Sell The Company To Its Workers

Building a robust ecosystem of employee-owned firms.

(Michael Raines/Getty)
Credits

Jason Oakes is a junior fellow at the Berggruen Institute and a research associate in the science and technology studies program at the University of California, Davis.

The ongoing coronavirus pandemic has caused an acute economic dislocation, one which has demonstrated many of the structural flaws of our current system. But really, the inequality and precarity of our economic arrangements have been growing during a period of remarkable transformation over the last few decades.

Deindustrialization has been a feature of American society since the 1970s, but its pace and extent have increased since the 2008 recession. Job and wage growth accrued unevenly to a handful of “superstar” cities and to employees with scarce credentials. The gig economy, temp work and contract employment have become more and more common, and the assumption that a stable career and homeownership will be the norm even for middle-class families seems increasingly unlikely. Even in job-rich regions, high levels of inequality and a lack of affordable housing make it infeasible for working people to live near where jobs are available.

Historically, one option for redress has been for the public sector to underwrite provisions of education, housing, insurance and/or employment. However, the present political landscape does not offer a lot of hope that this path will be repeated soon. Without major policy reforms that have significant buy-in from both political parties, what can realistically be done to address these problems? The answer, surprisingly enough, may be employee ownership and democratic management of enterprise: worker cooperatives and companies owned by employee stock ownership plans (ESOPs).

For decades, manufacturing has been dying, decreasing as a percentage of the employed labor force. In 1953, the share of the U.S. labor force in manufacturing was 32%. By 2015, it was 8.7%. This transformation has had serious repercussions on the structure of the labor force, work process, productivity growth and inequality. In almost all cases, the changes have been for the worse for lower-income employees and for economic activity in general. Manufacturing jobs were not easy or safe, but they were frequently an improvement over the agricultural jobs they replaced.

“Employee-owned firms align the interests of workers and owners, because they are the same people.”

Furthermore, jobs in industrial production had two significant benefits for both labor and capital. First, manufacturing jobs were physically centralized in the factories where they were carried out. This allowed for modern techniques of management to be applied in an intelligent way to improve productivity, and for the process of organizational learning to proceed rapidly because workers under one roof had daily contact and had to coordinate their labor to get the job done. Second, and relatedly, manufacturing work is collective, and the performance differentials between individual employees tended to be muted by the characteristics of the work process. In earlier periods of manufacturing employment growth, workers organized to mitigate these performance differentials through the labor movement as well as informal practices of social solidarity, such as tacitly agreeing not to work faster than the average line worker could handle.

Service work, which has progressively supplanted manufacturing, is distributed and individual. This has significant ramifications for inequality and productivity growth. The distributed nature of the work process in the service sector, including professional, technical, maintenance, retail and education, means that employees are more difficult to manage effectively and they have less opportunity to learn from each other. It is only when there is a significant effort put into performance improvement in institutional settings, such as large corporations’ training programs, that productivity increases.

In the more atomized nature of service work, the performance of individual employees is more easily disaggregated from their peers. And that means the normally occurring distribution of performance levels between employees is easier to track as well. Some people are faster, more accurate and more consistent than others. Additionally, individual service-work performance is unevenly recognized and remunerated depending on intersecting factors of employees’ race, class and gender. The labor movement fought against individual evaluations such as piece work, but unions are weaker in the services.

This means that as economic activity progressively moves away from concentrated and collective industrial work and toward distributed and individualized service work, there is going to be a continued trend toward sluggish productivity growth with high wage differentials. In other words, the problems we have seen since the financial crisis and ensuing recession are likely to continue or even get worse as manufacturing, as a proportion of economic activity, becomes about the same as agriculture, mining and fishing are today.

“Employee ownership makes it possible to provide income support on the basis of organization membership rather than individually evaluated performance.”

Employee ownership addresses both of these problems. Employee-owned firms align the interests of workers and owners, because they are the same people. And employee ownership makes it possible to provide income support on the basis of organization membership rather than individually evaluated performance.

First: inequality. Since service work is on average less well-compensated than manufacturing, and the distribution of income in services is much more unequal, addressing inequality will require some kind of income support for workers beyond their wage compensation. There are many such programs currently under discussion, including universal basic income, a large increase in the earned income tax credit or some form of a federal job guarantee. In addition to any of these, the “one person, one share” principle of employee ownership found in worker cooperatives and ESOPs allow for this work subsidy to be much more widely practiced and to take place outside of the purview of government, which makes it less of a partisan political issue.

Employee ownership has support from Republicans because it can be viewed as self-help and community solidarity rather than government programs funded by taxation. Employee ownership makes it easier to share the profits of an enterprise, and other kinds of multi-stakeholder cooperatives can be designed to include customers and members in decision-making. The structure of conventional firms makes this kind of arrangement more difficult because they are designed to retain earnings for shareholders or owners, not distribute them to employees or other stakeholders. An income support policy (in other words, higher wages) in a conventional firm might even lead to a shareholder revolt.

Second: productivity. In a motivated organization with good morale, authority and management can be pushed out to the edges of the organization, freeing up management attention to improve operations elsewhere. This is possible in employee-owned enterprises because the interests of the employees are more clearly aligned with the success of the business as a whole. This is a bit complicated in that there are many well-run conventional firms that have enough trust in the organizational culture to have a degree of decentralized authority, and there are many indifferently run or dysfunctional employee-owned businesses that do not. However, at the level of the structure of incentives for decentralized authority and its attendant increased productivity, employee-owned firms have an advantage.

“Employee ownership has support from Republicans because it can be viewed as self-help and community solidarity rather than government programs funded by taxation.”

Lately, the cooperative movement has been experimenting with a new institution: the platform cooperative. The aim is to integrate principles of collective ownership and democratic governance with the existing format of two-way market brokerage platforms such as Uber, Airbnb or Tinder. The Platform Cooperativism Consortium, an alliance of organizations that advocates for and supports co-ops using digital platforms, put it this way: “Platform cooperatives are businesses that use a website, mobile app or protocol to sell goods or services. They rely on democratic decision-making and shared ownership of the platform by workers and users.”

The platform cooperative concept is still experimental. However, it might be part of new ways of generating productivity growth in dispersed work processes such as those coordinated by the big existing software companies.

This is not a utopian dream. Employee-owned and (to a lesser extent) managed companies are a long-standing part of the U.S. landscape of firms, dating back in various forms to the 19th century and becoming well-established since the Progressive Era. U.S. agriculture has long depended on growers’ cooperatives, some of which are household names like Land O’Lakes and Ocean Spray. The outdoors retailer REI, as well as the armed services insurer USAA, are owned by their customers. The Vanguard Group, one of the largest financial services companies in the country, is owned by its constituent funds and therefore ultimately by its customers. And over 100 million Americans do their banking at a credit union, a member-owned financial cooperative.

Worker cooperatives are a tiny but growing part of the economy, and various forms of worker ownership, such as ESOPs, comprise thousands of companies employing millions of workers. One of the better-known worker cooperatives is the Arizmendi Association of Cooperatives, a California chain of worker-owned bakeries. There is also Publix, one of the country’s biggest and most successful grocery store chains, which is employee-owned.

“Employee-owned and managed companies are a long-standing part of the U.S. landscape of firms.”

The format is not without dangers. Some badly planned employee ownership schemes have been proposed as a way to evade other difficulties, such as the case of the Ohio steel company Youngstown Sheet and Tube, which was briefly considered for employee ownership in the course of its bankruptcy in the 1970s. United Airlines was majority-owned under its employee stock ownership plan from 1994 to 2000, before succumbing to the kinds of problems that have plagued commercial air travel since its inception: high costs, low profits and unpredictable business cycles. United went bust as an ESOP, but several of its competitors, such as Delta and American Airlines, also failed as conventional firms, so it is unclear whether employee ownership is bad for business or whether commercial air travel is just a tough industry.

And failure is not necessarily a bad thing. Companies should be able to experiment with different approaches. One major challenge to expanding employee-owned enterprises is that it is more difficult to get financing. Converting a conventional firm to an employee-owned one frequently requires recourse to private funding, and the terms often act against the very qualities that set worker-owned enterprises apart from conventional ones: the retention of the surplus for workers rather than investors.

Therefore, it will be necessary to extend government guarantees to loans for cooperatives and ESOPs, along the lines of proven and trusted American financial institutions like the U.S. Reconstruction Finance Corporation (RFC). The RFC rescued the banking system during the Great Depression and supported the electrification of the rural U.S. through cooperative utilities.

Another example is the U.S. Farm Credit System (FCS), a set of banks and credit associations that underwrite bonds to fund commercial agricultural activity. In a sense, the FCS banks are like Fannie Mae and Freddie Mac, the government-sponsored entities that guarantee residential home loans. An additional advantage of the FCS is that borrowers elect the members of the boards that govern the association, extending the practice of democratic governance further into the financial sector.

“A robust ecosystem of employee-owned firms supported by cooperative financial institutions would be able to take more rational action to protect workers and communities.”

Another challenge is that there are not sufficient institutions of technical transfer and organizational learning for employee-owned enterprises. In this regard, we have another successful American institution to look to for inspiration: the agricultural extension services. One of the central contributing factors to the productivity of American agriculture was the institutionalization of technology transfer from the land-grant university systems to farmers scaffolded by the extension service. Farmers could access information from up-to-date university research about best practices in seeds, machinery, cultivation techniques and expertise from extension agents. A repurposed extension service would play an important role in increasing productivity in service-sector cooperatives and other forms of employee-owned businesses of the future.

The Farm Credit System dates back to the Great Depression, and the agricultural extension services grew out of the land-grant university system begun in the 19th century. Given the transformations now roiling U.S. labor markets, there is some evidence we are experiencing a similarly large wave of political and economic realignment as we did in the early 20th century.

The COVID-19 pandemic and shutdown of economies and trade we are witnessing today may lead to a certain amount of reshoring of manufacturing back to the U.S., especially related to biomedical products and essential machines such as ventilators. There may also be a reassessment of the hidden costs of globally distributed supply chains. However, reshoring will not stop the trend toward services becoming an ever-greater proportion of employment.

Over the previous few months, as millions of businesses close to protect the public’s health, many have furloughed or laid off their workers, forcing the government to supply emergency funds to businesses and workers alike. A robust ecosystem of employee-owned firms supported by cooperative financial institutions would be able to take more rational action to protect workers and communities. The existing structure more or less requires that governments bail out shareholders as they rescue companies. With an employee ownership ecosystem, we could focus on bailing out members and worker-owners instead.