Inclusive Ownership Funds for the United States
May 15, 2019
By Lenore Palladino
Corporate “shareholder primacy” means that the vast majority of today’s record corporate profits are used to increase the wealth of shareholders, through dividends and stock buybacks. Meanwhile, real wages for non-executive workers have essentially remained stagnant for decades. Increasing worker bargaining power in the 21st century is necessary, and reforms to labor law that strengthen the ability of workers to form unions and collectively bargain is essential. Employees need and deserve stable jobs, dignity and respect at work, and higher income and benefits, and one additional way to achieve this is through employee ownership. What employee ownership does is formally recognize employees as stakeholders who are due a share of the dividends paid out when corporate profits rise. Additionally, the trusts are an important mechanism to ensure that employees have a clear role in corporate governance and to rebalance who has access to wealth across the economy. Finally, in an age of excessive short-termism and declining corporate investment, employee ownership provides a durable means for long-term prosperity.
The Labour Party in the UK has recently proposed a policy for the establishment of “inclusive ownership funds” (IOFs), which will require large corporations with over 250 employees to ensure that employees receive dividends along with external investors and management. Policymakers who are dedicated to rebalancing corporate power should introduce a similar proposal in the US. Granting employees an equity “stake and a say” in the companies that they work for means that when corporate executives decide on the level of dividends to be paid to shareholders, the workers who created the profits will not be left in the dust.
The Labour Party’s proposal for an IOF has reignited energy for why shared ownership of large corporations should be mandatory. The plan is detailed and ensures a gradual approach: There would be a transition process, so that employees would gain a 1 percent ownership stake every year, up to a cap of 10 percent. It’s crucial to note that once funds are in a trust, then the shares are not available to be resold. Under this proposal, the stakes are not a wealth asset that is freely transferable by the employee; the employee cannot purchase the stake, and so they cannot sell it when they leave employment. Rather, they are granted an ownership stake in the employee collective trust, and their stake remains in the trust when they move to a different job. What they have as a result of the ownership stake is the right to receive economic dividends—a share of profits—and the right to engage in the governance of the firm while they are employed by the firm.
For workers in the US to fairly benefit from the wealth that they help create, mandatory inclusive ownership funds should be established, which would hold shares in trust for employees. Employee ownership is more common in US business than many people realize, though its principally in the form of a retirement trust called an employee stock ownership plan (ESOP). Employee-owned businesses pay higher labor compensation and are more stable through the ups and downs of the business cycle. Some large corporations, notably in the tech sector, do provide equity to a broad base of employees. Of course, stock-based pay for corporate executives has been rising for decades and is a major driver of widening economic inequality. Sky-high executive pay has incentivized “downsizing and distributing” firm profits, rather than the creation of long-term value. The purpose of inclusive ownership funds for employees is to counteract the hijacking of corporate profits by a few at the top.
While some elements of a US plan should differ from the UK proposal, the core idea of recognizing workers as co-equal stakeholders to outside investors bears just as much promise here. We cannot solve economic inequality through wage increases; the gaps in wealth are too large. Along with other ways to build assets, a clear way to rebalance wealth in our economy is for employees to have a share of the wealth in the business where they work. The trust would serve as a way for employees to directly engage in business affairs of the corporation, participating in the big decisions that determine the company’s future—which is deeply tied to its employees’ futures.
Corporate boards are not going to benevolently share ownership with their employees, so structural changes to corporate governance must be driven by governmental policy. Under US law, negotiations between labor unions and corporate management cannot touch on business decisions; discussion is limited to the terms and conditions of employment. This has locked US workers out of collaborative participation in improving business productivity and practices. By engaging as owners of shares, employees will have the same rights to weigh in as investors do today—in mergers and acquisitions, liquidation, and electing the board of the directors, the individuals who make the other major decisions.
It is important to realize that not all shareholders hold the same power in corporate governance, and share ownership is not spread evenly across society. An inclusive ownership fund will start to rebalance share ownership. There is a wealthy elite who are share traders, actively buying and selling shares, while middle-class households hold small retirement or investment accounts. Nearly 50 percent of American households own some stock, though only 14 percent directly own stock. Forty-six percent of Americans own stock indirectly, though a pension account (46.6 percent), mutual fund (9.8 percent), or trust fund (3.9 percent). But only 37 percent of households have total stock holdings over $5,000, and only 25 percent have holdings worth over $25,000. Because non-wealthy shareholdings are intermediated by a mutual fund or another institution, household savers do not have any meaningful control rights vis-a-vis their investments, and their own funds can be used by companies in ways that directly oppose their own interests.
Employee IOFs are also an important tool to combat the racial wealth gap. The racial wealth gap is significant in holdings of direct and indirect stock and grows even starker when examining holdings over $10,000. Holdings have stayed nearly constant from 2001 to 2016: 57.5 percent of white households held stock in both 2001 and 2016, while the share of Black households holding stock fell four percentage points to 29.7 percent in 2016, and the share of Latinx households holding stock fell two percentage points to 26.3 percent. Perhaps more illuminating is the percentage of those holding stocks with a value of $10,000: In 2016, there was a gap of 28 percentage points between white and Black households (42.9 percent to 15.2 percent), and a gap of 30 percentage points between white and Latinx households (42.9 percent to 13.1 percent). Considering portfolios above $10,000, these are roughly the same gaps that existed in 2001 (the white-Black gap and the white-Latinx gap were 28 percent in 2001). (All data from found here). The concentration of larger shareholdings among a minority of wealthy and white households is important to address because it creates the potential for a divergence in interests between these shareholders and other corporate stakeholders—especially employees.
Analyzing Inclusive Ownership Funds for the US
What would American workers gain if inclusive ownership funds were established within large US corporations? I estimate that there are roughly 1,500 corporations with publicly traded shares that have annual revenues over $1 billion and over 1,000 employees.To be clear, the proposal would apply to privately held corporations as well to ensure that no incentive is created for companies to go private. My analysis here is focused on publicly traded corporations because they are required to disclose data on shareholder dividends in Securities and Exchange Commission (SEC) filings.
To understand the impacts on workers, I model what US employees participating in IOFs would have received from corporations in the 2018 fiscal year, if the funds had been fully established in that year, based on dividends paid out to shareholders. (I discuss the data limitations and exact methodology below.)
An important part of the policy proposal is that current investors are not greatly affected. As the funds would grow at 1 percent of outstanding shares per year, perhaps with a cap (or perhaps not in the US version), corporations can fund the trusts through the stock buyback programs that they already have underway, or through their ability to create new classes of stock at low levels without the approval of their shareholders (that can have specific income and control rights attached).
By the Numbers
For the 1,345 corporations that reported sufficient information, I find that granting 10 percent of dividends per employee would grant an average dividend payment per employee of $2,725 per year. Unsurprisingly, the corporations that would pay the highest employee dividends are financial corporations.
Dropping financial, real estate, and utilities (the “regulated” industries), I find that the average dividend per employee is $1,645. Again, dropping firms at both extremes, the average is $2,696 while the median is $740.
It is useful to look at what might be earned by low-wage employees at iconic companies if IOFs held 10 percent of corporate equity. An Apple employee could have taken home $10,405, while a Walmart employee would have taken home $400.
It is also useful to break down the average dividend payment by industrial sector. Again leaving out companies that pay either zero dividends or over $1 million per employee, I find that the transportation and warehousing sectors would pay $7,214 per employee. Additionally, I found that retail would pay an average of $836 per employee, while food service would pay $956. To ensure that IOFs would not further entrench existing inequities, this initial snapshot shows that policymakers would need to account for sharp sectoral differences in terms of employment and dividends.
Important caveats must be made given the data available. First, corporations report their total employees to the SEC; this includes both US and international employees. I have not attempted to correct for international employees here (except where available in the company-specific examples), given the wide range of domestic versus foreign employee ratios in different corporations. Second, 2018 was an abnormal year for corporate finances because of the passage of the Tax Cuts for Jobs Act (TCJA) in December 2017, which allowed for corporations to repatriate funds that had been held abroad at a lower tax rate. Thus, this should not be taken as a forward-looking estimate but rather as a snapshot of what workers could have received if the inclusive ownership funds had been in place in 2018. Employee dividends would likely be lower in most years, though of course as employee ownership trusts held more equity over time, dividends per employee would rise.
Two other important issues are accounting for the “fissured workplace” specifically and ensuring that the IOFs are not put in place and used to justify a commensurate decrease in labor compensation more generally. In any policy development based on employment, attention must be paid to ensure that the policy does not inadvertently encourage corporate management to outsource employees to independent contractor status or to subcontractors or franchisees. As the leading scholars of employee ownership have noted, one of the most important features of any employee ownership policymaking is to ensure that it does not become an excuse to lower labor compensation. A related point is that, because employees do not have to pay into the fund and the fund is structured as a trust, employees are protected from down-side risk of share prices falling.
Finally, would an employee ownership trust drive corporate executives to make further use of stock buybacks, in order to pay shareholders through buybacks rather than through dividends? This type of policy is only politically possible in a scenario in which banning stock buybacks is also politically plausible. In other words, if the rules regarding buybacks remained unchanged and IOFs were instituted, this would indeed be something to worry about. In a general sense, however, when there is the political willingness to rein in shareholder primacy, instituting IOFs and curbing or banning stock buybacks are two parts of any effective policy reform agenda.
Policymakers who aim to rebalance economic and political power and close the wealth gap should propose establishing inclusive ownership funds in the US. Though no single tool can establish an equitable and prosperous economy, rewriting the rules of who does well when corporate profits rise is a necessary step toward a more just, inclusive economy. Along with strengthening the ability to collectively bargain, rebalancing the tax code, and moving toward a stakeholder model of corporate governance, IOFs will move us away from extractive capitalism and begin to solve the multiple economic, climate, and social crises that we face today.