Employee-owners are more confident about their financial security. Marjorie Kelly
At a time of growing anxiety around economic issues for many workers, recent news indicates that employee owners are experiencing significantly less stress. According to a recent Forbes piece, employee owners have far fewer worries about paying their monthly bills than workers at other firms. While 38 percent of workers not in an Employee Stock Ownership Plan (ESOP) reported worry about ability to pay the rent, only 4 percent of employee-owners had that concern.
Employee ownership affords average Americans the stability required to live free of anxiety associated with medical emergencies, eviction, and low wages.
The piece reported on a John Zogby Strategies survey, noting that Zogby researchers benchmarked their survey of 3,415 employee-owners against an October 2016 Marketplace-Edison Research ‘Economic Anxiety Poll,’ which was taken before the 2016 U.S. presidential election. The report suggests that employee owners have reduced anxiety likely in part due to the greater transparency associated with ESOPs. That is, owners have greater insights into the financial health of their company than at other businesses. Employee owners also have much healthier retirement savings and higher wages. Employee ownership affords average Americans the stability required to live free of anxiety associated with medical emergencies, eviction, and low wages.
This news stands in marked contrast to the situation faced by other workers. According to a Go Banking Rates survey released last week, more than half, 57 percent, of all Americans have less than $1,000 in their bank account. The findings are in line with a Federal Reserve survey last year that found that about 46 percent of Americans do not have $400 to cover an emergency, like a medical or transportation-related expense. A recent census bureau report found that household incomes for the poorest fifth of households fell by $571 over the decade that ended last year, adjusting for inflation. Over the same period, the average income for the wealthiest fifth of households rose by $13,479.
As economic inequality continues to grow in the United States, stress-related illnesses are rampant. Economic precariousness increases stress, contributing to a host of stress-related diseases like depression, anxiety, heart attacks, diabetes, gastrointestinal problems and asthma.
“It takes a job to get out of poverty, but it takes assets to stay out of poverty,” Kelly said.
As Democracy Collaborative Vice President Marjorie Kelly notes in a recent podcast with the Next System Project, “Think about this. You break your ankle, your tire goes flat, your kid needs a school band uniform. You can think of a million reasons someone might need $400. To think that many Americans cannot put together $400, that’s scary. You would live in a state of economic anxiety pretty much all the time. That’s a terrible quality of life.” Kelly went on to note that “Most of us don’t think about assets. Most of us don’t understand the difference between income and assets.” Assets — like ownership shares in a company — represent something that has enduring value and that can increase in value over time, generating wealth. As John Barros, head of economic development for the city of Boston, once put it, “It takes a job to get out of poverty, but it takes assets to stay out of poverty,” Kelly said.
Employee-owned companies are an important and often overlooked avenue for ordinary Americans to accumulate assets that improve their quality of life. As the evidence of the John Zogby Strategies survey shows, employee owners feel more confident in their economic security compared to non-employee owners.
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Real Pickles DPO: How Employees Raised Half a Million Dollars to Buy a Business: A Creative Tool For Financing a Worker Cooperative
Real Pickles sold its first jar of organic dills in 2001, when founders Dan Rosenberg and his wife, Addie Rose Holland, decided to turn their pickle-making hobby into a business. By 2015, the business had grown to over than $1 million in revenue.
As the Rosenbergs began to consider the long-term sustainability of the business, they wanted to enshrine structural tools that would help keep Real Pickles in the community for the long-term and ensure that the company continued operating by the values it had been founded on. The solution, they determined, was to bring the workers on as co-owners and establish the new company as a worker cooperative. The financing mechanism they used to achieve this, an innovative financing tool called a direct public offering, offers lessons in grassroots financing for employee-ownership.
In 2012, the co-founders and staff members of Real Pickles together formed a new corporate entity, structured as a worker cooperative, to purchase the business. For the initial equity, the five employee-owners each purchased a $6,000 membership share. They then faced a hurdle of raising more than $500,000 in financing for the remaining buyout plus working capital.
Issuing preferred stock was considered the most viable option. The aim is to pay investors a 4 to 5 percent annual dividend; this was deemed more workable than the 8 to 12 percent interest likely to accompany debt financing, or the approximately 15 percent annual return needed for a royalty arrangement (in which royalties are a percent of profits). Adding a touch of creativity, Real Pickles decided to issue these preferred shares through a direct public offering (DPO).
A DPO is similar to an initial public offering (IPO), in that the business can advertise the offering openly and can accept unaccredited investors; yet because a DPO is offered on a more limited geography, SEC filings are not required (therefore it costs substantially less in legal fees) and the investors have ties to the local community (meaning many are stakeholders who care about the company, such as customers and neighbors). Real Pickles was assisted by Cutting Edge Capital, which has helped more than 60 clients launch DPOs.
Real Pickles set the minimum investment through the DPO at $2,500. This was a “key decision,” Rosenberg has said. “It was a figure low enough to allow for relatively broad participation, while high enough to keep our investment pool at a manageable size.” Shares are non-transferable, except to the coop, and they target a 4 percent dividend when the board decides to distribute dividends. Shares must be held for at least five years, at which time they may be sold back to the company at the same price for which they were purchased.
Real Pickles sold $500,000 in shares to 77 investors; some of whom were individuals that tapped their self-directed individual retirement accounts to access the capital. Institutional investors included consumer co-ops that purchase from Real Pickles, other wholesale customers, one supplier, a foundation, and a CDFI. The company originally planned a six-month campaign, but the shares sold out in two months. Employees completed the purchase of the business in May 2013.
Adapted from The Democracy Collaborative report, Strategies for Financing the Inclusive Economy.
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Half of American Workers Could be Employee-Owners
For those interested in employee ownership, it is critical to understand if employee ownership can achieve the scale required to truly reduce wealth inequality and create strong local economies. In a previous post, we saw that today there are thousands of employee-owned business operating in every industry and employing up to 2 million Americans. But while there are numerous examples of large EO companies, as a whole, these firms account for about 1% of the civilian labor force.
The obvious question for those interested in advancing employee ownership is — how big can employee ownership become? Can it get to such a scale that it impacts a larger portion of that economy?
To answer this question, let’s think of existing employee-owned companies as proof-points that EO is a viable model in a particular industry for companies of a particular size. For example, let’s assume that WinCo Foods — a large grocery retailer with 100+ locations in 9 states that is 100% employee-owned — provides evidence that employee ownership is a viable model for other large grocery retailers such as Safeway and Kroger. With this assumption, we can estimate the potential size of employee ownership by looking at existing employee-owned companies and adding up the size of all companies similar to them.
Under this model, the key inputs to calculate the theoretical potential of employee ownership are a complete list of employee-owned companies and an industry/size breakdown of the entire private sector. Fortunately for us the latter is provided annual by the Census Bureau’s Statistics of U.S. Businesses(also known as the SUSB, we use the 2013 information). Unfortunately, we are missing a complete database of all employee-owned companies. But we do have an incomplete version of this list from my work on Certified Employee-Owned that contains 3,139 firms thought to be at least 30% EO (for more information, see the method used here).
This analysis yields the surprising result that over half of private sector employees could potentially be employee-owners. Specifically we find that potential size of employee ownership is roughly 60 million Americans working at 2.5 million business establishments. This is compared to a total private sector workforce of 116 million in our data. Therefore, employee-owned companies could be 52% of the private sector.
Breaking these numbers down by state yields some interesting patterns. First, all states have considerable EO potential, with low states clocking in at least 35% of their private sector (weighted by employee) having the potential to be employee-owned. Second, some surprising states present major opportunities for the expansion of employee ownership. The 5 States with the largest EO potential are: Nevada, Texas, New Jersey, California, and Virginia. In total, 15 states have an EO potential above 50%.
Looking forward, we can make additional assumptions to understand how the potential size of employee ownership will change in the future. In the year of our analysis (2013) the size of the civilian labor force — think of this as all people who are eligible to work regardless of current employment status — was roughly 155 million Americans. Looking forward, by 2050 the civilian labor force is expected to be roughly 200 million. Assuming the proportion of the civilian labor force that could be employee-owners is constant, then our analysis indicates that the potential size of employee ownership in 2050 is 77 million.
As with any sort of estimate, it’s important to understand how much the answer can change with changing assumptions. For example, in an early version of this analysis, using the same assumptions but a much less complete list of EO companies (only ~1,000 companies vs the ~3,100 used here), I found a potential size of 46 million employee-owners. Swings of 10 million or more were common when changing other assumptions, for example what constitutes an industry (defined by different levels of the North American Industry Classification System (NAICS) and what constitutes a “small”, “medium”, or “large” company.
In the final analysis we used the 4 digit NAICS code and defined size as follows: small (5–99 employees); medium (100–499 employees) and large (500+ employees). I would have liked to add more granularity for large firms, but was limited by the SUSB data. Most employees in the private sector work at large firms, so the analysis will be particularly sensitive to this assumption.
Despite the sensitivity to assumptions, overall the analysis presented here is conservative. I estimate there are between 6,000 and 8,000 companies in America that are at least 30% employee-owned, but here we are using a list of only ~3,100 companies. Most of the omitted companies are going to be small, but adding more companies can only increase the number of potential employee owners.
Regardless of the particular assumptions, one clear result of this analysis is that employee ownership could be much larger than it is today. This comes directly from seeing EO companies of all sizes operating in nearly every industry in the economy. Even conservative estimates make clear that there is enormous potential to bring employee-ownership to a much larger scale, affecting the larger economy, and changing the way we do business for the better.
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Employee ownership and the next system
The Democracy Collaborative’s Research Director Thomas Hanna and Next System Project Deputy Director Dana Brown sat down with Dr. Joseph Blasi — preeminent expert on employee ownership, Distinguished Professor at Rutgers’ School of Management and Labor Relations, and regular contributor to work around Fifty by Fifty — for a chat about the importance of employee ownership and its role in a larger agenda to reduce inequality, anchor jobs at home, and rebuild a strong and stable American economy.
Thomas M. Hanna: Could you just give us a sense of why employee ownership is important, and also why it’s not more widespread in the United States at this point?
Joseph R. Blasi: Sure. In articulating what the next social and economic system should be, employee ownership is important because capital shares — by which I mean broadening the ownership of capital and broadening access to capital income — are essential to keeping a middle class and avoiding the current system becoming a form of feudalism. For any real form of financial inclusion, capital ownership and capital income are an essential part of the next system. There’s just absolutely no getting away from it, and the reasoning is this: both capital ownership and capital income are highly concentrated in the United States. More than about 80–90% of both are concentrated in approximately the richest 10% of the population.
It’s really quite a serious problem and this would not be an essential part of the next system if it was a case that middle class and working class families saw their wealth and their income expanding as a result of real wage growth. The problem is the economic situation now in which real wage growth is essentially flat or declining and the families that are prospering in the United States are mainly those families who have outsize wage incomes — like movie stars, investment bankers and such — or access to capital ownership and capital income by owning significant amounts of stocks, bonds, and real estate or receiving meaningful grants of profit sharing or employee share ownership in the firm where they work.
The point is that the families that have access to some form of ownership of a business or ownership of financial assets, with capital income, interests, rents, or dividends on those capital assets — those are the families that are doing well.
The point is that the families that have access to some form of ownership of a business or ownership of financial assets, with capital income, interests, rents, or dividends on those capital assets — those are the families that are doing well. If there’s going to be a next system designed in the context of a market driven economy, a broadening of capital ownership or capital income has to be part of it and we have to think through the details of that carefully.
TMH: We know that you share the goal of Fifty by Fifty and The Democracy Collaborative to bring about a massive expansion of employee ownership in the United States by 2050. What are some of the opportunities, strategies, and mechanisms for getting employee ownership to scale in this country?
JRB: I want to talk about both employee ownership and profit sharing because in American history both have become important ways to broaden capital ownership and capital income. Employee ownership is important when you’re talking about the roughly 5,000 corporations on the NYSE and the NASDAQ and when you’re talking about the tens of thousands or hundreds of thousands of privately owned small business corporations that have succession problems (where you’re hoping the founders will sell to the employees). Profit sharing should not be forgotten because profit sharing has a long history in stock market companies and family businesses in the United States and it can potentially represent 10–20 percent of additional income on top of fair wages, as we observe at unionized auto companies such as Ford and airlines such as Southwest.
There will be a lot of family businesses that would do profit sharing if it were encouraged by federal and state governments who would never do employee ownership of any significant amount because the families want to continue to own these businesses 100 percent, so we have to focus on both.
I think the principal strategy is to change around the entire system of tax incentives and tax expenditures in the United States so that the trillion dollars in tax expenditures that the Federal Government gives to corporations every five or six years, that those tax expenditures, those tax incentives, are conditioned on companies having broad based employee ownership. I justify this in Chapter One of The Citizen’s Share by reviewing the tradition in American history popular among many Founders that broad-based property ownership is necessary for a democratic republic to exist and to sustain itself.
If broadening capital ownership is an important goal, then a tax system that spends 99.99 percent of its tax expenditures encouraging something else needs to change.
Let me give you a little perspective, ESOPs (Employee Stock Ownership Plans) have a lot of favorable tax treatment in the US and I go over that in our book, The Citizen Share, and in our policy report, Having a Stake, costing taxpayers about a half a billion to a billion dollars a year, and some years less, in tax expenditures. Whereas in contrast we spend something like a thousand billion dollars — a trillion dollars — every five or six years on tax expenditures just for the existing format in corporations, so you can see it’s just really clear if broadening property ownership, if broadening capital ownership is an important goal, then a tax system that spends 99.99 percent of its tax expenditures encouraging something else needs to change.
All forms of broad based employee ownership need to be a part of a complete restructuring of the tax system, not just ESOPs, but a form of employee ownership that can deal with every kind of business entity. For example, worker cooperatives have a very important part to play in small and medium sized business and I think it’s really a moment for the future of worker cooperatives to be a way to buy family businesses where there isn’t a family member to take over. I think in public stock market companies we need to encourage ESOPs, such as the ESOPs that exist at Proctor and Gamble where workers own 15–25 percent of that company. We need new legislation to do that. In high-tech companies, we need to encourage grants of stock, stock options, and profit sharing to workers such as exists at companies like Google and Microsoft.
A major part of what I’m saying is that the strategy should first address the tax system in total and second it should address all the different formats of broad based employee ownership, no matter what they are — as long as they are based on grants of equity or profit sharing to employees and not workers buying company stock with wages or concessions — and it should address all the different sectors of the economy where those formats can be useful.
We’re not going to use worker cooperatives exactly as they are organized in small firms as a format for broad based employee ownership on the New York Stock Exchange.
We’re not going to use worker cooperatives exactly as they are organized in small firms as a format for broad based employee ownership on the New York Stock Exchange. Sorry to tell everybody, that’s not going to happen right now. But we may use ESOPs, grants of equity compensation, and broad based stock options. It is possible we can adapt the worker cooperative structure using platform cooperativism (see the books of Trebor Scholtz of the New School University) in such companies or the representative governance structures of Mondragón in larger firms. In the near future, worker cooperatives will have a very essential role in converting existing small businesses where the founder wants to retire to broad based employee ownership. Any notion of a utopian one-sized fits all strategy is doomed to failure.
TMH: In the past as you’ve mentioned, in the book and in the paper, employee ownership and profit sharing have been able to command pretty broad support across the political spectrum in the US from Ronald Reagan to Theodore and Franklin Roosevelt and beyond. What do you think the new Trump era means for employee ownership efforts? Are there any particular new opportunities or threats in your view? Is this potentially a hindrance to the effort to scale up employee ownership in the way that we’ve been talking about?
JRB: I think in the short term a lot of progress can be made at the Congressional level, because there are large groups of Senators and Congresspeople across the political spectrum that have an interest in broad based profit sharing and employee ownership. They have often times made themselves known by co-sponsoring legislation in this area and there has been a strong history of bipartisan support for ESOP legislation and broader coop legislation for decades.
I think in the short term a lot of progress can be made at the Congressional level, because there are large groups of Senators and Congresspeople across the political spectrum that have an interest in broad based profit sharing and employee ownership.
The problem is that I don’t think that Congress has been given enough information about how central a revision of national policy on employee ownership or profit sharing is to saving the middle class. That’s why Richard Freeman, Doug Kruse, and I wrote this “Having a Stake” policy piece for the DC think tank Third Way in order to provide a twenty-five page overview of this issue.
TMH: At The Democracy Collaborative, one of our stated goals is to move this country to a very different place, one in which outcomes are truly and genuinely equitable, democratic, and ecologically sustainable. Can employee ownership and profit sharing lead or contribute to such outcomes in your opinion?
JRB: Yes, to a great extent — but with some limitations. Let me explain why. To the extent that there are large groups of the population working in companies that have profits and where the ownership of these corporations has a lot of value, then employee ownership and profit sharing make a lot of sense.
This potentially involves tens of millions of adult workers in the population. However, we also have a lot of people that have dropped out of the labor market; who are under skilled; who are disabled; or who are senior citizens whose working life has mostly already taken place. We also have poor and needy children and adult workers in the nonprofit or public sector like the military, people in law enforcement, and teachers in kindergarten, elementary school, high school, day care centers, and universities. These groups account for tens of millions of more people. Employee ownership, broad based ownership, and profit sharing is not going to help them increase their wealth at all.
So, the next system really requires a strategy to try to maximize all forms and all formats of employee ownership and profit sharing in all sectors of the economy where there are workers who can get access to them. Then, we need to focus on things like universal basic income and what I call, “Citizen’s Trusts,” which are privately managed trusts where citizens can receive the dividends of capital ownership — capital income just as the citizens of Alaska receive dividends from the Alaska Permanent Fund.
We should encourage every state to set up a Citizen’s Trust, fund it with seed money from the US Government, and provide the billionaires of the country tax incentives to contribute some of the billions to these trusts. The trusts could use leverage/debt to buy assets and pay for them out of the income on these assets as Louis Kelso proposed in his book Democracy and Economic Power. Such trusts would be professionally managed and they would pay out, like the Alaska Permanent Fund, significant dividends to residents and workers who are not in the for-profit sector where employee ownership or profit sharing is relevant. I would like to see such trusts initially benefit the very old and newborns. As robotization and tech unemployment expands, they would be central to the income of most citizens. These privately-owned trusts must own the robots.
TMH: Some theorists have long suggested that employee ownership may not necessarily produce the egalitarian outcomes anticipated or desired. Or that, in fact, it may exacerbate some economic and social inequalities. Often some of these people argue that some form of social ownership or joint community-worker ownership alongside worker control or self-management of the enterprise itself would be preferential to pure forms of employee ownership. Do you have any thoughts on that debate?
JRB: Oh sure, I have a lot of thoughts! If you look broadly at all the employee ownership in the United States, the degree of ownership is largely correlated to salary levels. That is unlikely to change and it exists in worker cooperatives too.
At a Proctor and Gamble, for instance, someone making $150,000 year roughly may have three times the employee ownership as the person making $50,000 a year, or six times more than the person making $30,000 a year. In stock market companies, which use grants of stock and stock options for employee ownership, that may even be greater. While I know a lot of progressives worry about how employee ownership functions in the ESOP form, it is important to note that the ESOP is actually the only — and I stress only — form of employee ownership in the United States which has a certain egalitarian circuit breakers built into it. This is because ESOP’s are in ERISA (Employee Retirement Income Security Act) and have to grant employee ownership according to two strict rules.
The first is that ESOPs cannot benefit the highly-compensated employees or people who hold a lot of stock because they’re founders or family owners in the company. Secondly, they have to be at least as fair as according to salary.
To go to your broader issue, however, there are salary differences in worker cooperatives and there are salary differences in ESOPs, and I will claim to you that in an advanced and developed worker cooperative sector as we do not yet have in the United States — I wish we had one — but as we have in parts of Europe like Mondragón and such, the notion that the stock ownership varies with salary is pretty well accepted.
For example, in Mondragón they have an agreement that’s something like the highest person can’t make more than six or eight times than the lowest paid person. I will tell you that in general in ESOPs in the United States, because ESOPs are mostly in closely-held firms that used to be family businesses, we don’t typically see even these kinds of extreme salary differences.
I think that it is unrealistic, utopian, and counterproductive to think that we would have a big employee ownership sector where we wouldn’t have salary differences. If you look at Mondragón, which is the most developed example that we have in the world of a whole region trying to do employee ownership, they struggle to maintain their highest salary not more than eight times the lowest salary. They’ve even had to make exceptions in some cases.
In general, it’s my view as a private citizen and as sociologist, that one should be able to run most companies with less extreme salary differences than we have now in stock market companies (where we have outrageous and unsustainable salary differences). But the notion that we’re not going to have any salary differences is counter-productive. But if an intentional cooperative’s members desire that, they have the right to do it. Frankly, the issue of whether many millions will even have a salary or a stable job is more important for our nation. This is why Citizen’s Trusts are important. If jobs decline we will see a shift to many citizens having their — I hope — required non-profit work separated from their income. Many wealthy and so-called retired people function like this responsibly.
Now, let’s talk about worker control. I think that if we’re going to get tens of millions of people in the United States into thousands and thousands of firms which have significant broad based employee ownership, then we are not going to get there by having some purist, utopian, direct democracy form of worker control in many of those companies. It ain’t going to happen and it ain’t going to happen for the following reasons.
I think that if we’re going to get tens of millions of people in the United States into thousands and thousands of firms which have significant broad based employee ownership, then we are not going to get there by having some purist, utopian, direct democracy form of worker control in many of those companies.
First, it ain’t going to happen because if you look at the worker cooperative sector as it is, you only have a very small number of worker cooperatives that hold to that model. The larger worker cooperatives tend to have representative participation in management and not full direct democracy.
Secondly, the largest example of worker cooperatives in the world, Mondragón, contrary to what many ill-informed progressives think and continually misrepresent about it, focuses on representative forums of participation at the workplace and not direct forms. They elect representatives and their focus is more on teams and involvement at the workplace level.
Thirdly, most American adult workers don’t yet have the training and the skills to run highly participative workplaces. They would need to receive that training and skills. Do I think it’s possible? Absolutely. But I think if I had to choose between having only purist versions of broad based employee ownership and worker control only versus having more of a diversity of formats which would get to scale more quickly and broaden ownership meaningfully, I would go for diversity of formats.
TMH: I just wanted to pick up on the last point that you were making and bring it around to the question of democracy more broadly. Many arguments made in favor of employee ownership suggest that it can contribute to a reinvigoration of political democracy. And beyond the purely distributive elements of this argument, many theorists have suggested that the experience of participating in the economic decision making in the workplace could play an important role in this revitalization. Do you have any thoughts on that?
JRB: Absolutely. Carol Pateman wrote about this in her famous book, Participation and Democratic Theory, and we see in Northern Italy and in Mondragón that employee ownership has had a real impact on participatory democracy. I think this makes a lot of sense. I think that the concept of just voting as the only form of democracy is a ridiculous notion as democracy means lots more civic participation than the important act of voting.
I think that what social scientists call the “spillover impact” of participation at the workplace is most pronounced when employees have a lot of impact on how their job is organized, where they have self-directed work teams, where they have self-management — which is finally becoming more common in industry — and where they have a lot of participation at the department and division level.
I also think that it’s very important that when there are people who have ownership interests in a firm at any level, they should be able to vote for members of the board of directors, whether it’s a worker cooperative or Proctor and Gamble. Those are very, very important norms of governance that we have to move to consider them seriously. Shareholder governance rights are entirely consistent with private ownership.
I would like to see at least every form of worker ownership have the ability to elect with their ownership interest members of the board of directors of their company. I simply make a difference in terms of whether all workers at all work places should elect their managers. I’m not sure that that is a realistic approach except in very tightly knit workplaces where there is a lot of education and training and a lot of social capital between the workers. In Mondragón, worker representatives do not elect managers. For me, the best achiever needs to be the manager and diversified boards need to decide that.
We have a completely non-democratic form of corporate governance in the United States in general, in our 5,000 stock market companies. I ask my students in my corporate governance class, “What do you call an election where the number of winners of the election equals the number of candidates?” That’s how our Boards of Directors are elected in publicly traded stock market companies. We have to reform those first. We have to get to the point where the shareholders of stock market companies can nominate a broader slate of people to run for the boards and also where the employee shareholders can also nominate employees to run for the boards.
We have a completely non-democratic form of corporate governance in the United States in general, in our 5,000 stock market companies.
In those stock market companies, and even Silicon Valley companies, that have five percent, ten percent, twenty percent, fifty percent employee ownership, the employees should be electing people to the board. We have a really completely, undemocratic system of corporate governance in our stock market companies which is really, in principle, a violation of the norm of shareholder democracy in joint stock corporations legally.
TMH: You mentioned in Having a Stake that it’s time to examine how ownership and profit sharing policies can help make US capitalism more efficient and equitable in the current economic environment. What would you offer to those that may argue that we have to begin thinking of political economic alternatives beyond the way that the current American economic system works? In your opinion, what role could and should employee ownership play in such visions for a more community-sustaining system?
JRB: I think that the Federal Government should encourage employee ownership with tax incentives so that in general our stock market companies should be around fifteen to twenty-five percent employee owned, just as a rule of thumb.
I think that that there should also be a huge sector where small businesses of fifty, a hundred, five hundred employees are largely employee owned. I do note, as one of my friends has told me, that many family owned businesses and sole proprietorships are essentially employee owned because the employees and the owners are one and the same. Don’t forget that. The notion of the family farm and the small family business, which is essentially a worker/owner ownership situation, is still part of broad based employee ownership.
My problem with employee ownership, as I said earlier, is it doesn’t do much for the kindergarten teacher and the high school teacher and the soldier or the fireman or firewoman, and there we need to think in terms of these broadly owned citizen’s trusts which own the robots and own the capital of the country and pay dividends.
In our next system, we have to think about the chance — and it’s already happening — where our work is disconnected from income. We’re going to have situation where we’ll have so much technological unemployment that we will have a lot of people who will be receiving dividends, like the Alaska Permanent Fund, and some forms of universal basic income. We will also need to be thinking about different types of work: reading to the blind, helping children, helping senior citizens, and doing the kind of citizen participation that you alluded to at the town and city and county level.
People will need to think about their income coming from some sources, but doing social work, too. I think that’s a very important part of the next system. We may, in fact, have a certain part of the economy — not small — which is employee owned. But that part of the economy may not have most of the working population in it because of the large public and nonprofit sectors, and those receiving incomes from Citizens Trusts.
Proponents of alternative systems can’t have this one-size-fits-all view about employee ownership. And we will also need to develop this new idea about pro-social work so that people begin to feel that it’s important work, but not necessarily work that provides your income.
Dana Brown: What is it that gives you hope about the future of employee ownership and profit sharing in the United States? Are there particular examples that you think are inspiring and that people can learn from as they produce strategies to expand employee ownership and profit sharing?
JRB: Yeah, I think that there are two things that give me hope. There are currently thousands of fifty-to-hundred percent employee owned firms where an employee ownership trust has used credit to build significant wealth. As we discuss in our policy report, there is no evidence that wages are lower or that benefits are lower. On the contrary, these firms, to the extent we’ve been able to measure it, have more defined benefit plans than non-ESOP firms. They have higher wages and they tend to have second diversified pension plans. That gives me hope.
The second thing that gives me hope is that I think we have entered a new moment for worker cooperatives. Worker cooperatives in the past have tended to be concentrated in low-wage service industries, and while they have achieved a lot in local communities, they often have not had high enough wages and benefits to be able to build up large amounts of worker wealth. The average worker wealth for ESOPs in most of the 50 states is many many times the incomplete data I have seen on worker cooperatives. But I believe that will change and we will see ESOPs continue to get more participatory and have stronger “best practices” norms (in some cases responding to DOL enforcement) and worker cooperatives become more worker wealth and employee benefits and high wage oriented.
One of the most positive developments is that the traditional conflict between the ESOP format and the cooperative format is starting to fall away.
I think one of the most positive developments is that the traditional conflict between the ESOP format and the cooperative format is starting to fall away. If we can begin to have worker cooperatives that have the governance and participation norms of cooperatives and yet also use access to credit and tax incentives so that the cooperative is not founded using worker savings, but is founded using credit like ESOPs are, then we could have a hybrid form, a hybrid ESOP/cooperative form. It won’t necessarily be called that, but it will be a form of worker cooperative which can buy more valuable companies, offer higher wages, offer higher benefits and where the total value of employee wealth will be higher.
One of the things that a supporters of purist forms of worker cooperatives need to admit to is that worker cooperatives have often been in low wage industries, have had bad benefits, have been non-union, and have had very small wealth accumulation by workers. The worker cooperative movement has to own up to that. I think this has largely been a result of the fact that it’s very hard to start a worker cooperative with worker savings when you’re dealing with citizens who don’t have many savings and don’t have much wealth. It’s very, very risky.
If you could create a hybrid model where you’re using credit, like credit is used in the ESOP model, together with the worker cooperative model then you could have companies that have higher wages, higher benefits, and greater wealth.
TMH: Is there anything else you would like our readers to know or to think about?
JRB: I think the main thing I would like to say is that when I look at the thriving worker cooperative sector now, which I believe is on the brink of huge expansion of growth, and when I look at the ESOP sector, and the sector of tech firms and science based firms which are using profit sharing and employee share ownership in other formats, and when I look at the increased use of technology in all of these situations, I do think that we’re converging towards a next system business format where there’s profit sharing, where there’s member ownership, where there’s a lot of participation, where there’s very, very low hierarchy, and where there’s a more egalitarian compensation arrangement than we read about in the big Fortune 500 companies. And that’s positive.
I think it makes a lot of sense to stress the commonalities of all these formats and I think this current generation, the Millennial generation, is more open to diversity and participation and member rights and respecting the freedom of the individual and team work. In a way, this new generation is kind of built for this new future of work.
**
The ESOP-erative
A new design: worker cooperative governance with ESOP tax benefits
By Martin Staubus https://medium.com/fifty-by-fifty/the-esop-erative-daaa98c1174f
Businesses interested in transitioning into employee ownership are often presented with a structural dilemma: convert into an ESOP or a cooperative? Go for the democratic worker control and participation of a cooperative, or the tax benefits of an ESOP? I recently helped a company, Sun Light & Power, combine the two in an innovative design that others might find of interest.
A cooperative is attractive in principal because its legal structure inherently assures democratic ownership and governance. Cooperative employee-owners decide their own pay scales, schedules and management structure. Each member of the cooperative typically purchases one share, so all worker-owners have the same ownership interest and an equal voice in decision-making, a rarity in today’s economy of temporary, stratified, and low-paying jobs..
Another form of employee ownership is the employee stock ownership plan, or ESOP. With this arrangement, the stock of a corporation is put into a company retirement plan, and the shares are allocated among individual accounts for each participating employee. Thus, the employees are the shareholders of the company. While cooperatives pay taxes on their profits, ESOPs can have a significant business advantage because they are free from income taxes.
“…Ordinary workers are retiring from ESOP-owned companies with personal ownership accounts holding as much as $1 million in company stock.”
Free of taxes on its profits, the ESOP-owned business has more cash available to invest in the growth and success of the business. This generates financial gains for the employees through capital appreciation that has traditionally been the exclusive reserve of our society’s top 1 percent of earners. With the benefit of this advantage, ordinary workers are retiring from ESOP-owned companies with personal ownership accounts holding as much as $1 million in company stock.
The rules for ESOPs, however, do not require that employees receive equal ownership interests, or that the governance structure will assure democratic control of the business by workers. At the same time, the rules do not prevent ESOPs from organizing with full democratic governance by employees.
Here’s how these two models were combined at Sun Light & Power, a solar power company based in Berkeley, California. It has implemented an ESOP — coop hybrid arrangement that yields the best of both forms of employee ownership. The company, formed by a UC Berkeley engineering grad back in the 1970s, was considering transitioning to employee ownership as the founder retired. They established a committee of employees who researched the available options. Predictably, they found themselves on the horns of that dilemma: ESOP or coop?
The solution grew out of a collaborative effort of the Beyster Institute at UC San Diego and the ICA Group, consultants based in western Massachusetts. The great majority of existing ESOPs (there are about 7,000 in the U.S.) allocate the company’s shares among the employees in proportion to each employee’s pay, which means those with big salaries get considerably more shares than employees with modest salaries. But that practice, while common, is not required.
Likewise, most ESOP companies give employees only limited voting rights; and they tend to provide that those limited rights will be exercised on a one share, one vote basis (as typical corporations traditionally do it with shareholders). That means larger shareholders (with higher salaries) have greater voting power.
Yet the ESOP rules do permit a structure in which: a) employee-owners will participate in all votes; and b) the voting will be conducted on a fully democratic one person, one vote basis.
“The formula calls for 50 percent of the stock to be divided among all employees equally”
At Sun Light & Power, the employee committee developed their own formula for allocating the shares of stock that the ESOP would acquire from the founding owner. The formula calls for 50 percent of the stock to be divided among all employees equally; 25 percent to be allocated based on the number of years the employee has been with the company; and the final 25 percent on the basis of the employee’s salary level.
Next, they developed rules for their ESOP to assure that the employees will participate in all shareholder votes, and that the voting will be conducted on a one employee, one vote basis, without regard to the number of shares in an individual’s personal ESOP account. Most importantly, this approach now determines how the company’s board of directors is elected, where crucial decisions related to financial performance and management are made.
But there is one more essential issue that the Sun Light & Power model addresses. Yes, for the election of the board of directors, ballots go to all employees, who each get to vote their shares. But what is usually overlooked is this question: who selects the candidates whose names will appear on the ballot? This is a critical issue that often goes unaddressed. After all, if employees are asked to elect seven people for the seats on the board, and the ballot only shows seven names, the selection of the board has in truth already been made.
At Sun Light & Power, the solution was to form a body of employees known as the Cooperative. All employees of the company are eligible to become member of the Cooperative, once they have satisfied certain eligibility requirements, such as learning the basics of business finance through a financial literacy program. It is the Cooperative that selects the candidates whose names will appear on the ballot for the election of the board of directors.
“A company that is democratically owned and governed by its workers, and can operate free of income taxes on its profits, turning the company into a wealth-generating machine for its workers.”
The result? A company that is democratically owned and governed by its workers, and can operate free of income taxes on its profits, turning the company into a wealth-generating machine for its workers. It’s the best of both worlds.
Sun Light & Power has also registered as a “B Corp,” formally committed to triple bottom line success: that is, it’s aim is not just positive financial results, but also positive social and environments results.
Their own name for their arrangement? The “B/ESOP/erative.” When over 7 million baby boom small business owners will retire over the coming years, without succession plans, the ESOP-coop and B Corp model is a promising path for them to continue their positive legacies in their communities. Granting ownership to employees creates more stable, positive work environments. When we have more control over the work we do, we are more invested in its outcome, and more responsive to our co-workers. It’s just good business.
Martin Staubus is the Executive Director of the Beyster Institute, a consulting organization and center of expertise on employee ownership based at the University of California San Diego.
I recently completed a study tour to Mondragon, a small town in the Basque region of Spain, which is the home of the world’s largest and most advanced cooperative economy.
In the United States, the cooperative sector, which represents over $500 billion in revenues and employs about two million people, is surprisingly invisible. Despite its size, it is seldom, if ever, discussed in business schools or economics programs. Nonetheless, when you mention specific cooperatives or types of cooperatives, most Americans will have had at least some exposure to:
· Credit unions, which are member-owned financial cooperatives;
· Agricultural cooperatives, such as Sunkist, Ocean Spray, Land o’ Lakes, Organic Valley, etc.;
· Purchasing cooperatives, such as those in the hardware sector (Ace, Coast to Coast, and True Value);
· Consumer cooperatives, such as REI and a host of independent grocery stores;
· Housing cooperatives, which have been used to address the needs of seniors, students, mobile home park residents, and (occasionally) low-income communities.
Worldwide, cooperatives are even more significant, representing well over $3 trillion in turnover, 12.6 million in employment, and over a billion people in total membership.
Within the global cooperative movement, the Basque town of Mondragon occupies a special place. Founded in 1956 by Father José María Arizmendiarrieta, the Mondragon Cooperative Corporation currently consists of 102 federated cooperatives employing over 73,000 people. The vast majority of these worker-owners are in the industrial and distribution segments of the economy, competing successfully in global markets. In addition, the Mondragon cooperative system owns its own bank, university, social welfare agency, several business incubators, and a supermarket chain.
I went to Mondragon to see this system in action and to explore its relevance to the US. Like many Americans who are concerned with rising inequality and environmental degradation, I was seeking an alternative to our current system’s focus on maximizing shareholder value.
The surprise was in the scale of the experiment.
The tour I took was organized and led by Georgia Kelly of the Praxis Peace Institute. Our local guide was Ander Etxeberria, Director of Cooperative Dissemination. Here are ten takeaways from the trip:
- Mondragon is not a “local, living economy.”
I was not aware of my assumptions about Mondragon until I arrived and found myself surprised. For U.S. citizens sharing an affinity for a leftist critique of capitalism, the very name “Mondragon” conjures up a humane, economic alternative in which the interests of workers trump the dictates of capital and the well-being of the many trumps the self-interest of the privileged few. These values are well reflected in Mondragon’s operations. The surprise was in the scale of the experiment.
While I had imagined a “local living economy,” somewhat focused on bartering in line with E.F. Schumacher’s Small is Beautiful philosophy, that is not how Mondragon functions. In Mondragon, “large is beautiful” because large makes it possible to compete in global markets and thereby maximize employment — the ultimate goal of the worker-owned system.
2. Mondragon is an advanced industrial economy competing in global markets.
Mondragon today consists of 102 individual cooperatives united in a federation called the Mondragon Cooperative Corporation, which is also organized as a cooperative. Although Mondragon cooperatives now operate in multiple sectors, the most significant cooperatives are worker-owned industrial enterprises competing globally in niche markets.
We visited one of the industrial cooperatives, ULMA Packaging, which makes machines that make packaging for perishable food products. Note: ULMA does not make packaging for these products — it makes the machines that make the actual packaging.
There are several characteristics that make this an appropriate and potentially sustainable niche for a global competitor coming from a high wage country. First, in global terms, this is a relatively small niche market, less likely to attract a large number of competitors. Second, it is a highly technical niche, relatively insulated from competition from countries with large numbers of low-wage, unskilled workers. Third, each machine is customized to its specific application, thus requiring continued human intervention, providing continued employment. Finally, because these machines play a critical role in their customers’ production processes, they tend to compete on quality and reliability rather than price, and the customer necessity of maximizing “up-time” (that is, the time in which the machines are running properly and production is not halted) creates an important after-market service opportunity.
The plant that we viewed was an assembly plant, which utilized components, materials and logistics provided by both cooperatives and non-cooperatives. As our local guide, Ander Etxeberria, observed, “In Mondragon, on the one hand, we do not have enough companies to provide to us and, on the other hand, it is not mandatory to buy in our cooperatives.” Instead, their choice hinges on the most competitive bidder.
In an export-led economy, such as Mondragon, much of the “local living economy” is based on what Michael Porter and others call “industrial clusters.” In fact, according to Etxeberria, Michael Porter created a strategic plan for the Basque government in the 1990s and helped to shape the industrial clusters operating today.
The thing that was so refreshing about Mondragon was its willingness and ability to deal with facts on the ground, to allow practice to modify theory without losing sight of values.
3. Pragmatism is the only enduring “ism.”
Over and over, I was struck by the non-doctrinaire adaptability articulated by our guide and demonstrated by the history of the individual cooperatives. We heard (and read) many stories of economic crises and how the cooperatives, individually and collectively, weathered them. In all cases, they remained true to their core value — providing long-term employment (and other benefits) to their worker-owners — but they did so with creativity, self-sacrifice, an emphasis on fairness, and an impressive commitment to collaborative decision-making.
The desire for theoretical purity strikes me as a critical failure of both mainstream and alternative economics. When facts fail to conform to theory, there is a strong tendency on both sides to throw out the facts in order to preserve the theory.
The thing that was so refreshing about Mondragon was its willingness and ability to deal with facts on the ground, to allow practice to modify theory without losing sight of values. As I review my experience of Mondragon, I’m thinking this may well be its “secret sauce,” the key to its long-term success.
4. The social safety net.
In Spain, the state-run social safety net is designed to cover employees. As members of a cooperative, Mondragon’s worker-owners were not originally considered employees under state law. As a result, Mondragon had to set up its own social safety net, which it organized as a cooperative called Lagun Aro. Spain has since revised its position on coverage for worker-owners and Lagun Aro now provides benefits side by side with those offered by the government.
Benefits offered include health care, pensions, and unemployment. Each of these inspired considerable envy among our American tour group.
Spain offers universal health care to its citizens and Mondragon offers its own universal coverage system. We didn’t have an opportunity to discuss the thousand relevant details, large and small, that would give us the basis for a good comparison to the rest of the US system, but we already know our ailing system offers the worst care for the highest price of any system in the developed world. Mondragon may offer a worthy alternative.
The Mondragon pension system is now well aligned and fully integrated with the Spanish government system. Mondragon retirees receive 60 percent of their pension from the government and 40 percent from the Mondragon system. In total, they receive 80 percent of their former salary, enabling them to retire without having to make major shifts in their lifestyle.
The government pension program is an unfunded system (pay-as-you-go), while Lagun Aro is an individual capitalization system. Lagun Aro pension funds are invested conservatively, thereby avoiding some of the self-inflicted insolvency problems created by the US profit-maximizing system. That said, for the public part, the Mondragon system faces the same basic funding issues of defined benefit programs worldwide: uncertainty about where the money will come from in a volatile economy where current workers paying into the system are not keeping pace with the extended lifespans of retirees.
5. Governance
This is an issue that I think Mondragon has figured out really well, striking an important balance between the need for democratic decision-making and managerial discretion.
The cooperatives are structured consistently, roughly as depicted below:
Most of these structures have simple analogs in conventional capitalist firms. The Governing Council is roughly equivalent to the Board of Directors; the Audit function corresponds to the audit committee of the board; the Managing Director to the CEO; the Managing Council to the executive leadership team; and the Departments to standard departments, whether organized functionally, divisionally, geographically, or along some other line.
The critical difference, as noted previously, is that the purpose of the firm is to benefit its members rather than its shareholders. The governance structures supporting that critical difference are the General Assembly and the Social Council.
General Assembly: In most of the Mondragon industrial cooperatives, this is the organization of all worker-owners. In the “second level” cooperatives, that is, the cooperatives that serve other cooperatives, such as the bank and the health system, member-owners include both employees and representatives of the cooperatives served. The General Assembly meets at least once a year to act on what sounds like a mostly pro forma agenda. That said, its members elect the Governing Council, which in turn selects the Managing Director. Thus, in a very significant way, the workers are directly responsible for the long-term strategic direction of the firm and they select their own boss, who reports to them. And in times of trouble, the General Assembly is a place for the entire cooperative to thrash out difficult issues.
Votes in the General Assembly are strictly apportioned on a one-member, one-vote basis. In a cooperative, the janitor and the CEO have the same voice in the General Assembly — in contrast to the capitalist shareholder system, where the number of votes is based on the amount of money invested in shares of the enterprise — typically by absentee shareholders who have no other interest in the firm.
Social Council: This is an entity that is, in some respects, like a labor union, because it represents the concerns of worker-owners, but from the lens of their experience as workers. Since the traditional division of interests between workers and owners cannot, by definition, exist in a worker-owned cooperative, the Social Council was hard for me to understand initially.
It is an elective body that represents worker interests to the Governing Council and Managing Director. It has an advisory role and does not make decisions. However, if an issue is particularly contentious and the Social Council is opposed to the decision of the Governing Council and Managing Director, it can bring the issue to the General Assembly for a vote of the broader membership.
According to what I’ve read, this happens very rarely (as one would hope and expect), but when it has happened, the decisions of the General Assembly have gone both ways — sometimes supporting “management” (i.e. the Governing Council and Managing Director) and sometimes supporting the “workers” (i.e. the Social Council). Disputes are resolved by the “owners” (i.e. the General Assembly), where all three roles are united in a one-member, one-vote democratic system.
While I don’t have enough data to draw firm conclusions, I believe this structure produces decisions that are both different from and better than those of capitalist firms in two specific ways. First, I think it strikes the right balance between the economic survival of the firm and the economic benefits to the individual workers. And second, because economic decisions may impact individual workers differently, the structure helps produce decisions based on “fairness” in balancing the needs of the few directly affected individuals with the needs of the many who are not. And all participants in the system are free to make choices with broadly defined benefits — not the narrow capitalist dictates of maximizing returns to shareholders.
6. A case in point: “intercooperation” and the bankruptcy of Fagor Electrodomésticos.
In the wake of the 2008 financial crisis, Fagor Electrodomésticos, the largest of the industrial cooperatives, failed, eliminating the jobs of 1,800 worker-owners in 2013.
The cause of the failure was a “perfect storm” of three related issues. First, immediately prior to the recession, Fagor Electrodomésticos had expanded by buying a competitor in the household white goods sector; it financed the acquisition by taking on major debt. Second, the number of its Asian competitors was growing every day. And third, just as the cooperative’s expanded capacity came on line, the recession hit and the bottom fell out of the market.
What happened next is what was unusual. Because of the principle of “intercooperation” among the Mondragon cooperative enterprises — that is, the idea of connectedness and reciprocity among all the participants in the system — most the employees were relocated to other cooperatives. Some were offered employment in CATA Electrodomésticos, the private sector enterprise that took over the assets of Fagor Electrodomésticos. Some took early retirement, and a handful took a compensation package to leave the system. Some received unemployment benefits from Lagun Aro, the social welfare cooperative. By the time of our 2017 visit, only 60 former employees (three percent) remained unplaced.
Despite its many virtues, Mondragon is not utopia.
7. Contradictions.
Despite its many virtues, Mondragon is not utopia. In the course of our visit, three issues came to light that brought this truth home.
The first, and most troubling, was the issue of international workers who are not members of the cooperatives. As with many successful firms, regardless of structure or industry, much of the growth in recent years has come from international markets, which now account for 70 percent of Mondragon sales. This has necessitated hiring new workers in those new markets. Few, if any, of these new workers have been offered membership in the cooperatives. As a consequence, they do not participate in the benefits of worker-ownership. While they are reportedly treated well they do not participate in the governance of the firm and are not eligible for many of the other unique benefits of the cooperatives.
The most compelling reason we heard for why these international workers are not also owners is that there is not a culture of cooperatives in these foreign markets and Mondragon does not believe in, or have the capabilities for, proselytizing the cooperative form. Admittedly, it might also be against their economic interest to include more worker-owners in the confederation. But whatever the motivation, the net result is to create a set of second-class citizens on whose backs the growth of the firm now depends.
According to our tour leader, Georgia Kelly, “You cannot impose a cooperative culture where nothing like it exists,” she said. “It takes a tremendous re-educational effort to bring people into a culture that carries the responsibilities of running a business and sharing in a democratic process. Even with businesses they have acquired in Spain, an educational process must take place before assuming people are ready to be worker-owners. And, of course, not all people want to be worker-owners.”
The second contradiction at Mondragon relates to environmental issues. Even as “sustainability” issues have found a place in most global firms, I did not see much traction in Mondragon in either practice or articulated values. There is nothing in cooperativism that is inherently greener than any other structure.
On this issue, there is good news on three fronts. First, as environmental responsibility becomes an important consideration for both customers and worker-owners, it is likely to find its way into the mission and function of the cooperatives. Second, as the environmental crisis worsens, it will create many new business opportunities for companies with the technical skills to address them. Mondragon, with its strong technical and industrial skills, will be well positioned to take advantage of these new markets.
Third, the sustainability orientation of Mondragon is potentially further along than I could observe on the ground. According to Michael Peck, North American delegate for Mondragon, “in the area of sustainability, where Mondragon cooperatives started with EU adhesion to the Kyoto Protocol starting in 1997 (something the U.S. never achieved), they have been very conscious of both sustainability practices as well as essential green industrial certifications (the EU versions of LEED) which they need in order to compete in global markets. The Basque region of Spain is an absolute EU leader in recycling and reuse — having won awards and this sustainability mentality has also influenced Basque leadership on the GINI coefficient.”
The third issue of concern had to do with the status of women. They were not very much in evidence on either the shop floor as worker-owners or at the management level. Our local guide, the father of two daughters, acknowledged that this situation was less than desirable, but noted that the situation is improving, particularly at the level of the Governing Councils, where they now represent 25 percent of the membership. In Mondragon and elsewhere, there are still far fewer women than men studying engineering, a critical issue in Mondragon’s engineering-heavy industrial economy.
We were also told that to achieve a livable family wage, most families required two incomes. Although there were a handful of cooperatives where women were in the majority (such as the food service operation supporting the cooperatives) and we did see women in administrative positions in offices, I did not see or talk to enough women to get a feeling for their position in the Mondragon system.
Georgia Kelly, our US-based tour organizer, countered that she has seen a definite increase in the number of women in managerial positions and training programs in the nine years she has been coming to Mondragon. She notes that the biggest change is in the younger generation and further notes that men and women doing the same jobs receive the same pay — an obvious gender equity goal that has yet to be achieved in the US.
Michael Peck also offered specific examples of women in leadership positions, as the General Secretary for Mondragon’s Governing Council, the Mondragon Corporation’s CFO, and the CEO positions in several of the individual cooperatives.
8. Final reflections: Democracy.
As Winston Churchill and others have observed, “democracy is the worst form of government except for all those other forms.” I’ve certainly had occasion to reflect on that statement since the 2016 election and the advent of the Trump administration. Mondragon gave me further cause for such reflection.
The basic principle of democracy, in cooperatives and in nation-states, is one person, one vote. To work properly, democracy assumes that voters take the necessary time to educate themselves on the issues and participate in the process. In a cooperative, where the democratic process has a direct daily impact on people’s lives and livelihoods, the participation rate and level of thoughtfulness would be expected to be higher than in the more distant matters of representative government.
And sometimes it is. I was impressed in my reading by the complexity of the decisions worker-owners were asked to make, collectively, about salary adjustments, unemployment benefits, overtime pay, required capital inputs, retirement benefits, and a myriad of other issues.
However, while individuals can evaluate complex issues, they don’t always take the time to do so. When asked about specific issues at Mondragon that were troubling to me, our guide would sometimes shrug and say, “This is a democracy.” To me, that shrug said it all: sometimes people make thoughtful decisions, sometimes not; sometimes they take the time to participate in decision-making, sometimes not. But always there is another day: so long as democracy continues, there is the opportunity for another vote, a different outcome.
Also at work, however, was the notion of the “tyranny of the majority.” In winner-take-all voting decisions, the will of the majority is imposed on all, including the dissenting minority. In Mondragon, the worker democracy explicitly seeks to balance the general interests of the firm with the particular interests of the individual workers, which are not always internally aligned. Nonetheless, the Mondragon worker-owners are a fairly homogenous group, so one doesn’t have to travel far to experience empathy for “the other,” and the system is not being asked to address such intractable issues as homelessness, racism or multi-generational poverty, none of which were visible to me in Mondragon. That said, when Father Arizmendiarrieta came to Mondragon, it was the poorest area of Spain. Today, it is the wealthiest, with the majority of its residents as worker-owners of Mondragon. So, ownership has compounding social benefits, stable wages and livelihoods reduce income inequality and improve public health.
“ There are three kinds of power. Power than can crush us and we can and must resist it. That’s oppression. Power can assist us and we must guide it. That’s advocacy. But then we can also be power ourselves. This means organizing and building institutions together for what we need.”
9. Final reflections: Social change.
At one point our guide reminded us that Father Arizmendiarrieta was not interested in creating a cooperative economy. His goal was social transformation and the economic structure of the cooperative enterprises was simply a means to that end.
This observation prompted some musings about different approaches to social change — specifically, the differences between the goals of social responsibility, social justice and social transformation.
Corporations tend to talk about social responsibility, by which they mean taking responsibility for both the positive and negative impacts of the activities they pursue in the normal course of doing business. Their method is sometimes incremental improvement toward the goal of reducing harm, while preserving the essential characteristics of the existing system.
Social justice movements tend to talk about social justice, by which they mean some sort of redress of past wrongs — whether that takes the form of backward-looking reparations or forward-looking policy adjustments. I find I have a deeper understanding of the limitations of the social justice approach as a viable platform for social change, as opposed to building the institutions that undergird economic transformation, like cooperative structures. The Mondragon cooperatives talk about social transformation, a more far-reaching, future-oriented goal that seeks the creation of social and economic systems that reinforce the best in human nature. At the heart of this transformation is the desire to emphasize cooperation as opposed to competition as the most likely path toward creating a future that maximizes the well-being of all. In the United States, a social justice culture focused more on creating our own alternatives, as opposed to fighting old paradigms needs further nurturance. And in the culture overall, we need to take responsibility for our contributions to our financial destinies, to the extent we can under existing contraints.
As Ed Whitfield, Co-Managing Director of the Fund for Democratic Communities recently put it, “ There are three kinds of power. Power than can crush us and we can and must resist it. That’s oppression. Power can assist us and we must guide it. That’s advocacy. But then we can also be power ourselves. This means organizing and building institutions together for what we need.”
10. Final reflections: Could the Mondragon system work in the US?
This is the question that brought me, and most of my traveling companions, to Mondragon in the first place.
The answer is, at best, a “maybe.” I would have thought that the biggest obstacles to cooperativism in the U.S. would be American individualism, access to capital, and access to talent. In the end, I have come to believe the biggest impediments would be our culture and the weakness of our K-12 math and science education.
The issues of individualism and the availability of talent are related. The assumption of the dominant culture — reinforced by our current economic system — is that each of us is on our own, out for ourselves (and our immediate families), and that the pursuit of material rewards (including extraordinary rewards) is the primary motivation for our economic behavior. These are old, ingrained habits of thinking that will continue to persist among large segments of the US population, reinforced by neoliberal orthodoxy and business-driven consumerism. But there is growing evidence and support for alternatives that seek to satisfy deeper human needs, such as compassion for one’s fellows and the pursuit of meaning in one’s work.
As for the availability of capital, all cooperatives — and the Mondragon cooperatives in particular — require that their member-owners invest seed capital in the enterprise, giving them a definite sense of “having skin in the game.” While these contributions are unlikely to be sufficient to meet the capital requirements of the enterprise, they are an important start. The chief obstacle to attracting additional sources of capital is a lack of understanding of the cooperative model and investors’ reluctance to supply capital without clear collateral or recourse. There are ways to overcome this issue, beginning with loan guarantees from those who understand and support the model.
The two other obstacles — culture and K-12 education — seem far more intractable at this point. Unless that shifts, the cooperative model will not work. And the capitalist model — at least for the 99% — may fare no better.
As for K-12 education, the current U.S. educational establishment’s emphasis on improving STEM (science, technology, engineering and math) education is not misplaced. A majority of the Mondragon cooperatives are in the industrial manufacturing sector, an increasingly sophisticated part of the economy, where the need for math and science skills is clear — and the US ability to compete successfully is marginal. But it’s not just manufacturing. One can imagine a sophisticated, cooperatively organized, service-based economy that would also require significant technical expertise. STEM education is the right approach, but we are far from figuring out how to deliver it effectively.
There are a host of intractable social problems in the US — homelessness, racism, addiction, obesity, violence, to name just a few — that may have economic elements, but cannot be solved even by a cooperative economic utopia.
But all of these issues cited here exist in the United States and elsewhere, regardless of whether our economies are organized under capitalist or cooperative principles. The fundamental issues that are well addressed by cooperativism — a reduction in economic inequality and a better alignment of the interests of workers, owners and managers — are critical. I am deeply grateful for the lessons learned in the 60 years of the Mondragon experiment and hope we can apply some of them here in the U.S. as we work to create a more equitable, sustainable economy.
Jill Bamburg is a Co-Founder of the Bainbridge Graduate Institute and on the Faculty of Presidio Graduate School in San Francisco.
https://medium.com/fifty-by-fifty/mondragon-through-a-critical-lens-b29de8c6049
https://medium.com/fifty-by-fifty/employee-ownership-and-the-next-system-d919bf1af38a
