Running a successful company is very much a matter of trust, whether or not it is employee owned. But having visited about ten very different ESOP companies it is obvious to me that trust between employee owners and management is a -- maybe even the -- key to success for ESOPs.

In the traditional company, distrust is normal. The management spends a lot of money and effort on different control systems -- foremen, time clocks, time studies, etc. The workforce spends a lot of effort trying to evade these control systems. They make jigs the foreman doesn't know about, to take longer breaks or to make more money than the time-study engineer figured was possible. They punch time cards for each other and find any number of ways to try to take a bigger piece of the cake than management and stockholders want them to have. The result is of course that stockholders, managers and employees have a fight over a smaller cake than they would have if there were trust between them.

A properly run ESOP is a powerful tool for building trust in a company. The employees know that what they don't get in wages and bonuses will reach them in increased stock value -- provided the management doesn't rob the company.

In a few companies I visited, employees believed that management had tried to do just that. I met one CEO who complained that his board, which had an employee majority, put most of its efforts into controlling the management instead of concentrating on company strategy. The reason? The previous CEO had created a bonus system giving himself and his small management team 90 per cent of the bonus and 10 per cent to be divided among the employee owners. The board seemed to have learned from experience.

It takes years to build trust and seconds to tear it down.

I met some worker-owners who claimed that their company was run just like when it was family owned. I do not think they told me the truth. There might not have been much change in the formal organization, but talking to them I found a sense of responsibility for the bottom line and for the company that I never have found in any conventional workplace during my many years as reporter and editor for a Swedish trade union magazine. It was obvious that their company had a less formal structure than conventional companies, with less attention to job descriptions and formal chains of command, which made everyone happier and the company more profitable. The cost of conventional company control is higher than most people even can dream.

I also met some worker owners who worked in a very democratic spirit, but with no formal guarantees for their democratic organization. If there was a change in attitude among the majority owners, this workplace democracy could be swept away in seconds. But I think that the informal guarantees for continued democracy in these companies are fairly strong. People who are used to having a say, who have been empowered, do not easily adapt to dictatorship. Any company trying to go from democratic decision making to a command-and-control system would quickly find itself in deep economic problems.

Union roles

For a Swedish trade unionist, it is depressing to see the bad name some American unions have made for themselves and to see how little influence they have.

In some companies I visited, it was obvious that the narrow-minded view of union officials was hurting the best interests of the people the union is there to defend.

For fifty years, Swedish unions have promoted productivity. Our assumption has been that only successful companies can provide secure employment and good wages and benefits. The interests of the majority of workers have taken precedence over the interests of individuals. This kind of policy can of course also be carried too far, but when this union policy is complemented by good unemployment benefits and extensive systems of retraining, and other activities to help the unemployed move into new and better paying jobs, it becomes acceptable to all.

In unionized ESOP companies I saw how some unions had adapted to the change and helped build trust between worker owners and managers, how they made the job descriptions more flexible, and how they let people grow and work out of their assigned box. But I also saw unions that stuck by their old ways, that did not want to change their own structure, but defended the old company structure, the old union structure, the old job descriptions. I could not help thinking that in some unions the jobs for the union officials seem more important than the well-being of their members.

A good union, which puts its members first and defends the members' interests by helping them adjust to modern times, is a great asset. It is good for the members who are more secure and make more money working for a company that can change with the times. And it is good for the company because it can stay competitive and more profitable in a rapidly changing world. If a good union is combined with an ESOP, the workers have a great partner defending their individual interests, a partner with expertise to help them stay level with the management, help them make the company they partly or wholly own more profitable, and help them keep the balance between long-term company growth and job security, and a fair share of the short-term profits.

A bad union, on the other hand, which doesn't organize itself to be a good sounding board to management, can quickly destroy a company, and that way betray its members. Especially in bigger ESOP companies, with many different plants, unions that do not organize a bargaining unit on the corporate level easily fall prey to managements who divide and conquer -- or they can bring down the whole company by taking focus away from business, forcing management to concentrate on internal fights instead of the ongoing war in the marketplace.

It is an obvious conclusion that an ESOP company must have a democratic management and a workforce willing to take on ownership responsibilities.

An ESOP company cannot be successfully run in old style corporate ways. And a union in an ESOP company cannot behave as if the owners still are sweat-shop-runners or absent, profit-hungry Wall Street capitalists.

Successful ESOP companies obviously feel comfortable with the ESOP. Sometimes too comfortable, I would say. When people say they are so successful that they don't need input from the outside, that nobody knows their business better than they do themselves, I see warning lights flashing. Complacency is the beginning of failure.

In today's marketplace, you have to keep on the move to stay in the running. A company that is just chugging along will soon find itself in trouble. A company board with only inside directors is in obvious danger of sticking with products, production and marketing methods which "have always worked." Employees of one company I visited even believed that a CEO had nothing to offer that the employees themselves couldn't accomplish. I think that is a very dangerous way of reasoning.

There is a strong tendency for ESOP companies, especially majority ESOPs, to try to stop the clock, to stick with traditional products and methods, to say that "we know what we have and not what we will get," to resist change rather than lead change. Employee-owned companies generally do not seem to be growing very much, and some are more concerned with keeping existing jobs than creating new ones.

That must change for ESOPs to be successful in the long run. If ESOPs are only used to save companies which are in danger of going out of business, they might be dangerous to the whole community, as they would preserve obsolete economic structures, much like quotas and tariffs preserved the technological museums many people called the Ohio steel industry.

When an obsolete structure like that crumbles, which it sooner or later always does, it is much worse than continuous change. There is no time to adapt, as Americans in the Rust Belt so cruelly have experienced.

One reason for this conservatism in ESOPs is that many employee-owned companies not only suffer from lack of outside input, but also from lack of capital. Some are just poorly financed and some are hampered by their repurchase obligations. There is an obvious need for some kind of friendly financing vehicle, like Canadian-style labor-sponsored investment funds.

Some sort of holding company, to take stakes in ESOP companies, could also be worth looking into.

In Sweden we have a co-op owned by individual grocery store owners. This co-op finances new stores by setting them up as co-op subsidiaries and then it slips out of ownership via a profit-sharing scheme where the store manager buys the co-op out with part of the profit from the store. This is a model which could be used to ease the burden on new ESOPs.

Pooled resources would also ease the burden of repurchase

obligation, especially for small companies with a lop-sided age structure. It might also help to bring the repurchase obligation out in the open, which is a prerequisite for a correct evaluation of the share value in ESOP companies.

In Sweden, with its egalitarian principles, it is hard to imagine a full scale implementation of the American ESOP model. It would be considered unthinkable that people have all or most of their pension money tied to the company they work for. It would be unacceptable that some employees retire with hundreds of thousands of dollars while others might get nothing or just a few thousands.

But I do think that a combination of employee ownership, private ownership and employee-owned investment funds -- used in different combinations in different companies and situations -- not only would be a good idea, but a necessity for Sweden.

We need new tools to anchor ownership of Swedish industry in Sweden, to build more small and medium-sized companies, to help them grow, and to stay competitive in the global marketplace.

Individual entrepreneurs still play a major role in economic development in the US, but they have been disappearing in Sweden. We need new industrial owners willing to risk their money long term on new and uncertain ventures. Swedish employees, individually and collectively, have to build a structure for their savings which provides more than liquidity, security and diversification. An appropriate amount of ordinary people's money will have to fill the gap in the market which the disappearing individual capitalists have left. Local employee funds will have to take the risks of developing new technology and new companies, or the local economy will stagnate.

So ESOPs and individual stock investments have to be complemented with some form of collective funds which are long-term investors, which take an active part in building new business that are committed to building a local economy which can compete in the world market. The Canadian labor-sponsored investment funds provide a model, but I think it would be wise to limit the size of these funds, and to limit the portion of the savings that individuals put into the funds. Otherwise, they can lose their focus.

Globalization does require more rapid change. But, if we develop tools like ESOPs and local economic development funds, it can be a change for the better, from old industries, detrimental to the health of the workers and the environment, and from low-tech and low-wage industries, to modern high-tech, high-paying and high-security jobs, compatible with the world wide ambition to build a sustainable economy.

Change in itself is neither good nor bad. It is up to us to make change a positive thing and to make people feel secure with changing times.

Peter Kardas spoke to the OEOC's Faculty Associate Program quarterly dinner on December 2nd on the recent State of Washington study of the impact of ESOPs on wealth and income. The study found that companies not only provided a richer retirement for their employee owners than their conventionally owned competitors, but on the average they also paid 8% better wages and higher bonuses. Furthermore, ESOP companies were more likely to provide health insurance.

The next issue of Owners at Work will feature a summary of this important study.

The OEOC was featured in the special joint 1998 Labor Day issue Dollars and Sense and GEO on employee ownership.

The OEOC article reviews the history of the Center since its foundation in 1987. It summarizes the current work of the OEOC, including technical assistance the Center provides, Ohio's Employee Owned Network, and the impact the OEOC has had in increasing the rate of ESOP formation in Ohio. This 60 page special issue also contains a number of other good articles on employee ownership and labor. It is available from Dollars and Sense, One Summer St., Somerville, MA 02143 for $4.50 prepaid.

Twenty five years ago, mechanisms to help employees acquire ownership of their companies were scarce. Then the Employee Income Security and Retirement Act [ERISA] gave life to Employee Stock Ownership Plans [ESOPs]. Fifteen years ago, institutions supporting employees in their efforts to use ESOPs to buy their companies were scarce. Then state programs emerged in Massachusetts, Michigan, New York, Ohio, Oregon, and Washington to provide employees with timely information and access to experienced professionals. Ten years ago, opportunities for employee owners to share experiences with their peers at other ESOP companies were scarce. Then Ohio’s Employee Owned Network was set-up, soon to be followed by the establishment of dozens of state chapters of the ESOP Association.

Five years ago, the ESOP Association asked the Ohio Employee Ownership Center of Kent State University to run its successful Employee Owner Leadership Development Retreat for a national audience. Since that time, the OEOC has initiated several national training opportunities, including the Network’s annual CEO Retreat and, jointly with the Worker Ownership Institute, a Collective Bargaining Workshop attended jointly by union leaders and managers from employee-owned union organized companies.

Employee ownership in the US will be strengthened as more people acquire the means to educate the broad population, provide technical assistance to employee buyout groups, facilitate joint programs among companies, assist companies in the development of an ownership culture, and better understand the roles of managers and union leaders of employee owners. To meet these needs, Kent State University is establishing the National Employee Ownership Training Institute^™. The National Employee Ownership Training Institute will serve high school teachers, university professors, economic development professionals, ESOP service providers, managers, union leaders, and, of course, employee owners.

An important task of the National Employee Ownership Training Institute will be to recruit a national pool of instructors who are on the cutting edge of employee ownership research, training, technical assistance and hands-on company experience.

Look for the National Employee Ownership Training Institute to debut at Kent State in Summer 1999.