The report was presented in the plenary yesterday. At that occasion, rapporteur Phil Bennion (ALDE) explained the benefits of EFP for companies and especially SMEs as “a concrete way for companies to share success”. In the Strasbourg hemicycle, Bennion called for the EU to act, pointing out the lack of information within the EU, the lack of legislative incentives in some Member States, the different national taxation as well as the multitude of existing ESO models hampering companies that operate cross-border. To overcome these problems, Bennion proposes to share best practice examples between the Member countries, possibly leading to mutual recognition of these schemes. At this regard, Bennion refers to the current EU pilot project and the benefits that a Virtual Centre for EFP as well as an effective tax rate calculator could bring in order to augment the available information. Finally, he invited the Commission to conduct an impact assessment for a 29th regime for EFP.

– These topics will be part of our Brussels conference “Taking Action: Promotion of Employee Share Ownership” that will take place on the 30th of January 2014. –

In the following contributions, MEP Sari Essayah (EPP) pointed out the importance of the exchange of information between Member States. Shadow rapporteur Evelyn Regner (S&D) mentioned the Spanish Sociedades Laborales (click here to read more about this topic) as a well-working example for alternative EFP models. She also highlighted the voluntary character of EFP schemes which should always come on top of basis pay.

In his speech Commissioner Janez Potočnik emphasised the role of EFP as a source for long-term investment and he underlined Barnier’s support for the idea of a 29th regime. He further referred to the conference on ESO on 30 January, presenting an opportunity to get the feedback from the various stakeholders.

On 21 October 2010, the European Economic and Social Committee adopted an own-initiative opinion on EFP in Europe referring to the 1992 Council Recommendation and the 2002 European Commission Communication on the issue. Following the release of the 2012 EP Study on EFP, the European Parliament is currently working on an own-initiative report to be voted in the beginning of 2014.

With the inclusion of ESO in the 2012 Action Plan on Corporate Governance, the European Commission underlines its economical relevance, especially with regard to ESO’s capacity for enhancing transparency, responsibility and competitiveness and for its positive impact on corporate governance. In the Action Plan the Commission commits itself therefore to “identify and investigate potential obstacles to trans-national employee share ownership schemes” and to “take appropriate action to encourage employee share ownership throughout Europe.”

Against this background, the EU pilot project on Promotion of Employee Ownership and Participation funded by DG MARKT aims to

(1)    assess EFP across the EU-28 including reasons for wide divergences in approaches between Member States and problems with cross-border implementation of EFP schemes, and

(2)    formulate possible regulatory and non-regulatory actions that might be proposed or undertaken by the Commission to promote EFP and in particular ESO.

The conference “Taking Action: Promotion of Employee Share Ownership – Debating concrete policy options in the context of the EC Action Plan on Corporate Governance” will present the interim results of the pilot project aiming for feedback from experts and practitioners as well as policy makers.

Born in a suburb of Denver in 1913, Kelso’s childhood was characterized by the rural lifestyle, receiving his education from the catholic fraternity “Christian Brothers”. Having spent his teenage years during the Great Depression, the experience of the collapse and the search for its causes accompanied him through his entire life.

But before that, there was Pearl Harbor. Kelso was commissioned in the U.S. Naval Service and assigned to intelligence duty in the Canal Zone. Working tropical hours, Kelso used his free afternoons to work on his seminal manuscript “The Fallacy of Full Employment”.  In 1946, the completed manuscript in his footlocker, the Navy sent him back to civilian life. But 1946 was also the year Congress passed the Full Employment Act which defined economic policy in the United States 170 years after the birth of the Industrial Revolution as the right to a job. Kelso concluded that the time for his ideas had not yet come.

Only in the mid 1950s when he met the philosopher Mortimer J. Adler, he took a new step to publish his ideas. Together they wrote “The Capitalist Manifesto”, published in 1958 by Random House.

Two years before, Kelso had already done a first concrete step in practice. In 1956 he enabled the employees of the closely-held newspaper chain Peninsula Newspapers Inc. of Palo Alto, California, to buy out its retiring owners through a new financing concept: Kelso created the “Employee Stock Ownership Plan” (ESOP). Thanks to this financing technique working people without or with only little savings are enabled to buy stock in their employer company and pay for it out of its future dividend yield. ESOP was thus the prototype of the leveraged buy-out which was embraced enthusiastically by the later emerging private equity funds (KKR, Blackstone, etc. who Kelso knew all personally) – although aiming at different objectives.

Soon after, in 1958, Kelso innovated a related financing concept, the Consumer Stock Ownership Plan (CSOP), to enable 5.000 farmers in California’s central valley to become successful owners of Valley Nitrogen Producers, the fertilizer processing plant of which they were the principal customers. With the CSOP he created a low-threshold participation concept for citizens and consumers which today could change i.e. the market for renewable energies fundamentally.

What Kelso was aiming for, was to democratise access to capital credit, as Patricia Hetter Kelso summarised the idea behind the ESOPs in 1989 in The New York Times. She had met Kelso in 1963 and later became his joint publisher and second wife (1968: “How to Turn 80 Million Workers Into Capitalists on Borrowed Money”, Random House).

Kelso considered the ESOP and CSOP as pragmatic proof that his revolutionary revision of classical economic theory, and the financial techniques he derived from this new perspective, were sound and workable in the economic and business world. As a corporate and financial lawyer, and later as senior partner in the law firm Kelso&Company which he founded in 1971, Kelso well understood this world.

He was motivated by his conviction that lawyers had a special responsibility to maintain and improve society’s institutions in the light of its democratic values. He further believed that the business corporation was society’s greatest social invention and that its executives had a fiduciary responsibility to exercise its vast power.

Louis O. Kelso died in 1991 with 77 years of heart ailment in San Francisco.

Click here to see pictures of the celebration of Louis O. Kelso’s  100th Anniversary at the Europa-Universität Viadrina (Frankfurt/Oder).

Michel Barnier, EU Commissioner for Internal Market and Services, opens the conference which is jointly organised by DG Internal Market and Services, Europa-Universität Viadrina and Freie Universität Berlin (Inter-University Centre).

Conference

Taking Action: Promotion of Employee Share Ownership – Debating concrete policy options in the context of the EC Action Plan on Corporate Governance

When?

30.01.2014 from 8:30 to 16:30.

Where?

Albert Borschette Congress Centre, Rue Froissart 36, Brussels, Belgium

The best way to make this capital ownership available to all employees is by means of a leveraged ESOP model. The leveraged ESOP model allows the company to take on a bank loan in order to provide employees with shares of the company, by using the trust as the vehicle of holding shares. The leveraged effect originates from the loan repayment by future earnings.

[youtube=http://www.youtube.com/watch?v=BLqN8mj17hU&w=560&h=315]

Also see our previous blog posts:

The Economist: A shirnking slice – Labours’ share of national income has fallen

197 Words intro on leveraged ESOPs

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So what can be done? The Economist states that the goal should be to strengthen workers without hamstringing firms. In fact, “a good antidote to labour’s falling share of national income would be to boost ordinary workers’ share of capital.”

The Economist is right when underlining “ugly consequences” of this development. Since the rich own most of the capital – i.e. in 2008 the richest 20% of the population in Germany owned 80% of all capital assets – the increase of the share going to capital worsens inequality even more.

This effect is reinforced by the technological progress due to which the labour input in production decreases in comparison to the capital input and, as a result, the owners of productive assets receive a growing share of the income whereas the owners of human labour receive a proportionally ever-smaller share.

So the question is how productive property can be financed for the many. This is what the Employee Stock Ownership Plan, the ESOP, invented more than 50 years ago by American lawyer and investment banker Louis O. Kelso does. It uses the borrowing power of a company to acquire shares of that very company for its employees.

Click here to read more about leveraged ESOPs.

Read the full article from The Economist (Nov 2nd 2013) here:

A shrinking slice – Labour’s share of national income has fallen

Find a second article on the topic (from the same edition) here:

Labour pains – All around the world, labour is losing out to capital

At the time we assumed that all disqualifications of SLs (disappearance from the registry of SL) were due to liquidation or bankruptcy and calculated the survival rate accordingly. However, it turned out that an additional reason for their disappearance was that some SLs convert into conventional companies. They continue to exist with substantial employee ownership but do no longer qualify as SL, for example, because the employee ownership rate drops below 50%.

In fact, the reason that they disqualify is often that they become “victims of their success” (as opposed to going bankrupt). From what we know now, between 1 January 2010 and 31 December 2012 in the Basque Registrar of “Sociedades Laborales” of 110 disqualifications 51 became conventional companies, i.e., 46.36% of which only 8 have closed down.

This means that the survival rate we previously calculated for SLs in Basque Country is in fact much higher. Of the 110 former “Sociedades Laborales” which were previously reported bankrupt or liquidated 39% still exist nowadays but are conventional companies still with substantial employee ownership (but less than 50%).

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Employee financial particiaption (EFP) in Spain largely takes the form of Sociedades Laborales (Worker-Owned Companies). This concept is probably the only EFP scheme existing across the EU that is solely applying to small and smallest companies.

The best practice character and details of this concept are widely discussed among Spanish, Polish and German institutions within the Project Employee Financial Participation in Small and Medium Enterprises – A Strategy for Labour Market Policy and Regional Business Development.

This project of the Kelso-Professorship at Europa-Universität Viadrina Frankfurt (Oder) is supported by the Ministry of Labour, Social Affairs, Women and Family Affairs of the Land of Brandenburg with funds from the European Social Fund and the Land of Brandenburg. You are invited to join the final conference on the 4th of December, during which the project partners will present the results of their experience exchange.

Find more information on Sociedades Laborales in our blog post.

The best practice character and details of this concept are widely discussed among Spanish, Polish and German institutions within the Project Employee Financial Participation in Small and Medium Enterprises – A Strategy for Labour Market Policy and Regional Business Development.

This project of the Kelso-Professorship at Europa-Universität Viadrina Frankfurt (Oder) is supported by the Ministry of Labour, Social Affairs, Women and Family Affairs of the Land of Brandenburg with funds from the European Social Fund and the Land of Brandenburg. You are invited to join the final conference on the 4th of December, during which the project partners will present the results of their experience exchange.

Legal form – Prerequisites to qualify as a SL

A Sociedad Laboral (SL) is a specific form of corporation in Spain, with no exact parallel in other developed countries. It is an inexpensive form of incorporation, majority-owned by its permanent employees:

• An SL may take the form of Sociedades Anónimas Laborales or SALs (Public SL) or Sociedad Limitada Laboral or SLL (Limited Liability SL);
• Permanent workers must own more than 50 per cent of company shares;
• The minimum number of working partners is two, but no partner may own more than 33 per cent of the company’s stock (public organisations may own up to 49 per cent);
• Unlike co-operatives, it is based on share ownership and is permitted to utilise non-employee capital;

Providing stable employment for their worker-owners, who control the company’s directive bodies, they may be founded as SLs, or conventional companies may convert to this form.

Incidence of Sociedades Laborales

By the beginning of 2012, there were a total of 13,465 worker-owned companies providing 74,438 jobs and representing 3.8 per cent of Spain’s private sector companies with more than two workers.

• Clearly, the preferred legal form is the SLL (Limited Liability SL), employing an average of 4.6 workers. During the past 12 years (1999-2011), the number of workers in SLLs increased by 161 per cent.
• The general trend followed by SLs mimics that of mercantile companies since they are basically economic equals. They face the same problems as other SMEs, mainly to become sufficiently competitive.

Economic Policy: Comparison with conventional firms

Despite the lack of sound fiscal incentives, SLs have flourished over the past 15 years.

• Compared to conventional firms, SLs have grown in greater numbers, yet the net increase is negative. However, in most cases, they have converted to conventional firms (either by choice or by disqualification) becoming „victims of their success“.
• SLs have demonstrated their ability to generate stable employment and endure over time. The survival rates are slightly higher than those of conventional companies: More than 50 per cent of SLs survive the first five years.
• SL must set up a Special Reserve Fund into which 10 per cent of their annual net profits are allocated. If tax benefits are being applied for, they must allocate 25 per cent of their annual net profits to this Fund.

Labour Market Policy: Reactivating the unemployed

The key reason for the success of SLL is that since 1985, unemployed persons can capitalise their unemployment benefits as a lump sum instead of monthly payments in order to start a new SL or to recapitalise an existing SL by joining.

• If one decides to create a new co-operative or worker-owned company by capitalising unemployment compensation, a viable business plan must be presented.
• The plan is then screened by a SL development program and scrutinised by the unemployment compensation system.
• The new business continues to be monitored for three years after its founding.

Organisations such as ASLE and CONFESAL have played a key role in the support and promotion of worker-owned companies in Spain.