The Citizen’s Share

1. The Citizen’s Share Joseph Blasi, J. Robert Beyster Professor, Rutgers University School of Management and Labor Relations, NBER, IZA Richard B. Freeman, Herbert Ascherman Professor, Harvard, NBER, IZA, Centre for Economic Performance, LSE

2. A Global Equity Historical Story

3. Him, too?Yes!

4. And him : the First U.S. • Secretary of the Treasury • Alexander Hamilton • -Wrote glowingly of the share program • -Supervised the Customs Officers confirming ships’ share programs

5. Evidence on Broad-Based Shares, from the first days of US Republic • “They were generally found the most attentive when their dependence was on a share of what they caught.” • -Leading Philadelphia shipper Joseph Anthony, 1790

6. The British failed to develop a state-owned whaling industry without shares • -Jealous of the U.S. whaling industry, Britain tried to create their own state-owned not based on shares. It failed even though Britannia Rules the Waves

7. Our Talk Today: Three Points • 1 Why broad-based shares are a good idea? • 2 What does the U.S. example tell us about how broad-based shares work in reality? • 3 Can shares expand in the EU and help the EU recover from current woes?

8. 1. Why are broad-based shares a good idea? Diverse evidence using many data sets and methodologies from many countries shows that linking ownership and profit-sharing leads to better performance when there is a supportive corporate culture. Ouremployee& establishmentstudies, reviews of literature, includingmeta-statistics, casestudies, before-afterstudies –all givesimilarpicture.

9. But many managements have failed: • -to use the scientific evidence to persuade their boards and shareholders to introduce or expand ownership plans. • -to encourage inside researchers and academics to experiment with ways to develop share systems that best fit them. • -to make the case to institutional investors (who often have their own employee share plans).

10. A SOCIETAL PERSPECTIVE • The Founders of the U.S. had a political-economy view of why expanded ownership of productive capital was important. They believed that democracy could not exist without broad-based ownership of business, initially land, craft shops, & shipping. The alternative was feudalistic rule by aristocrats or populist threats to property rights.

11. They enacted government policies to make it easy to distribute property among heirs and to acquire shares: • -outlawed primogeniture • -favored low prices for land • -implemented repeated share plans to allow more citizens to own key productive asset land: the Louisiana Purchase and the Homestead Act

12. The Principles of the U.S. Founders • -Every citizen should own part of the economy and receive income from this share to be economically and politically independent. • -Citizens who shared fully in ownership and profits create a more productive economy. • -This independence produced a society with small government, low taxes, less corruption, and a healthier civil society.

13. Their message resonates today with rising inequality and huge economic problems recovering from Great Recession • -Shares are not only about company incentive programs but about assuring democratic success against a march towards plutocratic feudalism or populist disorder.

14. 2 What we’ve learned in the U.S. post the Old Fellows with wigs on US currency. First, society must go beyond land ownership, which is limited, to allow many citizens to acquire ownership of corporate assets. Second, governmentpoliciescanaffectthespread of ownership. So toocancompanypoliciesindependent of governmentprograms.

15. Generous U.S. Policies toward individual incentives • *Employee Stock Purchase Plans – for Broad-Based plans workers can buy up to $25,000 of stock a year and hold it for two years and pay ordinary income tax on the gain up to the discount and lower capital gains after (but no corporate deductions) • *Employee Stock Options –Unlimited tax deduction on spread between the grant price and exercise price for the corporation and worker. Further increase taxed at lower capital gains rates. • *Restricted Stock –Unlimited corporate tax deductions of the value of stock grant on which worker pays ordinary income tax.

16. Collective Employee Stock Ownership Plans (ESOPs) – for Broad-based Plans corporate tax deductions of the principal and interest on loans when the company purchases shares to be granted to workers and of dividends paid to the workers on the stock PLUS no capital gains taxes for sellers of more than a third of a company to the workers PLUS lower ordinary income tax rates for the worker since the plans generally pay out at retirement when tax rates are lower. VERY important for SMEs.

17. -ESOPs, invented by Louis Kelso, allows worker trusts to buy large stakes of firms in a single transaction using loans the firm guarantees and pays for. Employees are not liable for the loans. They get grants. ESOP firms get tax breaks. • -ESOPs are in 10,000 mostly closely-held firms with 11 million workers, about 3000 of which are majority or completely worker-owned. • -ESOPs are main component of US broad-based equity system with associations of firms active in policy debate.

18. Out Of a Labor Force of 107 million workers, • 18% own company shares. • 9% have options. In addition, profit-sharing or gain-sharing plans cover even more workers so that in total 47% of US workershave a financial stake in their firm, mostlywith a modestshare of their income and wealth.

19. Can increased share ownership expand in the EU and help the EU in its economic crisis? Yes. • -Therearesomeways to massivelyexpand EU shares. • -A new EU share-basedownershipsystemcan spur to • macro-expansionthatwouldgivehope to countriesfacing • years of austerity-drivenjoblessness. Byincreasing • marketdemandforexports in EU troubledeconomies, it • could also staunchthespread of the double/ tripledip • Great Recession to therest of Europe.

20. A Huge Gap In Shares Between Europe and the U.S. • -In principle employee financial participation is part of the European Social Model. • -But 3.3% of workers in Europe have shares compared to 18% • of workers in the U.S. Much of this difference is because few • workers in SMEs have shares in the EU whereas over half of • U.S. workers with shares are in SMEs.

21. Shares in Europe expand slowly despite the financial crisis: % of employees in share plans increased from 9.1% to 13.5 % for profit sharing and 2.3% to 3.3% for employee owners, 2005-2010 (EU Parliament, 2012)

22. One Proposal: The Lowitsch 28th Regime Idea • -A new EU regulation would define a European Financial Participation • Plan that companies could use EU-wide • -Because it is optional it would not require compromise among EU • member nations and companies could use the EU or the national model. • -It would allow full portability for employees across all the EU countries. • -Countries would retain sovereignty over tax legislation but make available • Easy online tax software to deal with tax issues. • -The goal is to make shares easier for large national and multinational firms.

23. A Second Proposal: Encourage National Laws on ESOPs EU-Wide • -Shares can be a major phenomenon in Europe if SMEs have a • simple legal, tax, and regulatory regime for current owners to sell to an ESOP. • -The business succession problem is the major problem of these firms. • -ESOPs, invented by Louis Kelso, allow worker/manager groups to buy major • stakes in one transaction using bank-approved loans paid back by the firm • -National laws need to create a trust to purchase and hold the shares. • -Supportive tax legislation for ESOPs requires workers to be exempt from • income tax when the ESOP acquires shares. • -ESOPs would receive a tax exemption on both interest and principal payments • on a loan used to acquire shares from a seller • -Owners of SMEs to be excluded from capital gains taxes on sales to ESOPs.

24. A Third Proposal To Help Resolve The Current EU Economic Crisis? • Jobs, GDP, sovereign debt crisis, divergence among economies with Euro. Rising inequality, increased numbers of working poor, danger of double-dip recession even in economies that have weathered the storm best, such as Germany and Sweden (which thanks Odin every night that citizens rejected its elite`s plan to join the Euro). • HELP! My kingdomfor an alternative.

25. Example of troubled EU economy: • Portugal – “Austerity‘sposterchild“ • -Has no policytools to growits GDP • -Islockedinto Euro so cannotdepreciate • -Deals with EU, IMF, ECB troika so no fiscal policy • -No monetarypolicy • -Weaklaborinstitutions so nostrong laborpolicies

26. The Dilemma • But ``alternativlos’ (no alternatives save for austerity) is the word on high. Suck it up, citizens. The elite knows, Troika leaches are the medicine of the day. • Tell it to the Portuguese, the Spanish, the Greeks, whomever is going to be the next victim of the crisis, • Tell it to the citizens throughout the EU who have lost faith in the European project. • Alternativlos has itupside down. There no road to prosperitythroughyears of low growth/declining GDP, mass joblessness, increased poverty, and economic misery.

27. What you do when there is nothing you can do –June 1

28. Current lack of vision/absence of private sector and socialpartners in EU debate • -Withausteritypolicyfailing,the EU has to find an alternative. • -Troika loans to pay back banks (and rewardspeculators • whoownbonds?) do not grow an economy. • -Equityorloansforproductiveinvestmentgrows an economy. • -Ideais an EU citizens Marshall Plan for EU countries in trouble • withinvestments in real economynot in bankbalancesheets.

29. A Plan tofunnelsavingsintoinvestmentthatcreatesgoodsandjobsandspreadsshareownership. • 1. EU financialorganizations – private pensionfunds (Netherlands, UK, German Riester pensions, theNorwegian Sovereign Wealth Fund?) -- investinto a European Crisis Private Equity Fund thatmakesinvestments in firmswhichadoptsome form of sharedequity and undertake real investmentprojects in troubled EU. • 2. Toincreaseprofitability, workers in thosefirmsmaytake wage cutsforsharestoobtainguaranteedequityor profit-sharingastheeconomyimproves. • 3. To involve SMEs, eachcountryshouldadopt ESOP legislation to makeiteasierforretiring owners to sell to workers/managers.

30. Government Encouragement • -Could incentivize investors into the European Crisis Private Equity Fund: • -Could provide some insurance/tax breaks for individuals who invest in the Fund (add-ons to what they do for mandated private pension schemes). • -Could give tax benefits to returns from the Fund. • -Lots of details for the devil, but private sector takes initiative outside politics and bank system to get money into viable projects instead of into bank balance sheets.

31. Examples • Historicallysome ESOPs form aspart of concessionbargaining in firms in troubleandsucceed in savingjobsand firm. Somefailaswell. • US bailout of autoindustry in Great Recessionsucceededwithgovtmoneys, Chapter 11 bankruptcy and large union cost concessions. • Detroit Worker Bonuses Approach Records on Rising Profits • (Bloomberg, Feb 2013). Ford’s $8,300 Chrysler $2,250. GM expected to exceed $7,325. For new Ford hires, who are paid about half what senior workers make, $8,300 adds 23 percent to their annual compensation of $36,000.

32. Virtues • Byinvesting in share-ownedfirms, the EU couldshiftemployment to morestablejobs. • Citizensbenefit on bothsides of thetransaction: those in prosperous countries getownership stake in firms (Peter Drucker‘sfamousanalysis of pensionfundownership of shares, 1976); those in economictroubleget stake in own firm. Bothbenefitfromrecovery. • Policyholdsevenif a troubledeconomyleaves Euro orifausteritykeepssqueezingpublicsector.

33. Who develops and leads this reform? Companies/social partners, not government. This is private sector response to disaster to real economy that is orthogonal to battles over austerity and Euro • A Way to Start • Private sector establishes commission to assess all three proposals, recommend national legal changes of share systems, advance “the 28th Regime” for large firms and ESOPs to encourage SMEs to follow the shared ownership route, and examine ways to establish the European Private Equity Crisis Fund.

34. CONCLUSION • ‘They’ cannot think of an alternative to austerity. So the door is open for chaos, collapse of European economy. But door is also open for reforming the EU economy and expanding shares. • In English, equity has two meanings: fairness and ownership. Broad-based share ownership fulfills both meanings. • Easier regulations for share plans EU-wide and equity investment from EU countries that weathered crisis best into firms with worker share ownership in troubled economies offers private sector alternative to escape economic disaster. • Equity for all, YES!

35. Sources: • The Capital Manifesto. Louis O. Kelso and Mortimer J. Adler. New York: Random House, 1958. Downloadable at: http://www.kelsoinstitute.org/download.html • The Citizen’s Share. Joseph Blasi, Richard Freeman, and Douglas Kruse. London: Yale University Press, 2013. • Jens Lowitzsch, IrajHashi et al. , Employee Financial Participation (EFP) in Companies’ Proceeds” Study for the European Parliament, Sept 2012. • Financial Participation of Employees in the European Union: Much Ado About Nothing? Christian Welz and Enrique Fernandez-Macias. European Journal of Industrial Relations, Volume 14, Number 4, 2008, 479-497. Report of the 2005 European Working Conditions Survey, European Foundation for the Improvement of Living and Working Conditions. • The Political Economy of Labor-Capital Income Imbalances: European Solutions. Ognian N. Hishow, German Institute for International and Security Affairs. Berlin, Germany, 2012. • The Evolution of Economic Inequality: Different Time Perspectives and Dimensions. United Nations Conference on Trade and Development. Geneva: UNCTAD, 2012. • Wealth, Inequality & Taxation. Thomas Piketty, Paris School of Economics. Presentation to the International Monetary Fund, September 27, 2012. • ) Income Inequality in the European Union. KajaNonesmoFrederiksen. Paris: OECD Economics Department Working Papers No. 952, April 16, 2012. • We thank Arne Peder-Blix of Accurate Equity and Mike Pewton of Global Share Plans for assistance. Global Share Plans allowed us access to their web site reviewing EU policies on share plans. We alone are responsible for the views in this presentation.