Employee owned companies

[Delayed_Reflex]

Inspired by some of the more recent discussion in this thread, I thought it might be interested to have a spin-off thread rather than derail that thread. I was thinking it would be good to have a more open-ended discussion about employee-owned companies vs. publicly owned companies and what people’s thoughts on them are.

I do like the sentiment that a company should have a strong interest in taking care of its workers, which ideally would be aligned with the wants of the company’s shareholders (after all, many companies claim that their people are their greatest asset), but often it seems like people complain that many companies do the minimum possible to keep a viable workforce (with respect to compensation, working conditions, etc.).

Mondragon Corporation based out of Spain seems to be one of the most successful worker cooperatives that I know of, but it is interesting to read that its non-owner workforce seems to be growing faster than the cooperative workforce. I found this article on Mondragon to be quite an interesting read. Do the benefits of a worker cooperative model outweight the limitations?
Some benefits seem to be:
-Democratic decision making process gives workers a feeling of empowerment and responsibility
-Likely to weigh worker welfare more heavily
-Likely more equitable sharing of company profits

From what I’ve read, the challenges seem to be:
-Less access to capital
-Less ability to attract top-end management talent (due to indexing management salaries to lowest wage workers - assuming that is a common model for worker cooperatives)
-“Tyranny of the majority”

That being said, worker cooperatives are just one type of employee-owned company - I’d imagine it’s more common to have companies where the shareholders of a company are just fully, or mostly, comprised of its workers. I’d imagine for many of these companies, the majority of the company is probably still controlled by a relatively small number of major shareholder employees, with rank-and-file employees owning relatively small amounts of the company. Do these kind of employee-owned companies have many benefits vs. publicly-owned companies?

How about you, Dopers? Have you worked for an employee-owned company or a worker cooperative? Would you prefer to work for one? Why do you think worker cooperatives are not more common in North America?

[Tired_and_Cranky]

I have worked on issues concerning employee-owned companies from just about the worst possible perspective to address your questions but I’ll give you my background. Generally, I looked at employee-owned companies who were victims of fraud and failed terribly. In this way, I’m a bit like a mechanic at a Toyota dealership who sees broken Toyotas all day and decides to drive a Honda.

One model for getting employees to own shares of their employers in the U.S. is for the company owners to sell the company (or a controlling interest in it) to the employees’ pension plan. Sometimes, this was done with the best of intentions - to give employees a stake in their employer. Sometimes, this was done because the owner realized he could get more money selling to the employee pension plan than from any other possible buyer, usually because the pension plan was worth more than the entire company.

The Department of Labor has issued considerable regulations that apply when a pension plan buys the stock of its beneficiaries’ employer. These regulations help to prevent the employees from being taken advantage of. For example, the pension plan must get an independent valuation of the assets that it is purchasing. The plan fiduciaries are supposed to enter the transaction only if it is in the best interest of the plan participants. Despite these protections, sometimes a pension plan buys a company, the company goes bust, and the pension plan goes broke.

After reviewing your list of pros and cons, I’ll note that it isn’t necessarily true that employee ownership through the method I describe gives the workers more direct voting control or democratic power. It’s definitely not (in any transaction I’ve seen) one worker/one vote. Voting interest most likely depends on the amount of stock the employee holds in the plan, thus more senior and longer-tenured workers have more voting power. It’s also possible that the plan fiduciaries will keep the right to vote the shares, and thus effectively control the corporation. If things are running correctly though, the fiduciaries should be acting in the best interests of the plan beneficiaries, who will largely be the employees, retirees, and their heirs. That probably does mean weighing worker welfare somewhat more heavily.

There is no particular reason that employee ownership should lead to less access to capital. If the board chooses, the company can still raise capital in all the traditional ways from all the traditional sources. If the employees use their influence (however structured) to ensure that their shares are not diluted by taking on more equity investors, it could mean that the company has less access to equity capital. Of course, that would mean raising more debt capital, which can be risky as illustrated by the article you cited.

There is also no particular reason to pay management talent less but I can understand how worker-led pay policies might lead to some employee-owned companies paying executives less than their competitors. That’s a choice that the company is making, however, and they can change the policy as soon as it stops working for them.

Your article also discusses how some, particularly foreign, employees aren’t members of the cooperatives and so don’t get all of the cooperative benefits. Something similar happens to businesses that are owned by employee pension plans. Over time, older workers retire or die, leaving their retirement plan interests to their beneficiaries. As a result, over time, the plan beneficiaries who effectively own the company aren’t the same as the company employees. These non-employee owners’ interests may be different than the employees’ interests, which is true of pretty much every normal company you can think of today. There are structures that can help to realign ownership with workers, such as adopting policies that give workers equity and using company profits to repurchase shares from non-workers, but these are actions that can constrain the company’s capital. It might be hard to invest in new machinery, for instance, if the company is spending all of its money buying back shares from retirees.

[bob_2]

There are a number of EOCs in the UK, John Lewis being the biggest and best known.

The 84,500 employees at the John Lewis department store chain and its sister brand Waitrose are referred to as “partners” and collectively own 100% of the company.

Since 1950, it has been owned by a trust on behalf of its staff, with each partner having a say in the business and the ability to raise issues through participation in branch forums.

The John Lewis Partnership generated £10.2bn in revenue last year and employees benefit from an annual share of company profits, favourable pensions and a programme of social activities although COVID has made a big dent in their profits.

The upside is that the employees/colleagues/partners have a stake in the business so they should be better motivated. I don’t know what the downside is.

[Delayed_Reflex]

@Tired_and_Cranky

I have worked on issues concerning employee-owned companies from just about the worst possible perspective to address your questions but I’ll give you my background. Generally, I looked at employee-owned companies who were victims of fraud and failed terribly. In this way, I’m a bit like a mechanic at a Toyota dealership who sees broken Toyotas all day and decides to drive a Honda.

One model for getting employees to own shares of their employers in the U.S. is for the company owners to sell the company (or a controlling interest in it) to the employees’ pension plan. Sometimes, this was done with the best of intentions - to give employees a stake in their employer. Sometimes, this was done because the owner realized he could get more money selling to the employee pension plan than from any other possible buyer, usually because the pension plan was worth more than the entire company.

The Department of Labor has issued considerable regulations that apply when a pension plan buys the stock of its beneficiaries’ employer. These regulations help to prevent the employees from being taken advantage of. For example, the pension plan must get an independent valuation of the assets that it is purchasing. The plan fiduciaries are supposed to enter the transaction only if it is in the best interest of the plan participants. Despite these protections, sometimes a pension plan buys a company, the company goes bust, and the pension plan goes broke.

After reviewing your list of pros and cons, I’ll note that it isn’t necessarily true that employee ownership through the method I describe gives the workers more direct voting control or democratic power. It’s definitely not (in any transaction I’ve seen) one worker/one vote. Voting interest most likely depends on the amount of stock the employee holds in the plan, thus more senior and longer-tenured workers have more voting power. It’s also possible that the plan fiduciaries will keep the right to vote the shares, and thus effectively control the corporation. If things are running correctly though, the fiduciaries should be acting in the best interests of the plan beneficiaries, who will largely be the employees, retirees, and their heirs. That probably does mean weighing worker welfare somewhat more heavily.

There is no particular reason that employee ownership should lead to less access to capital. If the board chooses, the company can still raise capital in all the traditional ways from all the traditional sources. If the employees use their influence (however structured) to ensure that their shares are not diluted by taking on more equity investors, it could mean that the company has less access to equity capital. Of course, that would mean raising more debt capital, which can be risky as illustrated by the article you cited.

There is also no particular reason to pay management talent less but I can understand how worker-led pay policies might lead to some employee-owned companies paying executives less than their competitors. That’s a choice that the company is making, however, and they can change the policy as soon as it stops working for them.

Your article also discusses how some, particularly foreign, employees aren’t members of the cooperatives and so don’t get all of the cooperative benefits. Something similar happens to businesses that are owned by employee pension plans. Over time, older workers retire or die, leaving their retirement plan interests to their beneficiaries. As a result, over time, the plan beneficiaries who effectively own the company aren’t the same as the company employees. These non-employee owners’ interests may be different than the employees’ interests, which is true of pretty much every normal company you can think of today. There are structures that can help to realign ownership with workers, such as adopting policies that give workers equity and using company profits to repurchase shares from non-workers, but these are actions that can constrain the company’s capital. It might be hard to invest in new machinery, for instance, if the company is spending all of its money buying back shares from retirees.

Thanks, that’s definitely some interesting perspective. The idea of retirees retaining their share of the company and having different interests than current workers (especially if they can pass on their ownership to their beneficiaries) does seem to defeat the “worker owned” aspect in the long run - especially since retirees would likely have built up a lot of equity in the company over their career I could see how it could be expensive to be constantly buying them out of their shares. I wonder if any companies are structured so that existing workers have equity in the company but people must relinquish their shares when they leave the company? It might incentivize the company to maximize dividends all the time at the cost of building long-term value in the company though, so it might not be a very viable model.

I agree that employee ownership itself doesn’t necessarily give workers more control - that seems to be more of a function of the way certain worker co-ops are structured. I am curious if there are any companies where they have a one worker/one vote setup - at least perhaps for voting in the board of directors, as opposed to voting on company decisions.

@bob_2

There are a number of EOCs in the UK, John Lewis being the biggest and best known.

The 84,500 employees at the John Lewis department store chain and its sister brand Waitrose are referred to as “partners” and collectively own 100% of the company.

Since 1950, it has been owned by a trust on behalf of its staff, with each partner having a say in the business and the ability to raise issues through participation in branch forums.

The John Lewis Partnership generated £10.2bn in revenue last year and employees benefit from an annual share of company profits, favourable pensions and a programme of social activities although COVID has made a big dent in their profits.

The upside is that the employees/colleagues/partners have a stake in the business so they should be better motivated. I don’t know what the downside is.

Well, one downside I suppose is that the livelihood of its employees might be even more tied to that single company than a typical employee of a corporation that they don’t have any stake in. The flipside to a share of company profits is pay cuts when a company is struggling, or something similar. As well, depending on how the ownership distribution is, an employee-owned company might not feel all that different to the rank-and-file lower level employees. If upper management comprises 1% of the number of employees but owns 50% of the shares, senior employees comprise 10% of employees and own another 40% of the shares, then the lower-level employees that only own a small fraction of the company might both get minimal benefit from their stake as well as negligible influence. For them it might not be too different than just owning some shares of a publicly-traded company that they work for. I suppose one difference would be that there aren’t some external shareholders pressuring management to act in a certain way? But the lower level employees are still ultimately at the mercy of the higher level decision makers within the company.

[Fotheringay-Phipps]

Key question: suppose there comes a point at which for whatever reason (mismanagement, industry changes, bad macroeconomic conditions etc.) the best prospects for the long term survival of the company are to close some divisions and/or lay off some people, and/or cut benefits etc. Does an employee-owned company have the ability to make that decision? Or are they likely to cling to some long-shot alternative strategy which is objectively dubious but which is has appeal to those whose main priority is the benefit of the employee-owners?

[zimaane]

It’s an interesting question. United Airlines was mostly employee-owned for some time, and it didn’t go well. Different employee groups disagreed with one another, and eventually the plan was scrapped in bankruptcy.

There are several issues to consider. First, the incentive effect may be exaggerated. If you are one of 10,000 employees, are you really going to work that much harder to improve the bottom line, knowing that your own benefit will be miniscule? Second, “employees” are not a uniform group, and the management may struggle to reconcile the interests of different groups. FInally, there is always a risk if one’s employment and investment are in the same company. If the company goes bust, you are out of a job AND your investment is toast.

[Kimstu]

@bob_2

There are a number of EOCs in the UK, John Lewis being the biggest and best known […] although COVID has made a big dent in their profits.

[OT] So I was all like “How the hell could COVID have made a dent in their profits, hasn’t this been the biggest year for gardening in already-gardening-mad Britain since like the invention of agriculture??!”…

… and then I realized I was confusing John Lewis with John Innes.

Never mind.
[/OT]

[ISiddiqui]

@Tired_and_Cranky

I have worked on issues concerning employee-owned companies from just about the worst possible perspective to address your questions but I’ll give you my background. Generally, I looked at employee-owned companies who were victims of fraud and failed terribly. In this way, I’m a bit like a mechanic at a Toyota dealership who sees broken Toyotas all day and decides to drive a Honda.

One model for getting employees to own shares of their employers in the U.S. is for the company owners to sell the company (or a controlling interest in it) to the employees’ pension plan. Sometimes, this was done with the best of intentions - to give employees a stake in their employer. Sometimes, this was done because the owner realized he could get more money selling to the employee pension plan than from any other possible buyer, usually because the pension plan was worth more than the entire company.

The Department of Labor has issued considerable regulations that apply when a pension plan buys the stock of its beneficiaries’ employer. These regulations help to prevent the employees from being taken advantage of. For example, the pension plan must get an independent valuation of the assets that it is purchasing. The plan fiduciaries are supposed to enter the transaction only if it is in the best interest of the plan participants. Despite these protections, sometimes a pension plan buys a company, the company goes bust, and the pension plan goes broke.

After reviewing your list of pros and cons, I’ll note that it isn’t necessarily true that employee ownership through the method I describe gives the workers more direct voting control or democratic power. It’s definitely not (in any transaction I’ve seen) one worker/one vote. Voting interest most likely depends on the amount of stock the employee holds in the plan, thus more senior and longer-tenured workers have more voting power. It’s also possible that the plan fiduciaries will keep the right to vote the shares, and thus effectively control the corporation. If things are running correctly though, the fiduciaries should be acting in the best interests of the plan beneficiaries, who will largely be the employees, retirees, and their heirs. That probably does mean weighing worker welfare somewhat more heavily.

There is no particular reason that employee ownership should lead to less access to capital. If the board chooses, the company can still raise capital in all the traditional ways from all the traditional sources. If the employees use their influence (however structured) to ensure that their shares are not diluted by taking on more equity investors, it could mean that the company has less access to equity capital. Of course, that would mean raising more debt capital, which can be risky as illustrated by the article you cited.

There is also no particular reason to pay management talent less but I can understand how worker-led pay policies might lead to some employee-owned companies paying executives less than their competitors. That’s a choice that the company is making, however, and they can change the policy as soon as it stops working for them.

Your article also discusses how some, particularly foreign, employees aren’t members of the cooperatives and so don’t get all of the cooperative benefits. Something similar happens to businesses that are owned by employee pension plans. Over time, older workers retire or die, leaving their retirement plan interests to their beneficiaries. As a result, over time, the plan beneficiaries who effectively own the company aren’t the same as the company employees. These non-employee owners’ interests may be different than the employees’ interests, which is true of pretty much every normal company you can think of today. There are structures that can help to realign ownership with workers, such as adopting policies that give workers equity and using company profits to repurchase shares from non-workers, but these are actions that can constrain the company’s capital. It might be hard to invest in new machinery, for instance, if the company is spending all of its money buying back shares from retirees.

This is entirely on point. I work for the US Department of Labor agency that investigates ESOP transactions (the regulations you note are what we enforce).

To add, a lot of times the independent valuation may not be all that independent. Or the valuation is deficient in some way. Perhaps the valuation company didn’t receive all the information they needed or just ignored some obvious things. Generally due to how the levels of the stock allocation are structured (proportional by compensation or years of service), the officers tend to end up with the most shares and are the folks that are going to decide which valuation company to hire after the sale (as the stock needs to be valued annually).

There are ESOPs who do it well, but there is a lot of room to make extra money.

[Odesio]

@zimaane

There are several issues to consider. First, the incentive effect may be exaggerated. If you are one of 10,000 employees, are you really going to work that much harder to improve the bottom line, knowing that your own benefit will be miniscule?

You’re talking about employee engagement which is how a worker feels about their job, the company, and how much effort they put into their work. And many studies show that employee engagement is actually higher in employee owned companies at least in part because workers feel as though they have a personal stake in the company. And it’s not necessary that they’re going to bust their asses all that much harder than someone who isn’t engaged. But they’re more likely to stick around and lowering your turnover is usually a good thing. Hiring new people is expensive.

[Tired_and_Cranky]

@Delayed_Reflex

I am curious if there are any companies where they have a one worker/one vote setup - at least perhaps for voting in the board of directors, as opposed to voting on company decisions.

I’m not personally familiar with such an arrangement but my experience here is limited and the world is vast. The OP’s article talks about coops that run that way.

@Fotheringay-Phipps

Key question: suppose there comes a point at which for whatever reason (mismanagement, industry changes, bad macroeconomic conditions etc.) the best prospects for the long term survival of the company are to close some divisions and/or lay off some people, and/or cut benefits etc. Does an employee-owned company have the ability to make that decision? Or are they likely to cling to some long-shot alternative strategy which is objectively dubious but which is has appeal to those whose main priority is the benefit of the employee-owners?

Yes, they can make those long-term decisions at the expense of some employees and the fiduciaries running the company should. Whether they will or not is a different question but privately-held companies are also imperfectly run and shareholders don’t necessarily benefit. Ask long-time shareholders in Sears, for example.

@zimaane

There are several issues to consider. First, the incentive effect may be exaggerated. If you are one of 10,000 employees, are you really going to work that much harder to improve the bottom line, knowing that your own benefit will be miniscule?

I know there are empirical studies that show employee ownership, through various mechanisms, is correlated with stronger financial performance but they are a hodge-podge of studies looking at share ownership by senior management (including founders), equity or options grants to senior executives, and employee stock ownership plans. I’m not sure what the studies just about employee stock ownership say specifically.

@ISiddiqui

I work for the US Department of Labor agency that investigates ESOP transactions (the regulations you note are what we enforce).

Thanks, and keep up the good work! You probably have a lot more to contribute here than I do, even though you perhaps also have the problem of seeing many bad deals and few good ones.

[bob_2]

@zimaane

There are several issues to consider. First, the incentive effect may be exaggerated. If you are one of 10,000 employees, are you really going to work that much harder to improve the bottom line, knowing that your own benefit will be miniscule? Second, “employees” are not a uniform group, and the management may struggle to reconcile the interests of different groups. FInally, there is always a risk if one’s employment and investment are in the same company. If the company goes bust, you are out of a job AND your investment is toast.

In the John Lewis example, Employees were encouraged to think of the company as “their” company. They were referred to as colleagues tather than employees for example. They also received an annual dividend (with lower tax than earnings) related to performance. This final year was the first in which no dividend was paid.

[nightshadea]

winco foods is one here in the us

WinCo Foods