This is a SECOND DRAFT of a paper
being prepared for the Ford Foundation. Ford has provided funding to establish
the COG Virtual Conference Center as a forum which can facilitate an ongoing
discussion around a number of policy discussion topics. These discussions were
initiated in 1999 and have continued throughout 2000. This paper is related
to the policy discussion focused on the use of employee ownership in privatization.
A previous draft was presented at the COG meeting on April 14-15, 2000. The
comments of that meeting’s participants have been incorporated into this second
draft. Additional comments emerging from the discussion carried on at the listserv,
eopriv@cog.kent.edu, will be incorporated into a third version.
YOUR INPUT IS REQUESTED. PLEASE SEND YOUR FEEDBACK AND ADDITIONAL IDEAS TO eopriv@cog.kent.edu.
EMPLOYEE OWNERSHIP IN PRIVATIZATION
Dan Bell, September 21, 2000
1. INTRODUCTION
An international economic development consultant
once described a seminar on privatization which he had attended in Prague. The
presenters were from an U.S. consulting firm which had won several USAID contracts
to advise governments on privatization policy. The audience were government
representatives from several of the states which emerged out of the former Yugoslavia.
The presenters explained all of the steps involved in taking an enterprise from
state ownership to private ownership and concluded by saying that they could
help with each of these steps. When they opened up the floor for questions,
one of the visiting officials said that he understood their model perfectly:
convert the enterprise into a corporation and seek outside investors to purchase
the shares. But in the former Yugoslavia, he continued, workers think they
own their enterprises. And worst yet, they have official documents from the
former communist government which appear to be legal titles. Before his government
could begin the process of privatization, they were going to need to regain
control over these enterprises. The consultant’s response was, “And sir, I can
help you overcome that problem too!”
Communism idealized worker ownership of the means
of production. The transitional socialist state was supposed to fade away as
workers no longer needed its direction. Due to the rhetoric, it was not difficult
for certain bureaucrats responsible for privatization to make the dishonest
argument that privatization through employee ownership was nothing more than
a return to communism. Anatoly Chubais, the principal architect of Russian privatization,
once refused to visit what was alleged to be a successful enterprise which had
privatized through employee ownership, explaining that he had already been to
a collective farm.
Labor union representatives often view privatization
simply as a government’s way of bypassing its contractual obligations to the
workers providing a state-sponsored service. Employee ownership is seen as a
token gesture to bribe its membership into accepting a privatization which could
eventually lead to the elimination of their jobs.
And yet despite pervasive negative views of employee
ownership in privatization, many successful cases have emerged over the years.
This paper will argue that, while privatization may not always be the best course
of action, where it is inevitable, employee ownership should be considered seriously.
A number of different privatization scenarios are reviewed. The paper narrows
its focus to those situations where privatization can be a good opportunity
for broadening ownership. Only where employee ownership in privatization will
lead to this goal should it be recommended.
To successfully privatize an enterprise through
employee ownership, the state must be willing to sell, the employees must be
interested in buying, the managers must be competent, there must be a market
for its products or services, the operation must be competitive, labor-management
cooperation must be achievable, and sufficient financing should be available.
The paper goes on to recommend ways in which these
necessary components of success can be enhanced in a given privatization situation.
The challenges as well as the recommendations are the fruit of a year of discussion
facilitated by the Capital Ownership Group and funded by the Ford Foundation.
The discussion included both professionals and novices with direct experience
in privatization from over twenty countries around the world.
2. SCOPE AND TERMS
There are a wide variety of situations which exist
under which the use of employee ownership is considered in the process of privatization
of state-owned services and enterprises. These include the political-economic
context, the origins of state ownership, the position taken by the employees,
and the competing interests involved. How employee ownership is used also varies.
Political-economic contexts can be sorted into
at least three different groupings: (1) those where government officials are
clearly held accountable to a voting population, the rule of law is effective
and a competitive market economy exists; (2) those where governmental accountability
is weak, cronyism is common, and an elite group play a dominant role in a quasi-market
economy; and (3) those where there is no governmental accountability, corruption
is widespread, and most fundamental elements of a competitive market economy
are absent or ineffective. The dynamics of an isolated sale of a state enterprise
in a working market economy is a completely different situation from a sale
occurring in the midst of massive privatization, such as what has been going
on in Central and Eastern Europe.
The origins of state ownership may fall into one
of the following four categories: (1) normal government service; (2) nationalized
community asset; (3) state-incubated enterprise; and (4) state-institutionalized
enterprise.
A normal government service is one which, in the
view of the majority, should be available to all, but requires a taxpayer subsidy.
If left to market signals, such a service would only be available to a subgroup
with sufficient income to pay a price above or equal to marginal cost. Historical
examples have included education, communications and utilities.
The copper industry in Chile is an example of a
profit-generating community asset which was nationalized. The production of
copper required a combination of an existing national resource and an investment
for its mining. The representatives of the Chilean people decided that the return
to those making the mining investment was disproportionate to the return to
those contributing the national resource.
The Chilean sugar and salmon industries were state-incubated
enterprises. The financial power of the state was used to fill an entrepreneurial
void and create a profit making activity. The early return to the state came
in the form of job creation, import substitution and export revenue. Once these
enterprises were capable of operating profitably on their own, the state’s goals
could be continued without prolonged state ownership.
The final category are those enterprises and services
which were taken over or created by the state to institutionalize its ability
to direct economic activity toward the satisfaction of the majority of the population’s
consumer needs through central planning.
Employees can find themselves (1) proactively initiating
the privatization of their state run enterprise or service; (2) reactively taking
advantage of an unsolicited privatization effort initiated by the state; or
(3) attempting to stop such a privatization effort. Employee ownership can be
a tool for either of the first two options.
Competing interests in the privatization of a state
enterprise or service include: (1) the government; (2) the community; (3) the
employees; and (4) external profit seekers.
The state’s interests could include an effort to
transfer the politically difficult task of terminating employment or reducing
the standard of living of state employees. It could also be seeking to reduce
state expenditures where taxpayers are subsidizing an activity. The state may
believe that the quality and cost of the product or service will be improved
under private management (without reducing employment and living standards).
The community’s interests include continued access
to the service or product provided at a lower cost and a higher quality. The
community is also interested in protection of the environment, local employment
and its tax base.
Employees’ interests include the maintenance or
improvement in their standard of living, career stability and the opportunity
to have greater control over the operations of their workplace.
External profit seekers are interested in gaining
a return from their contribution to the enterprise which is greater than what
they could gain by redirecting their contribution elsewhere. Employees can take
on the dual role of profit seeker as well. Where the opportunity for profit
is greater than an employee’s other interest in the enterprise, that employee
may act no differently than any other external profit seeker. Where such an
opportunity does not exist, the employee would act as an internal profit seeker,
one who is not indifferent to the reduction or elimination of the enterprise’s
operations.
How employee ownership is used also influences
whether it will be a transitional form of ownership or a lasting one. When the
rules of privatization discourage an organized block of employee shareholders
from emerging, it is less likely that employees will establish an effective
voice in governing their enterprise. Where acquisition of shares comes at below
market prices and the resale of shares is not restricted, employees may also
succumb to the temptation of a quick windfall. Such practices allow a privatization
agency opposed to employee ownership to undermine a politically mandated employee
ownership option. Employee ownership is used symbolically to diffuse worker
opposition to privatization.
3. BROADENING OWNERSHIP THROUGH PRIVATIZATION
Those who support the general mission of COG, broadening
ownership of productive capital to those who have little or no capital, can
certainly hold differing opinions on the advantages and disadvantages of privatizing
state-owned enterprises and government services. For the scope of this paper,
we are more interested in which privatization situations are good opportunities
for broadening ownership to employees and others with little or no capital.
Where such opportunities exist, what can be done to facilitate this goal?
In the United States, it is estimated that 1% of
the population owns 50% of the productive assets, 5% own 90%, and 15% own 100%.
This leaves 85% of the population without any productive assets. Similar statistics
can be generated for other parts of the world. It is to this final group in
each region, that we seek to broaden ownership. We will refer to this group
as the capital-less, meaning those with little or no productive capital.
The benefits of ownership include a say in how
a productive asset is managed and the enjoyment of the benefits produced by
that asset. Typically, owners enjoy these benefits in the form of cash, either
as dividends or the proceeds of the sale of their ownership interest. To some
extent, the entire population can participate in the ownership of a state enterprise
or service. As citizens, we have a say in selecting the representatives who
appoint the managers who operate state services. We also enjoy the benefits
of the state service, whether this is driving on a public road or getting an
immunization shot at a public clinic. Our net benefit would be determined by
subtracting out the taxes and service fees we paid.
As consumers, our input is expressed through our
decision to purchase a service from a private provider at the market price;
however, this input is only meaningful if we have the means to pay the market
price. We must be able to choose between yes and no. In theory, our net benefit
is zero because we either pay a market price equal to the value of the benefit
received, or we pay nothing and receive nothing.
By framing the issue this way, we can now ask the
question, will the privatization of a specific state service or enterprise broaden
or restrict the ownership of the capital-less? Answering this question goes
beyond the scope of this paper. The privatization situations we will consider
here will be based on the assumption that either (1) the capital-less are not
adversely affected by them, or (2) the option of preventing the privatization
is not realistic. This leaves us with the question: would the use of employee
ownership in a particular privatization situation contribute to the goal of
broadening ownership to the capital-less?
The capital-less can be divided into two groups:
employees of the enterprise in question or non-employees. The issue of direct
benefits which the capital-less receive from state enterprises and services
was already discussed above. What about the financial interest of the non-employees?
Where the operations of a state enterprise or service (meeting the above assumptions)
require a continuous taxpayer subsidy, the interest of the non-employees could
be summed up as the liquidation value of the assets less the cost of shutting
down the operation. From the taxpayer’s perspective, these shut down costs include
whatever additional costs the government will incur due to the resulting unemployment
and loss of tax revenue. Assuming this net value is positive, the taxpayers
may be compensated for this positive value either through the proceeds of the
privatization transaction, or the future stream of tax revenue coming from the
successor enterprise.
Where an enterprise or state service actually contributes
a net profit to the taxpayers in addition to the normal tax revenues collected,
a value can be assigned to this income stream and the taxpayers can be compensated,
again, through the proceeds of the privatization transaction.
The rest of this paper will focus on the use of
a privatization situation for broadening ownership to the capital-less employees
of the state enterprises or services involved.
4. WHEN DOES EMPLOYEE OWNERSHIP MAKE SENSE?
Employee ownership only meets the goal of broadening
ownership of productive capital when those employee-owned businesses are operated
in a way that maintains and increases their value. As a job preservation strategy,
employee ownership can keep a privatized enterprise operating even though the
business does not produce a sufficient return to attract an investor. Where
employee ownership can make a privatized business no less viable, and perhaps
more viable, than the absence of employee ownership, it makes sense. Thus, it
is important to examine the factors that determine the feasibility of employees
succeeding at privatizing their enterprise as a viable business.
4.1 Willingness of the state to sell the enterprise or service to the employees
When those who control the privatization process
have eliminated employee ownership as an option, it is a significant challenge
for the employees to reverse the policy. In Russia, some employees have had
some success by simply taking over their enterprise by force. In countries where
the rule of law is more developed, law suits and political campaigns may also
succeed; nevertheless, such successes would be the exception, not the rule.
Why would a government agency responsible for privatization be unwilling to
sell a state enterprise to its employees?
Personnel within the agency may have a vested interest
in selling assets cheap, almost at
throw away prices, to associates within the private
sector. This is likely to happen in countries where cronyism or widespread corruption
are common. There also may exist an ideological prejudice against the working
class, in countries where an elite group dominates the economy.
In a country that lacks a well developed market,
selling to employees may just result in transferring ownership from a non market
based government company to a non market based private company. If the private
company continues to operate inefficiently, covering continuing losses with
additional debt or the liquidation of excess assets, privatization will not
improve the situation. This was part of the problem in Russia. Where economic
reformers are attempting to engineer a market economy, they may also be influenced
by the misguided assumption that concentrating ownership into the hands of fewer
decision makers will speed economic growth. Some confuse employee ownership
with socialism.
Even where governmental accountability and a competitive
market economy exist, a privatization agency may resist a sale to employees.
It may be interested in quick cash proceeds or it may believe that the employees
are not as capable as an alternative buyer to continue making the service available
to the public at the highest quality and lowest cost. It may believe that the
employees will fail and the state will be drawn back in to the situation.
4.2 Employee interest in becoming owners
When employees own a significant piece of their
company, have opportunities to contribute proposals for improving its operations,
and participate in ownership training that helps them understand their business,
such employee-owned companies outperform the traditionally-owned competition.
This may be a crucial factor when the motive for privatization is a state enterprise’s
inefficient operation. If employees are forced to become owners against their
will, the new private enterprise could be handicapped from the start.
Why would employees not be interested in ownership?
Where the rule of law and a working market economy are absent, employees, just
like other potential entrepreneurs, may not believe ownership has anything to
offer them. They may be suspicious of the private market. If there is no effective
enforcement of their ownership rights and if operating a business subjects them
to pressures from organized crime for payoffs, this belief could be realistic.
Fear of risk is another important factor. In political-economic
contexts where either a small elite or the government has always controlled
everything, an attitude of dependency and lack of self confidence can permeate
the working class.
Realism could be the key factor. It may be clear
that the enterprise or service has only survived to date because of taxpayer
subsidies. The current level of wages and benefits may not be sustainable without
the public funds.
Even where the rule of law and good market conditions
exist, employees may not have the resources to effectively explore the option
of employee ownership as a response to a privatization opportunity. They may
lack the professional support to explore the situation, or the financial means
to pay for such support. In some cases, employees may simply lack the knowledge
that employee ownership is even an option.
Unions which represent employees may find themselves
divided in their view. They may not want to be organizing an employee bid at
the same time that they are running a campaign to stop the privatization completely.
Or, in the case of unions representing federal employees, they may not have
a strong incentive to get involved in an employee buyout, because they cannot
represent employees in the private sector.
4.3 Competent management
Employee-owned businesses, like any other, need
people capable of selling their product or service, organizing the operation
effectively to control costs and ensure quality, and managing their financial
affairs to make sure cash is available to pay bills when needed.
Where a market economy was absent previously, few
managers have had the opportunity to deal with the kinds of issues they will
be faced with when running a private company. The supply of qualified managers
is tight and such people will go where they can be highly paid. Where the newly
privatized firm is forced to either reduce or cap the wage and benefit package,
workers may resent giving their managers a competitive compensation package.
Where the rule of law is weak or non-existent,
another difficulty is finding managers who will work on behalf of the interests
of the shareholders, both employees and outsiders. Managers do not find themselves
being held accountable to anyone and this provides an enormous opportunity to
use the enterprise’s assets for personal gain.
Even in countries where the rule of law and market
economy are well developed, obtaining competent management is a challenge. Those
who have been managing a public entity may be resistant to turning over control
to others with more experience in the private sector.
4.4 Available market for the product or service
The need for a market is probably the biggest challenge
faced by employees privatizing their enterprise. No matter how well-managed
a company is, if no one is willing or able to buy its products or services at
a price that can sustain the standard of living of its employees, it will fail.
If the state’s motive for privatizing a service
or enterprise is because it is a drain on the budget, it is likely that the
private demand at a market price will be lower than what the state was supplying.
The newly privatized company will only be selling to that segment of the previous
customers who can afford to pay. A smaller market will result in pressure to
reduce the level of employment.
Where an entire country is going through a transition
to a market economy, general economic conditions could be such that the domestic
market for a newly privatized company may have shrunk. Foreign competitors may
be taking a significant share of a market which is otherwise declining due to
a drop in consumer income. The ability to sell to the export market may be inhibited
by the inability, whether real or perceived, to match international quality
standards.
Where the rule of law is weak, entry into new and
potentially profitable markets may be restricted by gatekeepers such as government
bureaucrats with licensing authority or organized crime bosses.
4.5 Competitive operation
The state of the equipment, the level of technology,
and the efficiency with which these are operated, all influence the ability
of a company to produce a product or service at a competitive price and level
of quality. Access to quality inputs, whether raw materials, skilled labor or
energy, at competitive prices is also important.
Where a centrally-planned economy has been dismantled,
established supplier relationships are often in disarray. Higher skilled employees
may find they are much freer to change positions and could be attracted away
by other companies in more lucrative activities. Years of isolation from the
West may have left the equipment and technology unsuitable for producing for
the international market. Energy sources may now be controlled by private monopolies
that increase prices from a government subsidized level to a premium high.
In countries where state companies were created
for the purpose of import substitution, the simultaneous removal of trade protections
may not leave enough time for an uncompetitive operation to make the necessary
adjustments before being swamped by foreign competition. On the other hand,
where the state filled the initial entrepreneurial role of creating a new industry,
the newly privatized firm may find itself in a highly competitive position.
4.6 Labor management cooperation
Perhaps the greatest asset which employee ownership
can bring to the privatization process is labor management cooperation. The
newly privatized company can no longer count on the taxpayers’ deep pockets
to cover its losses. External profit seekers will seek to eliminate losses by
reducing the standard of living of their employees while increasing the productivity
demands. This is a certain recipe for labor strife.
Wage concessions may be an unavoidable part of
the equation for a newly privatized firm. And yet, without a strong healthy
working relationship between the workforce and the company’s leadership, many
of the necessary changes and improvements may never be completely implemented.
Where employee ownership provides workers with a significant enough stake in
the company’s future value, these wage concessions can be reinterpreted as wage
investments. Without successful labor-management cooperation, even where employees
are owners, the promise of future wealth will sound hollow.
4.7 Financing acquisition, working capital and growth
Privatizing a state enterprise or service requires
financing for three key needs. The first is the value of the assets which the
taxpayers are turning over to new owners. The second is the cash needed to pay
bills during the long period between start up and collection of payments from
customers. When the entity was simply a subdivision of the state, it may not
have needed to concern itself with working capital. Strategic development is
the third financing need. Many newly privatized companies will need to upgrade
equipment, acquire more recent technology, develop new products and services,
and find new markets. These changes will fuel the growth that increases the
value of the productive assets which the employees are acquiring.
In countries where the rule of law is weak and
the economy is dominated by an elite group, a monopoly on capital credit generally
leaves employees in a poor position to find reasonably-priced financing. Where
the government favors employee ownership, it may be able to extend seller financing
to the employees, i.e., accept a note in lieu of cash; however, the government
probably lacks the resources to lend the additional cash needed for working
capital and growth. The standard of living in less-developed countries also
limits the ability of employees to contribute sweat equity in the form of reduced
wages and benefits.
5. WHAT IS TO BE DONE?
While not every state service or enterprise should
be privatized, where privatization is inevitable, capital-less employees should
have a fair opportunity to create an employee-owned company that allows them
to broaden their ownership of capital and gain a greater voice in shaping the
destiny of their workplace. The success of such undertaking rests on overcoming
a multitude of challenges as described above. Who can play a role in meeting
these challenges?
International donor and lending institutions, national
governments, regional credit institutions, regional technical assistance organizations,
labor organizations and employees themselves, all can make a difference.
5.1 Overcoming the unwillingness of the privatization agency to consider
an employee bid
Privatization agency decision makers opposed to
employee ownership can be categorized as either those using their position for
personal gain or those sincerely acting in the public interest. Where the public
servants are not serving the public, the options are to (1) remove them, (2)
force them to act appropriately, or (3) collaborate with them. Where the decision
makers are trying to do the right thing, two possible strategies are education
and helping to remove external pressures which control their actions.
The Russians have a saying: cheloveka nyet,
problemy nyet – remove the troublemaker and the problem disappears. Where
a rule of law exists, exposing and prosecuting corruption may be an effective
way of dealing with bad public servants. Where democratic elections and a free
press exist, the voters themselves may be able to put pressure on elected officials
to fire corrupt bureaucrats. More often than not, though, where corruption is
wide spread, entrenched bureaucrats may be hard to remove.
Where the players cannot be changed, the next option
is to try and create rules of the game which put constraints on their ability
to misbehave. Forcing transparency upon the privatization bidding process can
help. Also lengthening the time frame of the process of privatizing an enterprise
and informing the employees and the public early in the process will allow the
proponents of an employee bid to get organized rather than accepting a fait
accompli. Organized labor can also form coalitions that prepare themselves
in general to deal with privatization opportunities in order to be ready when
situations emerge.
In some countries, changing the rules of the game
may be unrealistic. Then the final option is to build a relationship of trust
with the entrenched bureaucrat and identify ways in which employee ownership
can be in his or her self interest.
Many people in privatization agencies truly want
to do what they believe is best for their community. In some cases, they may
not personally be against employee ownership, but they may be under pressure
from transnational actors who hold some leverage. For example, the International
Monetary Fund, the World Bank and the US Agency for International Development
all provide funds that can facilitate economic development. Employees of these
agencies sometimes impose their own views about the “right way” to privatize
and make their funding contingent upon conformance. In these cases, convincing
these international actors that employee groups can be qualified bidders may
can help, as well as organizing political pressure on them.
Education can be very important for privatization
agency personnel. They need to be made aware of the full process and impact
of privatizing an enterprise. Some view their task as narrowly as simply transferring
assets out of the state’s hands, without any concern for how those assets are
used subsequently. Some have unrealistic expectations of the intentions of buyers
to transform the enterprise into an entity that contributes to the economic
well-being of their community. They may be ignoring the economic, social and
political costs of throwing the fate of thousands of employees into the hands
of a profit-seeking investor.
Many privatization agents simply have not been
exposed to the real world of employee ownership. Well-targeted study tours to
visit successful employee owned companies, both abroad and in their own country,
can help to dispel unwarranted prejudices.
5.2 Building employee interest
It is not surprising that many workers are resistant
to the idea of seeing their company move from state ownership to employee ownership.
Part of this resistance can be attributed to objections they may have about
private ownership in general, but some may also be simple disbelief. To build
employee interest, one must overcome both ideological objections and personal
fears. In turn, to overcome personal fears, tools and resources must be available
to make a successful outcome realistic.
One ideological objection to privatization is the
belief that the nation’s patrimonial assets are being taken away from the community.
Workers who are comfortable with a socialist way of thinking may feel strongly
that the means of production should be controlled by the community, not distant
investors. Employee ownership, to the contrary, anchors the national industrial
jewels in local communities. While outside buyers may plan to move the economic
activity away, employee owners are part of the local community.
Organized labor may object to privatization because
it is often done in a way that weakens their ability to protect the rights of
their membership. Laws that govern labor relations in state enterprises may
not apply to private companies and past promises of job security and benefits
may not be honored by the ownership successors. Showing union leaders models
of employee owned enterprises where labor leaders continue to play an important
role can help deal with the question: how do we bargain with ourselves? Labor
leaders can benefit from understanding the advantages and disadvantages of a
broader set of scenarios than simple status quo or sale to an outsider. Building
a contingency plan around an employee bid can help them prevent a worse outcome
if the fight to stop the privatization fails. Unions need to figure out ways
to simultaneously prepare for an employee purchase at the same time that they
are campaigning to stop any sale.
In addition to the discussions about whether privatization
is good or bad, individual workers have fears about what will happen to them
personally. Proponents of employee ownership in privatization need to listen
to workers express these fears early on before pushing the privatization process
forward. Upon identifying these fears, strategies for deal with them need to
be included in the plan. Educating employees about where employee ownership
has worked in privatization can go a long way. Also making them aware of the
assistance and structures available to help them succeed will reduce some concerns.
Technical assistance programs designed to educate
employees and organize them as proactive agents in the buyout process are important.
Funding must be made available for prefeasibility studies which explore legitimate
concerns and explain how their firm will succeed as a private employee-owned
enterprise.
Employee fears of failure without the deep pockets
of the state can be softened if they know there is a fund set up to guarantee
no first year layoffs. Procurement contracts from the state to guarantee a minimal
level of production can help. And the establishment of a national credit agency
specifically for enterprises which were previously on the state budget can ease
concerns about not having a deep pocket.
Finally, helping employees build connections to
the political powers responsible for their future can open up lines of communication
and build trust. Employees must sense that the government is sincere in its
willingness to accept the long term challenge of seeing that they have income
security.
5.3 Developing competent management
A large part of the rationale for privatizing a
state enterprise is the conviction that the state does not manage it as well
as private owners would. The logical conclusion, then, is that original management
is inadequate and either needs to be replaced or assisted. Where an entire economy
is moving from state planning to market conditions, this challenge may be much
more acute.
While the original managers should not be dismissed
without review, it seems appropriate that their permanence in their positions
not be taken as an a priori either. A reasonable amount of time should
be dedicated to reviewing a number of management options including that of retaining
current management.
In addition to the standard set of management skills
(sales, finance, operations), values consistent with the ownership culture of
an employee-owned company should be identified and used to screen candidates.
Where corruption is widespread, another criterion may be the personal financial
position of the top manager. Some advisors have even joked that one needs to
find someone who has already stolen enough previously, that they are now willing
to focus on making the company successful.
Another challenge for attracting good managers
to employee-owned companies is financial incentive. If the managers’ stake is
not sufficiently large, adding value to the shares of all the stockholders may
not be an important enough priority for them. Designing an incentive strategy
which is generous to managers who perform well for the benefit of all is superior
to high salaries which drain much needed working capital and do not hold top
management accountable.
In transition economies with very limited pools
of ready-made managers, there will be some developmental needs. One way to address
this is to create a matrix of all of the relevant skill sets. Not only can the
matrix be used to assist in the selection process, it can also serve as a diagnostic
tool to assess management developmental needs. Training resources to strengthen
each skill set in the matrix can be systematically identified.
Privatized enterprises struggling to survive under
unfamiliar market conditions do not have the luxury of waiting for their managers
to gain sufficient market experience. During the first one to two years, these
companies would benefit from the assistance of short term experienced managers.
To make such people available, the privatization agency could establish a management
intervention team which supported several companies at a time, or it could subcontract
this task out to a network of employee ownership and turnaround managers. The
cost for this could be rolled into the overall long term acquisition financing.
A lower cost alternative would be to bring networks
of newly privatized enterprises together on a regular basis for in depth roundtable
discussions. The group could share experiences and concerns with each other
and also benefit from the input of a few experienced managers. The Internet
can also serve as a networking tool; for example, a closed list serv which allows
a select group of managers to query each other about periodic challenges.
Oversight of management is another significant
challenge. The role of the board of directors is an important check on management.
Employee owners are not normally equipped with the typical board member skills
needed to review management’s operation of their company. Over time, this can
change with the proper training. The natural divisions of opinion between management
and labor can be more successfully resolved with the assistance of a mutually-selected
outside board member with the power to intervene.
A transition board can be a good idea as well;
one that serves as a guardian of the employee owners’ interests until they are
ready to play a more active role responsibly. Such a board may also be important
for assuring that commitments made to the privatization agency about the continued
use of the assets to benefit the local community are met.
5.4 Creating a viable market
Enterprises facing privatization sometimes find
themselves without sufficient demand for their product or service to support
their operations at full capacity. Prior to moving forward with the privatization
process, a prefeasibility study should be conducted which includes a realistic
forecast in order to measure the size of the problem. The study should also
look at alternative services and markets which can fill the gap.
Where a reduction in demand is due to the inability
of former consumers to continue their consumption at the market price, this
demand can be shored up through either the distribution of vouchers to the consumers
or subsidies to the enterprise. Vouchers allow the enterprise to charge market
prices and a subsidy would allow the enterprise to lower its price to attract
more consumption. A third way to maintain the market is for the government to
guarantee a minimum level of procurement for a transitional period.
If the enterprise is expected to lose customers
to new competition, one possible method of building customer loyalty is to provide
equity in the new enterprise to the consumer group itself through a Consumer
Stock Ownership Plan (CSOP).
For the long term, the company’s products or services
are going to have to compete in the market. This will require that they be made
attractive to the consumer. Where management has not had to make products marketable
before, some investment in marketing skills training is warranted.
5.5 Building a competitive operation
No business can be a source of wealth creation
for its employee owners if its revenues do not exceed its costs. The newly privatized
enterprise needs an environment in which it can be competitive. Assuming, at
least in the beginning, comparatively low levels of quality and high levels
of cost, the new company may not be able to enter the international market immediately.
It also may have a difficult time competing against imports if no government
protections are in place.
The privatization agency should only accept bidders
with business plans that include a realistic three to five year plan of operational
improvements and capital expenditures which will allow the enterprise to compete
unassisted eventually. During the transition period, however, either government
subsidies to make competitive prices possible or protective tariffs to make
higher prices competitive will be necessary.
5.6 Establishing labor management cooperation
Research shows that when employee ownership is
combined with employee involvement in decision making, productivity, profitability,
and turnover rates improve. Building a relationship of labor-management cooperation
can go a long way towards making the newly privatized enterprise competitive
by both improving quality and reducing costs.
Experience with open book management and other
labor-management cooperation practices is widespread. The transfer of this experience
to locally-based technical assistance and training centers can help employee-owned
enterprises climb the learning curve much faster.
Networks of enterprises which include companies
that have had some success with employee involvement can be very powerful. They
allow managers to witness first hand the impact of such programs and to discuss
their concerns with their peers.
5.7 Financing successful employee-owned companies
Financing the acquisition, working capital and
development of a newly-privatized employee-owned enterprise faces several challenges.
These funds can come from a variety of sources including the seller (the government);
traditional private lenders; regional, national and international development
banks; equity partners and the employees themselves.
The government should consider seller financing
of an acquisition by employees. If the enterprise was a drain on the state budget
before, taking a note does not put the state in a worse position. If it was
a contributor to the state budget, as long as the debt service and income taxes
paid match the previous contribution, it is also not in a worse position. Of
course this assumes that the buyer will preserve and enhance the value of the
assets. It the buyer intends to strip the assets, the state could find itself
holding a note with nothing to back it. Where the workers control the enterprise
operations and effective oversight of management is in place, asset stripping
is less likely to occur.
Where a portion of the ownership is sold to an
outside investor, again the state would be no worse off lending the funds back
to the employees of the enterprise for working capital or capital investments.
Alternatively, the state could accept a note from the employees for the acquisition
and the outside investor could provide the funds for working capital and capital
investments in exchange for a portion of the ownership of the new enterprise.
Payments on the note could be adjusted to the profitability
of the enterprise. During the early years, payments would be minimal or deferred,
and increased once the business is stabilized. Extending loan terms for long
periods would have a significant impact, as 30 year mortgages have been made
home ownership a reality for millions in the United States.
One viewpoint is that in exchange for the state
assistance, the employee owned firm should relinquish rights to any excess profits.
Defining excess profits may be problematic. Also, such an agreement could be
a disincentive to operating the business profitably. Perhaps the most effective
way to carry out such an arrangement would be to give the state stock options
at a reasonable future target price.
Where it is realistic, workers should be required
to contribute to the necessary financing of their company. Such a contribution
can establish a sense of commitment to the endeavor and be a major step towards
the transition to a culture of ownership. While the ability to contribute is
an asset, the lack of such ability should not be used as a barrier.
In some countries, workers have accumulated retirement
assets which can be used. Risking diversified retirement assets to purchase
shares in a newly privatized company is a serious matter and is justifiably
seen as a means of last resort; however, dedicating a percentage such as 20%
is not unreasonable. Where wages and benefits are sufficiently above a comfortable
standard of living, the use of a reduction in compensation to be used to service
additional debt is another possibility. In some cases, workers may take on personal
liability to borrow a portion of the necessary funds, and then apply future
profits to the repayment of this debt. This personal liability should only cover
that portion of the funding which cannot be collateralized with the enterprise’s
own assets.
Another source of funds is an equity partner. Sharing
control with an outside investor may be preferable to taking on personal liability
and has the potential to bring in needed expertise. At the same time, the pure
interests of the workers will be subject to compromise. Side agreements to define
the future disposition of the outsider’s shares can enhance the workers control
over the future evolution of ownership.
Where there are no reasonable methods for financing
worker acquisition of a controlling ownership share, non-monetary shares with
defined voting rights may also give the workers a level of protection where
an outside investor acquires the controlling interest. At a minimum the workers
would have the right to veto negative practices such as asset stripping.
6. CONCLUSION
People who work for themselves do a better job.
Research strongly suggests that workers who own a piece of their company, who
understand the benefits to be obtained from that ownership, who are given the
opportunities to participate in decisions which can enhance the value of their
property, and who are given the training and education to make their participation
meaningful – such workers transform their enterprises into companies which consistently
outperform their competition.
An enterprise can be operated more efficiently
by people who clearly understand that their own personal well-being depends
on that efficiency. This has been proven time and time again where employee
owners have taken over unprofitable corporate divisions, only to turn them around
dramatically within the first six months.
Where the bureaucratic structures of the state
have proven ineffective in operating a state-owned enterprise, creating up-close
owners can often be the best solution for enhancing the value delivered by the
enterprise to its customers. Unfortunately, in too many cases, privatization
has been watered down from the establishment of owner-operated businesses to
the paving of the way for enrichment of the few at the expense of the many through
a simple transfer of property followed by systematic asset stripping.
This paper has supported the position that employee
ownership is the best form of creating up-close owners through privatization.
It has reviewed the necessary conditions under which employee ownership can
successfully broaden meaningful capital ownership to the vast majority who remain
capital-less. Finally, it has compiled numerous recommendations for increasing
the likelihood that an employee owned privatization effort will succeed. May
privatization agents of goodwill throughout the world seek to continually enhance
privatization as a tool for broadening capital ownership.