8 Responses to Best Candidates for Employee Owned Companies

  • Joe Hargrave says:

    Fun stuff, fun stuff.

    Ok, here are my comments.

    1) As you say, the first points against EOCCs are uncontroversial. Again, following J.S. Mill, or more recently, Robert Dahl and other advocates of economic democracy, it is widely acknowledged that there must be a period of worker-investor partnership. The shares alloted to workers are necessarily smaller, so that investors can profit. The idea is that a successful business will be able to gradually change the ratio of worker to investor ownership in favor of the workers.

    As Mill wrote, “it is even likely that when such arrangements become common, many of these concerns would at some period or another, on the death or retirement of the chiefs, pass, by arrangement, into the state of purely co-operative associations.” Others have suggested other means the same ends might be achieved.

    2) Regarding democracy, you write,

    “The success of such companies rely heavily on the creativity of the management team, and so they’re naturally going to be strongly top-down organizations. Democracy is much better at inertia than creativity, and thus the top down structure.”

    I think perhaps the fallacy here is the assumption that all decisions must be subject to a democratic vote. I would not propose that rank-and-file workers be granted creative control over new projects, or even a democratic veto. Of course the management team, if it so desires, can seek such input.

    But there are many, many operations besides the development of creative ideas that must take place in a company, no matter what they do. Administration, distribution, accounting, etc. There are day to day operations which have nothing to do at all with the creative process – there is no reason why the by-laws governing these non-creative processes cannot be democratically decided or influenced by those who must carry them out.

    The rank-and-file worker does not necessarily need a direct say in every decision made, in other words, in order for there to be democracy. The idea is to extend as much control and provide as much accountability possible within those areas that most directly affect the workers.

    3) Further on the topic of democracy, you write of large firms that

    “an individual worker’s vote is not going to count for much with so many employees.”

    I must object once again. I’ll leave aside whatever parallels might be drawn with political democracy and the implications that might have.

    Rather, I would suggest that, again, the concept of democracy need not be so narrowly applied. It need not be limited to a guaranteed vote on every matter. It may be as simple as having a say in the by-laws that govern a particular worker’s area of a particular firm, and a mechanism by which management can be held accountable. Or it could be more expansive. It depends upon what workers, managers, and investors are willing to agree upon.

    4)Here are what I think are serious problems: Ultimately a degree of good will must play a role, since I imagine that to many investors, it appears that a firm that keeps its workers in line autocratically or oligarchically will be more focused on the bottom line than one in which, yes, operations might be potentially held up by deliberations. This is one area where arguments against unions and arguments against economic democracy overlap; rising and falling stock values sometimes follow the victories and defeats of management versus labor.

    Superficial calculus might declare that more shares for the workers means less shares for the investor, but if worker ownership and democracy lead to greater productivity – and I think they can, do, and will continue to – then everyone wins.

    What we need are socially conscious investors who strive to do with their money what Christian morality demands of them, or their secular social conscience, or call it what you will. This is not to say that people should make BAD investments as an act of charity, but perhaps that they should forgo super-profits overnight for more modest returns over a period of time.

    For, in the end, if the model works, it works. There may be situations where slavery or some other hideous form of exploitation would yield even greater profits than the typical capitalist firm, but we avoid those and outlaw those because they are morally reprehensible. We let, in other words, a moral consideration, a view of the human person, draw a limit for our economic behavior.

    There is no reason this cannot also be a positive sentiment – instead of abstaining from a bad form of investment for moral reasons, engaging in a good form of investment for other moral reasons.

  • Blackadder says:

    I would not propose that rank-and-file workers be granted creative control over new projects, or even a democratic veto.

    In what sense, then, would the company be “employee owned”?

  • Joe Hargrave says:

    In the sense that workers own shares and earn dividends from them…?

    I suppose I should say, it isn’t necessary that every worker have control over every process in EOCC. It is sufficient that they have control over their immediate area of work, have the ability to hold all management accountable for their leadership and performance, and own shares in the company.

    I mean, do investors typically insist on control over the creative work of the management team? No. They own the company but, to use an example Darwin might be thinking of, they don’t sit in at every meeting to design the next video game, they don’t hover over the shoulder of the screen writer or the producer of the next movie.

  • JB says:

    Here is the guy who blazed the train here in the US

    Learn how Jack Stack and his fellow employees transformed a failing division of International Harvester into one of the most successful and competitive companies in America using the principles of Open-Book Management.

  • Blackadder says:

    Your typical investor isn’t going to be sitting in on board meetings, at least not at a large company. But if they don’t like the way the company is being run they can sell their shares, or vote against management at the next election. Because of this management is going to be very concerned about keeping shareholders happy, and would be unlikely to do anything that would upset the shareholders.

    In the case of a typical public company, keeping the shareholders happy isn’t inconsistent with a great deal of creativity and growth within a company. Where the shareholders are employees, however, the situation is somewhat different. Unlike a typical shareholder, who has invested only a small portion of this income in a given company, an employee shareholder will have almost his entire livelihood dependent on how the one company does, which is going to make him less willing to abide high risk/high return strategies. In addition, if an employee’s shares are going to be diluted whenever a new employee is hired, that is going to make employee shareholders less willing to expand, as doing so could lessen the value of their own shares even if it makes the company as a whole more successful.

    Mind you, all of that is premised on the idea that shareholders have some indirect control over management stemming from their ability to sell their shares freely and/or exercise voting rights. Presumably, though, you don’t think that employees should be able to sell their shares freely, as if they could the “employee owned” company would quickly become a regular investor-owned company. And based on your recent comments, it doesn’t seem like you think employee shareholders should have voting rights either (I kind of doubt that this is your view, but that’s what it sounds like from your recent statements). In that case I’m not clear on how you think employees are supposed to “hold all management accountable.”

  • Joe Hargrave says:

    “Your typical investor isn’t going to be sitting in on board meetings, at least not at a large company.”

    No kidding. And they aren’t going to sit in on “should Gandolf’s robe be dark grey or light grey in the Lord of the Rings video game” session either. The point here was simply that creative decisions are not going to be subject to democratic vote – but those coming up with the ideas will be held accountable for their performance.

    “Unlike a typical shareholder, who has invested only a small portion of this income in a given company, an employee shareholder will have almost his entire livelihood dependent on how the one company does”

    Understood. That still doesn’t mean that everyone has to have a vote on everything. This is a very simple point I am responding to. It isn’t an absolute requirement for economic democracy or worker ownership. It’s simple. There’s no need to nitpick the point. Either you agree or don’t. Either people have to be able to vote on everything for there to be democracy, or they don’t.

    Now, onto the other points…

    “which is going to make him less willing to abide high risk/high return strategies”

    Isn’t this assuming that the employee isn’t also earning a salary – like every executive is today? What is the difference between the executive with extensive stock options, whose “entire livelihood” is tied up with the company he works for, and the worker’s who stake is probably smaller? Wouldn’t it be less of a dependency on share value and more of a willingness to risk?

    On the other hand what makes a CEO and a well invested board of directors want to take major gambles with everything they have? Why is there a difference?

    “In addition, if an employee’s shares are going to be diluted whenever a new employee is hired, that is going to make employee shareholders less willing to expand, as doing so could lessen the value of their own shares even if it makes the company as a whole more successful.”

    It could do that, yes. Presumably, everyone will understand that possibility when they sign up. But even if the value of their shares decline, they would still be earning more than their counterparts in the industry who don’t own anything. Moreover, I see no reason to assume that this is a likely thing to happen. As the National Center for Employee Ownership reports,

    “Just as important, however, are potential productivity gains. Studies consistently show that when broad employee ownership is combined with a highly participative management style, companies perform much better than they otherwise would be expected to do. Neither ownership nor participation accomplishes these significant gains on its own. Companies want employees to “think and act like owners.” What better way to do that than to make them owners?”

    They do much better – meaning, as they company performs better, bringing on new workers will only make it better, and not necessarily cause a dividing up of the shares to result in a loss of income to the shareholders.

    As for the final paragraph….

    While I don’t think it needs to be a contract for life, I do think there has to be a contract of some kind, yes – for the reason you state.

    But the contract also includes voting rights, and I have absolutely no idea what “statements” you are talking about that suggest I don’t think employee shareholders should have voting rights. I do think they should have voting rights, I just don’t think they need to have a vote over everything.

    Let me try, try, to put it more clearly: some decisions depend upon objective knowledge, experience, skill, things that cannot be decided democratically. Those are the sort of things Darwin was referring to, companies that rely on the creativity of a small team to make big profits. I don’t think that creative process itself requires democratic oversight. But I do think that if it is manifest that the ideas aren’t selling, the workers can vote them out, like investors do with any poorly-performing executive officer.

  • Zak says:

    Joe,
    CEOs, entrepeneurs, and creative talent gamble on risky, potentially high reward strategies because the payoff for success is so much bigger, and because they don’t usually risk everything – their chances of rebounding from a loss are higher. Investors who choose such companies also have a higher appetite for risk than your average company man.

    And Blackadder’s point about workers being hesitent to dilute their share of the profits by allowing more employees rings true to me – look at how unionized industries (services in Italy, for example) and professional occupations (doctors, teachers) both tend to resist allowing more workers (through deregulation and licensing reform).

    That said, I find your idea for transitioning from venture capital to employee ownership as an industry matures an interesting one – perhaps through a pre-established dividend amount/share buyback (e.g. 3 times the investment, adjusted for inflation?).

  • Joe Hargrave says:

    Sometimes its true about the unwillingness to dilute shares, but the situations you’re talking about aren’t the same ones I’m talking about. I think that if it is clear that adding more workers is going to make the company more successful, worker-owners are going to have better reasons to bring on more worker-owners than union workers or professional associations are.

    A wage worker’s wages, even in a union, are determined more by supply and demand on the labor market than the profitability of the firm they work for. With worker-owners it is the other way around.

    As for the transition, yes, something along those lines.

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