September/October 2013 Issue • Volume 41 • Issue 6

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Congressional Fellow

Why the President’s 2014 Budget Should Restore Funding for ESOPs

Heather Gautney, ASA Congressional Fellow

During the 2013 election cycle, President Obama made an important observation when he said “You Didn’t Build That.” He was talking about the fact that American prosperity is not built by powerful corporate executives, but also by the the millions of Americans who contribute to the wealth of our country, and may not get the credit they deserve.

But if Obama really wants to help working Americans, he should begin by restoring funding for Employee Stock Ownership Plans (ESOPs), one of the closest things to economic democracy we have in this country.

An ESOP is a kind of employee retirement or savings plan, similar to stock bonuses except it can borrow money. ESOPs are typically created to buy out an owner’s interest in a company, or reward workers with the bonus of stock ownership. The stock is held in a trust fund, and employees can cash in their shares when they leave or retire.

ESOPs encourage and expand retirement savings by offering workers equity in the companies where they work. They can be a handy fix when a business needs a bailout. And studies show, they tend to increase productivity, and reduce absenteeism and turnover, especially when workers are included in decision-making.

Where’s the Incentive?

President Obama’s 2014 Budget proposes a cut in tax incentives for ESOPs, arguing that larger plans may carry significant financial risks, and diminish returns in terms of the “productivity incentives” they create for workers. In essence, the proposal says that employee ownership is fine for small companies, but the federal government will not incentivize workers to take ownership of the means of production on a large scale.

The President’s move denies the relation of value implicit in his own catchphrase—the value of human labor, knowledge, and vitality embedded in every commodity or service produced by the people who actually do “build that.”

ESOPs, as well as co-ops and worker-run enterprises in Europe, Latin America, and here in the United States, show an appreciation of this value. Aside from the obvious benefit when the actual doers of work help guide the production process, worker-run enterprises have played an important role in the recovery of nations hurt by economic shock, including failed businesses of all sizes and masses of unemployed. They are oftentimes more wage-equitable than traditional, top-down corporate structures. And, in some cases, are more productive, innovative, and profitable.

Following the 2001 collapse of the banking system in Argentina, for example, workers reclaimed and recuperated factories after a mass of owners declared bankruptcy and moved their money offshore (capital flight hit nearly $19 billion in 2001 alone). With 25 percent unemployment and 60 percent living in poverty by 2002, the recuperated factories saved the livelihoods of tens of thousands of workers, and helped kick-start a vibrant co-op movement, which by 2009 had involved some 10,000 businesses nationwide.

International Definition

In other parts of Latin America and the Caribbean, the concept of worker-ownership and management was applied to form the Bolivarian Alliance for the Peoples as part of the Our America Peoples’ Trade Agreement, which was driven by ethics of community well-being and cooperation. The region was ripe for it, as profit-driven “free trade” had been wreaking havoc on the region since the late 1970s. Peoples’ Trade accounted not only for the needs of workers, but also their communities. Buoyed by oil-rich Venezuela and gas-rich Bolivia, even struggling worker-run factories with less competitively priced goods could find markets for their products.

Across the Atlantic, the Mondragon Corporation in Spain is perhaps the most notable manifestation of the worker-ownership phenomenon. Mondragon has become the largest company in the Basque region, and fourth largest employer in all of Spain. With its own bank and university, Mondragon operates as a single corporation, yet is comprised of some 120 cooperatives.

Inter-cooperation among co-ops has enabled Mondragon to survive major economic upheaval with shared liquidity and a flexible workforce. Since its founding in 1956, Mondragon has not laid off a single employee. When demand for domestic products diminished with the dearth of new construction following the 2008 financial crisis, workers in the domestic products co-op were simply moved to another co-op to instead manufacture car parts, which were in high demand.

In addition to extraordinary job stability, Mondragon workers are integrated in a profit-sharing structure that includes a giveback to the community. They are also involved in key decision-making through General Assembly structures, which profit from workers’ collective know-how and imagination, as well as the group buy-in and internal cohesiveness they foster. This cohesion is reinforced by an equitable wage structure in which Mondragon’s lowest paid workers make only six times less than the CEO. American CEOs make at least 380 times more than the average worker.

Examples in the United States

Despite such glaring inequality, the United States does have a rich history of cooperative enterprise, from credit unions and food co-ops, to land trusts and community development corporations. The Evergreen Cooperatives in Ohio, for example, were founded as a development partnership between the Cleveland Foundation and local hospitals and universities in an area of the city plagued by 20 to 25 percent unemployment and 30 percent poverty. Inspired by Mondragon, Evergreen started up employee-owned, “green” co-ops to supply larger, “anchor” institutions, and help them reduce their carbon footprint, while enabling wealth to accumulate in the community.

Evergreen employees are recruited from surrounding neighborhoods, and many of them receive technical training. After a brief period, they are offered shares in the business. Since many cannot afford the initial fee, they’re given raises to a living wage, and a small deduction is taken from their pay until they reach the buy-in amount. All that, plus they are invited to participate on committees that steer the course of the company.

The state of Vermont too has made excellent strides in advancing worker-run enterprise. A non-profit organization called the Vermont Employee Ownership Center facilitates companies’ moves to ownership, and Senator Bernie Sanders has introduced bills in Congress to create a parallel office at the Department of Labor. He’s also introduced legislation to establish a U.S. Employee Ownership Bank to facilitate ownership transfer.

Vermonters may do co-ops better than anyone else in the United States—from community supported agriculture farms to credit unions to energy, food, and worker coops, community land trusts, and the nation’s first single-payer health care system. The Champlain Housing Trust, for example, is the largest community-land trust in the country, winning the prestigious United Nations World Habitat Award in 2008 for its innovative, sustainable programs.

It has become common knowledge that capital is the ultimate conduit of power. With 1 percent owning almost 40 percent of our wealth (and steep declines in trade unionism), worker ownership in productive enterprises marks an important step in reversing the tide of social inequality in our nation. More importantly, they are a crucial means for empowering everyday people and their communities to take stock in the worlds they are building. If they are the ones who are building that, shouldn’t they own at least some of it too?

Heather Gautney, the 2012-13 ASA Congressional Fellow, is working in the office of Sen. Bernard Sanders (D-VT).

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