Employee Democracy
Encyclopedia
Employee democracy is a term initiated by Dean Adams Curtis to combine the concept of the employee-owned corporation
with the ideas underpinning workplace democracy
, industrial democracy
, as well as worker self-management and the co-determination
laws of countries like Germany
.
When a bipartisan consensus in Congress and the White House initially created employee stock ownership plans (ESOPs) they decided not to include an employee right to vote the stock they would own in the plans. At the time of the ESOP law and ever since, advocates have pointed out that by not "passing through" stock voting rights to employees who are in ESOP plans they are denying employee owners the right traditional stock owners are entitled to.
There have been attempts by Congress to correct the omission of voting rights from the original law, for example the The Employee Ownership Act of 1999 (H.R. 1462) that would have allowed employees to own at least 50% of all voting stock in an Employee Owned and Controlled Corporation (EOCC). Also, employees in EOCCs would have been allowed to vote on all corporate issues, including board elections, while keeping all the benefits of ESOP plans.
The 36 co-sponsors of this bill in the House proves once again that "employee democracy" has broad support from people from all points on the political spectrum. Included as co-sponsors were Dennis Kucinich
(D-OH), Harold Ford, Jr.
(D-TN), Collin Clark Peterson (D-MN), Mary Bono
(R-CA), Gary Miller
(R-CA), Lindsey Graham
(R-SC) and current Republican
presidential candidates Ron Paul
of Texas
and Tom Tancredo
of Colorado
.
http://dept.kent.edu/oeoc/publicationsresearch/Sum1999/EOOwnedSum1999.html
http://thomas.loc.gov/cgi-bin/bdquery/z?d106:HR01462:@@@L&summ2=m&
During work on his masters in business administration, Dean Adams Curtis surveyed all the available worldwide literature on employee ownership and employee participation in self-management, focusing on the impact these ownership and management structures had on employee productivity. He discovered that neither model, i.e. ownership only, or participation only, consistently delivered dramatic productivity increases.
However, Curtis found that in organizations which combined both the ownership and self-management models, companies he labeled "employee democracies," impressive productivity increases were the norm.
During his studies, Curtis maintained active communication and correspondence with Corey Rosen, who headed the National Center for Employee Ownership (www.nceo.org), and also with the leadership of The Workplace Democracy Institute. These two organizations often held joint conferences. At one such conference, Curtis proposed that the two organizations be merged to advocate for the employee democracy.
Subsequently, Dean Adams Curtis led a movement for employee democracy at the Hughes Aircraft Company, which was then the crown jewel of the United States military-industrial-complex. Hughes Aircraft was owned by the Howard Hughes Medical Institute
(HHMI) after being donated to the institute by Howard Hughes
, who by the time of the employee democracy movement had been deceased for several years. The Hughes Employee Democracy Association that Curtis founded was joined by hundreds of Hughes Aircraft employees and was supported by a legal team including former Hughes corporate attorneys and Alan Morrison, a law professor at Harvard and head of the Public Citizen
Litigation Group.
Curtis' concept was to utilize employee democracy make one of the most prolific and successful high technology corporations in the United States even more productive, and thus more profitable, for the Howard Hughes Medical Institute and its employee owners. Instead, General Motors purchased the company from HHMI in exchange for GM stock. Over the years since, GM has sold the various pieces of Hughes Aircraft (satellite manufacturing, electro-optics, radar systems, ground systems, and missile systems) to companies such as Boeing, which merging the Hughes Aircraft research laboratories into GM Delco Electronics.
In 1991, Curtis ran for the Democratic Party's nomination for President of the United States. He called for every public traded company in the United States to be evolved into employee democracies. "The reason I believe this is justifiable," Curtis explained in one nationally televised speech, "Is because we (employees) already own a third of the stock, soon to be half the stock, in this country through employee retirement plans."
Curtis noted to journalists and voters that instead of bank trust departments who manage retirement plans having the right to vote all the stock of all the companies they own for the retirement of America's employees, that the employees of each public traded company should be allowed "to have democratic elections every year for a third of the board of directors seats." Curtis won a handful of local Democratic Party delegates at various caucuses in Iowa in early 1992, then won more votes than half the roster of Democrats in New Hampshire that same year. Having not developed enough momentum to continue his employee democracy campaign, he withdrew from the race and threw his support behind Bill Clinton.
Curtis continues to call attention to the fact that the large majority of employee ownership companies do not provide for employee elections of the board. In those that do, the research shows, with few exceptions, that employees do not use that influence to make significant changes in corporate policy. It is much more common for employee ownership companies to provide for substantial employee involvement in work-level decisions, often through various kinds of teams.
There is no data to show whether decision-making in these companies is slower or faster (and many more decisions are now localized to employee teams). But the data does show that companies that combine employee ownership with a high degree of employee involvement at the job level actually grow 6% to 11% faster per year than would have otherwise been expected (see Equity: Why Employee Ownership is Good for Business, Harvard Business School Press, 2005, for a summary, or go to www.nceo.org to look at summaries of all the studies on employee ownership and corporate performance).
There are several rationales for employee-owned corporations in the U.S. First, there are substantial tax benefits for employee ownership companies. Employee stock ownership plans (ESOPs) are set up by companies as a kind of employee benefit trust
. An ESOP is a type of employee benefit plan designed to invest primarily in employer stock
. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. All full-time employees with a year or more of service are normally included. The ESOP can be funded through tax-deductible corporate contributions to the ESOP. Discretionary annual cash contributions are deductible for up to 25% of the pay of plan participants and are used to buy shares from selling owners. Alternatively, the ESOP can borrow money to buy shares, with the company making tax-deductible contributions to the plan to enable it to repay the loan. Contributions to repay principal are deductible for up to 25% of the payroll of plan participants; interest is always deductible. Dividend
s can be paid to the ESOP to increase this amount over 25%. Sellers to an ESOP in a closely held company can defer taxation on the proceeds by reinvesting in other securities
. In S corporation
s, to the extent the ESOP owns shares, that percentage of the company's profits are not taxed: 100% ESOPs pay no federal income tax. Employees do not pay taxes on the contributions until they receive a distribution from the plan when they leave the company; even then they can roll the amount over into an IRA
.
Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or some more equal formula. Accounts vest
over time, usually following one of two formulas: in the first, vesting starts at two years and completes at six; in the second, participants become 100% vested after four years. When employees leave the company, they receive their vested ESOP shares, which the company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but are not required to be able to vote on other issues, such as choosing the board.
Employees also can acquire stock through grants of stock options, the right to buy shares at a price set today for a defined number of years into the future. There are no special tax benefit associated with most forms of stock options, however. Employees can also become owners by purchasing shares in a stock purchase program, usually at a discount, by buying stock in their 401(k)
savings plans, or by companies making matches of company stock to employee deferrals into these plans. Stock in 401(k) plans can be bought with pretax income, while company contributions are tax-deductible.
Altogether, there are about 11,500 ESOPs covering 11 million employees, almost all in closely held companies. The other forms of ownership generally occur in public companies, and another estimated 15 million employees participate in one or more of these plans (see data from the National Center for Employee Ownership).
Studies in Massachusetts, Ohio, and Washington state show that, on average, employees participating in the main form of employee ownership, employee stock ownership plans (ESOPs), have considerably more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about three times as great, and the diversified portion of employee retirement plans was about the same as the total retirement assets of comparable employees in equivalent non-ESOP firms.
Wages in ESOP firms were also 5% to 12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely to offer additional diversified retirement plans alongside their ESOPs. The data is also available at www.nceo.org.
Employee ownership in 401(k) plans, however, is more problematic. About 17% of total 401(k) assets are invested in company stock—more in those companies that offer it as an option (although many do not). This may be an excessive concentration in a plan specifically meant to be for retirement security.
In contrast, it may not be a serious problem for an ESOP or other options, which are meant as wealth building tools, preferably to exist alongside other plans. Detailed data on 401(k) plan investments are available at www.ebri.org, the home page of the Employee Benefits Research Institute.
Employee-owned corporation
An employee share ownership plan is the practice of companies giving staff members shares in their company as part of their salary....
with the ideas underpinning workplace democracy
Workplace democracy
Workplace democracy is the application of democracy in all its forms to the workplace....
, industrial democracy
Industrial democracy
Industrial democracy is an arrangement which involves workers making decisions, sharing responsibility and authority in the workplace. While in participative management organizational designs workers are listened to and take part in the decision-making process, in organizations employing industrial...
, as well as worker self-management and the co-determination
Co-determination
Co-determination is a practice whereby the employees have a role in management of a company. The word is a literal translation from the German word Mitbestimmung. Co-determination rights are different in different legal environments. In some countries, like the USA, the workers have virtually no...
laws of countries like Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
.
When a bipartisan consensus in Congress and the White House initially created employee stock ownership plans (ESOPs) they decided not to include an employee right to vote the stock they would own in the plans. At the time of the ESOP law and ever since, advocates have pointed out that by not "passing through" stock voting rights to employees who are in ESOP plans they are denying employee owners the right traditional stock owners are entitled to.
There have been attempts by Congress to correct the omission of voting rights from the original law, for example the The Employee Ownership Act of 1999 (H.R. 1462) that would have allowed employees to own at least 50% of all voting stock in an Employee Owned and Controlled Corporation (EOCC). Also, employees in EOCCs would have been allowed to vote on all corporate issues, including board elections, while keeping all the benefits of ESOP plans.
The 36 co-sponsors of this bill in the House proves once again that "employee democracy" has broad support from people from all points on the political spectrum. Included as co-sponsors were Dennis Kucinich
Dennis Kucinich
Dennis John Kucinich is the U.S. Representative for , serving since 1997. He was furthermore a candidate for the Democratic nomination for President of the United States in the 2004 and 2008 presidential elections....
(D-OH), Harold Ford, Jr.
Harold Ford, Jr.
Harold Eugene Ford, Jr. is an American politician and was the last chairman of the now-defunct Democratic Leadership Council . He was a Democratic Party member of the United States House of Representatives from , centered in Memphis, from 1997 to 2007...
(D-TN), Collin Clark Peterson (D-MN), Mary Bono
Mary Bono
Mary Bono Mack is the U.S. Representative for , and previously the 44th, serving since 1998. She is a member of the Republican Party. The district is based in Palm Springs and includes most of central and eastern Riverside County. Bono Mack sits on the Energy and Commerce Committee, and is...
(R-CA), Gary Miller
Gary Miller
Gary Gene Miller is the U.S. Representative for , and previously the 41st, serving since 2003. He is a member of the Republican Party.-Early life, education and career:...
(R-CA), Lindsey Graham
Lindsey Graham
Lindsey Olin Graham is the senior U.S. Senator from South Carolina and a member of the Republican Party. Previously he served as the U.S. Representative for .-Early life, education and career:...
(R-SC) and current Republican
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
presidential candidates Ron Paul
Ron Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
of Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
and Tom Tancredo
Tom Tancredo
Thomas Gerard "Tom" Tancredo is an American politician from Colorado, who represented the state's sixth congressional district in the United States House of Representatives from 1999 to 2009, as a Republican...
of Colorado
Colorado
Colorado is a U.S. state that encompasses much of the Rocky Mountains as well as the northeastern portion of the Colorado Plateau and the western edge of the Great Plains...
.
http://dept.kent.edu/oeoc/publicationsresearch/Sum1999/EOOwnedSum1999.html
http://thomas.loc.gov/cgi-bin/bdquery/z?d106:HR01462:@@@L&summ2=m&
During work on his masters in business administration, Dean Adams Curtis surveyed all the available worldwide literature on employee ownership and employee participation in self-management, focusing on the impact these ownership and management structures had on employee productivity. He discovered that neither model, i.e. ownership only, or participation only, consistently delivered dramatic productivity increases.
However, Curtis found that in organizations which combined both the ownership and self-management models, companies he labeled "employee democracies," impressive productivity increases were the norm.
During his studies, Curtis maintained active communication and correspondence with Corey Rosen, who headed the National Center for Employee Ownership (www.nceo.org), and also with the leadership of The Workplace Democracy Institute. These two organizations often held joint conferences. At one such conference, Curtis proposed that the two organizations be merged to advocate for the employee democracy.
Subsequently, Dean Adams Curtis led a movement for employee democracy at the Hughes Aircraft Company, which was then the crown jewel of the United States military-industrial-complex. Hughes Aircraft was owned by the Howard Hughes Medical Institute
Howard Hughes Medical Institute
Howard Hughes Medical Institute is a United States non-profit medical research organization based in Chevy Chase, Maryland. It was founded by the American businessman Howard Hughes in 1953. It is one of the largest private funding organizations for biological and medical research in the United...
(HHMI) after being donated to the institute by Howard Hughes
Howard Hughes
Howard Robard Hughes, Jr. was an American business magnate, investor, aviator, engineer, film producer, director, and philanthropist. He was one of the wealthiest people in the world...
, who by the time of the employee democracy movement had been deceased for several years. The Hughes Employee Democracy Association that Curtis founded was joined by hundreds of Hughes Aircraft employees and was supported by a legal team including former Hughes corporate attorneys and Alan Morrison, a law professor at Harvard and head of the Public Citizen
Public Citizen
Public Citizen is a non-profit, consumer rights advocacy group based in Washington, D.C., United States, with a branch in Austin, Texas. Public Citizen was founded by Ralph Nader in 1971, headed for 26 years by Joan Claybrook, and is now headed by Robert Weissman.-Lobbying Efforts:Public Citizen...
Litigation Group.
Curtis' concept was to utilize employee democracy make one of the most prolific and successful high technology corporations in the United States even more productive, and thus more profitable, for the Howard Hughes Medical Institute and its employee owners. Instead, General Motors purchased the company from HHMI in exchange for GM stock. Over the years since, GM has sold the various pieces of Hughes Aircraft (satellite manufacturing, electro-optics, radar systems, ground systems, and missile systems) to companies such as Boeing, which merging the Hughes Aircraft research laboratories into GM Delco Electronics.
In 1991, Curtis ran for the Democratic Party's nomination for President of the United States. He called for every public traded company in the United States to be evolved into employee democracies. "The reason I believe this is justifiable," Curtis explained in one nationally televised speech, "Is because we (employees) already own a third of the stock, soon to be half the stock, in this country through employee retirement plans."
Curtis noted to journalists and voters that instead of bank trust departments who manage retirement plans having the right to vote all the stock of all the companies they own for the retirement of America's employees, that the employees of each public traded company should be allowed "to have democratic elections every year for a third of the board of directors seats." Curtis won a handful of local Democratic Party delegates at various caucuses in Iowa in early 1992, then won more votes than half the roster of Democrats in New Hampshire that same year. Having not developed enough momentum to continue his employee democracy campaign, he withdrew from the race and threw his support behind Bill Clinton.
Curtis continues to call attention to the fact that the large majority of employee ownership companies do not provide for employee elections of the board. In those that do, the research shows, with few exceptions, that employees do not use that influence to make significant changes in corporate policy. It is much more common for employee ownership companies to provide for substantial employee involvement in work-level decisions, often through various kinds of teams.
There is no data to show whether decision-making in these companies is slower or faster (and many more decisions are now localized to employee teams). But the data does show that companies that combine employee ownership with a high degree of employee involvement at the job level actually grow 6% to 11% faster per year than would have otherwise been expected (see Equity: Why Employee Ownership is Good for Business, Harvard Business School Press, 2005, for a summary, or go to www.nceo.org to look at summaries of all the studies on employee ownership and corporate performance).
There are several rationales for employee-owned corporations in the U.S. First, there are substantial tax benefits for employee ownership companies. Employee stock ownership plans (ESOPs) are set up by companies as a kind of employee benefit trust
Investment trust
An Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....
. An ESOP is a type of employee benefit plan designed to invest primarily in employer stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. All full-time employees with a year or more of service are normally included. The ESOP can be funded through tax-deductible corporate contributions to the ESOP. Discretionary annual cash contributions are deductible for up to 25% of the pay of plan participants and are used to buy shares from selling owners. Alternatively, the ESOP can borrow money to buy shares, with the company making tax-deductible contributions to the plan to enable it to repay the loan. Contributions to repay principal are deductible for up to 25% of the payroll of plan participants; interest is always deductible. Dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s can be paid to the ESOP to increase this amount over 25%. Sellers to an ESOP in a closely held company can defer taxation on the proceeds by reinvesting in other securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
. In S corporation
S Corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
s, to the extent the ESOP owns shares, that percentage of the company's profits are not taxed: 100% ESOPs pay no federal income tax. Employees do not pay taxes on the contributions until they receive a distribution from the plan when they leave the company; even then they can roll the amount over into an IRA
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
.
Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or some more equal formula. Accounts vest
Vesting
In law, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal...
over time, usually following one of two formulas: in the first, vesting starts at two years and completes at six; in the second, participants become 100% vested after four years. When employees leave the company, they receive their vested ESOP shares, which the company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but are not required to be able to vote on other issues, such as choosing the board.
Employees also can acquire stock through grants of stock options, the right to buy shares at a price set today for a defined number of years into the future. There are no special tax benefit associated with most forms of stock options, however. Employees can also become owners by purchasing shares in a stock purchase program, usually at a discount, by buying stock in their 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
savings plans, or by companies making matches of company stock to employee deferrals into these plans. Stock in 401(k) plans can be bought with pretax income, while company contributions are tax-deductible.
Altogether, there are about 11,500 ESOPs covering 11 million employees, almost all in closely held companies. The other forms of ownership generally occur in public companies, and another estimated 15 million employees participate in one or more of these plans (see data from the National Center for Employee Ownership).
Studies in Massachusetts, Ohio, and Washington state show that, on average, employees participating in the main form of employee ownership, employee stock ownership plans (ESOPs), have considerably more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about three times as great, and the diversified portion of employee retirement plans was about the same as the total retirement assets of comparable employees in equivalent non-ESOP firms.
Wages in ESOP firms were also 5% to 12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely to offer additional diversified retirement plans alongside their ESOPs. The data is also available at www.nceo.org.
Employee ownership in 401(k) plans, however, is more problematic. About 17% of total 401(k) assets are invested in company stock—more in those companies that offer it as an option (although many do not). This may be an excessive concentration in a plan specifically meant to be for retirement security.
In contrast, it may not be a serious problem for an ESOP or other options, which are meant as wealth building tools, preferably to exist alongside other plans. Detailed data on 401(k) plan investments are available at www.ebri.org, the home page of the Employee Benefits Research Institute.
See also
- Employee Stock Purchase PlanEmployee Stock Purchase PlanIn the United States, an employee stock purchase plan is a tax-efficient means by which employees of a corporation can purchase the corporation's stock, often at a discount...
- CooperativeCooperativeA cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
- List of employee-owned companies
- Louis O. KelsoLouis O. KelsoLouis Orth Kelso was a political economist in the classical tradition of Smith, Marx and Keynes. He was also a corporate and financial lawyer, author, lecturer and merchant banker who is chiefly remembered today as the inventor and pioneer of the Employee Stock Ownership Plan , the prototype of...