In an article published in January 2003 issue of PVS Labor and Corporate Governance, I challenged the conventional progressive view of Social Security Reform and how organized labor might take advantage of the debate to improve conditions for American workers. This second essay details how to use Taft-Hartley pension funds or Personal Retirement Account funds controlled by labor to expand ownership and create the workplace of the future. Since its first posting on this site, this essay has been expanded with additional material, so much material that the Pay Equity portion has been moved to its own page.
Many readers of the January article expressed consternation with why PVS published an article suggesting compromise at this stage of the debate (including those readers in the Investment Management office of the AFL-CIO, who were so confused they had this article killed). In this essay, I explore how changing the assumptions behind how business is managed makes such a discussion worth Labor’s while. I highlight the differences between traditional firms and employee-owned firms and the implication of these differences for management and financial systems. This examination and the essay that follows on pay equity set out ways that employee-owned firms might do things differently, taking their performance to the next level.
The Social Context of Ownership
Traditional capitalist firms are organized on a principal-agent model. The organizational culture is best described as hierarchical. The purpose of these organizations is to maximize value for the shareholders. Employees in this schema are dispensable factors of production. While more enlightened management treat the employees as stakeholders, the purpose of doing so is to improve the value of the company for its shareholders, as is expected given the assumptions of Capitalism. More often than not, however, the actions of management are designed to encourage conformity to the norms and goals of the organization, rather than to encourage original thinking. Given the hierarchical organizational culture of most firms, originality by the vast majority of the employees is neither encouraged nor rewarded. In the rare case where such systems do exist, the lion’s share of the reward for innovation goes to shareholders and to management. Inventors within the system receive a small bonus for a patent, but often such rewards are a pittance compared to the value added by the invention. In traditional firms, scientists and engineers are rewarded with higher salaries up front. These salaries are related to the credentials they hold. The expectation is that in reward for these salaries, any invention is the property of the shareholders or proprietors. In exchange for assuming all of the financial risk, the traditional owners claim all, or most, of the rewards.
In the capitalist firm all profits go to the fiduciary owners of the firm, while none go to the employees. The implication here is that the owners of the firm own the labor, as well as the value produced by the firm's assets. This loss of ownership leads to the alienation of the worker from his work, as others have described. Workers put themselves into their labor and their most valuable resource, their time. Claiming ownership of another’s time on the planet without just compensation is tantamount to slavery. The only way to overcome this condition is through the just distribution of profit and ownership.
A Different Mindset
The challenge for labor and for employee-owners is step out of the traditional environment and an adversarial relationship with management and step into the possibility of a whole new paradigm of ownership. This mindset emphasizes worker democracy and equality while at the same time encourages individual achievement. The survival of a union or employee owned firm (or any firm) depends on its ability to achieve and adapt. To overcome the authoritarianism of Capitalism institutional systems must change. Most firms controlled by Employee Stock Ownership Plans (ESOPs) still contain hierarchical vestiges in pay and share distribution. Lower level employees are still regarded as expendable in many such firms. Overcoming these tendencies is important in realizing the potential of employee ownership.
Profit Distribution
One area ripe for paradigm shift is the distribution of profit. All profit need not go to the shareholders, even the employee-shareholders. Instead, profit is distributed based on the ownership of the factor employed. I reject the traditional economic tenet that wages are an adequate compensation for the inherent right of employees to a share in the profit of what is produced. As I demonstrate below, wage levels are determined by a variety of factors (most of which do not involve a free market for labor) and in many cases do not even reimburse the employee for the supply cost of labor. For example, if labor costs are forty percent of the cost of a product, then forty percent of the profit is justly distributed to the workers (regardless of the ownership share by the employees). Profits from material, and plant and equipment costs are justly distributed to the shareholders (including employee shareholders). Potentially, in labor-owned firms, the workers get two profit distributions, which beats zero (the status quo) any day. To approach a redistribution of profit, however, workers are to be adequately represented on corporate and ESOP trust boards and receive an equitable share distribution.
Board Representation and Share Distribution
Union ESOP shareholders insist that firms and ESOP trusts update their board structures so that each major ownership faction is fairly represented, including management shareholders, labor employee shareholders and professional employee shareholders, as applicable to the structure of the firm. This restructuring includes a method to assure that factional votes on the ESOP board are reflected in votes of the board of directors in those firms that are not wholly owned by the ESOP.
Currently, the majority of ESOPs distribute shares based on salary. This has the potential to demotivate lower salaried and shorter-term employees. When lower salaried employees receive less of an ownership share than higher salaried employees, they perceive the difference and adjust their conduct accordingly. Vesting requirements also play a role in this, especially those that require a "probationary" year of service prior to participation in an ESOP program. This is why organized labor continues to see many ESOPs as a vehicle to fund management using ERISA. Only by equalizing the basic share grant for each employee (rather than linking it so salary) is this perception overcome.
Union ESOP shareholders develop more equal share distribution and dividend reinvestment structures. Ideally, shares are distributed without regard to salary level; with each full-time employee getting the same number of shares (and part-timers getting a percentage of that). Share accumulation starts at day one, rather than after a year of service, which is the current practice in many firms. In today’s economy, where employees work at a firm for a few years and then move on, waiting any time period for a piece of the action has serious retirement and wealth consequences. Some mechanism is necessary so that long-term temporary employees are compensated with shares from the client firm. Temporary employment has its place in a flexible economy, but not as an excuse to deny workers the ownership benefits that they deserve. All of this leads to the heart of the matter, how managers are selected and employees are paid.
Adopting an Ownership Culture in Organized Labor
Union-owned firms must develop a profitability culture of ownership, as must unions who move from more diversified investment to direct ownership. Such a culture highlights team building with management and professionals and de-emphasizes work rules that maximize employment rather than safety. Firms that practice these principles innovate more and are more productive, so their profits are higher. Even taking into account the increased share paid to workers, investors are attracted to these firms, as they produce a higher dividend. As importantly, these firms get the best workers, the ones who work well and innovate. These firms win market share, as their products are newer and better. Other firms adapt to these methods or disappear.
The creation of Personal Retirement Accounts as part of Social Security Reform is one way to increase employee ownership. Another way for unions to tackle this issue is to restructure their pension fund operations. A portion of these funds is used to exercise direct control over the firms at which members work. This occurs through the creation of ESOPs, the direct voting by employees or by union investment agents, such as PVS or the union local itself, voting in the interest of member workers. In some cases, the result of such a conversion is voting control or control of enough shares so that the union employees at the firm have a significant voice in the management of the firm. The majority of ESOP conversion clients are privately held firms that are held by their founders and transferred to employees. Unions use the same types of capital credit mechanisms used to create ESOPs to buy out non-employee shareholders.
Expanding ownership brings the union movement into the Twenty-first Century and ultimately fulfills the long-term goal of workers controlling the means of production. After workers are in control, they adopt a more equitable pay structure than exists in traditional firms. In the short term, adopting these proposals gives both non-union laborers and professionals an additional incentive to organize. More than anything else, these strategies reverse the decline in union membership as a share of the workforce.
