Using Government (Corona-)Aid Packages to Establish Employee Ownership
It has become a common cultural reference that the Chinese character for ‘crisis’ combines the characters for ‘danger’ and ‘opportunity’. While the dangers of the ongoing crisis are increasingly clear, the opportunities have not been sufficiently explored yet.
Governments and central banks around the world are preparing huge fiscal and monetary packages to address the current liquidity crisis. These massive interventions should raise a policy question: how should we organize the post-corona economy so that it works for all of us, not only the 1%?
It is the responsibility of the governments to use what is in effect a tax-payers money to promote inclusive economic models. The interventions after the Great Recessions were, at the very least, an opportunity missed. Will this time be different?
Nationalization options are on the “European table”. And this is certainly not bad. The importance of a strong public sector has been, yet again, emphasized by the ongoing crisis. Few would, however, try to extend the proposal to other sectors of the economy, like the small and medium-sized enterprises (SME), and the corporations.
The crisis warrants a significant government initiative to establish systemic and broad-based employee ownership in firms receiving aid. This would represent a step to a democratic ownership structure with a great number of positive externalities:
- Employee ownership is a reward for employees and managers, who will, with the help of state aid, work through the crisis to get the company re-started (and, collectively, the economy as a whole).
- Employee ownership provides an incentive for workers; it gives employees a direct interest in their company, and an increased incentive to take it out of the crisis.
- Employee ownership typically increases productivity in a company.
- Employee ownership is a way of broadening and deepening the forms of democracy and democratic culture with spillover effects.
- Employee ownership is a perfect “exit strategy” for owners of SMEs. The US Congress designated ESOPs as “the most cost-effective means for both owners and companies to provide for business transition”. This is specially relevant for Europe, where every year around 450,000 SMEs employing 2 million people find themselves in a difficult situation due to ownership succession problem.
- Finally, employee ownership leads to a decentralization of capital ownership; it lowers economic inequality without government redistribution.
There are few ways to achieve broad-based employee ownership. At the Institute for Economic Democracy, we recently proposed that government aid is channeled to establish employee ownership according to the American Employee Stock Ownership Plan (ESOP).
In a nutshell, ESOP is a form of employee ownership that makes use of a dedicated trust-like structure associated with a company, which functions as an internal market for shares. These trust-like entities maintain ownership among the current employees even through generational transitions of workers in a company.
ESOPs are already well-functioning in the US (7000 companies in the US, 14 million employees or 10% of the private workforce) and the model may easily be adapted to the European context by using the national cooperative legislation, where a cooperative would function as an employee-ownership trust (with Mondragon-like individuated capital accounts).
In battling the liqudity crisis of private enterprises, governments are using debt abatements, grants, factoring, tax breaks and loans; all of which could be translated into employee ownership.
With the loan, for example, we can think of ESOP trusts as a vehicle for the loan, where the cash on the trust is than used to buy newly issued or treasury shares from the company, providing liquidity. All employees of the receiving company should become members of the trust, and get their share of rights derived from the ownership (voting, dividends, and the claim to individuated net asset value).
Direct subsidies, tax breaks, purchased receivables and debt abatements by governments may be similarly translated into ESOP shares. The value of the aid should be matched by newly issued shares or treasury shares, which are transferred to ESOP trusts and rewarded to employee-members.
Let me not sound overly excited; pessimism is granted. Each crisis presents a unique opportunity for structural change and only few in the past have been used to promote public interest. Naomi Klein today reasonably fears that coronavirus crisis will, like in 2009, yet again direct government intervantion in the hands of the wealthiest.
The ownership aspect would strengthen cooperation and joint responsibility among employees, two necessary and interrelated features to restore economic vitality in the face of a potential global catastrophe. People on either side of the political spectrum should used the political leverage of broad-based employee ownership that gives primacy to all the frontline managers and workers whose efforts will restart the real productive economy.