How labour-hostile US distributes wealth is a model SA can use well
The scheme, already successful in the US, could easily be instituted in SA to broaden ownership of the economy and empower workers
The ANC’s 2019 election manifesto released in January refers to the need to broaden ownership of the economy and “a focus on extending worker ownership across the sectors” as an essential part of transformation. Including workers in the democratic ownership of companies via employee stock ownership plans (Esops) may well be a viable option to achieve that goal.
Social reform and empowerment strategies usually involve either getting the government to do more good things for people or empowering people to do more good things for themselves. Employee ownership of companies is part of the second strategy and Esops are a potential entry point for such employee ownership.
Esops have proven successful in 7,000 enterprises in the US over the past 40 years, covering 10% of the private workforce. This model can readily be adapted to other private property market economies such as SA. However, the problem in SA is that Anglo-American set up some sham Esops in the late 1980s that were quite rightly ridiculed. Those and a few similar so-called Esops have given the concept a bad name.
The sham Esops are mainly oriented towards getting some fig-leaf black economic empowerment (BEE) compliance without having any genuine worker ownership. Our goal here is to explain how a genuine Esop works, and how the widespread uptake of genuine Esops could have a significant effect on income and wealth distribution in SA.
The main feature of (genuine) Esops is that all employees are included and receive part of their company with no risk to their private property. Key is the establishment of an employee stock ownership trust separate from the company, with the employees as beneficiaries or owners. As most countries already have some legislation for worker co-operatives, one possibility for SA without additional legislation is for a worker co-operative with all company employees as members to serve as an employee trust.
Our point is simple. If all this can happen in less than 40 years in a labour-hostile, industrialised country like such as the US, there is no reason why it cannot happen on even a larger scale in other industrialised democracies
The co-op then takes out a loan to buy shares, or the seller of the shares could supply the credit by exchanging some shares for a promissory note. The loan is guaranteed by the company and shares are held in a suspense account while the company pays off the loan. The Esop has a collective labour contract with the company for some fixed percentage, say 5%, of the members’ labour. Thus, each payday the employees get their usual pay but the company pays an extra percentage to the Esop, which is then passed through to the lenders or sellers to pay off the loan.
Since those extra payments are making the employees into owners, one could think of them as an ownership bonus. The payments leave the company as compensation for labour on the collective labour contract, so are a deductible expense. As each loan payment is made by the Esop, the shares of that value are transferred from the suspense account to the individual share accounts of the members (employees of the company) making the members part owners of the company through the
Employees may not sell shares to others and the Esop buys back the shares upon retirement, exit or after a fixed time. These are then redistributed to the remaining employees. This repurchase of a worker’s shares is financed by the continuing collective labour contract payments from the company to the Esop. Thus, the worker shares stay in the Esop so the worker ownership is a permanent part of the company — younger workers slowly buy out and replace older workers who retire. Worker ownership of the co-op/Esop may reach 100% after several tranches of share purchases. Of the 7,000 Esops in the US, about 500 are employee-owned.
The worker co-operative board, as the deciding body of the co-op/Esop, decides how to vote the company shares that are its assets as a block. In the most democratic version there might be a vote by the worker members on a one-member, one-vote basis, to instruct the board about how to vote the shares.
The original idea of Esops came from an eccentric San Francisco lawyer, Louis Kelso, who feared that automation would cause so many people to lose their jobs. He felt that society could only be stabilised if people had a capital income in addition to their labour income. Esops were pushed through the US congress by senator Russell Long, son of populist Huey Long, and were supported by legislation and tax breaks.
Interestingly, in the US the Esop legislation and amendments over the years have been supported both from the right (for turning workers into capitalists) and from the left (for moving towards workplace democracy). About 14-million people now work for the 7,000 companies with Esops. In the US there is also a substantial industry specialising in Esop transactions as well as a national information clearing house and research organisation (the National Center for Employee Ownership), two national and many state-wide Esop associations.
An Esop should not be confused with the more common employee share purchase plans, where employees use a portion of their salaries to purchase shares at a discounted price. Such plans rarely amount to a significant percentage of corporate ownership. By contrast, the Esop-leveraged buyout involves a loan to buy a significant amount of ownership at one time, although the employees only gain individual share ownership as the loan is paid off. In the Anglo-American type sham Esops, the shares are either a gift to a specific set of employees (who didn’t earn them by working as owners to pay off the loan) or the shares are supposed to be paid off by dividends, which could only pay off a pittance. This is not how the successful US models are run and seem to have given Esops a bad name in SA.
Our point is simple. If all this can happen in less than 40 years in a labour-hostile, industrialised country such as the US, there is no reason why it cannot happen on even a larger scale in other industrialised democracies. Esops improve income and wealth distribution, improve productivity because the employees are owners, stabilise communities by avoiding absentee ownership in the succession of local firms, and improve corporate social responsibility by aligning the incentives of owners and societal concerns, thus acting as a substantial social intervention.
Post-apartheid SA is not just another industrialised democracy. A quarter century has passed since 1994, and still the country has not utilised the time-tested model of a genuine Esop to institutionalise significant and broad-based employee ownership in its publicly traded or privately held companies.
The co-op/Esop model is implementable in any private property market economy without special legislation (and also without any special tax advantages until such legislation is passed). It would include the following features:
- Bringing all employees into an ownership position without risking their own assets;
- Creating a “company of owners” and culture of ownership;
- Allowing employees to cash out when they exit or retire (or sooner after a fixed time period); and
- Locking-in employee ownership so the ownership is stabilised and anchored in the local community.
• Ellerman and Galloway are with the Stellenbosch Institute for Advanced Study.