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Made in the USA

The heart of the employee ownership movement is close to home.

June 1, 2007


Ron Wirtz Editor, fedgazette

Suppose you went searching for the locus of employee ownership, the spot where the movement has the most solid foundation and energy. You might guess it lies somewhere in Europe or in another region with political and economic leanings that are more socialist and labor-oriented than the United States.

But in fact, the acknowledged leader of employee ownership is also the undisputed cheerleader for capitalism. The matter of who leads the world in employee ownership has never been scientifically studied, or even much considered, but existing research and the common perception of those who study employee ownership suggest that the United States is the phenomenon's clear center.

If that seems odd, well, maybe it is on the surface. Look a little harder at the underlying forces, though, and it makes good sense, a result stemming partly from coincidence but mostly from design. In a nutshell, it is the entrepreneurial bent of U.S. capitalism, combined with unique support across ideological and political boundaries, that has fostered the growth of employee ownership in this country.

Head of the EO pack

International comparisons of employee ownership are crude at best. Very few countries have anything approaching a valid count of firms that are even partially owned by employees or a measure of the depth of ownership by workers. What research is available suggests a broader presence of employee ownership at the firm level in the United States, and a much higher level of ownership in financial terms for participating employees.

U.S. employee ownership figures come with lots of caveats and guesswork—ironically, these are the most reliable figures for any country on the planet. Elsewhere, employee ownership is either nonexistent or largely unknown. In some places, like the European Union, a snapshot of employee ownership is just beginning to come into focus.

Says Joseph Blasi of Rutgers University, one of the preeminent scholars on this topic, "There's no question we are the top country in the world." According to Martin Staubus, the director of consulting at the Beyster Institute at the University of California, San Diego, employee ownership "is practiced to varying degrees in other places. But it's in the U.S. where it's the most practiced and well developed."

Staubus consults internationally and has traveled to China to advise officials there about how to encourage employee ownership as the country privatizes its government-owned enterprises. Given the country's background in collective ownership, "it just struck me as ironic," he says. "[N]ow they're looking to the U.S." to teach them about employee ownership.

Marc Mathieu, secretary general for the European Federation of Employee Share Ownership (EFES), in Brussels, agrees that the E.U. is playing catch-up to the United States. Although France, Spain, the United Kingdom, Finland and others have had a small, historical presence in employee ownership, he writes in an e-mail, "It is generally agreed within this world's employee ownership community that [the] U.S. is more advanced in the field. ... Here in Europe, we think that we are late compared to most other parts of the world."

The EFES itself is less than a decade old. Previously, each European country had one or more organizations promoting employee ownership, but each acted independently and little research had been done. Last December, Mathieu and the EFES unveiled research that provided a first glimpse at employee ownership among the largest E.U. firms in terms of market capitalization, as well as the 100 largest European companies that were majority-owned by workers.

The concept of employee ownership actually has some roots in Europe in the form of worker cooperatives. In fact, one of the largest employee-owned firms in the world is the Mondragon Corporation Cooperative (MCC), which employs roughly 75,000 people through a web of roughly 150 smaller co-ops in manufacturing, financial, retail, civil engineering, and services, and is sprinkled throughout the Basque region of Spain. Co-ops are also very popular in northern Italy.

But as a rule, employee ownership has not yet penetrated the broader economies in Europe to a high degree. A year ago, Mondragon University (not part of MCC) hosted the annual conference of the International Association for the Economics of Participation. Conference papers highlighted the fractured, early-stage development of employee ownership in a number of European countries.

Many countries have dabbled with the concept, including former communist ones that saw an opportunity for employee ownership when sizable portions of the government economy were privatized after the fall of the Soviet Union. Such efforts weakened over time, and many ultimately failed. Their failure isn't surprising; evidence from the United States suggests that employee ownership rarely works as an antidote to some larger design flaw, like transitioning economies or poorly performing firms.

Where employee ownership performs well is in firms where the corporate culture is—and remains—open and participative, with ownership transitioning to workers without much else changing, including the notion that workers work and management manages, albeit with better communication between the two groups.

You'll love it, trust us

But lots of firms around the globe have open and participative cultures. Why has employee ownership taken hold most tightly in the United States? That's where it appears some intangibles of the economy and political system in the United States come into play.

It sounds simplistic, but employee ownership appears to have sprouted here mostly because it can: Some firms have found it a useful and competitive model; others see that success and mimic it. Says Blasi, from Rutgers, "The U.S. has always been a big, diverse lab of businesses" that both allows and requires owners and managers to experiment to remain competitive. As Mathieu, from the EFES, says, "[T]he main reason employee ownership is more developed in the U.S. is because the U.S. [is] more capitalist."

Government incentives have also been critical in the employee ownership movement here. The most important of these: the Employee Retirement Income Security Act of 1974 that created employee stock ownership plans (ESOPs). What sounds like a technicality buried in a tedious law has acted as a springboard because it offers a financing vehicle for worker ownership, a vehicle with strong tax benefits. Economists consider such subsidies inefficient; regardless, experts worldwide cite ERISA's creation of ESOPs as fundamental to the U.S. employee ownership movement.

Public policy support here stems, in turn, from a diversity of traits that make the concept of employee ownership attractive to people of all stripes. "There is something about the American value system and culture" that helps encourage and nurture such firms, according to Staubus, from the Beyster Institute. "There is a broadly shared set of values. ... There is a sense of opportunity and a sense of populim and a classless society" in an employee-owned firm, he says.

The seemingly contradictory concepts of individual opportunity and share-the-wealth give employee ownership strong support across political and ideological lines. Whether conservative or liberal, Republican or Democrat, "they all see something in it that they like," Staubus says.

Of course, the United States does not have a monopoly on those values. But it appears the United States has the advantage of historical youth and proportionately less ideological baggage. Elsewhere, the transition to employee ownership typically has to battle entrenched political and economic interests.

For example, while employee ownership would seem to benefit workers, powerful employee unions in many countries often oppose, or at least do not actively support, such a movement. Unions are already helping workers get their share of the pie, and workers are often skeptical of giving up comparatively high benefits and wages for some alternative arrangement.

"Today in Europe, the employee ownership question is still mostly a political and ideological question, much more than an economic one," says the EFES's Mathieu. "There is still no general idea and certainly no conviction—maybe it is slowly progressing in the biggest companies—that employee ownership can bring better economic efficiency and wealth."

This debate goes back to the 1800s, according to Mathieu, when Marxist politics in Europe overshadowed the cooperative movement, which at root was anarchist. Anarchism held sway in Spain and Italy, which is a big reason that "employee ownership, in its cooperative version, is still very active and progressing" in those countries.

There are also pragmatic obstacles, notes Mathieu, like the fact that some 15 E.U. countries still have no legislation relating to employee ownership, and "you need unanimous agreement from every [one] of the 27 E.U. countries for any decision."

With global markets, advocates of employee ownership can take solace from the fact that developments in the United States can be more easily spotted, replicated and even improved upon to suit unique political cultures. And for those watching the trend in the United States, enjoy your view from the front row.

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.