Social reform and empowerment strategies usually involve either getting the government to do more good things for people or empowering people to do more good things for themselves. Employee ownership of companies is part of the second strategy and employee stock ownership plans are a potential entry point for such employee ownership.
Employee stock ownership plans have proven successful in some 7,000 enterprises in the US over the past 40 years, covering 10% of the private workforce. This model can readily be adapted to other private property market economies such as South Africa.
However, the problem in South Africa is that Anglo American set up some sham employee stock ownership plans in the late 80s that were deservedly ridiculed. Those and a few similar plans have given them a bad name. Now the sham employee stock ownership plans are mainly oriented at getting some fig-leaf BEE or BBBEE compliance without having any genuine worker ownership. Hence our task here is to explain how a genuine employee stock ownership plan works and how the widespread uptake of genuine employee stock ownership plans could have a significant effect on income and wealth distribution in SA.
The main feature of (genuine) employee stock ownership plans is that all employees are included and receive part of their company with no risk to their private property. Key to this is the establishment of an employee stock ownership trust separate from the company with the employees as beneficiaries or owners. As most countries already have some legislation for worker co-operatives, one possibility for SA without additional legislation is for a worker co-op with all company employees as members to serve as an employee stock ownership trust.
The co-op-trust then takes out a loan to buy shares, or the seller of the shares could supply the credit by exchanging some shares for a promissory note. The loan is guaranteed by the company and shares are held in a “suspense account” while the company pays off the loan. The employee stock ownership trust/employee stock ownership plan has a collective labour contract with the company for some fixed percent, say 5%, of the members’ labour.
Thus each payday, the employees get their usual pay, but the company pays an extra 5% or x% to the co-op employee stock ownership plan which is then passed through to the lenders or sellers to pay off the loan. Since those extra payments are making the employees into owners, one could think of them as an ownership bonus.
The payments leave the company as labour compensation on the collective labour contract so it is a deductible expense. As each loan payment is then made by the co-op-employee stock ownership plan, the shares of that value are transferred from the suspense account to the individual share accounts of the members (that is, employees of the company) making the members part owners of the company through the co-op/employee stock ownership plan.
Employees may not sell shares to others and the employee stock ownership plan buys back the shares (upon retirement, exit or after a fixed time) which are then redistributed to the remaining employees. This repurchase of a worker’s shares is financed by the continuing collective labour contract payments from the company to the co-op/employee stock ownership plan.
Thus, the worker shares stay in the employee stock ownership plan so the worker ownership is a permanent part of the company. The younger workers are slowly buying out and replacing the older workers who are retiring. In a privately held company, where the founder is retiring, the co-op/employee stock ownership plan may reach 100% after several tranches of share purchases.
Of the 7,000 employee stock ownership plans in the US, about 500 are a majority to 100% employee-owned through the employee stock ownership plan.
The worker co-op board, as the deciding body of the co-op/employee stock ownership plan, decides how to vote the company shares that are its assets as a block. In the most democratic version, there might be a vote by the worker members, on a one-member/one-vote basis, to instruct the board about how to vote the shares.
The original idea of employee stock ownership plans came from an eccentric San Francisco lawyer, Louis Kelso, who feared that automation would cause so many people to lose their jobs that society could only be stabilised if people had a capital income in addition to their labour income. Employee stock ownership plans were pushed through the US Congress by Senator Russell Long, son of populist Huey Long, and were supported by legislation and tax breaks.
What is interesting is that the employee stock ownership plan legislation and amendments over the years have been supported both from the right (for turning workers into capitalists) and from the left (for moving towards workplace democracy) in the US. Now about 14 million workers work in the 7,000 companies with employee stock ownership plans.
In the US there is also a substantial industry specialising in employee stock ownership plan transactions as well as a national information clearinghouse and research organisation (the National Centre for Employee Ownership), two national and many state-wide employee stock ownership plan associations.
An employee stock ownership plan should not be confused with the more common Employee Share Purchase Plans, where employees use a portion of their salaries to purchase shares at a discounted price. Such plans rarely amount to a significant percentage of corporate ownership.
By contrast, the employee stock ownership plan-leveraged buyout involves a loan to buy a significant amount of ownership at one time, although the employees only gain individual share ownership as the loan is paid off.
In the Anglo American-type sham employee stock ownership plans, the shares are either a gift to a specific set of employees (who didn’t earn them by working as owners to pay off the loan) or the shares are supposed to be paid off by dividends, which could only pay off a pittance.
This was not how the successful US models are run and seem to have given employee stock ownership plans a bad name in South Africa.
Our point is simple. If all this can happen in less than 40 years in a labour-hostile, industrialised country such as the US, there is no reason why it can’t happen on even a larger scale in the other industrialised democracies.
Employee stock ownership plans impact on improving income and wealth distribution, improving productivity because the employees are owners, stabilisation of communities by avoiding absentee ownership in the succession of local firms and, improving corporate social responsibility by aligning the incentives of owners and societal concerns, thus acting as a substantial social intervention.
And post-apartheid South Africa is not just another industrialised democracy. A quarter of a century has passed since 1994, and still South Africa has not used the time-tested model of a genuine employee stock ownership plan to institutionalise significant and broad-based employee ownership in its publicly traded or privately held companies.
The co-op/employee stock ownership plan model is implementable in any private property market economy without special legislation (and also without any special tax advantages until such legislation is passed).
The model includes the following features:
Bringing all the employees into an ownership position without risking their own assets;
Creating a “company of owners” and a culture of ownership;
Allowing employees to cash out when they exit or retire (or sooner after a fixed time period); and,
Locking in the employee ownership so the ownership is stabilised and anchored in the local community. DM
David Ellerman and Michelle Galloway, Stellenbosch Institute for Advanced Study.
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