Employee ownership has come a long way in the last quarter of a century in the United States. From a few hundred employee-owned corporations with a few thousand employees in 1973, the employee-owned sector has boomed to encompass more than 11,000 companies with 9.5 million employee owners today. In addition, there is significant employee ownership through company contribution of stock in match to 401K plans and through broad stock option programs. However, unlike ESOPs, these forms of ownership lack mechanisms for establishing employee influence in corporate decision-making; they lack the pooled equity aspect of the ESOP. Consequently, they are useful in broadening ownership but have not to date given rise to broader employee influence. This remarkable growth in employee ownership and employee influence was a consequence of the ideas of San Francisco investment banker Louis Kelso and the political acumen of Louisiana Senator Russell Long. Kelso developed the concept of the employee stock ownership plan as well as several other systems to broaden ownership as a response to what he saw as the inexorable tendencies in modern companies of increasing portions of income to accrue to capital; Kelso pushed the idea that along side labor income, all working people ought to have a stream of income from capital created through their work in the company that they worked for and owned. Senator Long, chair of the Senate Finance Committee and the son of Huey "share-the-wealth" Long, brought his legendary tax writing ability to bear on broadening ownership. Between 1973 and his retirement from the Senate in 1986, Long sponsored the key tax provisions that created the rapid growth of ESOPs that we have seen in the last quarter century.

However, tax breaks do not create a movement. Whatever employee ownership in America is, it is not a movement. At least not yet. Do American ESOPs have a common denominator, other than using a tax-advantaged pension plan to build some employee equity? "ESOPs," as former Fastener Industries' CEO Rich Biernacki liked to say, "are just like snowflakes. No two are alike." That has been both a strength and a weakness. Diversity is the strength. Lack of commonality is the weakness. One of the weaknesses of employee ownership in the US has been the lack of mass support. While ESOPs are designed to broaden ownership, there are few links between the ESOP community and other groups which have labored in the vineyard of broader ownership: the agricultural cooperatives, the consumer cooperatives, the credit unions, the mutual insurance companies. We need to reach out to build those links. Employee ownership is not high on the agenda of the organizations and movements which speak for those with little or no property in this property-owning democracy of ours. Look on the agendas of the organizations representing Afro-Americans, Chicanos and other Hispanic Americans, or labor. Can you find employee ownership? We need to build that agenda together. Employee ownership fits into the Jeffersonian vision of an America in which every working man or woman owns productive assets. It ought to be part of a national political debate. It ought to be a plank in both parties' campaign platforms. It ought to be a part of every candidate's stump speech. It's as American as apple pie. With the coming of a new century, and a new millennium, it is time to take stock of where employee ownership has been and where it is going. Consequently, Owners at Work has asked a range of leaders in the employee ownership community nationally and internationally to reflect on various aspects of that future. Their thoughts will appear in this special focus section on "Envisioning the Employee-Owned Future" over the next several issues. Here are the first two articles in the series.

Whither Employee Ownership?
Corey Rosen

Let me make my disclaimer first. I have some ideas about what I think will happen to employee ownership in the next few years that I think are reasonably reliable. After that, your guess is as good as mine. After all, who among us in 1991, when we estimated there were one million employees working for companies that gave stock options to all their employees, would have said that by the end of the decade, the number would be at least eight million, and would surpass the number of ESOP participants in the next year or two? Who would have guessed that the most intriguing, and possibly important, trend in employee ownership in the least few years has been the growth of multinational employee ownership plans. And to look back a little further, who in the 1980s thought that a) the Berlin Wall would fall, b) the Soviet Union would collapse, c) communism would die out in Europe, and d) employee ownership would be practiced on a very broad, if very flawed, way throughout many of these formerly communist states. Don't count me in that group of people who saw it all.

ESOPs
On the theory that the present is the best predictor of the future, let's look at the state of employee ownership today. There are about 11,500 ESOPs covering about 9.5 million employees. The number of ESOPs is up only about 1,000 from what there were a decade ago and the number of employees has declined slightly. This is the result of a number of factors.

First, in the late 1980s, many public companies set up ESOPs, largely as a means to fund their matches to 401(k) plans. It's a little complicated just how this worked, but basically companies were able to fund their commitments to the 401(k) plan partly out of the increase in their stock value. Public companies loved this – for a while. In the early 1990s, the Financial Accounting Standards Board said that the companies must start accounting for the cost of the plan based not on the original cost of the shares, as they had been doing, but at the current value of the allocated shares. Nothing really changed in what the company was doing, but the public perception did. That could hurt share prices, so many companies started terminating their ESOPs. These public ESOP companies accounted for at most 15% of all ESOPs in the late 1980s, but had the lion's share of employees, probably 70% or more. Hence the decline in the number of ESOP participants.

During the 1990s, private companies continued to be drawn to ESOPs, however, largely to provide a market for shares of existing owners. During the recession, about 400 new ESOPs were set up each year, while about twice that number has been set up during the recovery. This would add more plans to the total numbers except that there are always companies being sold and plans being terminated for various reasons (bankruptcy being one of the least common). Probably 4% to 5% of all plans are terminated each year. So as the total number of ESOPs grew, just to maintain a modest growth, the number of new ESOPs had to keep getting larger. There is no apparent reason why the number of new plans set up each year will increase significantly, so the net growth in ESOPs will probably reach an equilibrium point in the next several years at around 13,000 to 16,000 plans.

There is some anecdotal evidence, however, that provides a ray of encouragement. First, most consultants tell us their deals are often larger, with a number of companies with over 1,000 employees becoming majority employee owned in the last few years. In each case, existing owners simply preferred to sell to an ESOP, even though other buyers would have paid more. At the same time, mature ESOP companies, having paid off their loans, are now looking for acquisitions. Favorable tax laws for such transactions make these mature ESOPs effective competitors in the acquisitions market. Finally, we are seeing an increasing number of companies who want to set up ESOPs not to buy out owners, but just because they like the idea. That could increase the potential audience considerably.

Stock Options
You just haven't been paying attention if you haven't noticed that the most remarkable employee ownership trend of the last decade is companies giving stock options to everyone. It started with the high-tech sector, where the practice has now become commonplace. In some parts of the country, such as the Bay Area, most employees of high-tech companies get options (72% of one Palo Alto secretarial placement firms get options, for instance). The trend has spread well beyond high-tech, however. Most of the employees working for the country's largest banks get options, for instance. Starbucks, PepsiCo, Whole Foods, Walgreen's, Wendy's, Merck, Bristol-Myers, and all sorts of other companies have joined the trend. Altogether, surveys suggest about 10% to 15% of all publicly traded companies now give options to most or all employees, while 30% have plans that allow them to do so at a future date (this doesn't mean they will, but it is a sign they are thinking about it).

The reasons for this are not hard to find. Most important is the low unemployment rate, the best thing by far, tax incentives included, that ever happened to employee ownership. Employees want more than a paycheck. They see options as a way to participate in the wealth creation that usually leaves them behind. At the same time, companies are moving towards flatter, more participative structures and want to get people more involved. Options provide an equity stake to reward that behavior. Finally, options have very favorable accounting treatment. Public companies don't show options as a direct cost on their income statements, so it's a good way to increase pay without decreasing apparent earnings (yes, it's smoke and mirrors, but it's not going to change anytime soon).

Are options as good a way to confer ownership as ESOPs? We think so. They have no control rights, but most ESOP participants have little, if any, effective use of voting power. It's true that most employees never actually own shares with options (they exercise their right to buy shares at a bargain price, then turn around and sell the shares), but most broad plans grant options every year, two, or three, so employees always have unexercised options and hence an ongoing equity stake. ESOP participants rarely actually get shares they hold onto either. Unlike ESOPs, however, option holders get the right to get cash out periodically, not just when they leave. Economically, our data indicate option holders and ESOP participants make out about the same in terms of equity value. What options cannot do, of course, is aggregate ownership in a trust so that, collectively, employees can control companies. This is a valuable part of ownership, but one that most employees do not seem to place on their highest priority list for ownership rights. What we do not yet know is whether option companies have ownership cultures as much as ESOP companies do (such as sharing financial information and decision making rights at the job level).

There is every reason to think broad options will continue to grow, and grow rapidly. There appears to be no loosening of the job market, especially in certain industries. Demographers say we could have this happy condition for many years to come. Organizational flattening appears here to stay. Finally, the sectors where broad options have become most ingrained are themselves the fastest growing part of the economy.

Multinationals
Remarkably, many multinational companies – probably 100 or more – now make all their employees worldwide into owners, usually through options. Bristol Myers Squibb's program has already produced $32,000 in value per participant for its first round of worldwide options (all employees got the same amount regardless of salary or country, a pattern common to many of these plans). Given the enormous complexity and cost of setting up and running these plans, this is quite encouraging. We are finding growing interest in this trend, a trend largely resulting from a desire to create more of an ownership mentality worldwide. How much it will grow is hard to predict, but its eventual impact could be greater than anything that has happened in this field so far.

The Role of Non-Profits
It would be nice to say that those of us in nonprofit support organizations have made all this happen. It would be humble to say we just watched it occur and did what little we could to push it along. The truth is, of course, in between. The research on employee ownership and corporate performance that showed that ownership only produced results when linked to high-participation management clearly had a dramatic impact on how ESOP companies are run. So did the constant parading of our favorite highly participative companies in front of every audience we could find – we made these companies into the models. In terms of the number of plans, we helped in two ways. First, the seminars, media work, networking, and the like all increased awareness. Second, the availability of high quality and inexpensive information services made the idea of employee ownership less daunting. Finally, and most insidiously, we all kept saying this was a trend long enough and loud enough (especially to the media, who believed us, by and large) that people started to believe it was a trend. At that point, of course, they could hardly fail to go along; it was the trend, after all.

So what shall we all do next? More of the same, I would say. To be honest, I think all of us – the NCEO, the OEOC, the FED, the ESOP Association, the late, lamented state employee ownership organizations, and many others have done an excellent job. No, we didn't make all this happen by ourselves. But absent our efforts, there would be a lot less employee ownership and it would be a lot less participative.

Louis Kelso's Economic Vision for the 21st Century
Norman G. Kurland and Dawn K. Brohawn

When America crossed the threshold into the 21st century it led other countries as the most prosperous and powerful nation on the planet. Gazing toward the vast frontier of the global economy, we see a rapidly changing landscape shaped by forces beyond the control of any individual or nation. Space Age technology, global finance, global markets and transnational corporations are impelling us toward an uncertain future.

Certainly we as a nation have benefited from modern technology. It has contributed to our economic success in the world. It has lengthened our lifespans and shrunk to fractions of a second the time it takes to send a message or billions of dollars across the planet. The global economy has brought the American consumer a year-round cornucopia of goods from every corner of the world. Competitive forces continue to drive down the price of personal computers, video recorders, and cellular phone systems, putting unimaginably powerful tools of information and communication in the hands of the average citizen. But Americans have also seen harbingers of troubles to come: the disappearance of entire sectors of labor as robots, artificial intelligence, and ordinary office machines enter the work place. Globalization has encouraged the flight of jobs and capital to lower-wage regions of the world. Blue-collar workers and middle management alike have become targets for corporate downsizing. Today, six Ph.D. computer scientists from India can be hired over the internet for the price of a comparable American. Thousands of jobs have been lost to a computer chip. Even in the midst of our prosperity most of us feel powerless to control our own futures.

There is an economic fault line running throughout America and the world which today's economic gurus seem unable to explain or remedy: the ballooning wealth and income gap between a tiny rich elite and multitudes of poor in every country (including the United States), and between developed and developing nations. With global communications, the global economy, and our global environment, we cannot help but feel the tremors inside and outside our borders. These growing economic imbalances promote bloody conflicts, widespread starvation, international crime and corruption, depletion of the planet's non-replenishable resources, unconscionable destruction of the environment and systematic suppression of human potential and life-enhancing technology.

One post-scarcity visionary of the 20th Century, lawyer-economist Louis Kelso, understood the power of technology either to liberate or dehumanize people. Popularly known as the inventor of the employee stock ownership plan (ESOP), Kelso observed that modern capital tools and their phenomenal power to "do more with less" have offered people an escape from scarcity to shared abundance.

As a lawyer Kelso also saw that the design of our "invisible" institutional environment and social tools determine the quality of people's relationship to technology. Such intangible things as our laws and financial systems determine which people will be included or excluded from sharing access to equal economic opportunity, power and capital incomes.

Access to capital ownership, asserted Kelso, is as fundamental a human right as the right to the fruits of one's labor. Kelso argued that the democratization of capital credit is the "social key" to universalizing access to future ownership of productive wealth, so that every person, as an owner, could eventually gain income independence through the profits from one's capital.

Kelso's Economics of Ownership and Justice
At the heart of what Kelso called "binary economics" is a simple but revolutionary proposition. Kelso stated that people could legitimately create economic value through two (thus binary) factors of production:

Labor (which Kelso defined as all forms of economic work by people, including manual, intellectual, creative, and entrepreneurial work, and so-called "human capital"), and

Capital (defined by Kelso as anything non-human contributing to the production of marketable goods and services, including tools, machines, land, structures, systems, and patents).

Capital, in Kelsonian terms, does not merely "enhance" labor's ability to produce economic goods. (It wasn't Bill Gates' labor that accounted for the increase in his wealth in one year's time from $50 billion to $90 billion; his capital would have kept producing even if Bill Gates were in a coma.) According to Kelso, capital (increasingly the source of economic growth) should increasingly become the source of added property incomes for all.

Kelso based his ideal market system on the three basic principles of economic justice:

(1) Participation, the input principle. If both labor and capital are responsible for production, then equality of opportunity demands that the right to property (and access to the means of acquiring and possessing property) in justice must be extended to all.

(2) Distribution, the out-take principle. Property rights require that income be distributed based on what one contributes to production—one's labor, one's capital, or both. Assuming that capital ownership is spread broadly, the free and open market under Kelso's system becomes the most democratic and efficient means for determining just prices, just wages and just profits. If both sales revenues and all labor costs are set by globally competitive market forces, then profits, the revenues left over after all labor costs are subtracted, represent a market-based return to capital in the form of profits.
(3) Limitation, the feedback principle (which some Kelsonians call the principle of "Harmony"). This principle restores balance between "participation" (input) and "distribution" (out-take) and puts limits on monopolistic accumulations of capital and other abuses of property.

Kelsonian Macroeconomic Reforms
Democratized access to money, capital credit and credit insurance would become instruments of inclusion, not exclusion, and the means for "procreative" financing of whatever capital the economy needs to move toward prosperous lives for all members of society. Kelso's monetary, tax and other "Capital Homesteading" reforms would allow us to finance sustainable growth through techniques that offer more universal access to future ownership (see Norman Kurland's paper on "The Federal Reserve Discount Window," Journal of Employee Ownership Law and Finance, Winter 1998).

Kelsonian Microeconomic Reforms
Value-Based Management (VBM) was designed as a Kelsonian system for building and sustaining an ownership culture within the enterprise. Applying principles of economic justice, the philosophy of servant leadership and Kelsonian financing techniques, VBM will become the prevailing management system for the 21st century. VBM systematically anchors capital and builds ownership into successive generations of employees. VBM also re-orients the operational and governance systems of today's enterprises from the present top-down, risk-averse and conflict-prone patterns of the wage system, to a system of participatory ownership where risk, rewards and responsibilities are shared among many co-owners. VBM would enable all workers to be reconciled with the realities of global competition; supplemented by capital incomes, workers' incomes would increasingly shift from automatic wage increases to more equitable sharing of bottom-line profits.

The role of the labor unions will also evolve as unions move from the economics of conflict to the economics of co-ownership. Unions will regain their original role as a democratic society's most important institution for advancing economic justice by organizing all non-owners, not just workers, to help get them their fair share of the growing capital pie.

A Capital Homestead Act for America
How can we realize Louis Kelso's vision for America and the rest of the world? A 21st century counterpart to Abraham Lincoln's Homestead Act (which was limited to a finite land frontier) will provide every citizen and family with access to future capital and profits in a frontier without boundaries. The Capital Homestead Act is a comprehensive legislative program of Kelsonian tax, monetary, and fiscal reforms to make every citizen a stakeholder in the unlimited technological frontier. Facilitated by capital credit and loan default insurance available under "Capital Homesteading" reforms, each citizen will begin to accumulate dividend-yielding shares in (1) the company he works for through an ESOP, (2) the companies he regularly buys from through consumer stock ownership plans (CSOP), (3) a community investment corporation (CIC) to link him to the profits from local land planning and development, and (4) a variety of blue-chip growth companies he invests in through an individual stock ownership plan (ISOP).

A Glimpse of the Future
Envisioning a Kelsonian future where every American has a viable capital ownership stake in a growing economy, we predict:

America's moral leadership will be restored as we set an example for the rest of the world on how to achieve genuine economic democracy and justice for all.

Wealth, economic power and income gaps between the rich and poor will shrink, without present owners being deprived of their property rights.

Sharing profits and control of technology, all people will become empowered, not victimized, by technological change.

Market gluts and "overproduction" will be eliminated, as overall supply is matched by the simultaneous creation of mass purchasing power.

Enthusiastic and productive worker-owners will produce goods and services of the highest quality at low costs within corporations operating with more democratic accountability, efficiency and equity.

Politicians will be more accountable to more economically empowered and independent citizens, who will be less dependent economically on government welfare, subsidies and income redistribution.

Personal, family and community life will strengthen as more people gain greater control over their economic destinies.

The environment will become healthier as "Capital Homesteading" enables Americans to fund green technologies and non-polluting, "hydrogen age" energy sources that in the past lacked financing for their commercialization.

The quality of education and work will radically improve, as technology reduces the need for economic toil, and as more people gain the time and means to engage in lifetime learning and non-paid "leisure work", enabling them to work creatively for the common good and the advance of civilization.

A flourishing and peaceful world society will be built upon the decentralization of economic power, and, as in the first American Revolution, the power of government will again subordinate itself to the sovereignty of each human person.

In the 20th century, many lived lives of quiet desperation, struggling from paycheck-to-paycheck, or from hand-to-mouth, with no ownership stake in society's wealth-producing assets. Most 20th century Americans were limited to a choice between the wage-systems of capitalism and the wage-systems of socialism. Many have lost hope that they or their descendants will ever share in the American Dream.

Just as Lincoln provided opportunities for propertyless people in 19th century America to gain a piece of the world's shrinking land frontier, 21st century Americans will gain their ownership share in the limitless technological growth frontier. In the 21st century, Americans will be given a new choice, a "third way" opened up by Louis Kelso, an alternative model of development that transcends both Wall Street capitalism and all forms of socialism. Choosing this road will lead America back to its revolutionary roots to a more participatory, unified and empowering "Second American Revolution" and a more just, free and efficient market economy. America will then again serve as "the last best hope of mankind."

For more information on Louis Kelso's economic concepts and applications, and on the specific reforms of the Capital Homestead Act, visit CESJ's website at www.cesj.org or contact the Center for Economic and Social Justice at P.O. Box 40711, Washington, D.C. 20016, Tel (703) 243-5155, Fax (703) 243-5935, or E-mail: thirdway@cesj.org.