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Catalyzing worker co-ops & the solidarity economy

Employee Ownership Needs Worker Owners

June 24, 2014
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Ownership is the new black, orange, blue and green – socially cool in “new economy” advocacy circles with an economic justice edge, growing in corporate and cooperative numbers, and claiming superior sustainable practices. Divided into land, home, individual, and workforce “communities of practice,” ownership appeals to historically admired American values. Cooperatives (member-based, worker and union affiliated) and companies with varying degrees of employee stock ownership plans (ESOPs), individual proprietorships and partnerships connect ownership with cultural ideals of freedom, innovation, self-reliance, civic commitment, democratic decision-making, wealth-building through risk-taking, and equality-grounded opportunity and mobility. Incentivizing workers as owners in “doing well by doing good” projects and companies reflects core principles and practices as ineluctable components of the historical American Dream’s original civic promise.

On the east coast, New York City’s Mayor and City Council unanimously proclaimed Saturday, June 21st, as “Worker Cooperative Day” and promptly backed their words with a $1.2 million appropriation. On the west coast, Seattle’s Mayor and City Council unanimously approved the nation’s highest municipal minimum wage, $15 per hour that doubles the current federal standard. Clearly, momentum to transform stakeholders into shareholders is on the rise in America’s most progressive cities to combat the public sector taxing, private sector productivity-depressing, and neighborhood regressive inequality triad (wealth aggregation, mobility, and opportunity).

It appears that a new formula for American private sector competitiveness is staring the country in the face if the nation’s collective “ownership economy” can just check its privilege at the door on behalf of a growing populist movement that wants in. Furthermore, majority employee or worker-owned companies are more sustainable because worker owner shareholder-stakeholders are more open to eliminating environmental and hierarchical injustice that leads to performance degradation and resource waste.

A growing body of empirical evidence proves that positive employee and company performance over time correlates directly to high impact management participation on all levels by worker owners combined with the broadest possible equity distribution among workers and the largest possible emphasis on worker education and training. Employees with some form of worker ownership accumulate more savings than employees in non-participating firms, companies with some form of capital sharing perform better in the competitive marketplace than those without, and workers with profit sharing or employee stock ownership and stock purchase plans are higher paid and have more benefits than other workers (ESOPS hold $870 billion in retirement plan assets which, divided by 11 million employee-owner plan participants, equates to an average dollar value of $79,000 per person). ESOPs help preserve manufacturing and help moderate business cycles because they hire slowly, but lay off people far more rarely during recessions.

Low to zero turn-over through widespread ownership principles and practices lowers costs and increases profitability. By eliminating vulture investors and outrageous c-suite pay scales (“8 reasons CEOs make 300 times as much as their employees” –; “Big bucks for the big boss” – The Washington Post), more capital can be distributed to worker-owners in the form of higher salaries, better benefits, and equity valuation. A return to a true market-based economy based on level playing fields and “one worker, one vote” transparency will allow stakeholders to equate with shareholders and find common ground in an America that invests in itself through quality production and democratic principles. Today, America disinvests via tax havens, global labor arbitraging, the small print on special interest legislation, and the outright purchase of election results.

Steps are being taken which merit nationwide attention but much remains to be done. The American Sustainable Business Council (ASBC) which has recently surpassed the 300,000 member mark after only three operating years is launching the “Ownership4All” campaign to find common ground among all ownership silo communities to reach critical impacting mass and to proclaim a consolidated ethos. Hybrid models such as the union co-op structure advanced by the United Steelworkers Union and Mondragon USA offer pathways for inclusion to working communities currently outside of the ownership quadrant that marry the best of both worlds, one class equal share ownership with a progressive collective bargaining agreement. The Freelancers Union’s call for a “New Mutualism” offers a benefits platform not only for 250,000 members but also for nearly one in three Americans, 42 million voters, who work as independent contractors. A broader context, open-data culture in cities such as New Orleans with the original goal of combating climate change effects could be transitioned to form other relevant, stakeholder-centric, public-private-partnerships.

Given this drumbeat, there’s no philosophical or historical reason why worker ownership isn’t more widespread and promoted politically and socially as a bipartisan panacea to declining competitiveness, structural unemployment, and rising embedded inequality. Except it isn’t.

Instead, the U.S. Department of Labor reported last February that, “unrealistic growth projections and other ‘chronic problems’ in employee stock ownership plan valuations have compelled an enforcement strategy that places significant focus on ESOPs” based on “problematic appraisals and fiduciaries’ reliance upon those appraisals” (Jaclyn Willie, Daily Labor Report 28-DLRA-6, 02/11/2014,  “Employee Ownership: DOL Enforcement Strategy Targets Problems in ESOP Valuations, Speaker Says”). (Also see this Wall Street Journal article about DOL’s current lawsuits related to ESOPs.)

Based on feedback from the Labor Department as well as from enlightened ESOP practitioners and despite many notable exceptions honoring the original Louis Kelso concept in practice and in spirit, market valuations might be erroneous in as many as one-third of all current ESOPs. If true, then employee ownership as a movement risks becoming yet another vehicle for the one percent by unfairly subsidizing transitioning owners and investors while placing unjustified debt burdens on employees and workers. As an example, the $10 million U.S. Department of Labor settlement agreement with People Care Holdings Inc. earlier this year reports on breached fiduciary duties by “failing to correct unrealistically optimistic projections of People Care’s future earnings and profitability”… “Owners who sell their companies to their employees and benefit from ESOP tax treatments are responsible for ensuring that the terms are fair to the plan and its participants.”

Such ESOP unfairness portends an identity crisis and house-cleaning imperative for America’s worker ownership movement just when progressive momentum suggests a tipping point from niche to general practice status is in sight. It turns out as in all the other inequalities that the fault lines in American employee and worker ownership practices are based on economic class divides.

Many high impact, triple bottom-line ESOPS led by conscientious owners, investors, and worker-owners rise to the highest standards of fairness and inclusion. However, problematic ESOPS risk unloading unsustainable debt while practicing multi-class stock ownership that usually places workers at the bottom of the heap especially when markets turn downward similar to those infamous collateral debt obligation pyramid structures greatly responsible for the 2008 market crash, Great Recession, and subsequent public loss of trust. Deal commissions and investor pay-offs for such irresponsible and immoral ESOPS make their practitioners wealthy in a classic Wall Street context which allows brokers, attorneys, accountants, and bankers to grab their take off the top when the deal closes without having to live through the human consequences of what happens next.

It doesn’t have to be this way.

ESOPS could be incentivized to adopt Benefit Corporation (B Corp) standards (some of the best ESOP practitioners have already done so) while B Corp standards could be expanded to include worker ownership as a priority. Moreover, ESOPs should be encouraged to look at creating a more equal allocation of shares to plan participants. Most ESOPs tend to allocate shares based solely on W-2 compensation, the minimum required by law. This means that highly compensated individuals receive larger allocations of shares and the wealth that flows from those shares. A more equitable and productive way forward may be to base the allocation formula on a combination of factors by blending W-2 earnings, seniority, and, most important, equal equity percentages and pathways for everyone involved in the enterprise. This approach will create solidarity in deed as well as word.

During the November 2012 national election campaign, partisan political distinctions between “makers” and “takers”  threw cold water on any preconceived notion that America’s ownership movement is cohesive and inclusive. By dividing individuals into separate but unequal functions, “taking” was delinked from “making” and “I built it all myself” found little in common with “it takes a village.” By elevating passive income and rent-seeking entitlement as a means to its own self-justified ends, ownership in the post-Citizens United soft money era has became a socially mixed metaphor confusing rights and privileges by wealth caste and favors America’s top one percent and would-be oligarchs over everyone else.

It’s time to walk this back.

Cumulative unequal resource aggregation produces geographic, lifestyle, and demographic American “privilege” ghettos that solidify increasing societal differences to the detriment of workers who want and deserve to become self-actualized owners in their own right.  Furthermore, individual ownership legal classifications do not enjoy equal benefits status. There is diminished parity between different ownership categories mostly caused by technical tax and legal differences which can produce distorted outcomes for practitioners and recipients no matter how well-intentioned.

Finally, the answer to the question of whether ownership is a right or a privilege in a nation facing a growing inequality divide is that it must be both. The jury is out as to what will stick from what’s rising out of our collective commons also referred to as the sharing-caring economy, the solidarity economy, the restorative economy, the regenerative economy, the sustaining economy, the resilient economy, the stakeholder economy, and/or the worker-ownership economy.” Whatever the enduring framework, America must allow widespread employee or worker ownership starting with the inclusion of all workers as full, majority participants in their own enterprises to be the next “new, new thing” that sustains the overriding underpinning of individual freedom and success. This is how and why people came here in the first place, and why they still beat down our doors to join us in the streets.

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