Worker-Owners and Unions

You have probably heard the story of the scorpion that convinces a frog to carry it across a river. Halfway across, the scorpion stings the frog, which means both will drown. The frog does not understand; the scorpion explains, "I couldn't help myself. It's my nature."

In the abstract, worker-owned enterprises and labor unions would appear to have much in common. Both share the goal of improving pay and working conditions. Both aim to give workers a say in the workplace. And both belong on any progressive's short list of strategies for building a more just economic system.

But when unions and worker-owned businesses actually interact, they sometimes act more like the fabled arachnid.

The Ohio Employee Ownership Center at Kent State, where I work, provides preliminary technical assistance on worker buyouts. I once met with a group of employees exploring a worker buyout of a failing paper mill in southwest Ohio. When I asked them why they thought they would do any better, they gave me an example. Pointing to a large machine, they explained that it broke down regularly, resulting in lost production. Any repairs they could make were only temporary, until permanent replacement parts could be installed. They went on to explain that the mill had been bought and sold three times over the past two years. Two owners ago the parts had been purchased, but they were still sitting in a storeroom. When these employees became the owners, they were going to install the parts.

But would the workers really cooperate with management as employee owners, and would management really cooperate with them and empower them to make decisions and act independently? Or, as with the scorpion, were the decades of confrontational labor-management relations so engrained in the nature of both groups that they would sink their own company? In that instance we'll never know, because the buyout effort did not go forward.

Worker-owned businesses can take a variety of forms, from full-fledged worker cooperatives to companies whose structure and management practices are indistinguishable from ordinary capitalist firms except for the fact that their employees own some or all of the company's shares (see "The Many Forms of Worker Ownership."). Because most of the manufacturing companies where worker buyouts have been used to avert plant closures were unionized, unions have had to grapple with reshaping their role in this new context.

The term "worker ownership" can describe a variety of business structures. At one end of the spectrum, the worker-owned cooperative model rejects the very notion that capital should control the business and enjoy an unlimited return. To the contrary, as political economist David Ellerman describes it, in the cooperative model labor hires capital, governance is based on membership in the firm, and the return to capital is limited. As a result, investors are not easily attracted. Workers themselves typically have little capital to invest. So co-ops are rarely found in capital-intensive industries; most of the 400 for-profit co-ops in the United States are in labor-intensive service industries, which do not require expensive tools.

Another model involves direct worker ownership of voting stock. Unlike the cooperative, this model accepts the capitalist system but rejects the capitalist. Here, the workers accept the assumption that control and profits should be allocated according to the number of shares one owns, but reject absentee ownership of shares by those who do not work at the firm. Only a handful of worker- owned companies are structured this way because workers typically lack capital to invest and are averse to risking the little they may have.

By far the most common structure of worker ownership is the Employee Stock Ownership Plan, or ESOP, which has been used in over 11,000 U.S. companies since first being written into legislation in 1974. About 9,225 ESOPs are active today, according to the National Center for Employee Ownership. ESOP participants often share ownership of the company with large investors. Moreover, in most companies with ESOPs the worker-owners not only accept that capital, not labor, has the right to govern the business, but also allow someone else to vote their shares of that capital.

The ESOP itself is a trust that receives tax-deductible retirement contributions from the company. Two characteristics set ESOPs apart from other retirement plans, such as 401(k)s. First, ESOPs are not only allowed, but required, to invest a majority of their assets in the employer company's own stock. Second, an ESOP can borrow money to acquire stock, releasing shares to individual participants as future contributions are made. While employees may not possess credit, cash, or collateral, the ESOP provides a vehicle for the sponsoring employer to fill this gap with the credit, cash, and collateral of the company itself. In other words, ESOPs provide workers with a tax-advantaged structure for financing the acquisition of their company.

The legal owner of the capital is the ESOP trust, overseen by a trustee appointed by the board of directors. In managing the ESOP's assets, under current law the trustee is allowed to consider only the workers' interest in increasing the value of their retirement holdings -- not their interests as employees with concerns such as job security.

While worker buyouts to avoid shutdowns account for only about 3% of all ESOPs, a majority of these are companies with union representation prior to the buyout. Without the leadership, structure, and protection afforded by a union, employees generally cannot build common cause quickly enough to present themselves as viable buyers, before machinery has been moved out and customers turned away.

While unions and worker-owners share many aims, there are also profound differences. True cooperatives address working conditions through direct democracy at the company level. Members have the right to participate in making decisions on matters such as compensation and business planning. Co-op members do not like being restricted in their decision-making by factors external to the cooperative -- even factors like industry-wide collective bargaining agreements. When co-ops interact with other co-ops, they typically form secondary cooperatives controlled by the member co-ops, which run them to serve their common needs. One might say that co-ops tend toward decentralization.