The Citizen’s Share
Joseph Blasi, J. Robert Beyster Professor, Rutgers University
School of Management and Labor Relations, NBER, IZA
Richard B. Freeman, Herbert Ascherman Professor, Harvard,
NBER, IZA, Centre for Economic Performance, LSE
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A Global Equity Historical Story
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Him, too? Yes!
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And him : the First U.S.
Secretary of the Treasury
Alexander Hamilton
-Wrote glowingly of the share
program
-Supervised the Customs Officers
confirming ships’ share programs
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Evidence on Broad-Based Shares, from
the first days of US Republic
“They were generally found the most
attentive when their dependence was on a
share of what they caught.”
-Leading Philadelphia shipper Joseph
Anthony, 1790
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The British failed to develop a
state-owned whaling industry
without shares
-Jealous of the U.S. whaling
industry, Britain tried to create
their own state-owned not based
on shares. It failed even though
Britannia Rules the Waves
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Our Talk Today: Three Points
1 Why broad-based shares are a good idea?
2 What does the U.S. example tell us about
how broad-based shares work in reality?
3 Can shares expand in the EU and help the
EU recover from current woes?
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1. Why are broad-based shares a good idea?
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Diverse evidence using many data
sets and methodologies from many
countries shows that linking
ownership and profit-sharing leads to
better performance when there is a
supportive corporate culture. Our
employee & establishment studies,
reviews of literature, including metastatistics, case studies, before-after
studies –all give similar picture.
But many managements have failed:
-to use the scientific evidence to persuade
their boards and shareholders to introduce or
expand ownership plans.
-to encourage inside researchers and
academics to experiment with ways to develop
share systems that best fit them.
-to make the case to institutional investors
(who often have their own employee share plans).
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A SOCIETAL PERSPECTIVE
The Founders of the U.S. had a political-economy
view of why expanded ownership of productive
capital was important. They believed that
democracy could not exist without broad-based
ownership of business, initially land, craft shops, &
shipping. The alternative was feudalistic rule by
aristocrats or populist threats to property rights.
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They enacted government policies to make it
easy to distribute property among heirs and to
acquire shares:
-outlawed primogeniture
-favored low prices for land
-implemented repeated share plans to allow
more citizens to own key productive asset land:
the Louisiana Purchase and the Homestead Act
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The Principles of the U.S. Founders
-Every
citizen should own part of the
economy and receive income from this share to
be economically and politically independent.
-Citizens who shared fully in ownership and
profits create a more productive economy.
-This independence produced a society with
small government, low taxes, less corruption, and
a healthier civil society.
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Their message resonates today with rising
inequality and huge economic problems
recovering from Great Recession
-Shares are not only about company incentive
programs but about assuring democratic
success against a march towards plutocratic
feudalism or populist disorder.
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2 What we’ve learned in the U.S. post the
Old Fellows with wigs on US currency.
First, society must go beyond land ownership, which is
limited, to allow many citizens to acquire ownership of
corporate assets.
Second, government policies can affect the spread of
ownership. So too can company policies independent of
government programs.
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Generous U.S. Policies toward individual incentives
*Employee Stock Purchase Plans – for Broad-Based plans
workers can buy up to $25,000 of stock a year and hold it for two
years and pay ordinary income tax on the gain up to the
discount and lower capital gains after (but no corporate
deductions)
*Employee Stock Options –Unlimited tax deduction on spread
between the grant price and exercise price for the corporation
and worker. Further increase taxed at lower capital gains rates.
*Restricted Stock –Unlimited corporate tax deductions of the
value of stock grant on which worker pays ordinary income tax.
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Collective Employee Stock Ownership Plans
(ESOPs) – for Broad-based Plans corporate tax
deductions of the principal and interest on loans when
the company purchases shares to be granted to
workers and of dividends paid to the workers on the
stock PLUS no capital gains taxes for sellers of more
than a third of a company to the workers PLUS lower
ordinary income tax rates for the worker since the
plans generally pay out at retirement when tax rates
are lower. VERY important for SMEs.
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-ESOPs, invented by Louis Kelso, allows worker trusts to buy
large stakes of firms in a single transaction using loans the
firm guarantees and pays for. Employees are not liable for
the loans. They get grants. ESOP firms get tax breaks.
-ESOPs are in 10,000 mostly closely-held firms with 11
million workers, about 3000 of which are majority or
completely worker-owned.
-ESOPs are main component of US broad-based equity
system with associations of firms active in policy debate.
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Out Of a Labor Force of 107 million workers,
18% own company shares.
9% have options. In addition, profit-sharing or gainsharing plans cover even more workers so that in total 47% of
US workers have a financial stake in their firm, mostly with a
modest share of their income and wealth.
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3. Can increased share ownership expand in the
EU and help the EU in its economic crisis? Yes.
-There are some ways to massively expand EU shares.
-A new EU share-based ownership system can spur to
macro-expansion that would give hope to countries facing
years of austerity-driven joblessness. By increasing
market demand for exports in EU troubled economies, it
could also staunch the spread of the double/ triple dip
Great Recession to the rest of Europe.
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A Huge Gap In Shares Between Europe and the U.S.
-In principle employee financial participation is part of the
European Social Model.
-But 3.3% of workers in Europe have shares compared to 18%
of workers in the U.S. Much of this difference is because few
workers in SMEs have shares in the EU whereas over half of
U.S. workers with shares are in SMEs.
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Shares in Europe expand slowly despite the financial crisis:
% of employees in share plans increased from 9.1% to 13.5 % for profit
sharing and 2.3% to 3.3% for employee owners, 2005-2010 (EU Parliament, 2012)
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One Proposal: The Lowitsch 28th Regime Idea
-A new EU regulation would define a European Financial Participation
Plan that companies could use EU-wide
-Because it is optional it would not require compromise among EU
member nations and companies could use the EU or the national model.
-It would allow full portability for employees across all the EU countries.
-Countries would retain sovereignty over tax legislation but make available
Easy online tax software to deal with tax issues.
-The goal is to make shares easier for large national and multinational firms.
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A Second Proposal: Encourage National Laws on ESOPs EU-Wide
-Shares can be a major phenomenon in Europe if SMEs have a
simple legal, tax, and regulatory regime for current owners to sell to an ESOP.
-The business succession problem is the major problem of these firms.
-ESOPs, invented by Louis Kelso, allow worker/manager groups to buy major
stakes in one transaction using bank-approved loans paid back by the firm
-National laws need to create a trust to purchase and hold the shares.
-Supportive tax legislation for ESOPs requires workers to be exempt from
income tax when the ESOP acquires shares.
-ESOPs would receive a tax exemption on both interest and principal payments
on a loan used to acquire shares from a seller
-Owners of SMEs to be excluded from capital gains taxes on sales to ESOPs.
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A Third Proposal To Help Resolve The Current
EU Economic Crisis?
Jobs, GDP, sovereign debt crisis, divergence
among economies with Euro. Rising inequality,
increased numbers of working poor, danger of
double-dip recession even in economies that have
weathered the storm best, such as Germany and
Sweden (which thanks Odin every night that
citizens rejected its elite`s plan to join the Euro).
HELP! My kingdom for an alternative.
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Example of troubled EU economy:
Portugal – “Austerity‘s poster child“
-Has no policy tools to grow its GDP
-Is locked into Euro so cannot depreciate
-Deals with EU, IMF, ECB troika so no fiscal policy
-No monetary policy
-Weak labor institutions so no strong labor policies
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The Dilemma
But ``alternativlos’ (no alternatives save for austerity) is the word
on high. Suck it up, citizens. The elite knows, Troika
leaches are the medicine of the day.
Tell it to the Portuguese, the Spanish, the Greeks,
whomever is going to be the next victim of the crisis,
Tell it to the citizens throughout the EU who have lost
faith in the European project.
Alternativlos has it upside down. There no road to
prosperity through years of low growth/declining GDP, mass
joblessness, increased poverty, and economic misery.
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What you do when there is nothing you can do –June 1
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Current lack of vision/absence of private sector and social
partners in EU debate
-With austerity policy failing,the EU has to find an alternative.
-Troika loans to pay back banks (and reward speculators
who own bonds?) do not grow an economy.
-Equity or loans for productive investment grows an economy.
-Idea is an EU citizens Marshall Plan for EU countries in trouble
with investments in real economy not in bank balance sheets.
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A Plan to funnel savings into investment that creates
goods and jobs and spreads share ownership.
1. EU financial organizations – private pension funds (Netherlands,
UK, German Riester pensions, the Norwegian Sovereign Wealth
Fund?) -- invest into a European Crisis Private Equity Fund that
makes investments in firms which adopt some form of shared equity
and undertake real investment projects in troubled EU.
2. To increase profitability, workers in those firms may take wage
cuts for shares to obtain guaranteed equity or profit-sharing as the
economy improves.
3. To involve SMEs, each country should adopt ESOP legislation to
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companyit
logoeasier
here.
make
for retiring owners to sell to workers/managers.
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Government Encouragement
-Could incentivize investors into the European Crisis
Private Equity Fund:
-Could provide some insurance/tax breaks for individuals
who invest in the Fund (add-ons to what they do for
mandated private pension schemes).
-Could give tax benefits to returns from the Fund.
-Lots of details for the devil, but private sector takes
initiative outside politics and bank system to get money
into viable projects instead of into bank balance sheets.
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Examples
Historically some ESOPs form as part of concession bargaining in firms
in trouble and succeed in saving jobs and firm. Some fail as well.
US bailout of auto industry in Great Recession succeeded with govt
moneys, Chapter 11 bankruptcy and large union cost concessions.
Detroit Worker Bonuses Approach Records on Rising Profits
(Bloomberg, Feb 2013). Ford’s $8,300 Chrysler $2,250. GM expected
to exceed $7,325. For new Ford hires, who are paid about half what
senior workers make, $8,300 adds 23 percent to their annual
compensation of $36,000.
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Virtues
By investing in share-owned firms, the EU could
shift employment to more stable jobs.
Citizens benefit on both sides of the transaction:
those in prosperous countries get ownership stake in
firms (Peter Drucker‘s famous analysis of pension fund
ownership of shares, 1976); those in economic trouble
get stake in own firm. Both benefit from recovery.
Policy holds even if a troubled economy leaves
Euro or if austerity keeps squeezing public sector.
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Who develops and leads this reform?
Companies/social partners, not government. This is
private sector response to disaster to real economy
that is orthogonal to battles over austerity and Euro
A Way to Start
Private sector establishes commission to assess all
three proposals, recommend national legal changes of
share systems, advance “the 28th Regime” for large
firms and ESOPs to encourage SMEs to follow the
shared ownership route, and examine ways to
establish the European Private Equity Crisis Fund.
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CONCLUSION
‘They’ cannot think of an alternative to austerity. So the door
is open for chaos, collapse of European economy. But door is
also open for reforming the EU economy and expanding shares.
In English, equity has two meanings: fairness and
ownership. Broad-based share ownership fulfills both meanings.
Easier regulations for share plans EU-wide and equity investment
from EU countries that weathered crisis best into firms with
worker share ownership in troubled economies offers private
sector alternative to escape economic disaster.
Equity for all, YES!
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Sources:
1)The Capital Manifesto. Louis O. Kelso and Mortimer J. Adler. New York: Random House, 1958. Downloadable at:
http://www.kelsoinstitute.org/download.html
2)The Citizen’s Share. Joseph Blasi, Richard Freeman, and Douglas Kruse. London: Yale University Press, 2013.
3)Jens Lowitzsch, Iraj Hashi et al. , Employee Financial Participation (EFP) in Companies’ Proceeds” Study for the European
Parliament, Sept 2012.
4)Financial Participation of Employees in the European Union: Much Ado About Nothing? Christian Welz and Enrique FernandezMacias. European Journal of Industrial Relations, Volume 14, Number 4, 2008, 479-497. Report of the 2005 European Working Conditions
Survey, European Foundation for the Improvement of Living and Working Conditions.
5)The Political Economy of Labor-Capital Income Imbalances: European Solutions. Ognian N. Hishow, German Institute for
International and Security Affairs. Berlin, Germany, 2012.
6)The Evolution of Economic Inequality: Different Time Perspectives and Dimensions. United Nations Conference on Trade and
Development. Geneva: UNCTAD, 2012.
7)Wealth, Inequality & Taxation. Thomas Piketty, Paris School of Economics. Presentation to the International Monetary Fund, September
27, 2012.
8)) Income Inequality in the European Union. Kaja Nonesmo Frederiksen. Paris: OECD Economics Department Working Papers No. 952,
April 16, 2012.
We thank Arne Peder-Blix of Accurate Equity and Mike Pewton of Global Share Plans for assistance. Global Share Plans allowed
us access to their web site reviewing EU policies on share plans. We alone are responsible for the views in this presentation.
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