The Citizen’s Share: Worker Ownership for the Entire Economy?

Joseph Blasi, J. Robert Beyster Professor Rutgers University School of Management and Labor Relations

andFidan Ana Kurtulus, Assistant Professor of Economics

University of Massachusetts-Amherst

2013 Academy of Management Conference EntitledCAPITALISM IN QUESTION?

August 10, 2013Orlando, Florida

Part I. Joseph Blasi

A Story•George Washington, Thomas Jefferson,

and Alexander Hamilton

•Shares in the cod fishery

•The first HR/ER law of the first Congress

•Tax incentives made conditional on having broad-based profit sharing: the sharesmen

•The tax incentives themselves are shared

Four Arguments• A brief overview of our new book, The Citizen’s Share: Pitting

Ownership Back into Democracy, by Joseph Blasi Richard Freeman and Douglas Kruse,.

• First, worker ownership is not merely a HR policy and practice but must be examined in the context of business and society, political theory, the practice of democracy and the role of the corporation in society.

• Second, several decades of empirical research suggests worker ownership has acceptable firm and individual outcomes.

• Third, there are policy reasons why worker ownership is not larger than it is in the economy and these can be easily addressed.

• Fourth, worker ownership can be as effective economic system than concentrated or absentee ownership.

Democracy Requires Broad But Not Equal Ownership

• Republics require broad-based property ownership and a general equality based on individual merit. (Gordon Wood, The Empire of Liberty)

• Most Founders across all political divisions envisioned a nation of self-employed owners of land whose capital would make them independent and free from corrupting influences of elites.

• Initially some of them would not overcome the evil of slavery and the exclusion of women but the idea was supported across the political spectrum.

• Similar views espoused by Benjamin Franklin, Thomas Paine and even Alexander Hamilton who saw eliminating slavery and the exclusion of women from civil society as requiring this change.

• Abraham Lincoln became a major proponent but after his assassination, racism cut short General Sherman’s implementation black homesteads and a Congress’ black Homestead Act.

• Most recently the argument was made by Democrat Hubert Humphrey and Republican Ronald Reagan.

More Ownership, Better Social Organization • Washington: “citizens of moderate capital” and “ever better pleased laboring on their own

farms”

• Adams: “frequent division of landed property” and “property monopolized is a curse” and “power always follows property” and “unalienable right of acquiring, possessing, and protecting property

• Jefferson: “legislators cannot invent too many devices for sub-dividing property” and “every person entitled to fifty acres” and “cultivators...the most valuable citizens”

• Madison: “equality of individual property” and “misery abate(s)...wherever...laws favor a subdivision of property” and “freeholders...would be the safest depositors of Republican liberty” and “withholding unnecessary opportunities from the few to increase the inequality of property” and “without violating the rights of property reduce extreme wealth towards a state of mediocrity”

• SImilar views espoused by Benjamin Franklin, Thomas Paine and even Alexander Hamilton who saw eliminating slavery and the exclusion of women from civil society as requiring this change.

• Abraham Lincoln became a major proponent but after his assassination, racism cut short General Sherman’s implementation black homesteads and a Congress’ black Homestead Act.

Shift to the Corporation

• Bitter debate in Pennsylvania over the first incorporation in 1786

• Implemented a range of radical reforms to subdivide land including making primogeniture illegal, the Northwest Ordinance, and the Louisiana Purchase and the most radical was Lincoln’s 1862 Homestead Act

• But in the 1830‘s Madison worried land would exceed population growth and he was searching for more property to divide.

• Speaker of the House of Representatives Galusha Grow, the early founders of the American Economic Association, and many early social scientists saw shares in the corporation -- an unlimited growing asset -- as the solution.

• The study tells the story of the development of forms of corporate profit sharing and ownership sharing, such as employee stock ownership from the mid-1800s until today by corporate leaders, Procter, Eastman, Rockefeller.

Shares: Snapshot as of 2010

• General Social Survey with NORC at University of Chicago and NSF for 2002, 2006, 2010, and soon 2014 to create a systematic national dataset

• 18% of adult citizens own stock in the company where they work

• 9% of adult citizens have stock options in the company where they work

• About a third have profit or gain sharing

• For most the amounts are modest but for the top one or two deciles AT ALL INCOME LEVELS they provide significant capital ownership and capital income

Part II. Fidan Kurtulus

Overview

Overview of Social Science Research on Broad-Based Employee Ownership & Profit Sharing & Cooperative Ownership

(from The Citizen’s Share, Chapter 5 “Evidence)

Studies

• There have been hundreds of research studies examining the relationship between Employee Ownership/Profit Sharing/Cooperative Ownership

• spanning across many fields including management, economics, psychology, sociology

• using various different datasets, samples of different sizes, subject to different biases and data imperfections

• These include

• large-scale studies based on nationally representative samples of firms or workers

• case studies of a single firm or a few firms in a particular industry

• field experiments and laboratory experiments

Studies• Some of the most compelling studies are those that compare

firms before and after they adopt Profit Sharing and EO relative to firms that did not change policies

• A study by Doucouliagos (1995) presents a meta-analysis, consolidating and averaging across many studies, with the following main findings:

• The averages point to the finding that firm and worker performance is higher for firms that operate with Profit Sharing and EO than for otherwise comparable firms.

• The averages also show that workers in firms with shares and participatory decision-making have higher overall compensation, stay at their jobs longer, and offer more suggestions for improvement to the job process than workers at other firms.

Doucouliagos Study

• Doucouliagos’s meta-analysis also shows that:

• Profit sharing generally has larger effects than employee stock ownership

• perhaps because profit sharing is a more immediate reward than employee stock ownership, which is a more long-term reward

• this may also reflect the fact that some companies are motivated by tax incentives to offer shares to their employees without truly changing their mode of operation to treat workers as owners or partners in the business

• Combinations of programs—e.g. employee ownership along with profit sharing, or a stock purchase plan along with profit sharing—have larger effects than individual programs by themselves

• this complementarity might reflect the fact that profit sharing gives fairly immediate rewards, while stock ownership or employee stock options or restricted stock programs focus attention on actions that improve outcomes over the longer term.

• Broad-based share arrangements work better when combined with democratic decision-making

• In addition, employees at firms with broad-based share arrangements engage in worker co-monitoring, taking actions to correct the behavior of workers who are not working as hard as they should, more than workers without a property stake in their firm.

7 Specific Studies on the Effects of Profit Sharing and Employee Ownership

1)British Treasury Study

2)U.S. General Accounting Office (GAO) Study

3)Kruse-Blasi ESOP Study (2013)

4)Field Experiment on Fast-Food Franchises

5)California Study

6) NBER Shared Capitalism Study

7)Great Places To Work Study

1) British Treasury Study (2007)

• Aimed to examine whether programs that gave UK firms tax incentives to introduce individual stock ownership, profit sharing, and employee stock options affected the economic performance of those firms

• Data from confidential tax records for 16,844 firms

• Identified firms that had profit-sharing plans and company share option plans, and linked these to company variables like company value added, employment, profits, and capital

• Panel study of firms that entered or left the share programs, as well as a comparison of firms with and without the programs at a point in time

• Conclusion: The effect of tax-advantaged share schemes increases productivity by 2.5% in the long run

2) U.S. GAO Study (1987)

• Examined 414 corporations with employee stock ownership plans that were set up between 1976 and 1979, when ESOPs were just getting off the ground the US

• Mostly small and medium-size businesses whose stock was not traded on public stock markets, with workers’ ownership share of a company around 10 % on average

• The study matched the ESOP firms with non-ESOP firms in the same industry and size and compared outcomes three years after employee ownership started to two years before.

• Conclusion: A combination of employee stock ownership with a supportive corporate culture raised productivity by 52 percentage points on average, but ESOPs by themselves had no statistically significant effect on output

3) Kruse-Blasi ESOP Study (1999)

• Examined ESOPs set up between 1988 and 1994, at mostly small businesses with around 400 workers on average. Compared ESOPs to businesses of similar size without broad-based employee ownership inn the industry a decade into the future.

• Findings:

• Workers in the ESOPs had a capital ownership stake of around $15,000, were 5 times more likely to have a traditional pension plan, were 5 times more likely to have a 401(k) plan, were 4 times more likely to have a profit sharing plan, and 7 times more likely to have another retirement plan, than workers in the non-ESOP companies

• ESOPS had significantly higher sales growth and higher sales per worker than the companies without employee ownership

• The ESOP firms survived longer and had fewer bankruptcies; by 1999 almost 70% of the employee ownership businesses were still in existence, compared to only 55% of the non-employee ownership businesses. A follow-up study in 2002 found similar results.

4) Field Experiment of Fast-Food Franchises (Peterson and Luthans 2006)

• Examined 21 fast-food franchises owned by one firm, where 3 franchises were randomly assigned profit sharing, 6 were assigned nonfinancial incentives (social recognition and performance feedback), and the remaining 12 served as the control group.

• A pre/post comparison using monthly data found:

• Increased profitability and productivity, and decreased employee turnover, in the profit sharing franchises relative to the control group

• Also, profit sharing had a more immediate positive effect on profitability and productivity, as well as a greater long-lasting effect on reducing employee turnover, relative to the nonfinancial incentives.

5) California Study (2003)

• Survey of over 1000 establishments in CA conducted by the Goldman School of Public Policy at UC-Berkeley

• Findings:

• Managers’ assessments of quality, financial performance, and the turnover of workers were best when a participatory company culture was combined with profit sharing and employee ownership

6) NBER Shared Capitalism Study

• In contrast to the previous studies that focused on firm outcomes, the NBER project sought information from workers about how they respond to having a property stake in their workplace

• Insider Econometrics/Case Study approach, i.e., detailed quantitative analysis of a large number of subject within one or a few number of firms to gain an understanding of mechanisms

• Surveyed over 40,000 employees in 14 corporations that included large multinationals traded on major US stock markets as well as small corporations (53% response rate)

• Findings:

• Workers with greater shares of their firm were more committed to their employer: more likely to stay with the company, have greater loyalty and pride working for the firm, more willing to work harder, and make more suggestions. They also had higher fixed pay and better working conditions (i.e., employee ownership came on top of, not in place of, fair fixed salary and benefits).

• These results are also confirmed in the 2006 wave of the General Social Survey, which is a nationally representative survey conducted by the National Opinion Research Center at the University of Chicago.

6) NBER, contd.The NBER study also found important evidence against the free rider objection:

• i.e., the objection that profit sharing or broad based employee stock ownership in a large group cannot succeed because each individual has an incentive to shirk

• The free rider objection is rooted in the self-interested rational behavior of individual agents, on which most neoclassical economic and game theoretic models are built.

• Those models also predict that people would always defect in prisoner’s dilemma games rather than cooperating, should never vote, should never give to charity, and so on.

• Yet, in the real world there exists altruistic behavior and cooperation for a common good!

• A massive scientific literature from genetics, evolutionary biology and evolutionary game theory, psychology and neuroscience seeks to explain the existence of cooperative behavior despite incentives to free ride

6) NBER, contd.• In workplaces, one important channel for overcoming the free rider

problem is through worker co-monitoring--the process by which workers with an ownership stake and a profit share take on the responsibility of assuring that fellow workers do their part. This can take the form of workers helping their peers on the job or telling them to get their act together

• Until the NBER Shared Capitalism Project, no major survey had documented co-monitoring behavior, linked it to shares and the structure of work, and examined how it affected employee performance

• The NBER Study revealed that workers with employee stock ownership or profit sharing or gain sharing were more likely to step forward to try to improve their fellow employees’ work behavior than workers without shares, and these effects were amplified in workplaces the employed participatory practices like teamwork and democratic decision-making

7) The Great Places To Work

Study• Each year the Great Place to Work Institute reviews applications of major

corporations who seek a place on the list of Fortune magazine’s “100 Best Companies to Work for in America” (around 400 each year; about half are traded on the New York Stock Exchange and NASDAQ, where they represent 20% of the market value of the public stock market and 10% of employment and sales of all stock market companies)

• The GPW Institute surveys firms’ management and workers about turnover and various aspects of their corporate culture and workplace practices and pay methods (profit sharing, employee stock ownership, broad-based stock options)

• Firms that combined shares with participative work practices and a supportive corporate culture had the biggest payoff in reduced turnover and higher return on equity.

7) Great Places To Work, contd.

Findings:• 18% of the firms in the sample had ESOPs, 18% had cash profit or gain sharing

plans, 22% had deferred profit sharing plans. The average ESOP in the sample owned about 17% of company stock. 10% of companies were even majority worker-owned. 1 in 6 companies granted stock options to a majority of their workers. Another 17% of the companies granted stock options to between a quarter and half of all the corporation’s workers. The average profit sharing and gain sharing plan provided workers a 7% bonus on top of their pay.

• Workers at Firms with more extensive employee ownership and profit sharing rated their company as more credible, respectful of workers’ interests, fairer, and as providing greater participation in decisions than did workers in other firms.

• Firms with more expansive broad-based capitalism had lower voluntary worker turnover, higher employee intention to stay with the firm, and higher return on equity for the firm.

In Sum…

• In sum, the statistical evidence points to positive effects of employee ownership and profit sharing on worker and firm outcomes, especially when coupled with participatory and democratic workplace practices that.

• Extending employee ownership to more workers and firms and strengthening participatory practices in the workplaces where they exist offer a road for all workers to tap into the wealth embodied in corporate property. Extending these practices can help create a more equitable wealth distribution while protecting property rights, as the Founding Fathers envisioned. This is a viable model of capitalism for the United States.

Part III. Joseph Blasi

Organizing the Entire Economy with

Worker Ownership: Policies

Broad Ownership for Every Sphere • Fortune 100: about 1/5th with meaningful worker ownership mainly restricted stock

grants, ESOPs, ESPPs, stock options and 401k plans, e.g. Procter & Gamble

• Tech Firms: significant worker ownership, e.g. Google, Microsoft, Internet 100

• All 5000 Public Corporations: 10-20% have meaningful worker ownership but it has been declining because of poor public policies

• Large Private Corporations: about 1/5 with meaningful worker ownership, e.g. Cargill, Publix, Wawa

• Small and Medium Privately-held Firms: of the 500,000 firms with more than 20 employees, about 10,000 have significant employee ownership with 10 million workers and a billion in value, about 3000 are majority worker-owned, mostly ESOPs, e.g. Gore, New Belgium Brewer, King Arthur, Acadian

• Start-ups: several tens of thousands, a Dow Jones estimate that 3/4 grant options to most employees

• Special Case of 401k plans: excessive risk and need for private or public regulation although grants of shares to match limited prudent employee purchases is still good policy

Tax Incentives Impact

• There is a long history of legislation and tax incentives -- starting with the cod law -- to encourage broad-based capitalism. e.g. primogeniture bans, land distribution incentives and programs, stock plans

• One piece of legislation in the 1980’s led to most of the 11,000 ESOPs in the U.S.

• Broad-worker ownership formats have been generally encouraged in U.S. law, such as especially ESOPs, ESPPs, 401k employee ownership, stock options used in broad plans.

• In the last twenty years, there has been a huge REDUCTION in Federal encouragement for worker ownership, e.g. Section 162(m), public company ESOPs, broad-based stock options.

• From 2008-2014 just three corporate tax incentives will cost over a trillion dollars: accelerated depreciation, $662. billion,; the deduction of manufacturing earnings, $258 billion; the research and experimentation tax credit, $133. billion but do they contribute to broadened ownership??? They can if conditioned on companies offering broad share plans.

• An overall of the tax code is now being discussed.

• Strong statements about the Founders that the tax system was to be used to encourage the republican idea and not favor the rich.

Policy Suggestions

• The book is the first U.S. history of broad shares policies; in the 1970s and 1980s Blasi served as a legislative assistant in the House of Representatives for many years studying policies.

• Here is what we suggest:

• Office of Broad-based Capitalism in the administration and a caucus in the Congress to avoid policy disasters, coordinate policy, canvass ideas, and favor all forms of worker ownership such as coops.

• Expanded Small Business Administration initiative on ESOPs/coops particularly in the sale to departing business owners with added tax incentives for estates with small businesses to sell to the workers

• Change Internal Revenue Code 162(m) allowing the continuation of unlimited deductions for top five worker ownership/profit sharing programs IF all workers at the firm are covered

• Make major corporate tax incentives conditional on having a broad-based worker ownership program of some time not involving workers buying the stock.

• A special tax incentive for firms that have broad-based stock options for all employees.

• An incentive for Wall Street firms/financial firms to large ESOPs in public stock market companies by allowing deduction of a portion of interest income.

Significant Expansion of

Academic Research

• We have worked to develop a major national research program on shares.

• It is similar to the Andrew W. Mellon Fellowships in the Humanities that helped expand humanities education.

• Five years ago we developed a program at Rutgers SMLR patterned after this program, a national Fellowship Program offering 15-20 competitive fellowships to Ph.D. students, emerging researchers, and policy experts with major support from the Foundation for Enterprise Development and the Beyster Family, including a professorship and the Employee Ownership Foundation. Google Beyster or Kelso Fellowships.

• The program is interdisciplinary, has almost 100 fellows who meet twice a year in a summer Beyster Fellows Symposium and a January Mid-Year Fellows Workshop in honor of Louis Kelso.

• This program is responding to the relative lack of work in business schools, the social sciences, the humanities, and a dearth of policy studies in the area.

Part IV. Fidan Kurtulus

Assessing the Workability of Employee

Ownership & Profit Sharing & Cooperative

Workplace Practices in Lights of Empirical

Social Science Research

Conclusions

• The idea of The Citizen’s Share—that the economic and political success of the United States depends on citizens sharing in the ownership and profits of the economic system as well as in democratic decision making—resonates strongly with the vision of the Founding Fathers of the United States

• We have overviewed a vast research literature which shows that on average employee ownership, profit sharing and participatory workplace practices improves worker and firm outcomes

Examples

• There are also countless examples of individual businesses that have implemented broad-based employee ownership and profit sharing programs and have achieved great success:

• Google

• 73rd largest corporation in the US

• Ranked #1 on Fortune’s 100 Best Companies to Work For in 2012

• Has broad-based employee ownership and profit sharing, which is a part of a corporate culture that strives to empower workers and encourages them to participate in decisions

• Procter & Gamble

• 27th largest corporation in the US

• One of the first companies to implement broad-based equity grants and profit sharing during the 1880s and has a large employee stock ownership plan

• Exxon-Mobil

• Largest corporation in the US

• Has had broad based employee ownership for decades since John D. Rockefeller established one of the earliest and most generous employee ownership plans in 1919

Examples• Microsoft

• 37th largest corporation in the US

• In 1986 pioneered broad-based employee ownership in the software industry

• About 5% owned by its employees

• Apple

• 17th largest corporation in the US

• Has a generous employee stock purchase plan that allows employees to buy up to $25,000 of the stock annually at a 15 percent discount

• IBM

• 19th largest corporation in the US

• Has an employee stock ownership plan, a deferred profit sharing plan, and an employee stock purchase plan

Examples• Ford

• 9th largest corporation in the US

• About 13% owned by its employees

• Other Fortune 100 Companies with EO and profit sharing: Intel, Johnson&Johnson, GM, Chevron, UPS, Amazon, Coca-Cola, Cisco, Morgan Stanley, Goldman Sachs, etc.

• Among America’s Larges Corporations with EO and profit sharing: Cargill, Mars, Publix, Wegmans, etc.

Conclusions

•In light of the evidence we’ve put forward, the economic case for greater sharing of ownership and employee participation in business is a strong one

•Increasing workers’ ownership stakes will not only improve worker and firm productivity, but can lead to many desirable outcomes in our economy and society as a whole…

Conclusions• Increasing the citizen’s ownership stake in our society can help reduce

massive wealth inequality in our society

• It can also reduce the incidence of “crony capitalism” arrangements in which some corporations and small group of super-wealthy parties extract special privileges from the government through lobbying, political donations, and the revolving door between high political office and high-paid corporate jobs that is all too common today

• We citizens must press our elected officials and business leaders to adopt concrete polities to implement broad-based capitalism more widely—from changes in the tax system on equity and profit sharing plans that encourage firms to spread ownership widely, to compensation and personnel practices within companies that offer ownership stakes to all employees.

The End