Enabling Employee Ownership

This option is gaining momentum
with the help of skilled consultants

One of the articles in Living Business (IC#11)
Originally published in Autumn 1985 on page 49
Copyright (c)1985, 1997 by Context Institute

Christopher Makin is the Policy Director of the Industrial Cooperative Association (ICA, 249 Elm St, Somerville, MA 02 144; 6 1 7/628-7330), a non-profit consulting group that provides financial, managerial, legal, and educational assistance to groups interested in employee ownership. During the past 8 years, they have worked with groups of workers and managers interested in starting or buying-out companies, city and state governments interested in employee ownership as an economic development strategy, and trade unions and various non-profit groups interested in the idea as a possible job creation strategy.

ICA has done intensive study of the Mondragon Cooperatives in the Basque region of Spain (see IN CONTEXT #2), and has been a prime mover in adapting the lessons of Mondragon to the United States. They were instrumental in designing the first state laws for Mondragon- type Employee Cooperatives, adopted in Massachusetts in 1982. They have in part modeled their operations on the Mondragon Bank that combines money lending with high quality technical business assistance. Thus ICA complements its technical assistance with a $2 million revolving loan fund.

What is your sense of the way that industrial employee ownership is developing in America at this point?

Christopher: There are at least two streams in the development of interest and experience with the idea of employee ownership. First, there are certainly developments within what might be called the mainstream economy, where corporations have looked to employee ownership – primarily through employee stock ownership plans (ESOPs) – as being a means of attracting and holding talented and qualified personnel to their corporation, and in sharing the wealth of those corporations. The other stream is what might be called the mature alternative economy (as opposed to the sort of alternative economy that we were familiar with earlier in the 60s and 70s), where groups of men and women, workers and managers, have embraced the idea of employee ownership as an ideological match to their values of how they want to work.

In the mainstream economy you see a much greater mix of values, if you will, or motivations as to why corporations are moving in this direction – I mentioned the better motivations of wanting to hold onto people and reward them; there are also more conventional motivations of being able to take advantage of the tax advantages that a corporation can get through employee stock ownership plans. Unfortunately, a number of corporations make use of ESOPs only for tax advantages. They’re not to be necessarily criticized just for that, but they demonstrate no real interest in sharing any kind of decision-making or control with their workers. They seem interested in simply grafting the ESOP on in a small way. The primary distinction between the mainstream version and the mature alternative version is that in the second there is an explicit embracing of the idea of democratic ownership and control, and a willingness to grapple with the issues of how one introduces or institutionalizes democracy within very different kinds of corporate settings.

I think in that second arena there has been a good deal of development of understanding and knowledge about how one can work within a democratically owned, democratically structured company and still have clear divisions of responsibility and authority between people with managerial functions and people with sales or production functions, that democratic ownership does not have to mean consensus decisions about everything. These people are understanding, increasingly, that they’re operating in a fast moving market environment and the primary lesson they have to learn is how to delegate responsibility. The group can still have ultimate responsibility and control of the corporation as they should, but what people in this sector have learned is that they have got to be able to delegate responsibility and trust their leadership, while still retaining the power to change that leadership if the leadership is not doing a good job.

Robert: Mondragon, of course, has that kind of combination, and has been certainly one of the sources that ICA has drawn on as a model. I’m interested in how you are finding the application of the Mondragon model within the United States, how that is evolving, and what you are learning about making the translation from Mondragon to here.

Christopher: There are probably two things to talk about here. The first being the question of generalizability of the Mondragon model within the United States, and the second being the specific question of learning from them the technology of entrepreneurship. On the first score, any thoughtful analyst of the Mondragon experience will tell you that what has gone on there, what continues to go on there, is firstly an example of a people brought together for political and nationalistic reasons that grow out of the history of the Basque people’s struggles with Franco’s regime primarily. The Mondragon system was looked to firstly as a way of being able to ensure economic independence from Madrid. That is, by virtue of local people owning and controlling the economy, the Basque people would not have to be dependent on the capital and decision-making coming from the rest of Spain. The second motivation – and it’s not an unimportant one for them – is what they call values of solidarity over there between technically-trained managers and engineers and production workers. They have learned the positive lessons of working within democratic ownership structures which reinforced the similar interests and the solidarity between people of different backgrounds as opposed to emphasizing the differences between people with different levels of education.

Robert: Are you saying that this is something that grows uniquely out of Basque nationalism?

Christopher: No, I am just saying that there was reason for them to look for ways in which they could stick together and continue to stay together. But there’s also a strong influence of Catholic social teaching in there, the kind of egalitarian social vision that Father Arizmendi (the Mondragon founder) was inspired by. He was the one who goaded them into not setting up structures that would reinforce the differences between people, but would in fact – in reverse, if you will – emphasize the similarities. And that is not just rhetoric, that’s not just nice talk, it’s institutionalized in the most important internal corporate policies that run that movement there. I’m specifically talking about their wage and income policy, where there’s a 5 to 1 ratio of top salaries to bottom salaries within that system, which is strong evidence of the willingness of particularly professionally trained and technically trained people to not want to emphasize their differences over their brothers and sisters in the production sector. Perhaps one of the most remarkable phenomena of this experience is the willingness of technically and professionally trained people to sacrifice income that they could otherwise get from capitalist firms within the Basque region or within the rest of Spain, in order to further the Mondragon movement.

Robert: Can this be generalized?

Christopher: Yes, we are finding that it can. While we recognize the special features of Mondragon’s history, we focus on what appears to be the most potentially generalizable feature of that experience, which we think is the setting up of business enterprises, economic structures, that emphasize values of solidarity between people. When we think of taking this idea of solidarity into the American context, a much more individualistic context, what we look for are substitute forms of solidarity, other than blood ties. Given you don’t have people with the same historical and national experience, what is the next best thing that we can find here in a much more heterogeneous society?

We are working with three main approaches to this, although we are certainly open to others. (This is a very big and diverse country and opportunities arise from unexpected quarters.)

The first is what you might call geographic, or political solidarity. This does in fact exist within particularly demarcated geographic regions around the United States – usually a metropolitan area or a valley with a population that has lived in that area for a while and a common history of unemployment, dislocation and distress due to companies up and leaving. We’re probably most familiar with the experience in Northeast/Midwest older industrial cities, where you see stages of historical evolution of these economies. The first industrial economies were locally owned and controlled by sometimes not so decent folks who exploited their workers, and sometimes by fairly positive but paternalistic local owners. In that first historical stage, perhaps extending into the 30s or 40s, these communities, while they might have loved or hated the people who owned and controlled the industries in their area, at least knew who they were, and they felt like they had some understanding of who was controlling their economy.

That stage was replaced gradually in many parts of the country by the onset of absentee ownership and control of those very same types of companies, by large modern conglomerate and multinational corporations, sometimes foreign corporations, who bought up these enterprises and took local control over the future of the economy away from local interests, local hands. Sometimes those corporations have done fine by the communities and have created more jobs and so forth. Unfortunately there’s plenty of experience of the contrary, where those absentee interests acted simply to maximize their short-term profit interests and then left those communities high and dry, left in a way which demonstrated a lack of sensitivity and interest in the future of those communities.

The point is here that one substitute form of solidarity is the sense of local ownership and control over your economic destiny, or your economic future. We have found in our work that a very important motivator can be taking people through the step of emphasizing the value of having greater local ownership and control over their corporations in order to prevent future plant closings and so forth. And once people have gotten interested in the idea of corporations being locally owned, employee ownership can then be looked at as the means toward that end of local ownership.

The second additional form of solidarity – and it’s still very much being developed although it does exist in certain parts of the country – is labor union membership. Some union workers have experienced a common history, have a common sense of good times and bad times, and have identified and feel some solidarity with each other. They can take that sense of solidarity out into the marketplace by forming employee-owned, union affiliated companies where those same workers who have worked together shoulder to shoulder in construction firms or whatever can do the same as partners in employee-owned companies. They can maintain the ideals of the American Labor Movement by virtue of those companies being democratically owned, as well as union-affiliated. We have had some promising experience with a couple of construction trade unions, the operating engineers and the bricklayers, who have taken an interest in this idea.

Robert: I’m struck by the way that you’re finding success in the construction trades where most of the people who would be involved in the business might well be either in the union or have come through the union. I would think that if you were trying to do a business where there was more of a mix between people with professional backgrounds that usually were not unionized and people from the unions, then unions would be a more difficult source of solidarity.

Christopher: That’s right, and I think that’s a thoughtful way of explaining why we’ve had more interest from construction trades than other unions in following through on this idea, and it’s likely that that’s to be a more promising arena for doing this kind of work.

A third form of solidarity is basically ethnic. In certain situations, particularly in large cities, there can be a kind of racial or nationalistic solidarity that shows up in helping start companies which are primarily minority owned and controlled companies, be those Hispanic, black, Asian- American, or whatever. That kind of solidarity can also be used to create businesses that are employee- owned, as well.

Robert: I noticed that you have not mentioned the kind of solidarity that might operate in the mature alternative economy, where there’s more of a chosen lifestyle commonality. Have you found that this fourth solidarity doesn’t have as much strength as the other three?

Christopher: No, I think what you’ve mostly touched upon is that I’ve been thinking the most about the first three there, and in fact have been doing a lot of work on the first two of those. In fact, I think it is fair to go back to the first construct I gave you, and add that the mature alternative economy is really not as counterculture as we might think. I mean if we’ve got 30 unionized construction workers who want to start a employee-owned firm because they’re feeling the solidarity for each other and wanting to do it, well that’s a different set of motivations than Mobil Oil putting in a 10% ESOP. It is motivated by some alternative sense of economic structure, but we’re not just talking about sandals, candles and hippies. We’re simply talking about people who are motivated by democratic values.

But, you’re correct, and I think a fourth motivator which could qualify as a separate form of solidarity are whatever pockets of democratic egalitarian values exist within different communities across the United States – whether those values come out of some common religious experience; out of some common political experience of trying to change things in the political and economic sphere; or having those sorts of values from going to college or whatever; and then wanting to translate those values into people’s day to day work.

I think one of the most interesting and positive examples of that type of enterprise is the Solar Center in San Francisco. It is one of the most promising examples of those more alternative businesses that have matured and done quite well. It is primarily, as I understand it, staffed by people who probably average now in their mid-30s, and come out of a certain culture of protest and criticism. It is now quite professional and very successful as a solar design company. That’s an example of a business that I think has evolved from more utopian beginnings to a more realistic management structure while still maintaining its commitment to democratic ownership and control.

Robert: There are some fairly specific structural inventions that Mondragon came up with in terms of internal capital accounts, etc. ICA was instrumental in getting a Massachusetts law so that these could be used in this country. Once you’ve got a group that has some useful degree of solidarity and some real interest in employee ownership are you finding that you’re able to make use of those structural patterns?

Christopher: For certain. I started off by dividing the Mondragon pie into the question of generalizability and entrepreneurship. I did neglect a third, which is really where ICA started. It’s related to the entrepreneurship thing in a sense, but it is the more technical question of internal financing and accounting structures of the firms themselves using the individual internal account structure as a way of being able to allocate profits and losses and hold on to profits and losses within the firm. We have been able to successfully translate this into the American scene, and there are upwards of a hundred companies we’d estimated are making use of the model by-laws that we’ve developed which are designed in large part from our learning about the Mondragon system.

Robert: Have there been other states besides Massachusetts that have now adopted additions to their corporate law to give a legal form for Mondragon-type cooperatives?

Christopher: Yes, Maine, Vermont, New York state, Connecticut, and Massachusetts, are the five states that have now passed similar statutes, and with our help.

Robert: It sounds to me as though, in fact, applying the internal capital accounts and that whole accounting process has been so successful that it’s no longer a major issue in your mind.

Christopher: You’re right, it’s sort of taken for granted. However, this is not the only model we use. In that mature alternative economy I’ve been talking about, ICA has been using two structures to bring about democratic employee ownership: either the direct industrial cooperative structure, featuring the internal capital accounts, or the more complicated and initially more expensive democratic ESOPs. We have now developed an expertise in being able to implement democratic ESOPs, using this primary tool of the mainstream economy within the enterprises that we help. The ESOP can give tax advantages that are superior to what an industrial cooperative can give. It depends entirely on the prospective profitability of the enterprise, the size of the enterprise, its payroll, and so forth and so on. It really has to be taken on a case by case basis. But this is just a question of specific means towards the end of democratic employee ownership.

Robert: How about your role in entrepreneurship? The Mondragon bank has played a really important role in that system as a support for entrepreneurial expansion, and I’m interested in whether or not ICA is in a sense bootstrapping itself up to being, like that bank, a bunch of godfathers?

Christopher: Well, we’re not quite there yet, but we’re getting a lot of gray hair, (laughs) if that in part qualifies. The second most dramatic discovery of our looking at Mondragon was the way in which their bank does not simply perform a passive money-earning function within their economy, but plays a very active developmental role in creating jobs through the division of the bank, of the Empresarial division, which is the division that we have studied in some depth, and that we are, it is true, most trying to emulate here at the ICA between the Loan Fund and our Technical Business Services.

I guess the general point to be made is that Mondragon teaches us that entrepreneurship need not be thought of exclusively as the romantic individualistic American idea of the tinkerer in his or her garage, engaged in hit and miss efforts to come up with a viable new product idea. Mondragon has made more systematic the whole science of entrepreneurship. We’re not talking about umpteen thousands of individual entrepreneurs with their private ideas in their private garages coming up with mostly bad ideas that won’t work – which is in fact the real case for American entrepreneurship. In spite of all the ballyhoo and press to the contrary, most entrepreneurship fails in this country. In Mondragon they’ve been able to make it more systematic, make it more scientific, and concentrate more engineering and technical resources on those individuals. (There are still individuals involved there who are willing to take on risks, and there is still risk involved in Mondragon. That has to be emphasized. This isn’t some collectivized, no-risk kind of scheme.) There is a more concentrated and systematic investment of time and expertise in the starting up of new enterprises. There is also an attempt to support enterprises which logically fit into the local economy of the Basque region. There is some organic growth, if you will, and spin-off of new enterprises, so that they are related to the other enterprises as well as being able to market their products and services to distant markets.

Robert: How has that sort of entrepreneurship been developing in this country, both in terms of ICA and other places you may know of?

Christopher: The four most developed centers of trying to do this are the ICA itself, a group called PACE in Philadelphia, (Philadelphia Association for Cooperative Enterprise), a group in North Carolina called the Community Center for Self Help in Durham, and a group in New York City called the Center for Economic Development, which is a subsidiary of the Community Services Society in New York City. All four of those groups are active technical assistance providers to democratic employee ownerships that have taken a developmental and an entrepreneurial attitude towards their work. We have all been through our first successes and failures, and have learned the lessons of how to give technical assistance – we haven’t learned all the lessons, but we’ve learned lots of lessons about how to give technical assistance – how to judge people and ideas for their viability and their strength. (A fifth group that is just getting started is the Michigan Employee Ownership Center in Detroit.) We have in different ways developed very partial spheres of expertise: the retail food industry for PACE; the garment, metal, and construction industries for ICA; and the garment industry for the Center for Community Self Help. These are areas that we are particularly experienced in, but our work is hardly limited to these. Democratic cooperative ownership is in practice everywhere from computer software to specialty steel.

Robert: How widespread is employee ownership? Do you have any sense of the number of companies and the number of employees that are involved?

Christopher: You know, I think, how hard it is to collect statistics of this sort, and we’re not in the business of doing that. But the basic statistics that you hear, starting at the most general level of including everyone in both the mainstream and the alternative economy I guess the estimate is that there are about 7,000 companies employing 10,000,000 workers where some degree of significant employee ownership is at work.

Robert: At least an ESOP?

Christopher: Right, at least an ESOP. Narrowing down from there, there probably are about a thousand American companies in which the workers own a majority of the shares. Narrowing still more, we’d estimate that there probably are no more than 200 of those thousand firms where the workers and the managers together exercise democratic control over the companies, and the majority of those 200 firms have in one way or another come in contact with the four groups that I just mentioned.

Robert: What trends are you seeing in the mainstream? You talked earlier about some of the mainstream attitudes. Are you seeing, say over the past five years or even over the past three years, any shifts in attitude?

Christopher: I think that there is more openness in the mainstream economy. There are some high profile examples now, People Express, Eastern Air Lines, Weirton Steel in West Virginia, large companies that dove in with significant percentages of employee ownership. They have seen dramatic results in terms of increases in productivity and morale among their workers when workers start to get a significant share of ownership. In the best of those companies there is a move in the general direction towards democratic employee ownership and control. In the worst of those companies they certainly enjoy the jump in productivity, but when they confront the almost inevitable – and I emphasize this – the almost inevitable question that their employees bring to them of "where are our rights that go along with the employee ownership control?", the worst of those companies retreat into the sunset and pull back the plan. When they see the first signs of workers wanting to exercise rights of ownership in some democratic participatory way, the worst of them are threatened. The best of them, if they don’t welcome it, at least don’t run from it. They are seeing that offering ownership as an incentive will eventually incur offering it as a right.

Robert: Can you name some examples?

Christopher: I think that Eastern is probably one of the better ones, and I would emphasize that one of the reasons is that the workers there have some means at their disposal, through their unions, to ask the questions of whether they should have rights associated with these shares.

Robert: At this point in the development of the whole process, what would you say are the key resistance points?

Christopher: I guess the main resistance point, particularly within the mainstream economy, is the question of the legitimacy of the idea of democracy working in the economic sphere, of the notion that economic enterprise and participation and control and democracy can coexist. There is, unfortunately, in the minds of many people – and we get this through the schools and everywhere – the idea that the economic sphere is either the law of the jungle, where you’ve gotta fight for yourself and so forth, or that it’s a land of paternalism, where the weak look for protection from the mighty. The idea of people being able to control their own economic destinies and work together with that value of solidarity emphasized in Mondragon is unfortunately an idea that too many people are skeptical about. That is probably the major obstacle, and it’s a cultural obstacle. It is breaking down, slowly, and in different ways in different places. So I guess that’s the major obstacle.

Robert: How about opportunities?

Christopher: The major opportunities are two things: one is the existence of models, of concrete models of where this stuff is working, be that Rainbow Textiles in San Francisco, an employee owned sewing company here in Massachusetts, or a software company in Burlington, Vermont.

Robert: Do some of these now have a number of years of history behind them so that one can say that it’s not just the initial enthusiasm?

Christopher: That’s right, like the Solar Center that’s been around for I think at least 7 or 8 years, if not 10 years. There are working models that people can refer to and say "By God, this stuff does work." And of course there’s also Mondragon. That’s the most elaborate model of how this can work.

Another source of opportunity is the growing interest and acceptance of this idea by a number of groups in our society that are beginning to put it on their agenda. I’m talking about the churches, different people in the public sector, city and state governments interested in local control themes, labor unions are beginning to look at it, and different people in the Democratic Party are taking an interest in it.

Robert: Perhaps in another 5 years or so the wave of understanding and cultural shift may have gotten to the point where it will have become a major cultural issue, but we’re not there yet.

Christopher: Right, we’re not quite there yet, but we’re a lot further along than we were 7 or 8 years ago when we got started.

Robert: And it’s moving consistently in that direction?

Christopher: I think so. I hope so.

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