1. Establishing a Legal Framework on ESO 

We should work to create an optional legal framework at the EU level that in particular would fa-cilitate cross-border ESO schemes. An EU framework is needed to establish a level playing field that would especially create opportunities for SMEs which are most affected by the consequences of the financial crisis. SMEs should receive more policy support, in particular considering the signifi-cant unexploited potential for ESO. In this context establishing a so-called 29th regime on Employee Financial Participation (EFP) appears a promising option. Hence, it seems justified that the Pilot Project should include a preliminary impact assessment of such a regime.

2. Promoting the exchange of best practice 

In order to establish a functioning exchange of best practice, systematic processing and editing of information is very important. Rather than producing “another study for the shelf”, we should look into the creation of one-stop shops. A “Virtual Centre for EFP” (as presented during the confer-ence) could be a first step in that direction.

3. Providing transparency with regard to fiscal treatment and tax incentives 

Tax incentives are not a prerequisite for successful implementation of ESO, but they do effectively promote such schemes. Therefore, while harmonisation is not a condition, transparency with re-gard to the different national fiscal treatment of ESO is key. In particular, an Effective Tax Rate Cal-culator (as presented during the conference) could provide a useful decision-making tool for com-panies with cross-border activities that plan to introduce EFP schemes.

4. Combining economic and labour market policies and reducing inequality 

ESO fits logically into the EU’s multi-dimensional approach of combing economic and labour mar-ket policies. ESO schemes may help to create and secure jobs, reactivate unemployed and facilitate business succession in SMEs. In order to establish equality of arms, we should develop recommen-dations at EU level for fiscal and other incentives for SMEs interested in implementing ESO schemes. In this respect, investigating and promoting the transferability of best practice ESO schemes like the Sociedades Laborales and Employee Stock Ownership Plans (ESOPs) is important.

5. Incorporating ESO into Corporate Governance and Long-Term Investment strategies 

Turning workers into shareholders of their employer company helps to improve corporate govern-ance by promoting transparency, sustainability and responsibility in corporate decision-making, which is one of the main objectives of the EU’s corporate governance policy. Therefore, integrating ESO into this policy should be strongly considered. Further, as ESO can foster growth of SMEs and facilitate business succession, financing ESO schemes should become one of the objectives of the Commission’s Long-Term Investment strategy. In particular it should be considered to integrate ESO in the EIB products for SME financing and incorporate ESO into the Commission’s proposal for the regulation on European Long-Term Investment Funds (ELTIFs).

In order to achieve these aims, social partners and all other relevant stakeholders should be closely involved in the process. Further, any promotion of ESO should respect the relevant fundamental princi-ples as identified by the 1992 Commission Recommendation on EFP and reiterated in the EP Own-Initiative Report of 15 January 2014. After many years of research and fruitful discussion the time has come for concrete actions: Let’s make ESO a positive priority in Europe!

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Introduction

Voestalpine AG—headquartered in Linz (Austria)—is mainly active in the production and treatment of steel. As a successful international corporate group with some 300 production and sales companies in more than 60 countries, it has nearly 40,000 employees (fewer than half of them in Austria). In conjunction with discussions about the full privatisation of the corporate group undertaken at the beginning of 2000, the group’s Board of Management together with the employee representatives developed and later implemented an employee participation scheme, which at that time was unprecedented in Austria. Through this, a large portion of the group’s workforce as well as a small group of ex-employees currently hold a 13.3 per cent stake (around 22 million shares) administrated by a private foundation (Voestalpine Mitarbeiterbeteiligung Privatstiftung).

The case of the Voestalpine AG

In 2000, the Austrian Government—under Chancellor Wolfgang Schüssler—enacted the so-called ÖIAG Act133 with the intention of accelerating the privatisation process among (partial) state-owned industrial companies. One of these companies administrated by the Austrian Industry-Holding Company Stock Corporation ÖIAG (Österreichische Industrieholding AG) was the Voestalpine AG. In 2000, ÖIAG administrated a state-owned stake of 38.8 per cent, which subsequently was slightly reduced in two steps to 34.7 per cent. In 2003, the Austrian Council of Ministers mandated ÖIAG to fully privatise the Voestalpine AG. Against all concerns, in the context of the so-called secret project “Minerva”, a hostile takeover by Magna was prevented, and since August 2005 the Voestalpine AG has been fully privatised (Auer, 2008, pp. 245-249).

Origin of the Voestalpine employee participation scheme

In response to the privatisation ambitions of the Austrian Government, in 2000, the Voestalpine management in co-operation with the group’s employee representatives immediately started intensive discussions about the group’s future ownership structure. In the course of these talks it became generally accepted by both parties that a substantial equity stake owned by the group’s workforce could contribute to a more stable ownership structure (strategic ownership). From the very beginning, an ambitious plan was conceived to acquire in the short and medium term an employees’ stake of not less than 10 per cent of the total number of voting rights (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, p. 20).

Schemes

Through the first of the six employee participation schemes implemented so far, the Voestalpine workforce in Austria acquired an immediate 4.9 per cent equity stake (around 1.6 million shares). Once again, based on opening clauses in relevant wage agreements, an additional wage agreement (Zusatzkollektivvertrag) was fixed between social partners (Labour Union and Economic Chamber) on 1 November 2000, which allowed the group’s management to retain parts of concluded pay increases for the purpose of attaining the employee share ownership target.

Thus, one per cent of monthly employees’ gross wages in combination with company’s savings in non-wage labour costs arising from stock transfers134 and a yearly value adjustment of employees’ own contributions135 were the basis to calculate within the complex Barwert- modell (Cash Value Model) the total advance of money used for the acquisition of the above mentioned 1.6 million shares at the stock exchange (Voestalpine Arbeitnehmer-Privatstiftung, 2006, p. 12).

An irreplaceable element of the first and all later schemes—the still extant private foundation—has been utilised and developed. The Voestalpine Mitarbeiterbeteiligung Privatstiftung is not only responsible for the administration of the acquired stock, but also concentrates all individual employees’ voting rights due to a transfer of the ownership’s civil claim, fixed within integrated trust agreements (Treuhandverträge). Thus, it is ensured that the work- force has an important vote within the General Meeting of Shareholders. On the other side, the individual right to receive a dividend remains in employees’ hands. To fully utilise tax incentives according to § 3 I Z. 15 lit. b of the Austrian Income Tax Act and savings in social security contributions according to § 49 III Z. 18 lit. c of the Social Security Act, acquired shares were just allocated to employees to a maximum limit of EUR 1,460 per year. Employees’ shares remain within the foundation for the entire period of employment. All relevant regulations—e.g., relating to the retention of employees’ pay increases or the allocation of shares to individual employees—were concluded within the internal company agreement mentioned under 2.1 (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, p. 33).

• For all employees hired after 1 November 2000, a Schichtmodell (Shift Model) was developed, which calculated the employee’s own monthly contribution in accordance with the Barwertmodell (one per cent of the employee’s monthly gross wage, the company’s savings in non-wage labour costs and a yearly value adjustment (3.5 per cent) of this contribution) (Voestalpine Arbeitnehmer-Privatstiftung, 2006, p. 12).

Strategic employees’ share ownership has been further promoted through five additional schemes (II-VI). All of these have been based on additional wage agreements to retain a percentage of employees’ pay increases . Furthermore, the financing of the monthly employees’ own contribution in all schemes is accordant with the Schichtmodell (model I). Unlike the initial scheme, the pre-financing of shares in the following schemes II, III and V was leveraged (credit-financed).

• In 2002, scheme II increased the existing employees’ stock136 by 2.5 per cent (around one million shares), and in 2003 the so called “squeeze-out-boundary” of ten per cent was overstepped for the first time by the purchase of around 1.5 million shares (3.7 per cent). Since then, the Voestalpine Mitarbeiterbeteiligung Privatstiftung on behalf of the workforce has been empowered to nominate a representative to the Supervisory Board. This achievement was only once put at risk when in 2005 the Voestalpine AG issued convertible bonds and increased the group’s share capital.
• Thus, at the end of 2005, a fourth scheme was concluded, through which the Voestalpine AG between 2007 and 2009 credit financed the purchase of about 3.2 million shares137 (two per cent) on the stock exchange and transferred them to the Voestalpine Mitarbeiterbeteiligung Stiftung (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 38-44).
• Based on an additional wage agreement—reached in the course of collective bar- gaining in the metal industry—, a fifth scheme was started in November 2007, mainly in order to integrate a large number of new Voestalpine staff—particularly from the BÖHLER-UDDEHOLM-Group—into the employee participation scheme. It was agreed to allot 0.5 per cent of their monthly gross wages for this purpose. On the other side, the monthly contribution of already participating employees was raised by 0.3 per cent of their monthly gross wages. Deviating from the procedure in previous models, shares still available within the foundation were utilised for this new allocation.
• Scheme VI—implemented as a result of a conditional capital increase—enlarged the employees’ stock within the foundation by two per cent, i.e., 3.3 million shares (Ibid., pp. 46-48). 
Today, Austrian employees spend up to 3.25 per cent138 of their monthly gross wages for the allocation of shares (Ibid., p. 48).

The Voestalpine Mitarbeiterbeteiligung Stiftung and its role 
As earlier mentioned, the Voestalpine Mitarbeiterbeteiligung Stiftung is the centrepiece of the Voestalpine employee participation scheme. In Austria, the utilisation of a private foundation for the purpose of employees’ (financial) participation legally underlies § 4 XI Z. 1 lit. c of the country’s Income Tax Act (Otto, 2011, p. 136). The work of the Voestalpine Mitarbeiterbeteiligung Stiftung mainly consists of the following three tasks (Stelzer, 2010, p. 6):

• administration of the different schemes (assisted by the Actuaria Benefits Consulting GmbH, see Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 96 f.);
• further development of the employee participation scheme;
• execution of voting rights at the General Meeting of Stakeholders.

The two main bodies of the foundation are the Management Board and the Advisory Board. The group’s Board of Management and Works Councils nominate its members equally.139 Both bodies are chaired by an employees’ representative, who—in case of a tie—casts the deciding vote (Dirimierungsrecht). The Advisory Board makes all decisions concerning employee participation schemes—e.g., their further development—and is responsible for appointing the Management Board. The chairman of the Management Board represents the voting rights of all participating employees at the General Meeting of Stakeholders. His vote at the meeting is restricted by the decisions of the Advisory Board, which are always taken on the basis of a suggestion by the Management Board and a wide opinion-building process among the group’s Works Councils. 
The Management Board is further responsible for administering the participation scheme and also foundation assets140.

Implications

As presented within the introductory remarks of this chapter, the strategic dimension has been the driving power in 2000 to apply such an ambitious employee participation scheme. The Voestalpine Mitarbeiterbeteiligung Privatstiftung on behalf of the workforce has been the most stable core shareholder for years. Today, it is the second largest shareholder (13.3 per cent141) after the Raiffeisenlandesbank Oberösterreich Invest GmbH & Co. (more than 15 per cent). The chairman of the foundation’s governing body represents 12.4 per cent of the voting rights within the General Meeting of Shareholders (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 62 f.). In addition, since 2003 the foundation has had the power to nominate a representative for the Supervisory Board.

From a financial perspective, the workforce’s capital investment has absolutely proved its value. As Figure 23 shows, each year since 2000 the Voestalpine AG has declared a dividend. In total, between 2000 and 2010 it has distributed EUR 47.3 million in dividends to participating employees.

Figure 23: Dividend payout, 2000-2010

Source: Voestalpine Mitarbeiterbeteiligung Privatstiftung (2010), p. 32.

As proof of the employees’ confidence in their capital investment, 17 per cent of them (3,576 individuals) have decided to re-invest their dividend. Furthermore, at present, 3,277 individuals—either still active within the Voestalpine AG or already separated from it— exercise their option to keep their “private shares” (around 1.6 million shares) within the Voestalpine Mitarbeiterbeteiligung Stiftung. Among them are almost two thirds of all employees, who left the group within the last three years (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 62 f.).

Best practice and transferability

The results of the previous chapters should help to answer whether the employee participation scheme of the Voestalpine AG, whose general structure resembles an ESOP, deserves to be designated as “best practice” and if it is transferable or has already been transferred to other companies.

Success of the concept

Comparing potential implications or benefits collected in chapter 2 with those from the Voestalpine example, it is evident that both the Voestalpine employees and the Voestalpine AG itself have demonstrably benefited from such an ambitious employee participation scheme. Even though not solely intended as an employee financial participation scheme, it has created an additional source of income for all participating employees. Furthermore, the objective to establish strategic ownership has been fully achieved and the workforce has been put in a position to contribute as a key stakeholder to the group’s future. Thus, to a certain extent, it seems possible for them to support their own concerns, in particular job security. From the employer perspective as well, the Voestalpine AG has strategically benefited from its courageous decision to implement strategic employee share ownership. It not only reacted flexible to the privatisation process, but also established a stable anchor shareholder under its ownership structure, present and future, i.e., its employees.

As for negative results or implications, none could be identified. It must be mentioned, however, that for several of these criteria no data is available in the Voestalpine case (e.g., if production has increased after the introduction of the employee participation scheme). Nevertheless, positive implications reported for Voestalpine employees as well as for the Voestalpine AG itself are important indicators that the Voestalpine case can undoubtedly be labelled as an example of best practice.

Transferability

Acknowledging that the Voestalpine employee participation scheme deserves the appellation of best practice, it is interesting to speculate whether it could easily be transferred to companies in or even outside of Austria. With respect to its export potential, the efforts of the Voestalpine AG to adapt certain features of the Austrian models to Voestalpine companies in other EU Member States have clearly shown the difficulties. In particular, widely differing national labour and tax regulations have made this implementation impossible. Therefore, both of the international models142 so far implemented are based on conditions different from those of the Austrian models, although oriented around general characteristics (such as concentration of the voting rights within a private foundation143) (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 50-53).

At first glance, it seems possible to duplicate the Voestalpine employee participation scheme within Austria. Nevertheless, certain aspects still narrow its transferability. First, the scheme is not appropriate for small and medium-sized companies inasmuch as the integration of a private foundation as well as a large administrative workload is too expensive for them.

Furthermore, the employee participation scheme has been designed to fit certain circumstances, conditions and objectives. Thus, the question of whether it would work under (partly) different conditions is an open one.

Though according to the PEPPER IV Report, since 2001 employee financial plans have in- creased in Austria (Lowitzsch et al., 2008, p. 155), the best practice example of the Voestalpine AG has yet to be imitated. Although Voestalpine representatives have held several meetings with interested companies about its employee participation scheme, none of them has yet adopted the Voestalpine model for itself. Moreover, no other companies within Austria are using the opportunity of an additional wage agreement.144

Conclusions

In conclusion, this case has shown how the Voestalpine model—with its strong positive effects on the workforce as well as on the entire corporate group—deserves to be designated as best practice. Nevertheless, its transferability abroad is limited, above all because of the particular legal structure. Within Austria, though it is possible to duplicate the model. In practice, transfer to small and medium-sized companies will hardly be an option because of implementation and administrative costs arising from the private foundation.

Footnotes

133 The ÖIAG Act was publicly announced in the Federal Law Gazette 1 no. 24/2000.

134  According to the Social Security Act, employers in Austria are not required to pay non-wage labour costs in case of stock transfers. In the example of the Voestalpine AG it was decided to pass these savings on to employees, thereby increasing their own contribution about 25 per cent.

135  The calculation included a yearly 3.5 per cent increase in employees‘ contributions.

136  At this time, the stake already had been decreased to around four per cent in consequence of an increase in 
capital.

137  As a result of a share split in July 2006, each share had been split into four.

138  All implemented schemes increased the amount taken from the monthly gross wage: scheme I (one per cent), scheme II (0.5 per cent), scheme III (0.5 per cent), scheme IV (0.5 per cent), scheme V (0.5 per cent in case of new integrated employees and 0.3 per cent in case of already participating employees) and scheme VI (0.45 per cent). Thus, an employee involved in the employee participation scheme since the beginning spends at the moment 3.25 per cent of its monthly gross wage for the allocation of shares.

139  The Management Board consist of three members (the third member is collaboratively nominated) and the Advisory Board of 12 members.

140  Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp.92-94

141 The 13.3 per cent stake mainly includes the share ownership of Austrian employees, but also in a small part of German and British employees as well as of ex-employees.

142  In 2004, the first international-oriented model was implemented for Voestalpine staff from the Netherlands. Based on these experiences early in 2007, it was started to develop a common international model. So far, this was implemented in Great Britain and Germany. In Belgium and Sweden, legal boundaries and the impacts of the economic crisis have prevented an implementation.

143  While the Dutch model concentrates all voting rights in an own private foundation, voting rights from the international model are held in the Austrian Voestalpine Mitarbeiterbeteiligung Privatstiftung.

144 Information provided by Max Stelzer, Management Board Executive Voestalpine Mitarbeiterbeteiligung Privatstiftung, to the author.

Literature:

11.00 am – 1.15 pm Employee Financial Participation in SMEs: A strategy for labour market policy and regional business development.

David Brodwin, the author, points out that: “A truly sustainable economy needs more employee-owned businesses and partnerships.”

He also makes an important point by claiming that: “These businesses stabilize consumer incomes and spending power, stabilize employment, stabilize corporate cash flows, and blunt the extremes of the business cycle. For this to happen we’ll need to find ways to attract more capital into the field, to finance the conversion of existing investor-owned businesses to a new ownership model.”

Visit: http://www.usnews.com/opinion/blogs/economic-intelligence/2013/11/07/why-employee-owned-businesses-work?src=usn_tw

There are several reasons for introducing EFP:

• It facilitates the provision of start-up finance for new enterprises by attracting risk capital for firms operating in innovative sectors with highly skilled employees
• It promotes an “entrepreneurial spirit” in the workforce of SMEs
• It helps securing external funding by signalling high-growth potential
• It enables firms to attract and retain key personnel
• It creates a viable option for solving succession problems.

The main conclusion is that EFP provides important benefits to businesses through inducing employees to work harder, to have greater commitment to and identification with the firm, thus leading to higher productivity and, therefore, competitiveness.

Furthermore, financial participation can help to recruit employees with high qualifications and skills and retain them by providing benefits for employees in addition to wages. It offers highly skilled employees an attractive place to work. Capital participation of employees as shareholders ensures that the long-term interests of the company would tend to dominate and excessive risk-taking by managers is largely constrained. In addition, employee ownership offers the opportunity to involve employees and solicit their suggestions concerning enterprise strategy, thus enriching the company’s decision-making process.

EFP offers a solution to the succession problem, the transitions in ownership and management, of family enterprises and SMEs securing their continuity and the stability of jobs and production. The schemes are often seen as a solution to some of the problems of industrial societies, dissatisfaction of employees, poor quality of working life and declining productivity. It is argued that EFP schemes are likely to lead to greater employee commitment, lower absenteeism and labour turnover, greater investments in company-specific human capital and reduced conflicts within the company. The final result of these features will be an increase in productivity which has been recognised as the fundamental pre-requisite for economic growth and employment growth.

Finally EFP can provide employees with benefits which are supplementary to their wage income agreed through the collective bargaining process. Therefore the concept should be of major interest to employees and trade unions in the future.

See also the Zeit-article on Employee Financial Participation: http://www.zeit.de/2011/09/GS-Mitarbeiterbeteiligungen

But let´s be frank: Wouldn‘t you go out on the streets too, if your healthcare-system, your children´s education system, the pension system, wages and other elementary pillars of a social-welfare state are affected? The measures include new taxes, cuts of public expenses and the privatisation of state-owned major companies during the next five years. All these will have a considerable impact on the economic and social development of the country. The Minister of Finance Evangelos Venizelos himself remarks, that the measures are harsh and even unfair. Unfair especially because the greek average citizen did not cause the actual crises. But they will have to pay for it.

Why should the average Greek citizen accept only the negative consequences?

Let’s assume, that this rescue programme with all it’s presuppositions was absolutely inevitable for Europe and for Greece – upon which we may agree or disagree. Let us accept this for now and focus on the next steps, on the chance which the actual critical situation is giving and elaborate a social plan, let’s design a more just social society and wealth distribution, from which a relevant part of the Greek people can profit! One option is the participation of employees and citizens in the privatisation process by implementing employee stock ownership plans (ESOPs)  and general stock ownership plans (GSOPs).

The privatisation plan is not elaborated yet in its details, the process is not clear at the moment. But it will include among others the selling of the greek telecom OTE, shares of the major airports, 2 ports (Athens and Thessaloniki), gas companies, the public water company in Thessaloniki (supplying a basic commodity), the state lottery OPAP and others. Privatisation is expected to generate revenues of 50 Billion Euros to the treasury, which are earmarked for repaying the loans and for social expenditures.

So why not giving employees access to productive capital and put them in the position of being more independent by letting have shares in productive capital. This would make them less dependent from the grants or „generosity“ of the state. Rather than to sell 100% of the concerned enterprises to private (foreign) investors, let citizens and employees take a share of at least 10-20%. Since the privatisation process is not totally elaborated at the moment, this is the chance for the people on the streets to make their voice and their demands to be heard.

Greeks, do not let them to make you participate only in sharing the losses, risks and the public cuts! Claim your fair share in the action!