From: _Dollars and Sense_, Jul/Aug95
CO-OPS, ESOPS,
AND WORKER
PARTICIPATION
by Rebecca Bauen
In 1991 the 130 employees of Market Forge, an industrial
cooking equipment manufacturer in Everett, Massachu-
setts, were threatened with loss of their jobs. The Chicago-
based conglomerate that owned the 95 year-old plant in-
tended to sell it to a firm in Georgia and move operations
there. When the union, United Steel Workers (USW) Lo-
cal 2431, successfully halted the move, the company
threatened bankruptcy.
But in 1993, after two and a half years of negotiations,
the workers bought their plant. With the help of the USW
the employees were able to assess whether the firm would
be a good investment before purchasing it. Said Dave
Slaney, Vice President of the Steelworkers local, "We creat-
ed a financing structure which allows employees to own
100% of the shares and
have full control: each
employee has one vote to
decide on management
salaries, their own pay
raises, firing the manage-
ment, as well as plant re-
location. "
The Market Forge buy-
out was accomplished
through the increasingly
common tool of an Em-
ployee Stock Ownership
Plan (ESOP). But 100%
ownership by workers is
rare for ESOPs. In al-
most all cases employees
own a small fraction of
the stock, and so have lit-
tle decision-making
power.
ESOPs are one of two
mechanisms that many
corporations are encour-
aging as solutions to mea-
ger rates of productivity
growth. The second
mechanism is employee
participation plans, which allow workers to have input
into how their jobs are structured and how companies
are run.
Business leaders hope that ESOPs and participation
schemes will raise productivity by reducing workers' alien-
ation from their jobs. But both of these mechanisms are
management-inspired, and neither, on its own, gives em-
ployees real power within their workplaces. As a result
they have generally failed to yield serious productivity
improvements.
In contrast, worker cooperatives, in which the em-
ployees have both full ownership, and control over
management decisionmaking, are a true break with tra-
ditional corporate structures. As such, studies have
shown that not only do they generate more employee
satisfaction, but production efficiency often improves
greatly. While still a tiny fraction of American compa-
nies, worker coops are steadily demonstrating their vi-
ability in the marketplace.
ESOPs ARE NOT WHAT THEY SEEM
There are approximately 9,500 U.S. companies with
ESOPs -- including Hallmark, Avis, and United Air-
line -- covering over 10 million employees, who con-
trol over $150 billion in corporate stock. And they are
growing at a rate of 300,000 to 600,000 new partici-
pants a year, according to the National Center for Em-
ployee Ownership (NCEO), an Oakland-based non-
profit.
In most ESOP corporations, employees are offered
stock as part of a benefits package, and accrue increasing
rights to shares with seniority. Some companies substitute
ESOPS for pensions altogether -- despite the riskiness for
employees of having their retirement invested in the fate of
the company.
Veronica Manson of NCEO explains that ESOPs are
popular with corporations because of the tax benefits. In
fact ESOPs were invented by a corporate investment
banker in 1974. ESOPs allow a company to set up a trust
fund for employees and borrow money to buy shares. The
company then makes a tax deductible contribution to the
plan to enable it to repay the loan.
Besides large corporations, small family-
owned firms are also turning to ESOPs. Tra-
ditionally, when a company's founder wants
to retire and cash out, the owner sells the
company to a large firm, or goes out of busi-
ness altogether. The alternative is to sell to
the workers and get a tax break.
Many stock ownership plans offer em-
ployees the right to vote for the board of
directors. But, unlike the Market Forge
case, employees rarely comprise a majority
of the stockholders. NCEO reports that
less than one-third, or about 2,500 compa-
nies, form ESOPs for philosophical rea-
sons; to really share ownership. A top man-
ager in one of the country's leading ESOP
investment firms admits, "ESOPs are the
antithesis of workplace democracy." The
Horatio Alger strategy of benefitting indi-
viduals, rather than collective groups of
workers, is the operative one.
At first glance, ESOPs seem to offer a win-win strategy;
the individual employees gain by the financial success of
the company, and the corporation gains tax benefits. Yet
the cards are stacked: the company's financial success is
only a possibility, while the tax benefits to the corporation
are guaranteed. "Employee owners" are still employed by
CEOs and outside stockholders, who continue to both
reap profits and make the majority of decisions about the
future of the firm.
PARTICIPATIVE MANAGEMENT:
ANOTHER DIVERSION
Another strategy that appears to offer increased democra-
cy in the workplace is participatory management. Invent-
ed by management consultant Edward Deming in the
1950s, employee participation's purpose is to increase pro-
ductivity and employee motivation.
How work is organized is a key to productivity. By set-
ting up flexible work teams and inviting production work-
ers to contribute to product design, management found
new ways to remain profitable in an increasingly compet-
itive global market. By appealing to workers' "higher or-
der" need for meaning through increased participation,
corporations avoided compensating them financially for
their extra efforts. Yet, for most employees, increased in-
volvement has resulted in few real changes.
Most Fortune 1000 participatory management pro-
grams allow employees to give input--but only to make
suggestions, not decisions. In order to make good deci-
sions, workers
need informa-
tion. Yet in 25%
of these firms, em-
ployees have no ac-
cess to information on
the company's overall
performance -- even
though that information is
public. Half don't regularly in-
form employees of their teams'
unit operating costs, which
would help them evaluate their
own performance.
Both employee participation
programs and ESOPs are man-
agement-inspired models. In ES-
OPs, employees gain individual
stock benefits, but the ratios be-
tween the highest and lowest
wage levels do not change, and
most profits still go to non-employee stock owners. In-
creased participation through teams may make work
more "meaningful," but offers little real power. In both,
employees remain at the whim of management and
stockholders.
WORKER COOPS: A DEMOCRATIC ALTERNATIVE
Participation alone doesn't lead to greater productivity.
Rather, having real decision-making power does, accord-
ing to studies tracked by the NCEO. And participation
without ownership tends to be short-lived or ambiguous.
Ownership seems to provide the fuel to keep participa-
tion going. On the other hand, ownership alone affects
performance little if at all. A 1987 U.S. General Ac-
counting Office (GAO) study found that ESOPs had no
impact on profits.
July/August 1995 21
NEITHER
ESOPS NOR
PARTICIPAT10N
PIANS GIVE
WORKERS
REAL POWER
WITHIN THEIR
WORKPLACES
But firms that are managed in a participatory way and are
employee-owned increase their productivity growth rate by
52% per year, according to the same GAO study. NCEO
confirms, "We can say with certainty that when ownership
and participative management are combined, substantial
growth results. Ownership alone and participation alone,
however, have, at best, spotty or short-lived results."
Worker-owned cooperatives are a model that combines
and extends the benefits of both ESOPs and participa-
tion plans. Ownership of the firm belongs solely to those
who work there rather than to those who can afford to
buy stock. Employees are not subject to the whims of the
chief executive officer or board. Instead, the worker-
owners elect the board, who in turn hire management
and control capital.
Economic benefits--regular pay and net profit--are
distributed equitably to workers, not to external share-
holders according to the number of shares purchased. De-
cision-making power also belongs to workers. Each person
has the right to one vote based on their work in the com-
pany, not on the number of
shares owned. And, by com-
bining economic ownership
with participation in signifi-
cant decisions, worker-owned
cooperatives have proven to
- be more productive than tra-
ditional businesses.
Dick Gilbert (one of the
founding owners of Stone
Soup, a worker-owned restau-
rant in Asheville, North Caro-
lina), myself, and others re-
cently conducted a survey of
coops throughout the nation.
It provides the most comprehensive information available
on worker-owned cooperatives in the U.S. today. There
are nearly 150 such businesses (not including consumer-
owned coops, such as most food coops), primarily concen-
trated on the west and east coasts. Some are in manufactur-
ing, others in retail trade, while most are in services such as
printing, restaurants and health care. Like traditional busi-
nesses, these firms must develop marketable products,
gain access to financing, and compete in the market while
at the same time attempting to model economic justice
through shared ownership.
While some of those employed in coops are attracted
by the ownership structure, many just need the jobs.
Cooperative Home Care Associates (CHCA) in the
Bronx currently employs 300 low-income Latina and
African American women, 80% of whom previously
had been receiving some sort of public aid. Offering
women the opportunity for ownership, as well as higher
wages and better advancement opportunities than are
normal in this "ghettoized" industry, they believe that
high quality care will result. Success has led to franchis-
ing home care cooperatives in Boston, Philadelphia and
rural Connecticut.
Following CHCA's success in home care services, Bos-
ton's ICA Group, a non-profit providing technical assis-
tance to worker-owned firms, is encouraging coop devel-
opment in low-income communities in five other indus-
trial sectors: retail franchises, temporary employment, en-
vironmental products and services, childcare and private
security services.
ICA chose these industries based on its analysis of the
market--minimal barriers to entry, growth potential,
access to capital, and the potential to employ a significant
number of low income people. Job quality -- opportuni-
ties for liveable wages and advancement -- was also an im-
portant consideration.
SO, WHY THE SMALL NUMBER?
Skeptics conclude that their small numbers indicate work-
er-owned firms are inefficient organizations. The chal-
lenges of democratic control by ordinary workers must
lead to a greater failure rate than conventional business.
This conclusion is wrong.
Worker-owned cooperatives have no greater failure
rate than conventional businesses. Yet, because they are
unique, they attract more attention and appear to fail
more often. External market forces cause some of those
failures that do occur. Stone Soup, for example, faltered
when seven new restaurants opened in Asheville's
downtown.
Failures also take place due to the difficulty that tradi-
tional business services and conventionally-trained indi-
viduals have in relating to cooperatives. Coops' democrat-
ic structure makes it more difficult for them to access fi-
nancing, or to attract managers who are both competent
and understand democratic participation. In addition,
most workers have little or no prior experience in educa-
tion or employment that prepares them for cooperative
business practices.
Gerry Mackie, former director of Hoedad, the largest of
the Northwest's Forest Workers Cooperatives, believes
capitalizing new worker-owned cooperatives is more diffi-
cult than traditional businesses. In many industries, coop-
erative members can't finance all the costs themselves
through individual investments, and locating outside
money without voting rights is difficult. Venture capital-
ists are unwilling to forfeit these rights. Traditional banks
are wary of the unusual cooperative structure and hesitate
to make equity or working capital loans.
[Note from facilitator <econ.democracy>: On this very crucial
point see: Whyte and Whyte _Making Mondragon_(1988), Chapter
5, THE COOPERATIVE BANK, pp. 49-52. I may as well take this
opportunity to remind you that this volume is the bible/hand-
book on this topic, encapsulating 40 years of experience.]
Carol DiMarcello of the ICA Group disagrees with
Mackie, stating, "Money does exist for groups to start
worker-owned cooperatives, through intermediary groups
such as ICA, which makes loans nation-wide, as well as
other regional and local credit unions." Foundations are
increasingly supportive of non-profits starting worker-
FIRMS THAT ARE
MANAGED IN A
PARTICIPATORY
WAY AND
ARE EMPLOYEE-
OWNED
INCREASE THEIR
PRODUCTIVITY
GROWTH RATE BY
52% PER YEAR.
owned cooperatlves as a
means to create economic
self-sufficiency for eco-
nomically deprived
groups. New York's Coop-
erative Home Care Associ-
ates continues its work
through foundation sup-
port.
"Finding managers who
understand cooperative
structures and are willing
to work in them, at a rate
lower than they could
make in conventional
firms, is more difficult
than financing," says Di-
Marcello. In addition to
traditional business skills, managers need to understand
the cooperative's unique internal capital accounting sys-
tem (which tracks workers' initial investment as well as
their share of profits and losses), cooperative problem-
solving, and democratic information sharing.
Others, like Dick Gilbert of Stone Soup, believe co-
operation is difficult to teach and maintain, particular-
ly in industries with high turnover rates, like restau-
rants. Stone Soup managed to reduce its annual turn-
over rate to 50% (half the workers leave each year), far
less than the industry's average of 600% (workers last
only two months on average) . But it was still difficult to
share information, build trust, make collective deci-
sions, cooperate in conflict resolution, and run the
business.
To maintain the democratic nature ofthese groups, they
need to instill and practice democratic management. Gil-
bert, along with a handful of worker-owners and adult ed-
ucators around the country, is organizing educational pro-
grams to teach the culture and history of cooperation as
well as the technical aspects of running and managing
worker-owned businesses.
"Given our acculturation, we're probably more com-
fortable in authoritarian structures and carrot and stick
motivators," Gilbert says. "This isn't the way it should be.
We need to build models which are different and gain an
understanding of how it's done."
In the United States today, there is greater capacity than
ever before to promote worker-owned cooperatives. There
are increasing numbers of financing mechanisms such as
community development banks, revolving loan funds,
foundations, and union pension funds. We also have more
savvy at cooperative business development, and more
technical assistance organizations like the ICA Group in
Boston, Praxis in Philadelphia, and NCEO in Oakland.
We have learned through our own history and internation-
al experiments what contributes to building networks of
cooperatives. We still need to develop education for eco-
nomic cooperation in schools and universities, as well as in
our places of work.
As we find ourselves lured by the promise of reorganiz-
ing traditional workplaces, we should not be seduced by
the economic benefits of ESOPs to individuals, or by em-
ployee participation schemes. Although interest in them is
widespread, they are diversions from a broader goal. In-
stead, we should move beyond management's strategies
and create new ways to equitably share control and the
economic rewards of our labor.
Resources: Industry Sector Assessment for Community Economic
Development Replication Strategy, The ICA Group, 1994 (20
Park Plaza, Suite 1127, Boston, MA 02116); Employee Owner-
ship and Corporate Performance, National Center for Employee
Ownership, undated (1201 Martin Luther King Jr. Way, Oak-
land, CA 94612).
July/August 1995 page 23
Rebecca Bauen works in
community development in
Seattle, Washington, and
is a D&S associate.
Dollars & Sense magazine is published by the
Economic Affairs Bureau, Inc.
One Summer Street
Somerville, MA 02143
617 628-8411
