A collection of essays by Bill (website@ccjj.info) accompanied by feedback from his friends.

Monday, January 17, 2011

Employee-Owned Companies

I recently went to a lecture where someone suggested that one beneficial change our system can make is to shift from its present form toward employee-owned companies. Thus, the "evil", "greedy", "exploitive" capitalist would be removed from the equation and the company would be run according to the interest of the employees.

There are no legal barriers to doing this: employee-owned companies do exist, but they're rare.

Quantity of Capital

The first problem with it is: do the employees have enough money to own their companies? The total value of all companies in the US that are traded on the stock market is $14 trillion. Say that's 2/3 of the economy, so extrapolating, the total value of all the companies in the country is $21 trillion. The total number of workers in the US is 154 million. That means that the average worker would have to cough up $136,000 to own their share of the company.

The average worker does not have that sort of money sitting around. Typically they want to own their homes, and if they do that nearly all of their money is going in that direction. They also want to save for retirement. One could argue that when they retire, they can sell their stake in the company and use that for retirement. I will show why that is a bad idea later.

Also, should such a company hire someone who is broke, like a young person entering the workforce? How would that be arranged? How would those people get jobs?

The Dubious Wisdom of Investing in One's Employer

A big problem with the whole idea is that it presents extremely poor risk diversification. An important principle of investing is that you don't want all of your investment in one place, you really don't want more than 20% of your net worth in any one investment. That way, if any one of your investments goes sour, you still maintain 80% of your net worth.
From a viewpoint of risk diversification, you are already over invested in your employer just by working there. If your company does badly, especially badly enough to lay you off or go out of business, the consequences for you are catastrophic. If all you own is stock in the company, your stock has depressed, maybe even zero, value at exactly the same time as you lose your income, making it difficult to survive long enough to get a new job, or move to a new job, or retrain for another profession.

Many companies offer stock options to their employees, and stock-purchase plans, where employees are given the chance to buy company stock at a discount as part of their compensation. It makes sense to do this, because it is in the interest of the company to have its employees' self-interest tied to the firm. The fact that it's a good thing for the company doesn't mean it's the best thing for the employees.

Many people feel that because they work at a company, they have an intimate knowledge of how well it is performing and how well it will do in the future. This is not accurate. Studies show that employees really don't have an accurate estimation of their companies. All you know firsthand is how well your part of the company is doing. Most of what you hear is one-sided propaganda from management, spun to put the best possible face on everything. It's common for layoffs to be preceded by an announcement to the effect of "We're facing a tough stretch ahead, but no matter what, we won't lay anybody off!". Furthermore, what you hear from your peers in the workplace is skewed. People know that expressing negative opinions about their employer is not a good career move, so you won't get an honest assessment from most of your co-workers. Furthermore, employees who do have insights that the company is going to do badly find other jobs and quit, at which point they are usually dismissed by the remaining employees as malcontents. So employees usually have a very distorted, rosy view of the prospects of their companies. Not a good position for an investor to be in.

Several times I have worked for companies where company stock has come into my possession through stock options or stock-purchase plans. I have always sold it immediately and invested it in something else, to diversify my position.

Similarly, using stock in your employer as a retirement investment is a terrible idea. What if the company goes bankrupt two years before you plan to retire? Hope you enjoy the taste of dog food!

Quality of Management

Another question is: Would the company be well-run? An employee-owned company would be like a union-run company. Unions are usually the mortal enemies of employee accountability and meritocracy.

When a normal company has a union, there is management independent of the union to represent the interests of the stockholders and customers, to balance out the voice of the union.

Would an employee-run company ever decide to buy new automation so that they can get more done with fewer employees? That is something that must be done periodically to keep the company efficient and competitive. If business is dwindling, would an employee-owned company lay off employees, or would they just sink deeper and deeper into debt until they go bankrupt altogether?

A Balanced Solution: Addressing These Concerns

Suppose we moderate the idea to address some of these concerns. Suppose we have part of the company owned by the employees, and let investors other than employees also buy stock so there is enough money altogether to own the company. The management of the company would be chosen by all the investors, not just the employee investors. New employees, if they don't have enough cash to buy their share of the company, can be hired and have part of their savings go to buying its stock. If the employee would rather buy a house, save for retirement, or just spend their money rather than investing or saving it, they would be free to do that. Management would be not only answerable to the employees, but also to the non-employee investors. Such an arrangement would be completely legal under existing laws. It would be very easy to implement. In fact, it is exactly the arrangement we currently have!

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