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The 2 PER CENT SOLUTION: A Workable Way to Achieve Employee Ownership and Autonomy *** The 2 PER CENT SOLUTION: *** *** A Practical Path to Employee Ownership and Autonomy***by Jonathan Marin Introduction.This article presents a gradualist approach toward majority ownership, byemployees, of the stock of the companies they work for. The idea has meritin its own right, and could be strategically important to broader campaignsfor the rechartering and redefining of corporations. Corporations' power over governmental institutions and the marketplace isdiffuse and largely unaccountable. Corporate management operates companiesfor the benefit of shareholders, subject only to specific, limited, legalrequirements. It is their duty to do so. Unions only represent a smallfraction of the work force in the United States. Most employees have littlevoice in decisions that affect their vital interests.When corporate decisionsimpact the lives of their employees, the cause-and-effect relationship isunmistakable. Campaigning for these ideas will raise employees' awarenessof how corporations restrict their choices as consumers and as citizens.Achieving it will give them a voice in decisions that directly affect theirlives.Mergers, downsizing, and restructuring eliminate jobs. When companies closefacilities and move operations to lower cost locations abroad, many permanentpositions are phased out, or replaced with "temporary" positions that provideno sick leave, paid vacation or other traditional benefits.New technologies reduce market share and squeeze margins. Unless plants keeppace with technology, their plant and equipment becomes increasingly obsolete.Eventually, when they can no longer match costs with competition, themost cost-effective option available to management is to close the plantand relocate its operations elsewhere. But whether the decision to closethe plant is made by incumbent management, or follows on a merger or corporatetakeover, the apparent cost-effectiveness of relocation usuallyreflects decisions taken years earlier.The economy as a whole often realizes little or no net gain from such closings.The savings that the companies achieve are partly or wholly offset by costsborne by others - what economists term an externality. "Downsized" employeesbear the costs of their forced relocation. Compelled to sell their homesinto a suddenly glutted real estate market, many lose most or all of theirhome equity. Communities with a reduced and financially stressed tax baseare left to pay off the bonds which paid for now-excess infrastructure: schools,parks, water supply, sewers, etc., and must bear increased expendituresfor additional social services. In addition to the quantifiable costs, thereare always intangible costs that include demoralization, family disintegration,increased drug use and alcoholism, and suicide.Externalities grate on our sense of right and wrong. The greater part ofour civil law is based on the notion that it is wrong to intentionally actin a way that imposes loss on others, and that anyone who does it must compensatefor the loss.Even when there is a net benefit from incremental efficiencies and a moresmoothly running economy, the benefits are diffuse, while the costs areconcentrated. However much they may be offset by gains elsewhere, theexternalities remain. This article presents an approach that will reducethe externalities, and spread the costs. It will make for a healthier economy,and a healthier and more just society. I. Migration to Worker Control and Ownership - "The 2% Solution""The 2% Solution" is a way to give corporate employees a voice in, and ultimatelycontrol of, the companies they work for. Companies would continue to be managedfor profitability, go public, split their stock, and do all ofthe things corporations do. The dilution of the interests of outsideshareholders will be so slow as to be imperceptible, and will be offset bybenefits to corporations that will reflect in their earnings and share prices.Every existing corporation, and every new corporation when formed, wouldhave a ten year grace period during which to become fully established.At the end of the tenth year, and of every year thereafter, corporations'would automatically increase the number of outstanding shares by 2%, compounded.The issued shares would go to an Association owned and controlled by theemployees, vested former employees, and retirees. Employees would not ownthese shares as individuals.If at the end of year ten a company had, say, 10 million shares outstanding,200,000 shares would automatically issue. After year eleven, a new 2% ofthe then outstanding shares would be issued to the employees, and so on.By year forty-six, the employee pool would contain ten million shares - halfof the capital stock of the company. Long before that, the employee poolwill have become a force to be reckoned with; many large corporations haveno single shareholder who owns as much as 10% of the outstanding shares.Employee stock ownership plans, profit sharing paid in company stock, andstock option plans would accelerate the process, as would employees' private purchase of company shares. Any new stock offerings periodwould include the adjustments necessary to prevent dilution of the employeeownership. The employees of each company would set the rules regarding vestingof rights in the pool, retiree rights, the distribution of dividends, andindeed, all decisions affecting their ownership interest.Employees of aging corporations will participate in the choice whether tomaintain their income by keeping an aging plant open and running at lowprofitability, or invest in technology and equipment. Where a plant has becomeunprofitable, they would have the option to absorb a reduction in their payto make up the shortfall, rather than give up their paycheck altogether.By acting to continue operations, the employees would not only benefitthemselves, but avoid burdening their community with externalities, and avoidburdening the economy with insuffiencies in aggregate demand, downward wagepressures in the labor market, and balance of payments problems.Investors in the primary markets - the entrepreneurs who form companies, the venture capitalists who finance them, and the purchasers of sharesat initial public offering - measure their time horizon in years, not decades.They do not invest unless they expect to achieve their investment objectivesin less, usually much less, than ten years. The ten-year grace period, therefore,will prevent any noticeable decrease in the capital available to start-ups.The glacial, nearly imperceptible dilution of equity will have littleif any appreciable affect on shareholders of existing companies, the secondarymarket. The dilution is small in comparison with investor targets. It falls within the "noise" of short-term market fluctuations. In any givenyear a potential purchaser of the stock is looking at a 2% dilution, a levelwhich is small in comparison with his investment objectives, and less thanthe commissions formerly paid to brokers as a percentage of portfolioon an annual basis. To the extent that there would be any effect at all,it would be the socially beneficial effect of diverting funds away from thesecondary market toward the primary market with its dilution-free grace period.If the employees were the only beneficiaries of the plan, its effect wouldbe equivilant to a 2% tax on a round-trip stock transaction. In fact, dilutionwill be largely or fully offset by benefits to companies. Even in companieswhich already have stock option or profit sharing plans, employee moraleand productivity will be enhanced by employees' financial interest in thecompany's long-term success. The plan will soften the adversarial relationshipbetween employees and management, reducing wasteful friction.In time, the existence of an important shareholder constituency with a longtime horizon will serve to counter-balance forces that pressure managementto plan and act for an unduly short time horizon. These effects will reflectin earnings, and stock prices. Corporations are a creation of the state. A large body of law defines theduties of management and the rights of employees and shareholders,and the public. It is a dynamic area of the law, constantly adapting to changingcircumstances, re-balancing those rights and duties in the interest of fairnessand efficiency. The 2% program entails a modest realignment of those interests,no greater than those passed from time to time, and certainly less than,say, the creation of the SEC or the NLRB.Though opponents may claim that the program constitutes a taking withoutdue process, in violation of shareholders' Fifth Amendment rights, a largebody of constitutional law stands against them. Corporations exist becausetheir existence is in the public interest. The precedence of compelling publicinterest over the property rights of shareholders has been upheld in mattersthat far more directly affect share values - price controls, exportrestrictions, environmental laws, and so on. On a practical level, it ishard to see how anyone could establish, much less quantify, a claim involvingthe market value of securities that change hands frequently and whose marketvalue fluctuates hourly, against a program that would not take effect forten years.The 2% dilution approach recognizes the societal interest in attractingentrepreneurial and venture capital, and accommodates it. It also acknowledgesthe importance of secondary markets in establishing correct share valuationas a basis for subsequent primary offerings. While retaining the opportunitybenefits of free capital markets, it accommodates the reality that employeesare committed to a company on a much longer time scale than the shareholdersof any given moment. The dilution is of little consequence to investors'decison buy the stock, or to sell it. It is critical to the interests ofthe people who will spend years or their whole careers at a company.Long before employees actually own a majority interest, they will becomean important part of the decision processes that affect their lives. Theywill positioned to prevent the physical deterioration that ultimately makesrelocation attractive. Unlike outside investors, for whom selling sharesis as easy as a point-and-click, they will be a vigilant guard against anytendency of incumbent management toward complacency, bloat, and inertia.I take it as axiomatic that no policy that tends to enrich the rich at theexpense of the poor can be justified, unless it expands the economy as awhole, or furthers some other compelling public interest. Grantingthe management of young companies wide latitude to act in the best interestsof their shareholders meets this standard, because of the benefits new companiesconfer. The investors who capitalize new companies expect to be rewardedfor their risk, and for their central role in bringing the company into being.Their reward depends on the essential mechanism of the secondary equitiesmarkets. Anything that interferes with the ability of that market toattract early investors, will adversely affect the flow in capital into newventures. As companies age, however, that justification diminishes.After years of turnover the shareholder rolls are many times removedfrom the original and early investors. Policies that promote the interestsof investors and management, vis a vis those of employees, become difficultto defend.However long shareholders have owned their shares, their connection to thefortunes a company becomes increasingly remote through time. Whatever theircontribution to the present share price of a company, the share price tenyears from now will mostly reflect the energy, effort and ingenuity of theemployees. In a perfect world, the interests of employees and communitieswould be a major factor in corporate decisions. A constituency with an interestin the long term health of the company would offset pressures on managementto focus on the short-term bottom line. The share of profits taken by thesuccessors to an ancient investment would diminish as the significance ofthat investment receded into history, while an increasing share would goto the people who produced them. The 2% Solution is a step toward that perfectworld.COMING SOON: Part II. Captive Suppliers. Dedicated Services. The Rights of Temps, Vested Former Employees, and Retirees. Part III. Secondary Offerings. Foreign -owned Companies, LLPs, LLCs, Joint Ventures, and other Forms of OrganizationPart IV. A force toward good corporate citizenship. A counter tounaccountable power.Copyright(C) 1998, 2001 by Jonathan MarinRETURNTO ANALYSIS AND INSIGHT INDEX Adoptionopoly- The Board Game You Play in the DarkBack to Jonathan Marin'sHome PageSatire, Humor,and Wit This page is maintained byJonathan Marin e-mail:j.marin.1@alumni.nyu.edu The author holds a Bachelor of Science degree in Eonomics from New YorkUniversity.Last modified on August 14, 2001 |
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