Employee Ownership: A New Strategy for Economic Development

Introduction

Currently, most economic development strategies are based on one of two approaches: providing incentives to those who have capital to invest in target areas to provide what end up being mostly low-paying jobs to the poor, or finding new ways to help those without capital create their own new jobs. Although these two approaches have met with some success, they both ignore a viable alternative which would provide workers with new jobs and income while helping them build capital ownership. This alternative is employee ownership. If development strategies could incorporate expanded ownership, low-income people could accumulate wealth in addition to receiving income.

Making people owners is not as quixotic as it might seem. Thousands of American companies now share ownership with their employees. Most are not doing so out of altruism; rather, they are responding to the substantial tax benefits available to companies with employee ownership plans, (particularly ESOPs – employee stock ownership plans), to the belief that employee owners will be more productive and conscientious workers, and to indications that employee-owned companies may have a competitive edge.

Unfortunately, economic development programs have not used these existing lures effectively to encourage companies to set up employee ownership plans. These programs must start promoting business incentives in order to convince local industries that the cost of establishing an employee ownership plan is small compared to the resulting benefits. At the same time, employees will acquire a significant capital stake in their companies, and the community will profit because employee-owned firms are less likely to relocate.

Once publicized, the benefits of employee ownership will themselves persuade many companies to set up plans. A more aggressive strategy may be needed in those rare situations where employee ownership is used to save a failing firm, but substantial financial resources for this purpose are already available. The continuing vital role for economic development specialists, however, will be to provide interested groups with guidance on setting up a plan, and with counseling on contouring the plan to provide the greatest benefit to the employees.

As mentioned above, there are numerous advantages to a company utilizing an employee ownership plan. The primary criteria of an effective economic development program is that the companies involved succeed financially. Several studies now indicate that employee ownership companies are more successful than their conventional competitors. A recent study in the Journal of Corporation Law found that companies with ESOPs had average annual productivity increases 1.5% greater than the national production average for the period 1975-79. A 1985 National Center for Employee Ownership (NCEO) study of publicly-traded companies with at least 10% of their stock owned by their employees found that these firms did better than 51-75% of their competitors, depending on the financial measure used. More importantly, a 1983 NCEO study showed that companies in which employees owned a majority of the stock generated three times more net new jobs per year than comparable conventional firms.

Employee ownership is not just good for the company; it is good for the financial health of employees as well. According to a 1985 NCEO survey of 140 ESOP companies, an employee earning the 1983 median wage of $18,000/ year would accumulate over $31,000 in stock in the typical ESOP after just ten years. That figure is approximately three times the median amount of net financial assets acquired by the average American family at retirement. Congress central purpose in encouraging employee ownership was to broaden the distribution of capital ownership. Since employees rarely give up anything to get their ownership stake (as will be explained below), this goal is being met.

It is not a new idea that the economy – and the polity – would work better if employees owned and participated in the management of the workplace. Albert Gallatin, Secretary of the Treasury under Jefferson, believed that “the democratic principle on which this nation was founded . . . should be applied to the industrial operations as well.” This notion is currently gaining bipartisan support. In 1984, the Democratic party incorporated it into its platform. Moreover, political leaders such as Ronald Reagan and Russell Long have espoused the concept, as has the New York Stock Exchange. The Pope, in his recent encyclical on work, has strongly endorsed it as well.

In American industry, over 7,000 companies now have ESOPs, while thousands more have implemented other types of employee ownership plans. At least 10% of these firms have a majority of their stock owned by employees and collectively employ over 1,000,000 people. Despite this nascent development – and despite all the political support and the increasing evidence that ownership and participation work – due to obstacles discussed later in this piece, only about 8% of American workers are involved in these plans, and many of these are in companies in which the workers own only a small piece of the firm.

Ownership, however, is not the only issue. As American institutions, both public and private, have become larger and more bureaucratic, individuals have seen a steady erosion in their ability to control their own lives. In more and more areas, we have seen a functional end to anything resembling democracy. For most people, the workplace is the most important economicand social community in their lives; democratizing it is our best hope of reinvigorating democracy in society.

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