When workers are owners

IT IS popular to lament the growing gap between capitalists and workers. In one respect, however, the gap is shrinking: the number of workers who own shares in the business that employs them has never been higher. America leads the way: 32m Americans own stock in their companies through pension and profit-sharing plans, and share-ownership and share-option schemes. The idea continues to gain momentum. Hillary Clinton’s recent speeches suggest that she may make it an important plank in her plans to reform capitalism. And worker-capitalists are also on the march in Europe and Asia.

Conservatives like employee ownership because it gives workers a stake in the capitalist system. Left-wingers like it because it gives them a piece of the capitalist pie. And middle-of-the-roaders like it because it helps to close a potentially dangerous gap between capital and labour. David Cameron, Britain’s Conservative prime minister, praises John Lewis, a retailer entirely owned by its staff. Bernie Sanders, America’s only socialist senator and now a candidate for the Democratic nomination (see Lexington), is a champion of employee share-ownership.

The trend is also being driven by a long-term shift from “defined benefit” (DB) pension plans, in which employers guarantee the retirement income of their workers, to “defined contribution” (DC) schemes, in which workers and employers put money into an investment pot, with no guarantees of how much it will eventually pay out. Including current workers and pensioners there are more than 88m DC plans in existence. A 2013 survey by Aon Hewitt, a consulting firm, found that 14% of such plans’ assets were invested in the shares of the employer in question.

A number of studies have found that workers at firms where employees have a significant stake tend to be more productive and innovative, and to have less staff turnover. Employee ownership has its drawbacks, however. One is the risk that workers have too many eggs in one basket: if their employer goes bust they can lose their pensions as well as their jobs. Enron employees were encouraged to stuff their “401(k)” plans (the most popular type of pension scheme) with company stock. Just before the firm went bankrupt in 2001 the average employee held 62% of his or her 401(k) assets in Enron shares. Likewise when Global Crossing went bust a few months later, the collapse in its shares wiped out a large chunk of its workers’ pension savings. Despite various initiatives by Congress to stop firms touting their shares to employees, cases are still arising: some former workers at Radio Shack, a retailer that filed for bankruptcy in February, are taking the firm to court, arguing that it kept offering to make its pension contributions in the form of company shares, when it should have known they were going to lose value.

A second problem is entrenchment. Supporters of worker ownership argue that it helps companies take a more long-term perspective. Critics argue that it can entrench bad management and undermine a company’s long-term competitiveness: underperforming bosses are much more likely to be able to stay in place, and resist hostile takeovers, if some of the company’s shares are in friendly hands. In 1994 United Airlines handed many of its workers a 55% stake, and representation on the board, in return for pay cuts. But its performance remained poor, and it filed for bankruptcy in 2002.

A third risk is entitlement. The strongest argument in favour of employee ownership is that workers will not only toil harder if they get a slice of the profits, but will make sure that their colleagues do so too. A new paper by Benjamin Dunford and others, presented at the Academy of Management’s annual meeting in Vancouver, argues that commitment can transmute into entitlement. The academics studied a sample of 409 employees at a commercial-property firm in the Midwest and found that those who invested a higher proportion of their 401(k) accounts in company stock expected better benefits—in the form of promotions and pay rises—than the rest, and took more discretionary leave. (However, the study did not consider whether, nevertheless, employee ownership boosted the firm’s overall performance.)

ESOP fables

Arguments about employee ownership can easily become too sweeping: grand claims from supporters invite vigorous rebuttals by critics. A great deal depends on how schemes are structured, and the motives for introducing them. Another recent paper, by Han Kim and Paige Ouimet, of the University of Michigan and University of North Carolina respectively, considers the sizes of ESOPs and of the firms that offer them. They find that small ESOPs (which control a stake of less than 5% in the company in question) are far more likely to boost productivity than large ones, because firms that introduce large ESOPs are often troubled ones trying to conserve cash by substituting shares for pay, or seeking to fend off hostile takeovers by giving shares to friendly insiders. They also argue that ESOPs are much more likely to work in smaller firms than larger ones because employee-owners can more easily monitor each other and thereby boost overall productivity.

There is plenty to be said for employee ownership. It can sharpen workers’ motivation and go some way to healing a potentially dangerous divide between the working class and the boss class. But if politicians are serious about the idea, they need to think harder about how to make it work in practice. They should pay closer attention to how schemes are designed, and look for ways to tailor regulations and tax incentives so as to encourage well-designed schemes. They also need to deal with the problem of concentrating risk in a single company’s shares. Given that the average life expectancy of Fortune 500 companies has fallen from 75 years in the 1930s to perhaps just 15 years today, encouraging employees to invest their savings with the companies that employ them is a recipe for miserable retirements.