The Paradox of a Distributist Economy and an Introduction to Employee Ownership

Updated: Jun 1, 2020

My last post was an attempt to explain in simple terms what “Distributism” is and why it represents an attractive alternative to Capitalism. You will find it here. In a nutshell, the core goals of distributism are philosophical in nature. To support the expression of individual creativity, passion and ambition by as many people as possible. To give people greater control and ownership over their productive lives, and on a more ethical note, to increase the distribution of wealth across society.

An economic system that merges the aims of capitalism and socialism

To understand the genius of distributism, one must embrace the idea of a paradox and recognize that paradox is possible and necessary, particularly in the case of political economy. The human tendency is usually to dichotomize an issue, and then bear to the left or the right of it, hence capitalism (which might also be termed individualism) and socialism. In simple terms, while a capitalist prioritizes self-interest and the agency of the individual, socialists beat their drum for the masses.

Distributism insists that these seemingly incompatible or opposing positions can be united, more than that it suggests that they must be. Distributists champion the individual by encouraging greater personal ownership in our societies, while simultaneously upholding the masses by ensuring that this ownership is widespread.

In a very real sense distributists are more individualistic than capitalists, who look on while an individual’s aspiration and well-being cedes position to corporate earnings. Paradoxically, distributists are also more socialist than socialists who in fighting for the rights of the many disenfranchised, wind up centralizing power in the government, who then play fast and loose with the rights they are supposed to protect.

Employee Ownership

So are distributive economies just a pipe dream? An interesting idea to get you through Monday morning? Demonstratively not. Let’s take the case of employee ownership. “Fifty by Fifty” is a research group that supports the growth of employee owned businesses in the United States. They estimate that there are already 7,000 U.S. companies in operation that are owned wholly or in part by their employees. These 7,000 companies employ 10 million employee owners. This is roughly six percent of the U.S. workforce. A modest percentage, but enough to offer statistically significant data about employee-owned firms. Their studies focus on the effects of employee ownership on employees, businesses and communities. Here are a few telling statistics from their research:

1. “Employee owners earn average wages 5 to 12 percent higher than employees in conventional firms.”

2. “The net worth of employee owners aged 28 to 34 is 92 percent higher than for non-employee owners.”

3. “The average retirement savings for an ESOP (Employee Stock Ownership Program) employee is $170,000, twice the national average.”

4. “Employee engagement is higher and turnover is lower at employee-owned companies.”

5. “Transitions to employee ownership increase productivity by more than 4 percent.”

6. “Employee owners are one-fourth as likely to be laid off and their companies go bankrupt less frequently

Photo by Ellicia on Unsplash

Why is employee-ownership not more widespread?

If employee-owned firms are so great why aren’t there more of them? The biggest reason is agency for employees. To illustrate, let’s say you own a tool and die company. You have owned it for 40 years, over which time it has been highly profitable and has competed well, even against the so called “big guys”. You are now 70 years old and are ready to retire. If you decide not to pass the company on to the kids or have no kids to pass it on to, you have to monetize the value of the company somehow, what investors call “exiting”. What are your options today?

For this type of company, probably just three. You can sell it to a private equity firm, you can sell it to a competitor, or you can liquidate its assets. Why not sell it to your employees? They simply do not have the capital. Actually, in general terms no one buys a firm with their own capital. Most private equity or merger activity is highly leveraged (uses money that is borrowed), the difference is that these organizations have access to leverage often to the tune of 80% of the value of the company, whereas your employees do not.

We all know how the story usually goes post-merger or buy-out...layoffs first, then reductions in wage increases, dilution of company values and mission, loss of culture, disinterested employees, poorer products, detached management, high turnover, on and on and on. The solution would be to provide employees with agency, the ability to enact a transaction of their own. This requires a financial product which currently is not in broad circulation. One that provides employees of a firm (perhaps as a group) with loans at interest rates and payment terms that are in line with employee earnings.

In the U.K. and some parts of the U.S. there are now tax incentives for the creation of ESOPs and similar vehicles for employment ownership, but the initial hurdle of finance still remains a challenge. There is some impact investing activity designed to fill this financial gap, but for employee ownership to truly take off, the pool of available finance at reasonable terms needs to get substantially larger. This will likely require creative interventions from local, state/provincial and federal governments in stimulating the creation of this new "class" of finance.

The other big reason for the sluggish growth of employee ownership is that most owners simply do not know of it as an option, and if they do, do not feel they understand it well enough to pursue it. There is a massive education gap which needs to be filled (for owners AND employees) alongside the financial gap.

There is a lot more to say about how we go about expanding ownership, the inherent challenges, and the numerous benefits. Future posts will address these questions. Till then, I highly recommend as a resource for beginning to understand employee ownership.

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