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*** THE 2 PER CENT SOLUTION: ***

*** A Practical Path to Employee Ownership and Autonomy ***

by Jonathan Marin



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Introduction.

This article presents a gradualist approach toward majority ownership, by
employees, of the stock of the companies they work for. The idea has merit in
its own right, and could be strategically important to broader campaigns for the
rechartering and redefining of corporations.

Corporations' power over governmental institutions and the marketplace is
diffuse and largely unaccountable. Corporate management operates companies for
the benefit of shareholders, subject only to specific, limited, legal
requirements. It is their duty to do so. Unions only  represent a small fraction
of the work force in the United States. Most employees have little voice in
decisions that affect their vital interests.When corporate decisions impact the
lives of their employees, the cause-and-effect relationship is unmistakable.
Campaigning for these ideas will raise employees' awareness of how corporations
restrict their choices as consumers and as citizens. Achieving it will give them
a voice in decisions that directly affect their lives.

Mergers, downsizing, and restructuring eliminate jobs. When companies close
facilities and move operations to lower cost locations abroad, many permanent
positions are phased out, or replaced with "temporary" positions that provide no
sick leave, paid vacation or other traditional benefits.

New technologies reduce market share and squeeze margins. Unless plants keep
pace with technology, their plant and equipment becomes increasingly obsolete.
Eventually, when they can no longer match costs with competition,  the most
cost-effective option available to management is to close the plant and relocate
its operations elsewhere. But whether the decision to close the plant is made by
incumbent management, or follows on a merger or corporate takeover, the apparent
cost-effectiveness of  relocation usually reflects decisions taken years
earlier.

The economy as a whole often realizes little or no net gain from such closings.
The savings that the companies achieve are partly or wholly offset by costs
borne by others - what economists term an externality. "Downsized" employees
bear the costs of their forced relocation. Compelled to sell their homes into a
suddenly glutted real estate market, many lose most or all of their home equity.
Communities with a reduced and financially stressed tax base are left to pay off
the bonds which paid for now-excess infrastructure: schools, parks, water
supply, sewers, etc., and must bear increased expenditures for additional social
services. In addition to the quantifiable costs, there are always intangible
costs that include demoralization, family disintegration, increased drug use and
alcoholism, and suicide.

Externalities grate on our sense of right and wrong. The greater part of our
civil law is based on the notion that it is wrong to intentionally act in a way
that imposes loss on others, and that anyone who does it must compensate for the
loss.

Even when there is a net benefit from incremental efficiencies and a more
smoothly running economy, the benefits are diffuse, while the costs are
concentrated. However much they may be offset by gains elsewhere, the
externalities remain. This article presents an approach that will reduce the
externalities, and spread the costs. It will make for a healthier economy, and a
healthier and more just society.




I. MIGRATION TO WORKER CONTROL AND OWNERSHIP - "THE 2% SOLUTION"

"The 2% Solution" is a way to give corporate employees a voice in, and
ultimately control of, the companies they work for. Companies would continue to
be managed for profitability, go public, split their  stock, and do all of the
things corporations do. The dilution of the interests of outside shareholders
will be so slow as to be imperceptible, and will be offset by benefits to
corporations that will reflect in their earnings and share prices. Every
existing corporation, and every new corporation when formed, would have a ten
year grace period during which to become fully established.

At the end of the tenth year, and of every year thereafter,  corporations' would
automatically increase the number of outstanding shares by 2%, compounded. The
issued shares would go to an Association owned and controlled by the employees,
vested former employees, and retirees. Employees would not own these shares as
individuals.

If at the end of year ten a company had, say, 10 million shares outstanding,
200,000 shares would automatically issue. After year eleven, a new 2% of the
then outstanding shares would be issued to the employees, and so on. By year
forty-six, the employee pool would contain ten million shares - half of the
capital stock of the company. Long before that, the employee pool will have
become a force to be reckoned with; many large corporations have no single
shareholder who owns as much as 10% of the outstanding shares.

Employee stock ownership plans, profit sharing paid in company stock, and stock
option plans would accelerate the process, as would employees'  private purchase
of company shares. Any new stock offerings period would include the adjustments
necessary to prevent dilution of the employee ownership. The employees of each
company would set the rules regarding vesting of rights in the pool, retiree
rights, the distribution of dividends, and indeed, all decisions affecting their
ownership interest.

Employees of aging corporations will participate in the choice whether to
maintain their income by keeping an aging plant open and running at low
profitability, or invest in technology and equipment. Where a plant has become
unprofitable, they would have the option to absorb a reduction in their pay to
make up the shortfall, rather than give up their paycheck altogether. By acting
to continue operations, the employees would not only benefit themselves, but
avoid burdening their community with externalities, and avoid burdening the
economy with insuffiencies in aggregate demand, downward wage pressures in the
labor market, and balance of payments problems.

Investors in the primary markets - the entrepreneurs who form companies,  the
venture capitalists who finance them, and the purchasers of shares at initial
public offering - measure their time horizon in years, not decades. They do not
invest unless they expect to achieve their investment objectives in less,
usually much less, than ten years. The ten-year grace period, therefore, will
prevent any noticeable decrease in the capital available to start-ups.

The glacial, nearly imperceptible dilution of equity will have little if any
appreciable affect on shareholders of existing companies, the secondary market.
The dilution is small in comparison with investor targets. It  falls within the
"noise" of short-term market fluctuations. In any given year a potential
purchaser of the stock is looking at a 2% dilution, a level which is small in
comparison with his investment objectives, and less than the commissions
 formerly paid to brokers as a percentage of portfolio on an annual basis. To
the extent that there would be any effect at all, it would be the socially
beneficial effect of diverting funds away from the secondary market toward the
primary market with its dilution-free grace period.

If the employees were the only beneficiaries of the plan, its effect would be
equivilant to a 2% tax on a round-trip stock transaction. In fact, dilution will
be largely or fully offset by benefits to companies. Even in companies which
already have stock option or profit sharing plans, employee morale and
productivity will be enhanced by employees' financial interest in the company's
long-term success. The plan will soften the adversarial relationship between
 employees and management, reducing wasteful  friction. In time, the existence
of an important shareholder constituency with a long time horizon will serve to
counter-balance forces that pressure management to plan and act for an unduly
short time horizon. These effects will reflect in earnings, and stock prices. 

Corporations are a creation of the state. A large body of law defines the duties
of  management and the rights of  employees and shareholders, and the public. It
is a dynamic area of the law, constantly adapting to changing circumstances,
re-balancing those rights and duties in the interest of fairness and efficiency.
The 2% program entails a modest realignment of those interests, no greater than
those passed from time to time, and certainly less than, say, the creation of
the SEC or the NLRB.

Though opponents may claim that the program constitutes a taking without due
process, in violation of shareholders' Fifth Amendment rights, a large body of
constitutional law stands against them. Corporations exist because their
existence is in the public interest. The precedence of compelling public
interest over the property rights of shareholders has been upheld in matters
that far more directly affect share values - price controls, export
restrictions, environmental laws, and so on. On a practical level, it is hard to
see how anyone could establish, much less quantify, a claim involving the market
value of securities that change hands frequently and whose market value
fluctuates hourly, against a program that would not take effect for ten years.

The 2% dilution approach recognizes the societal interest in attracting
entrepreneurial and venture capital, and accommodates it. It also acknowledges
the importance of secondary markets in establishing correct share valuation as a
basis for subsequent primary offerings. While retaining the opportunity benefits
of free capital markets, it accommodates the reality that employees are
committed to a company on a much longer time scale than the shareholders of any
given moment. The dilution is of little consequence to investors' decison buy
the stock, or to sell it. It is critical to the interests of the people who will
spend years or their whole careers at a company.

Long before employees actually own a majority interest, they will become an
important part of the decision processes that affect their lives. They will
positioned to prevent the physical deterioration that ultimately makes
relocation attractive. Unlike outside investors, for whom selling shares is as
easy as a point-and-click, they will be a vigilant guard against any tendency of
incumbent management toward complacency, bloat, and inertia.

I take it as axiomatic that no policy that tends to enrich the rich at the
expense of the poor can be justified, unless it expands the economy as a whole,
or furthers some other compelling public interest.  Granting the management of
young companies wide latitude to act in the best interests of their shareholders
meets this standard, because of the benefits new companies confer. The investors
who capitalize new companies expect to be rewarded for their risk, and for their
central role in bringing the company into being. Their reward depends on the
essential mechanism of the secondary equities markets.  Anything that interferes
with the ability of that market to attract early investors, will adversely
affect the flow in capital into new ventures. As companies age,  however, that
justification diminishes. After years of turnover the shareholder rolls are many
times removed from the original and early investors. Policies that promote the
interests of investors and management, vis a vis those of employees, become
difficult to defend.

However long shareholders have owned their shares, their connection to the
fortunes a company becomes increasingly remote through time. Whatever their
contribution to the present share price of a company, the share price ten years
from now will mostly reflect the energy, effort and ingenuity of the employees.
 In a perfect world, the interests of employees and communities would be a major
factor in corporate decisions. A constituency with an interest in the long term
health of the company would offset pressures on management to focus on the
short-term bottom line. The share of profits taken by the successors to an
ancient investment would diminish as the significance of that investment receded
into history, while an increasing share would go to the people who produced
them. The 2% Solution is a step toward that perfect world.







COMING SOON:


PART II. CAPTIVE SUPPLIERS. DEDICATED SERVICES. THE RIGHTS OF TEMPS, VESTED
FORMER EMPLOYEES, AND RETIREES.

PART III. SECONDARY OFFERINGS. FOREIGN -OWNED COMPANIES, LLPS, LLCS, JOINT
VENTURES, AND OTHER FORMS OF ORGANIZATION

Part IV. A force toward good corporate citizenship. A counter to unaccountable
power.

Copyright(C) 1998, 2001 by  Jonathan Marin

RETURN TO ANALYSIS AND INSIGHT INDEX



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This page is maintained by Jonathan Marin
e-mail: j.marin.1@alumni.nyu.edu

The author holds a Bachelor of Science degree in Eonomics from New York
University.
Last modified on  August 14, 2001



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