakeholder ownership and/or control (e.g. Turnbull's Ecological Corporate Structures, Mondragon worker coops, employee buyouts.)
4a. Stakeholders Councils
Proposed by Shann Turnbull.
For taxpayers to obtain the best value for tax incentives used to further employee ownership, stakeholder governance will need to be tied in for medium and larger sized firms. Employee ownership without participation in control can be counter-productive, as when management votes the shares of their employees to entrench their own position, remuneration and perks. As a condition of gaining government benefits, corporations would be required to set up Stakeholders Councils within their firm, specifically:
1. To establish councils representing each stakeholder constituency, with council members elected by the constituents. Strategic stakeholders would be recorded in the books of the business to provide a basis for the formation of such councils in the form of employee forums, customer panels and supplier assemblies.
2. To change the corporate constitution to require the Board of Directors to meet with each of these councils on at least a quarterly basis and also to allow stakeholders to attend (but not vote) at meetings of stockholders. The stakeholders could advise stockholders in voting matters and stand for election to the Board.
3. Change the corporate constitution to establish a Watchdog Board appointed only by the shareholders on a democratic basis, one vote per shareholder.
The Councils for the most part would be only advisory in nature. The executive board would have all its normal powers, except the Watchdog Board would have veto power over any actions in which the directors have a conflict of interest. (This would give it the functions often delegated to an audit committee, remuneration committee and nomination committee.)
Instituting these Councils would enhance information feedback and monitoring of operations, provide a watchdog independent of management, improve the capacity to adjust to changes in the business' environment, and give corporate governance the benefit of perspectives from the standpoint of long-term interests. Stakeholder Councils introduce an internal loyal opposition to any misguided strategies, policies or self-dealing by employees. In this way they can directly protect the interests of investors much more effectively than institutional shareholders that do not have detailed operational information.
The Stakeholders' Councils structure is superior to putting representatives of stakeholder constituencies on a unitary board, because the latter creates conflicts of interest. It generates suspicion by the nominees' board colleagues that confidential information will be widely shared, and/or a suspicion by the nominees’ constituency that their nominees have been captured and/or has misplaced loyalties. A compound board avoids the lose/lose position for all parties.
4 b. Comments on Mondragon Model
Multiple boards similar to this exist in Japan, Germany, the United Kingdom, the Mondragon cooperatives in Spain, and other places. The Mondragon board structure is compared with a unitary board structure in the paper by Shann Turnbull ‘The Competitive Advantages of Stakeholder Mutuals’. (Refer to Figures 3 & 4 and Table 6).
Comments from Deborah Olson:
Some of that exists in the form of Mondragon style cooperative structures promoted by the Industrial Cooperative Associations in the early 1980’s, and used by practitioners like me. They proved not as flexible as ESOPs for attracting capital. However, the general idea of building models to propagate is very valuable, and should be pursued. These types of corporate structures can be created under current US law; the problem is finding a client who wants it. We are using some of Shann’s ideas in creation of new IT firm structures.
Comments from Shann Turnbull:
A small step in this direction is provided in the Appendix to my paper "Corporate Charters with Competitive Advantages", Private conference on alternative perspectives on corporate governance, Columbia University, Law School, Friday, January 23rd, 1998. Forthcoming, St. Johns Law Review, St. Johns University, New York City, Winter, 2000.
Computer related, IT and knowledge businesses have the most to gain from stakeholder governance. The practice of establishing co-operative relationships with stakeholders, including competitors through strategic alliances is already well entrenched in these industries. Look at those between IBM, Microsoft, and Apple, etc. However, let us not ignore IPO's when corporate constitutions need to be amended. IT companies are much better companies to focus upon for this model than depletable resource companies.
It has been standard practice for many years in Japanese companies to issue stock to their suppliers and customers to establish strategic competitive relationships. It was this practice, which is also found in Germany to a lesser extent that created the role model for Michael Porter to recommend in 1992 that US companies follow this practice and involve employees, customers, suppliers and members of their host community in their ownership and control structure. However, Porter's recommendations would be counter productive without creating multiple boards to separate out and manage the conflicts of interest as discussed in a number of my papers describing "Stakeholder Governance" (Refer to ‘The Competitive Advantages of Stakeholder Mutuals’).
Comments from David Ellerman:
In a democratic or laborist firm, the people working in it would jointly through their legal embodiment shoulder the legal liabilities for the used-up inputs (that's the negative product). The legal embodiment could be a cooperative corporation (e.g., the Mondragon variety), a partnership (e.g., self-managed professional firms particularly when all staff are partners in some form), or proprietorships. Since you probably think in terms of corporations, we can take that as the standard case. In a democratic corporation, the membership rights (rights to current profits and voting rights) are personal rights attached to the functional role of working in the firm (your citizenship rights are similar personal rights, not property rights that can be bought and sold). There is also an amount of capital with your name on it in the company. That credit-balance "equity" account is like an internal savings account.
Your voting and profit rights are independent of the balance in the internal capital account, as those rights are proportional to your labor (called "patronage" in a worker cooperative). Your patronage-determined share of the retained profits (or losses) is added to (or subtracted from) the balance in your internal capital account. There are various arrangements to eventually pay out the accounts, but we can skip the details here. The important part for your points is that the balances in the members' accounts stand to cover the losses that the company might incur, but the distribution of the losses between the accounts is determined by the member's labor patronage. Thus the residual claimancy (RC) function in this type of corporation is attached to the member's labor, not the member's capital in the company.
Most people in the workplace democracy field learned about this internal capital account structure from the Mondragon cooperatives. Conventional and traditional worker co-ops in the US and elsewhere have a much more confused structure. It was soon discovered that one might completely redraft the by-laws in a joint stock corporation to set up this whole Mondragon-style internal capital account structure. This was done in the Model By-Laws of the Industrial Cooperative Association in the 70's and such by-laws can still be obtained (I think) from that organization in Boston now named "The ICA Group." Moreover, new state statutes for this type of cooperative were first drafted in Massachusetts and were passed into law in 1982 as Chapter 157A of the General Laws of the Commonwealth. That Mondragon-style statute was then copied with various changes in a number of other states (I have lost track).
There are a number of these Mondragon-style co-ops across the country today. Probably the biggest success story is the Community Home Health Care cooperative in the South Bronx that is now being replicated in a number of other cities by the replication project run by Steve Dawson, the executive director of the ICA for its first decade. But co-ops in general suffer a significant tax disadvantage relative to ESOPs so for larger worker-run companies, the ESOP form was more often used, particularly when ways were developed to make them more democratic, e.g., United Airlines.
Once the idea of RC attached to some measure of labor and the structure of the internal capital accounts were understood, then it was realized that professional partnerships have had essentially this structure all along. One need not travel to Mondragon or to an ICA co-op to see the idea. For instance, law partnerships might have partner capital accounts, and yet the amount of the profits or losses assigned to each partner is proportional to some measure of their "patronage" or business, not the size of their capital account.
Comment from Deborah Olson:
Most states in the US now have Limited Liability Corporation (LLC) statutes that provide a great deal of flexibility. They have the limited liability features of corporations, but not the double taxation. They provide broad flexibility for the partners or members to create almost any type of governance they wish in their operating agreements. However, in the US the tax benefits of ESOPs, particularly those available in Sub Chapter S companies often overcome the company’s desire for flexibility.
Comment from Race Mathews (borrowed from the COG Subnational discussion):
Regarding uses of state and federal employee ownership legislation and the replicability of the Mondragon model. Given that one of the uses of federal systems is to promote diversity, both federal and state employee ownership legislation may have their place. My own experience in both spheres of government suggests to me that the aim of legislation should be largely if not exclusively facilitative - i.e. That government should not have a hand-on involvement in causing individual employee ownership arrangements to be happen, but rather should focus on seeing that an appropriate legislative framework is provided, impediments removed, consciousness raised and information made available and - perhaps - transparent incentives in the form of tax breaks offered on the basis of their status as a public good. While some aspects of company and tax law may be federal prerogatives, there is still ample scope for initiatives by state legislatures.
The Mondragon experience suggests that local or regional credit unions or other mutualist financial intermediaries can have a key role in providing capital for the establishment of ESOPs that would otherwise be harder to obtain or afford. The use the Mondragon credit union, the Caja Laboral Popular, made of its slogan "savings or suitcases" in mobilizing local capital for the manufacturing, retail, financial, service and support co-operatives which now comprise the largest business group in their region and the ninth largest in Spain should be food for thought for all of us who share John Logue's perception of the need for local communities to retain some influence over how and to what extent their affairs are shaped by globalization.
Similarly, there is no reason why - say - a credit union or insurance mutual should not become a provider of business support services for employee-owned firms such as those of the Empresarial Division of the Caja Laboral Popular in the Mark I phase of Mondragon. Given that, as much in North America as in Australia, credit unions and insurance mutuals are struggling to regain the sort of relevance to the lives of their members which is needed in order to keep them out of the hands of predatory demutualisers, it may be that self-interest as much as altruism would make such an involvement attractive to them. Moreover, as the Mondragon experience makes plain, it might also open some interesting doors for them in exploring a range of other possible synergies along Basque lines with subordinate or delegated public bodies such as municipalities or regional development authorities.
Now that the growth of what is in effect a second Mondragon in Catalonia - the "Grup Empresarial Cooperativ Valencia" - has finally laid to rest the myth that Mondragon is a one-off quirk of Basque history and sociology which necessarily cannot be replicated, it should be possible to get on with the practical task of deriving from Mondragon such lessons as may be applicable to our own circumstances, and in particular to the facilitation and support services which plainly would expedite a widespread adoption of ESOPs. The antecedents of this approach and how it might be given effect is explored in more detail in two papers I have posted in the COG library, and my 1999 book "Jobs of Our Own: Building a Stakeholder Society" (Sydney, Pluto Press, and London, Comerford and Miller).
On a related matter, for all that, as Father Greaney points out, Bellocian distributism has been hijacked and prostituted in quarters ranging from social credit to the crypto-fascism of Britain's National Front, its central tenet - that ownership should be widely distributed rather than concentrated in the hands of wealthy minorities as under capitalism or of the state as advocated by some socialists - is alive and well at Mondragon. If Belloc and Chesterton had lived to see Mondragon, the evolved form of distributism that it exemplifies might well surprise them, but it is unlikely that they would be disappointed.
While not wanting to claim any but lay competence in the interpretation of papal writings on Catholic social doctrine, a recent extensive reading of what Belloc and Chesterton and their distributist associates had to say about distributism - not least in their weekly journals of the day, the "Eye-Witness", the "New Witness" and "G.K.'s Weekly" - leads me to believe that their understanding of what it meant and the measures which might be required to bring it about was more radical and far-reaching than Father Greaney's account perhaps implies.
That they were not moderates is apparent, for example, from Chesterton's "What's Wrong with the World", where he writes with great force and eloquence: "The thing to be done is nothing more or less that the distribution of the great fortunes and the great estates. ... If we are to save property, we must distribute property almost as sternly and sweepingly as did the French Revolution". Does not residual claimancy or anything else proposed by those singled out by Father Greaney as misinterpreting Catholic social teachings - notably David Ellerman, Shann Turnbull and Keith Wilde - pale by comparison with so sweeping an aspiration?
Comment from Deborah Olson:
Employee Owned Unionized Temporary Work Agency
The basic concept begins with an employee owned temporary work agency. One or more unions, or a non-profit union friendly organization, would create, organize or approach one or more temporary employment agencies with a proposal to create a temporary agency with expanded benefits and reach. Its initial goal would be to provide ongoing pension and insurance benefits to people whose services it contracts out to various employers. It would expand its programs to meet the needs of its members for other types of services, such as child and elder care, and other personal services needed by members. It would look initially within its ranks to find ways to continue to provide employment for its unemployed members, and possibly subsidize the insurance and pension benefits when members were serving each other in such areas as child and elder care. Hopefully these agencies would grow into organizations providing a variety of benefits and social interactions to help temporary workers in various aspects of their lives. This could be an innovative role for labor building on one of its oldest models.
There are some examples of this in development and operation at the low and high end of the spectrum. There is the Community Home Health Agency mentioned above, and the LLC/ESOP employee owned technology engineering and services company mentioned above. Both of these are primarily working on the level of employee owned hiring hall or employment service agency. Neither has gone to the next stage.
Now may be the best economic moment to try something like this for temporary workers, as their bargaining power has never been better. The initial union role would be to negotiate contracts with the agencies for wages, working conditions, ownership rights, and to provide multi-employer benefit plans to which they could belong. If these agencies can be organized now, and get some market share, they could become very significant benefit to workers and the labor movement during the next downturn. There are a variety of legal issues to be sorted out, but none of them seems insurmountable to me.
5. Tax Policies for Building Equity
These proposals would reduce the tax burden on low-asset individuals and households trying to build equity.
5a. Separate Labor Income and Capital Income for Income Taxation
Proposed by Alan Zundel.
First, employment income (wages, salaries, fees) and capital income (interest, dividends, capital gains) should each be treated separately in individual income tax filing, applying personal exemptions, the standard deduction, and progressive tax rates to each type of income individually instead of both together. Instead of paying taxes on the income from their savings and investments at the top rate for their labor income (currently capital income is, in effect, piled on top of labor income), they pay zero or low tax rate on capital income until it begins to grow to some predetermined size, after which tax rates gradually rise as the income rises. This benefits small savers and investors in two ways: (1) helps their nest egg grow by reducing taxes on the income from it, and (2) gives them more of an incentive to save and invest.
Second, make dividend payments tax-deductible against corporate profits. This eliminates the double-taxation of dividends, but with the separation of labor and capital incomes in the income tax (as above) it primarily benefits small savers and investors. Large capital incomes would be taxed at rates high enough to recapture (at least some of) the loss from the corporate income tax.
5b. Inheritance and Gift Taxes Based on Wealth of Recipient
Proposed by Norm Kurland, derived from Louis Kelso.
The tax rate for inheritance and gift taxes should be based on the wealth of the recipient, not the wealth of the estate. This encourages donors to spread equity ownership among heirs/recipients.
5c. End Regressive Taxation
Proposed by Alan Zundel.
In U.S. there has been a trend towards greater reliance on regressive taxes such as payroll taxes, sales taxes, gas and cigarette taxes, and so forth. Reversing this trend would make it easier for low and moderate-income individuals and households to save and to build equity.
6. Information and Education
These proposals are aimed either at generating more information on the degree of concentration or diffusion of capital ownership in order to raise awareness of the problem, or at educating people toward an ownership orientation.
6a. Tracking Concentration of Wealth
Proposed by Alan Zundel.
National government agencies (e.g., in the U.S., the Federal Reserve) and an international agency should report annually on the degree of concentration of wealth nationally and internationally.
6b. WOK: Worker Ownership Confidence Ratio
Proposed by Richard Foley.
Publicly traded companies should report to government and/or shareholders on the proportion of shares owned by employees or other stakeholders.
6c. Ownership Impact Statements
Proposed by Shann Turnbull.
Government agencies should perform Ownership Impact Statements in advance of significant actions, to estimate effects on concentrating or diffusing the ownership of wealth.
6d. Education for Ownership
Proposed by Alan Zundel.
Secondary schools should teach mandatory classes in personal financial management (debt, saving, compound interest, investing, building equity through home ownership and retirement accounts, etc.).
6e. Influence Academic Research Agendas
Proposed by Shann Turnbull.
Economists should research, study and teach about the concentration of wealth, its institutional causes and how public policies affect it. Specifically, economists need to learn about and teach how wealth concentration is created by investors getting overpaid through “surplus profits” as described in his paper 'New Strategies for Structuring Society From a Cashflow Paradigm', http://cog.kent.edu/lib/turnbull1/turnbull1.html
7. Directly Subsidized Ownership
7a. Individual Development Accounts (IDAs)
Invented by Prof. Michael Sherraden and already being tested in a national demonstration program.7
Dual account savings plans, where an employer, non-profit organization, government agency or other entity matches deposits made by low-asset savers. Accounts must be used for designated purposes such as education, starting a micro-enterprise (very small business), or down payment on first home.
7b. Universal Savings Accounts (USAs)
Proposed by Prof. Michael Sherraden, and supported by President Clinton in his last two State of the Union Addresses. Similar to IDAs, government matching deposits for low-asset citizens who start special retirement accounts.
7c. Citizens' Grubstakes
As proposed by Profs. Bruce Ackerman and Anne Alstott,8 a "grubstake" would be a one-time government grant of $80,000 (for education, starting a business, buying a home, or saving/investing for retirement) for each citizen when they come of age. It would be funded by a dedicated tax, and repaid at death by those who haven't lost it, and eventually become self-financing. They think this would be more politically feasible than any kind of guaranteed annual income.
As proposed by Terry Mollner of the Calvert Social Investment Fund, "Trusteeship Trusts" were similar in concept to Ackerman and Alstott's "grubstake" idea, but not dependent upon the federal government. State and local governments, non-profits, banks, philanthropists, professional/civic organizations and/or community groups could set up a program for any community (however defined). All that would be required would be some seed money, including some entity (perhaps state/local government) to guarantee a seed loan if necessary. Mollner also believed such a program would eventually be self-financing as initial recipients paid back their stake at death.
8. Miscellaneous
8a. Public pension systems converted into individual investment accounts (e.g., in the U.S., privatizing Social Security).
8b. Privatization of companies using employee or other stakeholder ownership.
8c. Combine co-determination with employee ownership. (Europe)
8d. Non-government agencies (NGOs, such as World Bank) persuade global corporations to extend ownership. Organizations, such as the World Bank and the International Monetary Fund, could require some percentage of employee ownership as criteria for providing loans and other financing. An example of this is the US Agency for International Development (AID) requirement of employee ownership in companies to whom it provided assistance in Egypt. (There.is more on this in the COG Transnational Employee Ownership paper.)
8e. Companies bidding for government contracts get credit for degree of employee ownership.
8f. Constitutional guarantee to right of effective access to productive property.
9.Broad Ownership as Alternative to World Bank/ IMF Structural Adjustments
Karen May, a participant in both the Homestead and Trans-National COG discussions, asked that the following ideas being discussed in the Trans-National discussion be reviewed by the Homestead discussants, as a possible future focal point of COG’s policy development efforts.
Shann Turnbull wrote an Op.Ed. piece describing OTCs as a solution for the problems presented by globalization. Deb Olson responded to Shann asking that he consider proposing a broader spectrum of ownership broadening policies, in addition to OTCs, as means of reforming globalization.
Karen May responded to Shann’s Op.Ed. piece stating that COG should propose that the World Bank and International Monetary Fund should require broadened ownership, using any number of the proposals described herein, instead of the structural adjustments they now impose on borrowers.
(To Shann Turnbull)
“If individual countries adopt COG-recommended policies, fabulous. Weshould be working in our home countries to get to that point. I have no problem with your notion of the OTC, although I do think the message needs to be simplified. But more importantly, who are you appealing to, and what exactly do you want them to do? Reinvent international accounting standards? Pass domestic legislation to incentivize the OTC? Who has the authority to institute such policies, and what (other than pure merit--wish the world operated that way!) will appeal to their self-interest? What is the point of leverage that will convince nations
to adopt such legislation?
GATT and other trade agreements, the World Bank, IMF, etc. etc, now make
a regular practice out of strong-arming borrower and trading governments to change their policies in order to reap the benefits of the multilateral agencies and agreements--a point of leverage, with a significant degree of control over domestic-level policies, all over the world. I am arguing that the debt-relief discussion has achieved a broad enough recognition that we can use it as a point of entry into the globalization debates and constituencies. The international agencies are finally RESPONDING to the outcries of injustice, and are even running scared. They know they need to respond--demonstrations are scheduled for every international finance meeting for the next year. We should not let them off the hook. And on the other side of the table, the movement folks are not offering a pragmatic alternative. I think we need a top-down and bottom-up approach; give the movement something real to propose--a PACKAGE of ownership-expanding measures, and give the global decision-makers an alternative way out.
So, bottom line, work at home, but also work on the international bodies that may be able to achieve change on a scale that could really impact the situation.
Shann agreed with Karen and supported her argument for not letting the IMF/World Bank get off the hook.
“I am providing another hopefully intellectually compelling argument for reforming their operations. The World bank should be teaching countries how to development themselves on a self-financing self-determined basis (i.e. teach them how to fish) rather than extracting value from them in the form of interest and dividend payments by providing finance (i.e.giving them fish). But before they teach them how to fish they need to show poor countries and those like my own of how to stop overpaying foreign investors which drains away economic values and foreign exchange.
There are many answers to your question as to what I want people to do. The first priority is to educate economists, politicians, citizens generally and protestors in particular, that investors are getting overpaid. This is a simple emotive message that should obtain a political mandate in all democracies. My "Globalization reform" essay provides a solid intellectual explanation of how and why investors get overpaid and so identifies a solution.
We need to establish intellectual respectability that the current dominant form of capitalism is inefficient, inequitable and non sustainable and we do not want to put up it any longer. We need simple slogans to answer the protestor chants of "What do we want?" (Stop investors getting overpaid) "When do want it?" (Now).
We want public policy influence leaders and political parties to compete for a political mandate to reform capitalism and the processes of globalisation. It is a multi-dimensional interlinked program. There are many pressure points to develop.
When the Australian government invited submissions last year on their approach to the MAI initiatives at the WTO, I suggested that they introduce an alternative initiative to establish a "world wide Community Investment Code" (CIC) as suggested in my essay on reforming globalization. I used the word "community" as a counter to my submissions 20 years ago suggesting a "World Corporate Code" which has the connotations of top down authority rather than bottom up initiatives. But what ever works is fine.”
Vic Thorpe responded to all this by agreeing that globalization is not something that can be stopped, but rather that citizen’s organizations must develop strategies to deal with increased global corporate power. He provided the EO Trans-National group with a 52 page paper he wrote for ICEM on globalization “Facing Global Power: Strategies for Global Unionism” which will be added to the COG library. Vic’s intent is to analyze the essential elements of the power shifts created by globalization and seeking to address those new imbalances of power, for which he sees worker ownership as one tool.
D. Analysis and Next Steps for COG on the Homestead Proposals
This last discussion is highly relevant to the remainder of this paper. COG has managed to generate a substantial variety of ideas on broadening ownership over its initial 18 months of funded existence.These ideas are all aimed at addressing the detrimental aspects of globalization. This same 18 months has been an historic period, as issues of global economics and finance that were once little known or understood by the public have become the subject of massive, global protests.
The next stage of our work is to sort through these proposals, along with the evidence gathered in the other COG working groups concerning which types of ownership broadening programs have been the most effective. We must then analyze the global, national and sub-national political situations to determine which policies have been most successful, which new ones seem are the most fruitful to pursue, and the most likely to get a hearing amongst policy makers.
.
1. Questions to ask as we create criteria to evaluate proposals
COG received a variety of proposals on broadening ownership. Our next step is to determine what we can and should do with them. The questions we face are:
· Which ones are worthy of an investment of more time and resources?
· Which ones are worthy of more research?
· Which ones fit COG’s mission?
· Do any of them force us to reevaluate the mission?
· Are the people sitting at the table the right people to make these decisions?
· Are there certain decisions we must make, and others that we should hold off on until
we have widened the circle of participation?
2. COG’s Mission is
“To create a coalition that promotes broadened ownership of productive capital, in order to reduce inequality of income and wealth; increase sustainable economic growth; expand opportunities for people to realize their productive and creative potential; stabilize local communities by improving living standards; and enhance the quality of life for all.”
3. Differing Priorities
Two viewpoints have emerged on which of the following is the most important in addressing this mission:
· Help regular folks get more property to improve their lives, independence, and ability to self-actualize; and
· Help regular folks gain control over corporate decision making to humanize corporate decisions, tempering profit maximization with community social, economic and environmental concerns.
These two may or may not be related. The first is a more individualistic approach. The second, a more collective approach. The first may be more politically palatable to a wider audience. The second aims at making more fundamental social change, and thus may be much more difficult to attain politically.
We need only acknowledge these differences. We need not decide between them at present. As we review the proposals, we should think about how this dichotomy in viewpoints should be addressed in our work. As a pragmatist, practitioner, idealist, and (hopefully) visionary, I (Deborah Olson) believe we should consider pursuit of some of each. We need small successes to keep us going, and we need large visions if we hope to make major changes.
While we believe broadening ownership leads to COG’s mission, we do not seem to share the same theory of governmental intervention, or necessity of redistribution to achieve broadened ownership. In the section of discussion protocol we deal with some of the problems this has caused and potential solutions.
4. Criteria for evaluating ideas
Technical Feasibility:
· If you got it done, would it work?
· Would it do what it is supposed to do, or would it have unintended consequences
that would mitigate its attractiveness?
· What research is necessary to determine if this is technically feasible?
Significance:
· If it worked, how significant would the changes be in meeting COG’s goals
and objectives?
· Does it move the system?
--(Big hit - large impact, visibility)
--(Small hit - educational, nice demonstration, keeps us noticed, maintains our momentum)
· Do smaller initiatives build to anything significant over the long run?
· Is it worth pursuing various iterations of a particular idea to get it to a point of
technical feasibility if it is not now there?
Political Feasibility:
· What is the likelihood of implementation?
a) What is the scope of proposed change?
b) Whose vested interests stand in its way?
c) Are there natural constituencies interested in the ideas enough to spend political chips on it?
d) Can such constituencies be found?
e) What is needed to reach out to those constituencies in terms that are understandable to them?
f) What has already been done to promote this idea?
g) How have those efforts been received?
h) What research is needed to determine if this idea is politically feasible?
· Size, scope and cost
a) Is it achievable?
b) How complex/simple is the idea?
c) Is there a champion for a specific project/policy initiative?
--Who has the passion to implement it?
--Does COG as an organization take it on?
--Does one of COG’s partner organizations take it on?
--Is it a joint project?
d) What context would be most supportive to attempt implementation?
e) Where could grassroots, political, financial and media support be marshaled?
f) What opposition would it face?
g) What would it cost? (money, people, other resources)
h) Who would pay for it?
i) Is there a way to make it self-sustaining?
j) What is the time frame?
k) What additional information do we need to know to determine whether it is achievable?
· What are the learnings/spin-off/replication?
a) What could we learn from this approach that we don’t know?
b) Who would be interested and why?
c) Would this approach be replicable in other settings? How much would it cost to replicate?
· What are the overall strengths and weaknesses?
· What are the necessary next steps towards implementation?
a) What key research needs to be done?
b) What information needs to be put together to enlist support?
c) What key players need to be on contacted?
5. Shortcomings of our current process
5a. Funding is needed for research, development and outreach. In order for policy makers to seriously consider our ideas they need at least two prerequisites:
· Some constituency which thinks the policies are important; and
· Some reputable, academic research to show that serious, independent people
have reviewed the idea and certify that it is worthy of consideration and will not have unintended bad consequences.
Research Funding: It is very difficult for many practitioners and academics to take the time for the detailed and in-depth work of this group without compensation. We need to create an agenda of research work, obtain funding for it, and find appropriate and qualified people to bid on the doing the research.
Outreach Staff: We need staff whose primary function is organization and maintenance of the network. In order to have meaningful discussion and strategic action around these proposals, we need staff who seek out the necessary parties to review the research, write it up in language the average person can grasp, make it available to the leaders of appropriate constituencies, arrange meetings of those leaders and researchers, and work at creating appropriate collaborations with other organizations.
5b. Discussion Protocol: Many practical people have come to the discussions and been turned off by the efforts of a few to dominate the discussions with their ideology.
· Do we need to create rules within the network to avoid that kind of badgering? Or is it more important to keep an open discussion?
· Can we keep serious participants in the discussion by creating new discussion groups?
· Do the moderators need to exert more control over participants who violate the norms of the group? If yes, what are these norms?
5c. More Focused Discussions and Classes: The Homestead discussion has been rich with citations to numerous papers. So rich, that most participants have been unable to keep up with all the information. Following are some ideas for creating more focus. These might require more moderators. Alternatively, we may be able to get funding to pay some moderators if we turn a portion of this effort into courses or symposia and offer them for college or graduate credit through various universities. This may also enable us to get more research done. We could:
· Create syllabi for specific discussions;
· Hold discussions on specific papers or books;
· Create a calendar for in-depth discussion of each of a set of the ideas we decide are worthy of pursuit, and invite speakers to run on-line symposia on these topics;
· Set up a listserv for each book or article being discussed with a moderator whose job it would be to summarize the discussion periodically for the general Homestead or COGall list;
· Set up classes on specific topics;
· Create academic competitions to write papers on topics we feel need greater research;
· Ask our existing participants to provide us with research proposals on topics we are
already discussing for submission together as part of the overall COG program.
E. Conclusions
1. Appendices B – F (below) list the research and outreach projects and priorities discussed at the COG meeting in Chicago on April 14 –15, 2000. Based on our discussion with Lance Lindblom at the Ford Foundation outlining portion of this which interests Ford, we have made a proposal to Ford to support the core COG network activities. We will need to seek funding for all other specific projects from other funders.
2. We have asked all COG participants to respond to these proposals regarding any and all items listed in the Appendices below on which they are interested in working and any sources of funding or other resources they believe may be available to pursue them.
3. We are seeking funding to hold live strategy meetings to review the proposals and findings of the COG discussion groups, with policy makers and with a broad group of constituency groups.
4. We want to expand the network on a wholesale basis to include a broader range of participant organizations. We want to differentiate the discussion groups, allowing fuller and more focused discussions to develop more thoroughly individual proposals and ideas which attract significant interest.
Appendix B. Defining and obtaining necessary research and analysis
1) In conjunction with network participants, we have determined the following research priorities:
a) Collect and commission research on the effects of ownership on all manner of social outcomes including – incomes, patterns on poverty, employment, education, democracy, environmental awareness and impact, the economic status of women and children and minority communities, health, family cohesion, birthrate, employment, voting behavior, income allocation, etc. For example, we might build on the State of Washington study, which could be replicated or expanded in Maine or Vancouver. We could also design a prototype of the type of ownership impact analysis (similar to environmental impact studies) governments could mandate as part of their requirements for loans or investment of their funds;
b) Finish the compilation of laws and regulations on employee ownership globally, and analyze which ones have had the greatest impact on fostering broadened ownership, and related economic and social impacts;
c) Study the revenue implications for governments of tax policies to encourage ownership as a substitute for redistribution and an incentive to greater productivity.
2) We want to hold an international conference of practitioners and researchers, using the final papers from our initial project providing a broad survey showing what exists and the policy ideas we have collected. We want these practitioners and researchers to review and critique the policy papers we created and help with the strategic planning for next steps around them, including development of follow-up research, demonstration projects or policy implementation. This conference can be organized and take place within 12 months of funding.
3) Some other research and development discussion topics include these:
a) David Erdal, Executive Director of Ownership Limited in the UK who has done comparative research on social impacts of co-operative ownership in two similar towns in Italy. We join his interest in seeing similar work done elsewhere.
b) David Erdal, Shann Turnbull of Australia, David Ellerman of the World Bank, Victor Thorpe of the International Chemical Workers Federation of Unions (ICEM), and Lynn Williams, former President of the United Steelworkers of America, have all responded very positively to this outline of COG’s future work.
c) Thorpe and Williams are considering running a labor discussion group on employee ownership policy and strategy on the COG web site.
d) Turnbull and Ellerman will be significant participants in our newest web based discussion group on Stakeholder Governance. We hope that group will help flesh out some of the work both have done in this area, enabling COG participants to create concrete policy proposals and demonstration projects from it.
e) Marjorie Kelly of Business Ethics plans to use the Homestead discussion report as the basis for a major portion of her September 2000 issue and to do a press release and media campaign around it. She also asked about the creation of an employee ownership mutual fund or mini stock exchange. This idea has been discussed within employee ownership circles for several years. We hope to generate a COG discussion on this topic with several of the practitioners who have tried to develop this idea. There have been stumbling blocks, but further discussion may well create a path for new developments in this area.
f) Keith Wilde, an economist for the Canadian Pension System, wrote a summary of COG’s work to date for circulation within the Canadian government.
1) The best use and obvious next steps for the 5 papers created by COG thus far is to:
a) perform the strategic analysis proposed at the end of the Homestead paper to focus on the best of the ideas proposed therein and to develop an in-depth research, writing, communication and demonstration project agenda to provide policy makers with the case for those ideas;
b) commission research on additional facts needed to create policy proposals;
c) identify champions and develop research they identify as necessary to move forward.
2) Investigate and debate the pros and cons of direct vs. trusteed ownership as used in our other proposals. Employee ownership (as organized in many different forms and countries) is trusteed. The fiduciary obligations of trusteeship have profound implications regarding how employee owners can and cannot use their economic power for non-economic purposes. Direct ownership can be atomized and ineffective and is easily subject to corruption. These issues must be reviewed and considered carefully as policy proposals are developed.
3) Do a systematic examination of the various employee ownership structures that have been presented during the COG discussions. These models include the American ESOP model; the British “common ownership” model (e.g., Scott Bader); the Mondragon cooperative model with internal accounts (popularized in the US by the Industrial Cooperative Association); individual employee share ownership like that generally used in privatization in the United Kingdom and Russia; broad-based stock options, stock appreciation rights and phantom stock plans which mirror the change in value of the underlying stock without actual ownership (though they may become ownership); hybrid models which combine two or more of the above; and new models using limited liability corporations, etc..
4) Given the rapid growth of broad-based stock options extending to most or all employees of the firm (rather than just management) in the United States and the controversy swirling around them in the Department of Labor, a policy paper may be useful on how to modify legal and accounting practices to avoid abuse and to make them a more reliable form of employee ownership and wealth creation.
Appendix D. Developing Implementation Strategies
1) Run focus groups to vet the ideas with local and national policy makers to improve their practical appeal.
2) Hold a major invitation-only policy conference in Washington, DC in 24 months to present research results and policy ideas and to obtain feedback on the political feasibility of the policy proposals.
3) Develop more precise models, including projected economic impact, of SQPQ, OTC’s, grubstakes, and other ideas developed in the Homestead discussion for discussion with policy makers.
4) Find or organize focus groups of local, regional and national policy makers to review new policy proposals generated by the Homestead discussion as well as those existing examples compiled via the sub-national and national papers. Present data on how the existing policies have worked, including the impact research, and get feedback on the political feasibility of promising new and existing proposals.
5) Organize one or more high-level policy conference(s) reporting on the policy proposals and the outcomes of the social and economic research on the effects of broad ownership. Hire a consulting firm with the necessary contacts to ensure that high level folks come to the conference and are properly briefed.
Appendix E. Foster demonstration projects
An important function of our network is bringing together like-minded people, with diverse or convergent expertise and needs, and to facilitate their joint work. Their joint endeavors may include research, policy development or organization of demonstration projects. COG needs staff resources to co-ordinate these activities and to help them find resources.
Examples include:
1) We’d like to find financial and technical resources for a project to help an existing community economic education center in Mexico develop its ability to serve as a Mondragon-like co-operative business incubator.
2) Participants from British Columbia and Maine are interested in pursuing the Stock Quid Pro Quo for government largesse (SQPQ) proposals with policy makers.
3) The council for Hometown Jobs and Growth is interested in working with us to design and implement a community and/or consumer trust for a company with which they are working, to serve as a model similar to the Shann Turnbull proposal of Ownership Transfer Corporations (OTCs).
4) Organize a graduate school of management focusing on employee owned and participative firms. Given the national dispersal of potential students for this program, we would explore the possibility of running on-line courses (a non-profit version of the University of Phoenix) together with having the courses held in a “brick and mortar” institution.
5) Other examples of network assistance includes: helping people from the following countries share policy ideas which are likely to be implemented: We provided Swedish labor venture fund information to Chileans, Canadian labor venture fund legislation to Swedes, Irish employee ownership legislation to the Swedes, and provided Australian labor organizations information about Canadian facilities owned by related owners.
6) We organized the April 14-15 COG meeting in Chicago where the participants met one another and worked on policy and research papers together. There were participants from Mexico, Canada, Singapore and the US. With travel funds, we would have participation from very active and useful participants from Australia, India, Europe and likely others. We have several foundations that may be interested in helping us bring participants together for meetings to discuss research, policy proposals and experiments.
Appendix F. Disseminating research results, policy proposals and information on demonstration projects
1) Develop a multi-media educational outreach effort to get the idea that broad ownership is a fundamental component of global economic democracy onto the radar screen of the national and international media and policy makers
2) Publish our papers as a book.
3) Get summaries of our research results and policy ideas published in policy and popular publications.
4) Use the Internet to disseminate the short versions of our papers to constituency groups.
5) Develop a speakers bureau and send our staff to speak at conferences and events.
6) Create press packages with research results and examples of demonstration projects and provide them to the press and influential policy writers and policy makers.
7) Develop contacts with television and movie media and, such as The Working Group and Hedrick Smith Productions, to provide contents such as ownership stories for dramatization or as news features. (There is a lot of drama involved in saving a small town with an employee buyout, etc.)
8) Partner w/ “Yes” magazine and “Business Ethics” - Business Ethics is about to feature the outcome of our Homestead discussion in its September 2000 issue.
9) Create content for public access TV.
10) Forward the “Uprovisa” video to PBS and cable.
11) Develop media slogan, PR strategy and simple description of the COG mission. Some ideas generated on this subject at our Chicago conference included:
a) formulate ideas to appeal to the values of those in power;
b) consider the different strategies of Singapore vs. Brazil – D. Korten’s books;
c) use focus groups to frame the message;
d) consider framing the issue as
-“right to vote” in corporations as corporations become the new world powers; or
- “seduced by wealth vs. up-close ownership” or
- the values of Singapore – performance, growth, productivity and speed vs. the needs of democracy
- ownership is power, when combined with knowledge of long term self-interest
12) Develop a video lending library of employee ownership stories, such as those of Mondragon, Uprovisa, Sharpsville Quality Products, Algoma Steel in Canada, Scott-Bader, etc. Get permission to distribute these and distribute them widely with texts to explain how these examples are relevant as examples of what might be more general solutions to the problem of maintaining communities in a global economy.
13) Hire a blue ribbon panel to provide political feasibility analysis to proposals generated by COG and publicize the outcome. Invite the blue ribbon panel to the high-level policy conference.
14) Become a publisher of both scholarly and popular publications on ownership policy and practices, and their economic and social impacts. Develop distribution channels, in all media, for these ideas and data.
15) Take over an existing policy journal and focus it on our issues.
16) In conjunction with (or following the model of) NCEO develop relationships with researchers where they do the technical research and publish in academic journals and we get the right to first publication in all non-technical media.
17) Work with EFES, NCEO and GEO on their global employee ownership database project, to the extent that COG as a non-profit entities is able to participate.
C:/msofc/wwrd/cog/Homestead 10 01 00 tb and dgo final.wpd
*Professor of Political Science, University of Nevada.
++Attorney at Law in Detroit, MI, “of counsel” with Jackier, Gould, Bean, Upfal & Eizelman, P.C. and Project Coordinator of COG.
1“Comments” sections in this paper are not necessarily in the words of the commentator, all have been edited and some have been paraphrased.
2 Shann Turnbull, Democratizing the wealth of nations (Sydney, Australia: The Company Directors Association of Australia Limited, 1975); C.S. Shann Turnbull, "Another America," in Mainstreet Capitalism: Essays on Broadening Share Ownership in America and Britain, ed. Stuart M. Speiser (New York: New Horizons Press of the Council on International and Public Affairs, 1988), pp.107-122; C.S. Shann Turnbull, "Socialising Capitalism," in Equitable Capitalism: Promoting Economic Opportunity Through Broader Capital Ownership, ed. Stuart M. Speiser (New York: New Horizons Press, 1991), pp 97-113.
3 Most co-operative fail because they use unitary boards. A condition precedent for sustain ability is a division of power internally to create internal political markets for control rather than through the stock market as explained by Shann Turnbull in his article ‘The competitive advantages of stakeholder mutuals’, refer to COG virtual library http://cog.kent.edu/lib/Turnbull7/StkMut.htm. The control and incentive architecture of Mondragón firms was custom designed according to the nature of both their activities and their principal stakeholders. The resulting unique control arrangements and outstanding performance supports the hypothesis that the structure of governance is a determinant of sustainable competitive advantages. See P. Bernstein, Workplace democratization: Its internal dynamics (New Brunswick, New Jersey: Transaction Books, 1980); also to P. Bernstein, Guidelines for the design of economic feedback systems (Washington, DC: Office of Technical Assistance, Economic Development Administration, US. Department of Commerce, October 1978).
4 This is a slightly edited version of the proposal contributed by Itil Asmon.
5 Norman G. Kurland, "Beyond ESOP: Steps toward tax justice," in Curing World Poverty: The New Role of Property, ed. John H. Miller (St. Louis, Missouri: Social Justice Review in collaboration with the Center for Economic and Social Justice, 1994), pp. 151-181.
6 Robert Ashford and Rodney Shakespeare, Binary Economics: The New Paradigm (New York: University Press of America, 1999).
7 Michael Sherraden, Assets and the Poor: A New American Welfare Policy (Armonk, NY: M.E. Sharpe, Inc., 1991); Michael Sherraden et al, Saving Patterns in IDA Programs (St. Louis: Center for Social Development of George Warren Brown School of Social Work, Washington Univ. in St. Louis, Jan. 2000).
8 Bruce Ackerman and Anne Alstott, The Stakeholder Society (New Haven: Yale Univ. Press, 1999).