Note: This was published in 1983 when I was just out of college as a cover story for The Elks Magazine, which had a circulation of about 1-million. ESOP regulations have evolved in the decades since, but the underlying principles discussed here remain largely applicable today. As you read, simply adjust the sales figures to modern dollars.
In 1975, Cluett, Peabody and Company was preparing to shut down its Saratoga Springs, NY, fabric manufacturing plant. It was no longer profitable. Like most people, the employees at this plant didn’t want to see the place where they had spent years working close its doors. They didn’t want to become statistics, simple additions to this country’s unemployment lines. Unlike most people, however, they weren’t willing to sit back and take it on the chin. Led by Donald Cox, who was running the plant at the time, the employees combined forces and purchased the plant from Cluett Peabody. Today, each employee at Saratoga Knitting Mills, the name they adopted for their plant, has a stake in everything their company does.
A growing number of employees today are getting together and buying out their companies. Some are tired of seeing the boss raking in all the profits while they sweat it out on the shop floor all day and get blasted regularly by inflation. Others are simply frightened. They don’t want to see their jobs, and possibly their pensions, disappear when their employer shuts his doors for good. Some are idealists and wonder why they can’t become formal partners with the people they work side-by-side with every day. But it rarely turns out to be as simple as they thought it would be.
Thousands of companies across the country have stock giveback programs and partial employee stock ownership plans (ESOP). Employees have a majority interest in only a few hundred of these firms, however. In addition to these majority employee-owned firms, there are also several hundred employee cooperatives, a somewhat different type of company that is completely owned and controlled by its employees.
Most of the ESOP employee-owned firms do not give their employees a great deal of operating control. At most, the employee does not get to vote on company policy or for the firm’s board of directors until he becomes fully vested, which usually takes 10 to 15 years. The employee is given one vote for each share of stock he owns, rather than one vote per person, under this system.
The purchase of Saratoga Knitting Mills from Cluett Peabody, like most employee buy-outs, was no simple matter. There was no way that the firm’s 62 employees could contribute enough money to buy the plant; and why would any bank put money into a plant whose parent company had decided was unprofitable? After months of promising, dealing and hair pulling by quite a few people, loans were obtained from the New York Job Development Administration and the New York Business Development Corporation. The employees put up $120,000, and additional stock was purchased by interested local people. Some employees were unable to buy any stock. Some mortgaged their houses and dug deep into their savings to help keep the plant running.
The firm was soon back on its feet, and those who had bought stock were able to sell it at a 100 percent profit after two years. The firm’s volume nearly doubled in its first year of independent operation.
Today, 65 percent of the company’s stock is held by the employees’ ESOP trust fund. In this trust, each employee has a certain number of shares in his name, as well as a certain amount of money, and the number of shares he holds increases with every year of service. The trust will act as the employee’s pension when he retires. After 11 years, an employee is fully vested and able to vote for the company’s board of directors. Because Saratoga Knitting Mills was created in 1975, no employee will be fully vested until 1986, so the employees don’t have full control of their company. The employees do have some input into the company’s system, however. Two employees are elected by the work force to serve on the seven-member board of directors, which steers the company.
In the employee cooperatives, on the other hand, the employees are given quite a bit of control over their companies. Each person is given one vote, rather than one vote for every share of stock he owns , and is allowed to begin voting as soon as he becomes a member of his co-op. There is usually a short probationary period before the employee becomes a member. Co-ops in the United States date back to the 19th century, and these have tended to be organized along industry lines. There was a string of barrel-making co-ops in Minnesota in the mid-1800s, and there were also quite a few iron foundry co-ops in that century. The most successful of the cooperatives operating today are the plywood cooperatives of the Pacific Northwest. The first of these started in the 1920s, and there are now about a dozen or so in operation.
Astoria Plywood was created in 1950 by a group of lumber and plywood workers who wanted to try running a mill on their own in Astoria, OR. Each employee purchased one or more shares in the company, and thus was given the right to vote for the company’s board of directors. The board, which consisted of seven employees, selected the corporate management. Thirty years later, Astoria Plywood is run in pretty much the same way. The seven-man board of directors sets long-term company policy and goals, and approves the policies of the management it selects. Each shareholder, be he a foreman or a janitor, is paid the same, $10.80 an hour. The shares, which originally cost $1,000, have skyrocketed into the $75,000 or $80,000 range. This had made it a bit difficult for new employees who want to begin working at Astoria. Buying a share, the equivalent of buying a job, now costs as much as, or more than,
a house. Shares are usually purchased on long-term payment plans, with down payments going as high as $20,000 and payment often lasting ten or 15 years. Thus, the shareholder looks at his share as a type of second pension plan that he will draw from when he retires.
The results have been pretty good. When the lumber industry was sturdy, the employees were making as much as $30,000 or $40,000 a year. Productivity has been much higher in the plywood co-ops. Today, however, the plywood industry, like the entire construction industry, is flat on its back. Astoria Plywood is still running smoothly. While many union lumber employees are now unemployed, the employees at Astoria Plywood have stuck together and kept their firm running. Overtime has been cut back, and the pay scale was cut from $12 an hour to the present $10.80 in late 1981. But the men still have their jobs. The attitudes of the employees remain optimistic. Turnover is small and loyalty is still high. “The employees own the company, so they work a hell of a lot harder,” says Elmer Brown, the co-op’s general manager, a non-shareholder. “The person who has part ownership in it has a lot more interest in it,” says Don Webb, who runs the saws in the mill when he is not acting as the vice-president of the co-op’s board of directors. “They’ll work harder. When you have a lot of money invested, you’re a lot more concerned with what takes place than if you’re just working for somebody. The new employees are paying money every month for their shares, for as long as ten or 15 years. They’re not looking at it from a day-to-day or a month-to-month operation.”
Although they are just beginning to make a dent in North America, employee-owned firms have been thriving in Europe for years, where in some places they have developed into more than simple workplace operations. The best-known example of these is Mondragon, a cooperative community of 15,000 workers. Mondragon was started in 1956 by a priest in a depressed, high-unemployment area in the Basque region of Spain. The focus of Mondragon is its network of 100 industrial co-ops. In addition to these, however, they have created housing co-ops, agricultural co-ops, consumer co-ops and a cooperative schooling system. Mondragon also maintains a central bank that helps finance many of the co-ops’ endeavors. They also have a record that is close to perfect.
“Mondragon is an enormously successful example of what cooperatives can do,” says David Ellerman, staff economist for the Industrial Cooperative Association, a private consulting group that develops co-ops in the United States. “In fact, it’s the most successful in the Western world by no shadow of a doubt. The employees make more money than others in their region and have control over their work. They’ve started 100 co-ops and have had only one failure, which is unheard of in the small business sector, where typically, four out of five firms fail within five years. In the recent recession they haven’t even had any layoffs. They’ve simply stopped bringing people on and have had to shift some people between firms.” The lone failure in the Mondragon network has been a fisherman’s co-op, a stride away from their standard industrial co-op. Companies today can join the Mondragon community if they are willing to make some concessions, foremost of them being that they must become a cooperative. The employees have a great deal of input into the system, and regularly, the workers or their representatives get together to decide how much everyone will get paid or how much should be demanded of a given co-op firm. Unlike the U.S. plywood cooperatives, share values do not appreciate over the years. Each employee pays a membership fee of approximately $5,000. Rather than distribute profits annually at the end of the year, these and other rewards for productivity are placed in internal savings accounts, from which the employees draw when they retire.
Even though these reports of successful co-ops occasionally buzz across their desks, few employers in the United States would have enough trust in their employees to turn the reins over to them. In fact, many of the ESOP firms have created systems that stop their employees from getting too much power. Donald Cox, the current chairman of Saratoga Knitting Mills and the architect of their employee buy-out, does not believe that his employees are quite ready to take over the workplace.
“The ordinary hourly employee is not thinking ten years out,” says Cox. “When I tell them, ‘You own this company,’ I get, ‘So what?’ “It’s a little difficult for the guy on the floor who’s making $6 or $7 an hour to think in terms of hiring a guy in New York for $100,000 to work the garment district; but that’s what’s necessary if you want to be successful in this business, because you have to have that class of professional in that particular situation. An employee-owned firm, if it does not have the necessary background and knowledge to elect professionals to run the company, will go broke. “I do see us moving towards a company that’s more participative in the sense that the employees will have more control over their immediate environment, however. But for right now, I don’t think that having the employees run the company would be workable. That’s all tempered by time, however. Suppose this was a company that had been in this kind of posture for ten or 15 years. These people would have a hell of a lot more respect for the two sides of the fence than they do now, and have a much better basis for judgment. They could understand why it would be necessary to go out and hire a professional president and not elect the maintenance supervisor.”
Others see basic problems developing deep within the system, and these have caused the ‘So what?’ attitude that Cox speaks of. “Our labor system kind of encourages mindlessness,” says David Ellerman. “The whole idea is that when you hire a person, you buy his labor. It’s a market commodity. That’s what the employer/employee contract is all about. It’s a long process. Mainly, people don’t have control over where their lives are going to go in the future, so they form habits of thought where they say they’re not concerned with where their company is going. It’s sort of like, ‘Why be very concerned with it when you can’t really do much about it?’ Once people do recognize that they can have control over the future and they do have control over the future, those habits of thought change.
“There’s no problem with planning for the future in Mondragon, for example. If you take a worker off the street, where all he is is a normal employee, then of course he doesn’t have this control. It’s sort of a sour grapes thing.
“In the co-op, everybody is jointly self-employed. It’s kind of like asking, ‘Who’s the king in a democracy? Is everybody king? Is everybody subject?'”
Ellerman’s Industrial Cooperative Association (ICA) works with many cooperatives at all levels. They are often involved in start-ups and in conversions from standard ownership to co-op management. The Somerville, MA, organization stresses egalitarian procedures and tries to get its co-ops to mimic the Mondragon system. One thing they have become wary of, however, is the company that is already too far gone. Employees often come to them for help in buying out a dying company, and ICA is often forced to tell them that buying out their company will only prolong the firm’s misery.
“We get a lot of plant-closing people coming to us and we take a look, make a feasibility study, and it usually doesn’t come back positive,” says Ellerman. “We recommend intervening before it’s dead. We’ve been doing some work recently with unions where they suspect a pattern of systematic divestment and the unions are now on to the whole thing. They’re going into collective bargaining, saying, ‘Fish or cut bait. Reinvest in the plant and make it viable, or sell it to someone who wants to run it, but don’t sit here and take all your tax write-offs on the thing, systematically milk the thing and then kill our jobs.'”
In one case recently, the employees were told far in advance that their company would be grinding down to a halt, but the sheer costs of saving it have made many unsure if they want to buy back their jobs. National Steel recently determined that it was “not economically feasible” to continue funding the modernization of Weirton Steel Company, one of its plants. The majority of the work force in Weirton, WV, the company’s home, is employed at the steel plant, and they have already seen 2,600 of their co-workers lose their jobs. By 1987, 70 percent of the remaining 8,800 workers will also lose their jobs, unless the employees can find a way to raise the approximately $200 million that will be needed to buy the plant.
This would place quite a burden on these employees. Four hundred of them would have to be laid off even after a buy-out, and the remainder would have to take a 32 percent pay cut. The employees would also have to find a way to finance the modernization of the steel mill, which could cost upwards of $1 billion over the next decade. The workers shudder when they look at these costs, but also realize that without a buy-out, Weirton will become a ghost town.
A buy-out may turn out to be the best thing that could ever happen to Weirton Steel. There is every indication that employees at employee-owned firms work harder and cooperate with the management to a greater degree, although research in this area is incomplete and sometimes sketchy. Paul Bernstein, a professor at the University of California at Irvine, found that productivity is greater than normal in the plywood co-ops. According to his study, the average co-op worker will do 25 to 43 percent more work than will a worker in a comparable, non-cooperative plywood mill. South Bend Lathe, in Indiana, had been unprofitable for over five years before it was turned over to its employees. Within a year, productivity had risen 25 percent and the firm was soon in the black. Waste, tardiness and absenteeism had also decreased.
The air at these companies is one of cooperation and of working together, rather than one of employees on one side and management on the other. “I think there’s more flexibility here,” says Fred Leslie, office manager of Astoria Plywood. “There’s the opportunity for workers to do many different jobs. We’re not limited by the unions’ categorizing each person’s ability to do work. They can’t all do any job, but it’s surprising how many jobs some people can do. If you don’t need a person at a certain job on a certain day, for instance, you can use him on another job. You can’t always do that with union mills.”
Some things that are so common at non-cooperative firms that they are taken for granted don’t show up at employee-owned firms. “One of the things that always amused me was that being a fabric mill, we had scissors,” says Cox. “Everybody in this plant, including me, has a pair of scissors nearby. We used to buy the damn things by the case. It seemed like we were supplying the whole town with scissors. We’re not anymore. We buy a few scissors now and then. The idea is that those scissors belong to me. I own the company. Don’t be carrying my darn scissors off.”
Regardless of the amount of employee-involvement in how the company is run, all get a share in what the company develops at an employee-held firm. Profits that were once raked in by the boss or were distributed among the outsiders who held stock in the company no longer slip away from the employees’ hands. These are redistributed in several different ways, such as through stock dividends, additions to their pension plans or through annual bonuses. The incentives are there, and the difference shows. In a study by Michael Conte, an assistant professor at the University of New Hampshire, employee-owned firms are much more profitable. In fact, for every one percent of employee-ownership, the firm will be one percent more profitable. A completely employee-held firm, therefore, is twice as profitable as a privately held company.
“I’m a firm believer that the employee-owned firm is a step in the future,” says Cox. “I see no reason why the employees of General Motors can’t own GM, and I think that will be the next step in our industrial organization. After all, the payroll of most companies represents a considerable part of what they spend. The beauty of all this is that if the corporation is successful, the people who are dirtying their hands to make it successful have a real share in what it makes. That’s the key. The guy who’s on the floor making it, he gets to share in it. In most companies, they get the bad, the layoffs, but not the good.”
– Copyright 1983 by Alan Darling