I. Employee Ownership as Public Policy

Introduction

Twenty-five years ago the concept of employee ownership was virtually unknown in this country. But that has changed. An estimated 11,090 companies employing more than 7 million Americans are at least partially employee owned. Perhaps 2,500 of these, employing at least one and a half million workers, are majority owned. Most of these are profitable companies sold to their employees by retiring owners, bought by their employees to avoid other purchasers, or the companies partially acquired by their employees through company contributions to Employee Stock Ownership Plans (ESOPs). In Ohio, only a handful--perhaps 5% of the majority employee-owned firms-were acquired by their employees to avert shutdown. Nationally, it is estimated that only 1 to 2% of employee owned firms were acquired to avert shutdown.

Employee ownership owes its current success not to utopian aspirations but to the tax code. Since ESOPs were first mentioned in the Regional Rail Reorganization Act of 1973, nineteen federal laws have been passed affecting them. The most notable was the Employee Retirement and Income Security Act of 1974 (ERISA), which established tax deductibility of employer contributions to ESOPs. Since then a number of other measures have established regulations for ESOPs and expanded their tax advantages. Resources for employee ownership are also available through JTPA and the Workforce Investment Act.

Twenty-eight states have passed employee ownership legislation since 1974. The type, and amount, of legislation has varied from nothing more than a simple policy declaration encouraging employee ownership to legislation providing for the encouragement, promotion, and facilitation of employee ownership. The allocation of resources to and utilization of various types of programs, established by state legislation, has also varied greatly from state to state. The apparent function of the legislation also appears to have varied by state, and over time.

Current law makes ESOPs beneficial to practically everyone. Employee shares are first taxable when sold, generally at retirement when income and taxes are lower. Company contributions are deductible: and until 1996 commercial lenders were permitted to deduct half the interest on ESOP loans from their income; and businessmen who sell closely held companies to their employees are permitted to defer capital gains taxes by rolling their capital gains over into other corporate equities. In 1996, ESOPs became eligible to become tax-free by electing to be treated as an S corporation. These tax advantages have made ESOPs the primary form for employee ownership. So while there have been modest expansions in the other forms of employee ownership such as production cooperatives, ESOPs have become one of the most rapidly growing forms of ownership over the last two decades.

It is important to note at the outset, that employee ownership is not a panacea for all the ills afflicting industrial states. As one employee ownership proponent points out "for every success, in the 1970s and early 1980s, half a dozen or more buyouts failed." These failures were more often due to the lack of timely and accurate information rather than due to market conditions. However, as stated in one business editorial "it is one concept that can raise both corporate competitiveness and employee wealth without gumming up the free market."

States have sought to promote employee ownership as an alternative to plant shutdowns and as a strategy for broadening ownership of capital. However, employee ownership as a means to prevent shutdown is more often promoted for political motives rather than economic realities. That being said, it is a form of ownership that seems to be highly compatible with keeping jobs where people are and protecting state and local economies against the capricious decisions of distant conglomerates and multinational corporations.

State and local communities, as the economy becomes more globalized have become more focused on methods of job retention and creation. This point is quite clear in the economic development literature. As accurately stated by one economic development practitioner:

"As the rate of capital and labor mobility accelerates, and the global competition for investment tightens, local communities become more vulnerable to external decisions that can dramatically influence their economic well-being. The complexity and rapidity of these economic changes threaten the stability of local revenue sources…. This revenue imperative-the effort to increase the stability of the local revenue base-prompts many local officials to seek new types of economic activity to provide more local jobs."

Employee ownership provides an alternative strategy that can greatly reduce the risk and uncertainty associated with capital flight. Research has shown that employee ownership not only helps retain jobs but also can create jobs. Employee ownership not only benefits the employees of the employee-owned firm but the community at large. Firms build relationships with other local firms that often tend to be customers and suppliers. Local firms are not only dependent on the local consumer but other local businesses. In light of this complex relationship, the closing of a business not only impacts the employees of the closing firm but other local firms with which the closing firm did business. Implementation of employee ownership at a closing plant allows these relationships to continue.

What is to come!

This study covers several aspects of employee ownership legislation and states’ role in utilizing employee ownership as an economic development strategy. Section II presents a review of employee ownership studies, specifically regarding performance and productivity. The evidence suggests that increased productivity at employee-owned firms is correlated to the age of the ESOP. Earlier studies also suggest that not all types of employee ownership are equal. Section III examines trends associated with the passage of employee ownership legislation since 1974. Particular attention is paid to the amount of legislation, the type, and the location of the states where the legislation passed. Section IV presents an overview of state employee ownership legislation passed to date. Section V presents an overview of the Ohio program and a proposal for a model state policy program [or strategy] based on the overall analysis. This model is built on the success of earlier policies while at the same time attempting to correct for earlier policy failures. Section VI provides a synopsis of the paper and speculates on the future of employee ownership as an effective economic development strategy.

Date: 2015-01-11; view: 871