Renewing Enthusiasm for Employee Ownership

Pundits wring their hands about growing wealth inequality, and the loss of local control of corporations due to takeovers. What most fail to realize is that a proven solution is already at hand. It's employee ownership. And by that we mean real, long-term ownership -- not the speculative stock-option kind. Largely beneath the public radar, a major experiment in employee ownership has been underway for the last 25 years. It's succeeded in putting an estimated $650 billion in company assets into the hands of some 10 million white-collar and blue-collar workers.

It's an experiment that is working. Research and experience has shown that employee ownership can not only broaden the ownership of assets, but also avert plant shutdowns, increase productivity, reduce absenteeism, decrease the risk of capital flight, and defer (or eliminate) taxes for founders who sell to employees. But despite all it offers, employee ownership remains an under-appreciated policy option. It's time for that to change.

Employee ownership deserves to be more widely supported -- for the benefit not only of employees, but of the entire economy. One study reached the dramatic result that, in companies where employees own a majority of the stock, three times as many jobs are created per year as in conventional firms. Another analysis for the New York Stock Exchange estimated that productivity in the U.S. would increase by 20 percent, if American companies made a serious effort to involve employees in decision-making at all levels and reward them with the gains from this effort.

Employee ownership entered the scene in a major way in the 1970s -- after the federal 1974 Employee Retirement and Income Security Act (ERISA), establishing the tax-deductibility of employer contributions to Employee Stock Ownership Plans (ESOPs).

In the following two decades, the number of ESOPs and stock bonus plans increased sixfold, from 1,600 in 1975, to an impressive 10,170 in 1995, according to the National Center for Employee Ownership in Oakland, Calif. Growth more recently has leveled off, with 1998 ESOPs and stock bonus plans totaling 11,400 -- only slightly higher than three years before. The number of employees covered declined slightly after 1996, from a high that year of 8.7 million covered, down to 8.5 million in 1998.

One reason, according to an analysis by the Urban Institute in Washington, D.C., is that employers are choosing other forms of stock compensation -- such as 401(k)s, broad-based stock purchase plans, or stock options. The NCEO estimates 15 to 20 percent of public companies offer options to most employees -- including PepsiCo, Starbucks, Walgreens, Whole Foods, and Whirlpool.

But options do not represent ongoing ownership, because 90 percent of employees sell immediately after exercise. Growing in significance are 401(k) plans, which controlled $300 billion in the stock of sponsoring employers in 1998, compared to $500 billion for ESOPs. But since 401(k)s convey no employee voting rights, they too fail to represent real employee ownership. ESOPs still remain the primary vehicle for employee ownership.

A key reason is that they offer a significant advantage, in the opportunity for employee participation in management. While not all employee-owned firms use participation, those that do find it is key to success. Studies consistently show that when broad employee ownership is combined with informed participation, companies perform substantially better than otherwise expected.

The neglected policy option of employee ownership deserves to be picked up again. In doing so, it behooves us to learn from past mistakes. For if employee ownership itself has been a success, state efforts to promote it have been less so. Since 1974, 28 states have taken steps to encourage employee ownership. The initiatives include declarations of support, state centers with extensive programs, tax benefits, exemptions from state securities laws, loan guarantees, or interest-rate subsidies and special financing.