Employee Democracy

Employee democracy is a term initiated by Dean Adams Curtis to combine the concept of the employee-owned corporation with the ideas underpinning workplace democracy, industrial democracy, as well as worker self-management and the co-determination laws of countries like Germany.

When a bipartisan consensus in Congress and the White House initially created employee stock ownership plans (ESOPs) they decided not to include an employee right to vote the stock they would own in the plans. At the time of the ESOP law and ever since, advocates have pointed out that by not "passing through" stock voting rights to employees who are in ESOP plans they are denying employee owners the right traditional stock owners are entitled to.

There have been attempts by Congress to correct the omission of voting rights from the original law, for example the The Employee Ownership Act of 1999 (H.R. 1462) that would have allowed employees to own at least 50% of all voting stock in an Employee Owned and Controlled Corporation (EOCC). Also, employees in EOCCs would have been allowed to vote on all corporate issues, including board elections, while keeping all the benefits of ESOP plans.

The 36 co-sponsors of this bill in the House proves once again that "employee democracy" has broad support from people from all points on the political spectrum. Included as co-sponsors were Dennis Kucinich (D-OH), Harold Ford, Jr. (D-TN), Collin Clark Peterson (D-MN), Mary Bono (R-CA), Gary Miller (R-CA), Lindsey Graham (R-SC) and current Republican presidential candidates Ron Paul of Texas and Tom Tancredo of Colorado.

During work on his masters in business administration, Dean Adams Curtis surveyed all the available worldwide literature on employee ownership and employee participation in self-management, focusing on the impact these ownership and management structures had on employee productivity. He discovered that neither model, i.e. ownership only, or participation only, consistently delivered dramatic productivity increases.

However, Curtis found that in organizations which combined both the ownership and self-management models, companies he labeled "employee democracies," impressive productivity increases were the norm.

During his studies, Curtis maintained active communication and correspondence with Corey Rosen, who headed the National Center for Employee Ownership, and also with the leadership of The Workplace Democracy Institute. These two organizations often held joint conferences. At one such conference, Curtis proposed that the two organizations be merged to advocate for the employee democracy.

Subsequently, Dean Adams Curtis led a movement for employee democracy at the Hughes Aircraft Company, which was then the crown jewel of the United States military-industrial-complex. Hughes Aircraft was owned by the Howard Hughes Medical Institute (HHMI) after being donated to the institute by Howard Hughes, who by the time of the employee democracy movement had been deceased for several years. The Hughes Employee Democracy Association that Curtis founded was joined by hundreds of Hughes Aircraft employees and was supported by a legal team including former Hughes corporate attorneys and Alan Morrison, a law professor at Harvard and head of the Public Citizen Litigation Group.

Curtis' concept was to utilize employee democracy make one of the most prolific and successful high technology corporations in the United States even more productive, and thus more profitable, for the Howard Hughes Medical Institute and its employee owners. Instead, General Motors purchased the company from HHMI in exchange for GM stock. Over the years since, GM has sold the various pieces of Hughes Aircraft (satellite manufacturing, electro-optics, radar systems, ground systems, and missile systems) to companies such as Boeing, which merging the Hughes Aircraft research laboratories into GM Delco Electronics.

In 1991, Curtis ran for the Democratic Party's nomination for President of the United States. He called for every public traded company in the United States to be evolved into employee democracies. "The reason I believe this is justifiable," Curtis explained in one nationally televised speech, "Is because we (employees) already own a third of the stock, soon to be half the stock, in this country through employee retirement plans."

Curtis noted to journalists and voters that instead of bank trust departments who manage retirement plans having the right to vote all the stock of all the companies they own for the retirement of America's employees, that the employees of each public traded company should be allowed "to have democratic elections every year for a third of the board of directors seats." Curtis won a handful of local Democratic Party delegates at various caucuses in Iowa in early 1992, then won more votes than half the roster of Democrats in New Hampshire that same year. Having not developed enough momentum to continue his employee democracy campaign, he withdrew from the race and threw his support behind Bill Clinton.

Curtis continues to call attention to the fact that the large majority of employee ownership companies do not provide for employee elections of the board. In those that do, the research shows, with few exceptions, that employees do not use that influence to make significant changes in corporate policy. It is much more common for employee ownership companies to provide for substantial employee involvement in work-level decisions, often through various kinds of teams.

There is no data to show whether decision-making in these companies is slower or faster (and many more decisions are now localized to employee teams). But the data does show that companies that combine employee ownership with a high degree of employee involvement at the job level actually grow 6% to 11% faster per year than would have otherwise been expected (see Equity: Why Employee Ownership is Good for Business, Harvard Business School Press, 2005, for a summary, or go to www.nceo.org to look at summaries of all the studies on employee ownership and corporate performance).

There are several rationales for employee-owned corporations in the U.S. First, there are substantial tax benefits for employee ownership companies. Employee stock ownership plans (ESOPs) are set up by companies as a kind of employee benefit trust. An ESOP is a type of employee benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. All full-time employees with a year or more of service are normally included. The ESOP can be funded through tax-deductible corporate contributions to the ESOP. Discretionary annual cash contributions are deductible for up to 25% of the pay of plan participants and are used to buy shares from selling owners. Alternatively, the ESOP can borrow money to buy shares, with the company making tax-deductible contributions to the plan to enable it to repay the loan. Contributions to repay principal are deductible for up to 25% of the payroll of plan participants; interest is always deductible. Dividends can be paid to the ESOP to increase this amount over 25%. Sellers to an ESOP in a closely held company can defer taxation on the proceeds by reinvesting in other securities. In S corporations, to the extent the ESOP owns shares, that percentage of the company's profits are not taxed: 100% ESOPs pay no federal income tax. Employees do not pay taxes on the contributions until they receive a distribution from the plan when they leave the company; even then they can roll the amount over into an IRA.

Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or some more equal formula. Accounts vest over time, usually following one of two formulas: in the first, vesting starts at two years and completes at six; in the second, participants become 100% vested after four years. When employees leave the company, they receive their vested ESOP shares, which the company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but are not required to be able to vote on other issues, such as choosing the board.

Employees also can acquire stock through grants of stock options, the right to buy shares at a price set today for a defined number of years into the future. There are no special tax benefit associated with most forms of stock options, however. Employees can also become owners by purchasing shares in a stock purchase program, usually at a discount, by buying stock in their 401(k) savings plans, or by companies making matches of company stock to employee deferrals into these plans. Stock in 401(k) plans can be bought with pretax income, while company contributions are tax-deductible.

Altogether, there are about 11,500 ESOPs covering 11 million employees, almost all in closely held companies. The other forms of ownership generally occur in public companies, and another estimated 15 million employees participate in one or more of these plans (see data from the National Center for Employee Ownership).

Studies in Massachusetts, Ohio, and Washington state show that, on average, employees participating in the main form of employee ownership, employee stock ownership plans (ESOPs), have considerably more in retirement assets than comparable employees in non-ESOP firms. The most comprehensive of the studies, a report on all ESOP firms in Washington state, found that the retirement assets were about three times as great, and the diversified portion of employee retirement plans was about the same as the total retirement assets of comparable employees in equivalent non-ESOP firms.

Wages in ESOP firms were also 5% to 12% higher. National data from Joseph Blasi and Douglas Kruse at Rutgers shows that ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely to offer additional diversified retirement plans alongside their ESOPs. The data is also available at www.nceo.org.

Employee ownership in 401(k) plans, however, is more problematic. About 17% of total 401(k) assets are invested in company stock—more in those companies that offer it as an option (although many do not). This may be an excessive concentration in a plan specifically meant to be for retirement security.

In contrast, it may not be a serious problem for an ESOP or other options, which are meant as wealth building tools, preferably to exist alongside other plans. Detailed data on 401(k) plan investments are available at www.ebri.org, the home page of the Employee Benefit Research Institute.