Sharing Is The New Economy

Joseph R. BlasiJ. Robert Beyster Professor

Based on The Citizen’s Share, by J. Blasi, R. Freeman and D. Kruse, Yale University Press, 2013

SNPI ConferenceErasmus University – Rotterdam

March 13, 2014

The Dutch Connection

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Colonel Henry Rutgers• Son of Dutch immigrants Hendrick Rutgers and

Catherine DePeyster

• Settled the Dutch colony of New Netherland

• Prominent layman in the Dutch Church and early advocate of American Independence

• Donated land/funds for Queens College (Rutgers University), seminary for Dutch Reformed Church

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J. Robert Beyster• Prominent California high tech entrepreneur• Nuclear scientist• Dutch Catholic with strong social ideals• Founder of Science Application International

Corporation, once the largest employee-owned engineering consulting firm of 40,000 employees and $ 8 billion in sales

• Endowed the J. Robert Beyster Professorship, founded the Rutgers Beyster Fellowship Program, founded the UCSD Beyster Institute and the Foundation for Enterprise Development

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The First Research on Shares“The Captain and the Crew drew one half, and agreed

Among themselves in what Proportion to divide the

Fare. Sometimes the Owners hire the men by the

month and give them Common Seaman’s wages

…they were generally found the most attentive when

their Dependence was on a Share of what they

Caught.”

-Joseph Anthony, leading shipper in Philadelphia,

letter to Assistant Secretary of the Treasury

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What I Will Talk About?• A Short History?

• How Much and Where?

• What Are The Results?

• What Is The Government Policy?

• What Are the Lessons Learned?

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A Short History: The Founders• Washington signs the shares law on the cod fishery on

February 16, 1792

• “It (America) will not be less advantageous to the lowest

class of people because of the equal distribution of property.”

George Washington, 1789

• “The only possible way of preserving equal liberty…is to make the acquisition of land easy to every member of society.” John Adams

• Broad property promotes growth. Alexander Hamilton

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A Short History: Land to Businesses• A republic was impossible without broad property and each

citizen needs enough capital to be independent in contrast to history of VOC

• Louisiana Purchase (1803) Homestead Act (1862)

• The future of shares was in corporations

• Pillsbury, Procter, Eastman, Carnegie, Rockefeller,

and, most recently, Louis O. Kelso

• yy13

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How Much and Where: Who?• Employee stock ownership: 17.4% - 19 million

• Employee stock options: 8.7% - 9 million

• Profit sharing last year: 30.2% - 26 million

• Gain sharing last year: 21.3% - 24.4 million

• Some shares: 47% of all/63% in corps – 47 million

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How Much and Where: What Groups?STOCK OPTIONS

• Management: 22% / 11%• Mgt Related29% / 17%• Professional 18% / 9%• White Collar 23% / 14%• Blue Collar 15% / 5%• Service 5% / 1%

• Union 15% / 10%• Non-Union 17% / 9%

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How Much and Where: $$$$$$$• Company Stock

-$47,000 or 81% of annual fixed pay is the average

-$10,000 or 21% of annual fixed pay is the median

• Profit Sharing and Gain Sharing

-$7,000 or 9% of annual fixed pay is the average

-$1500 or 4% of annual fixed pay is the median

• Potential Stock Option Profits

-$250,000 or 184% of annual pay is the average

-$75,000 or 100% of annual pay is the median

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How Much and Where: Trends

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How Much and Where: Trends

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How Much and Where: Sectors• About 20% of the Fortune 100: Exxon/Mobil (2), GM (7),

Ford (10), P & G (28), UPS (53),Morgan Stanley (96)• About 10% of the Fortune 500: Publix (108), Nucor

(146), Southwest (208), ParkerHannifin(211)• Common in high tech: Apple (6), Microsoft (35), Amazon

(49),Google(55), Cisco (60), Qualcomm(149)• Common among large private companies: Cargill/1,

Mars/3, Fidelity/20, Bloomberg/44, Wawa/47, Hallmark/95• Meaningful among top 200,000 small businesses 100 to

1000 with about 2-3,000 ESOPs with 2 million employees• Large in tech start-ups and small among worker coops

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The Results? The NBER Study• Kruse, Freeman, and Blasi, 2010, NBER and University of ChicagoPress. Fixed-effect cross-sectional study of 41,000 workers in 14 firms

with the 2002 and 2006 General Social Surveys as the national control

Group compares workers with and without shares and policies addresses firm policies and examines all forms of shares accounting for

All worker compensation. Workers with more share plans and the above

median % of pay in shares exhibited: lowered turnover, greater loyalty,

more suggestions, more willingness to work hard and innovate, more

willingness and actual behavior of worker co-monitoring to counteract

free riding, especially with high performance work practices (ei/teams,

training, job security) when absenteeism also went down. Confirmed by a

natural experiment. Below market wages, risk, and high supervisionerased the effects. Funded by Russell Sage and Rockefeller Foundations.

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The Results? The Hundred Best Study• Kruse, Blasi, and Freeman, 2012, NBER Working Paper. Study of

1300 corporations who applied for Fortune’s Hundred Best Company to

Work For competition form 2005-2007 using 305,339 random worker

surveys from the Great Place to Work Institute as well as management

Culture Audit Surveys Captures 10% of total sales, 10% of total

employment, and 20% of the market value of all publicly traded

corporations in 2007. Firms with more broad-based employee

ownership, profit shares as a % of pay, and stock option coverage have

more high performance work practices, higher Trust Index Scores,

more high trust supervision, with ESOPs in the lead. Shares plus

employee empowerment had the lowest turnover and highest Return on

Equity. Funded by the Alfred. E. Sloan Foundation.• Questions Raised: Why are there not more and larger shares?

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The Results? Focus on ESOP Sector• From Louis Kelso’s creation to Long’s ERISA 1974 to present, 10,300 companies, 10 million workers, about a trillion

in market value, 1/3rd majority to 100% and 1/3 10-49% worker-owned, with 90% in closely-held firms, 60% in firms with

40-1000 workers • The distinguishing feature is that workers do not purchase the shares, rather employee trusts take out loans to buy

shares with tax incentives that companies pay back out of earnings.• 1987 GAO study found productivity improvement with participation• Kruse and Blasi 1997 review found 4-5% productivity improvement upon adoption with maintenance of higher

productivity• GSS 2006 finds 80% of worker owners report paid at or above market• Kim/Ouimet 2013 Journal of Finance study finds higher fixed wages in public ESOPs using Census data supported by

comparisons of ESOP and non-ESOP firms in Massachusetts & Washington• Blasi, Kruse, Weltmann 2014 population study of all ESOPs founded in 1988 ten years later found half as much

bankruptcy and four times more likely to have a pension plan

• The National Center for Employee Ownership 2010 study of 3,976 closely-held ESOPs found half had a diversified

pension plan, average worker contributions to ESOP were close to nil, average company contribution was $4433 versus

$2,533 for non-ESOP plans defined contribution plans, & ESOP workers had retirement assets over twice of non-ESOP

Workers who make employees pay for a large proportion of their own retirement savings.

• U.S. Bureau of Labor Statistics 2013 study of rates of return earned in ALL retirement plans shows ESOPs did better than all retirement plans in every period from 1992-2011.

• Study of 27 ESOP administrators finds 2009-2010 default rates of 0.3% vs 3% for PE and 6% for LBO

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The Results? The Business Model• Evidence is that managers are getting culture right

partly as a result of a changed view of hierarchy. See both General Social Survey & 100 Best study.

• The evidence shows shares + culture = results• Most US shares do not involve wage substitution• Important to combine cash and equity shares.• The popularity of shares in more team-oriented

high technology companies has helped.• Wages and retirement savings are higher because

the pie is getting bigger on average.• Finally, lower supervision & working smarter.

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Government Policy: Why Success?• Businesspeople pushed leaders.• Just a few champions with strong advisory teams.• Always been non-partisan, all political parties.• Industry associations in the capital city.• Firms & their employees & leaders exchange visits.• Tax policies exist for every size and sector with

incentives for firms to do it and workers to make $.• The special taxes creating ESOPs helped a lot.• Special tax incentives got Wall Street involved.• BUT poor White House coordination & mistakes

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Government Policy: A Reason to Care

• Economic inequality advancing to feudalism

• Concentration of capital ownership, income, gains

• Fixed wage growth is flat adjusted for inflation

• Returns to education are flattening out

• Those with increasing wealth get it by shares.

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Government Policy: U.S. Errors• The Enron Mistake: pushing workers to buy

company stock in 401k plans was an error.

• Share policies need to be based on grants of ESOP

stock, restricted stock, performance shares, and

stock options NOT ON WORKER PURCHASES.

• Two very important tax incentives for shares, one

for Wall Street and one for high tech for reversed

because the industry was not well organized. 30

The Share Economy • Shares improve firm performance with a

supportive corporate culture.

• Shares address economic inequality because they expand the middle class’s access to capital ownership, capital income, and capital gains.

• Meaningful national shares can expand economic growth by giving the middle class more to spend.

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The Lessons Learned? Employers.• Measure your plans.

• Be active in associations. Take nothing granted.

• Visit government officials along with the workers.

• Invite in researchers.

• Support university programs

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The Lessons Learned? Unions

• Unions worked with the concept at extremes:

either founding firms without good management or

using the concept to rescue failing firms

• A word on United Airlines – NOT AN ESOP• Unions have a strong reason to push share policy

• Unions should bargain for share plans and options,

especially the establishment of the Leveraged ESOP33

The Lessons Learned? Universities

• With all these shares, University study was low.

• Presidents, Deans, Chairs, and Professors played to the egos of the hierarchy of the firms not the models

• Key is to persuade the share firms and CEOs to act

• Then, one needs to develop data and fellowships.

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A New Film by Mary Ann Beyster• WE THE OWNERS is an examination of the

dynamics of operating an employee-owned business in a brewery, a construction company, and a solar installation cooperative

• www.wetheowners.com for the trailer

• Available in DVD and 3 year streaming from the Film Media Group at: http://films.com/ItemDetails.aspx?TitleId=27331

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THE END

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