Ownership: Rosen & Case


Ownership: Reinventing companies, Capitalism, and Who Owns What by Corey Rosen and John Case should be read by every director on the board of public pension funds. I (James McRitchie) am planning to send a copy to all the board members of CalPERS once newly elected members take office next year. In celebration of Employee Ownership Month.

Ownership: Especially for Public and Impact Funds

Companies with employee ownership typically outperform, narrow the wealth gap, increase GDP, and can even help reduce political polarization. Public and impact funds that are interested in double or triple-bottom-line returns should favor investments in companies with substantial employee ownership and engagement. NCEO created the Employee Ownership Index in 2017. It was composed of companies that both had won major awards for high-engagement management styles and had some form of broad-based employee ownership. The Index has since outperformed the S&P 500 by about a 2-to-1 ratio.

Trickle Up

The International Monetary Fund finds GDP growth is 0.08% lower in the five years following a 1% increase in the concentration of wealth. In contrast, increasing the share of income to the bottom 20% by 1% is associated with a 0.38% rise in GDP.

Trickle-down was popularized by US economist Arthur Laffer. “Laffer was clear his theory worked best when personal tax rates were prohibitively high, by which he meant between 50% and 100%. At rates below 50%, Laffer found cutting taxes led to bigger rather than smaller budget deficits.” (Larry Elliot, 9/20/2020)

Trickle-up economics works. Raising the wealth and income of the masses stimulates local, state, national and international economies. Workers who are shareowners in their companies build wealth faster and are more involved in shaping better companies.

Most have heard of the Federal reserve study that found almost half of Americans cannot come up with $400 to pay an unexpected bill. Given that fact, it should not be surprising that 1/2 of all employees approaching retirement have no retirement plan assets.

Americans have plenty of investments. In fact, less than 60% of Americans’ overall income comes from working. (p. 2) The rest comes from owning capital.

Ownership: Not Equally Divided

Having that second source of income is critical to building wealth but ownership is not widely distributed. In 2021, the Federal Reserve reported that 89% of stocks are held by the richest 10%. Nearly half of American households own no stock at all. Estimates are that 35-40% of America’s privately held wealth is inherited.

One rich person steps into a room and the average wealth goes up by millions of dollars but no one in the room got richer. Few of us are really “average” in terms of wealth. Between 1979 and 2018 wages grew 0.27% per year; returns on stock grew 8% a year. (p. 3) We typically think Americans are rich. Take a look at this table on Wikipedia, List of countries by wealth per adult. Sort by mean (average) wealth and the American adults look wealthy. With almost $580,000 in assets, only those in Luxemburg and Switzerland are higher.

Now sort by median wealth. At $93,000, adults in 20 countries come out ahead of Americans. For example, the median adult wealth in Luxemburg is over $350,000. In Italy, it is $112,000, still considerably higher than in America. Another fact to consider, in the United States, “the typical White family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family.” 

Of course, this tremendous gap in wealth inequality leads to or is at least correlated with a large number of social and environmental problems. One of the developments I find most concerning is political polarization. (see Can American Capitalism Survive? p.161) Wealth inequality and Citizens United have led to regulatory capture and political stalemate.


Inequality - Polarization

Ownership, by Corey Rosen and John Case, provides ample evidence that more employee ownership can reinvent capitalism to work not just for the 1% but also for the 99%. I listened to Ownership on Audible, then bought the paperback.

Ownership: Limits of Conventional Reform

Those who manage investments for institutional shareholders are measured on and are therefore focused, on short-term returns.

(B)usinesses can be milked for cash, burdened with debt, merged or sold off as their owners’ short-term interests dictate. This is not a recipe for an effective economy, let alone for one that people feel is fair… We need a solution that goes to the root of the problem. We also need a solution that both sides of the political aisle can agree on so that change can actually happen. That’s what this book is about. (p. 4-5)

I spent much of my career working for the State of California on environmental protection but eventually decided companies were regulating the State as much as we were regulating them. Their lobbyists wrote most of the laws. On the surface, many appeared strict. However, if a company hired the attorneys who wrote the bills, they could make use of many hidden loopholes.

Laws and Regulations

Rosen and Case discuss labor laws, restrictions on behavior (such as polluting), tax and accounting rules, laws to strengthen labor unions, etc. They conclude that few new regulations or reforms have any real chance of passing because of a divided Congress.  A second obstacle is that government cannot afford to post an enforcement official at every job site

Investor Pressure

Next, the authors discuss how Pax World and other socially responsible investment (SRI) funds were developed to provide alternative investment vehicles, mostly by screening out objectionable companies. In response, companies developed corporate social responsibility (CSR) principles. I well remember British Petroleum’s “beyond petroleum” PR campaign. Next came the environmental, social, and corporate governance (ESG) movement. While some gains have been made without new government regulations, Rosen and Case identify four drawbacks:

  • Confusion. Signatories of the Business Roundtable’s Statement of Purpose have done no better than others in protecting labor rights, worker safety, gender equality, etc. The authors are dumbfounded that British American Tobacco (BAT), which makes products that kill millions of people every year, was named the 3rd highest ESG performer by A Better Tomorrow. Of course, that is because while a company may rate very low on one measure, such as making products that kill people, it can rate highly on other measures.  For example, BAT also won a score of ‘A’ from the Carbon Disclosure Project (CDP).
  • Weakness. Effectiveness depends on investor opinion (notoriously fickle) and corporate willingness to take ratings seriously.
  • Limited impact. ESG does not focus on wealth security, CEO pay, stock buybacks, and many other issues.
  • Restrictions. Depending on the political winds, pension funds and others may be limited to consideration of ‘pecuniary factors.’

I will note the SEC is attempting, through regulations to address several of these issues as are coalitions of investors and ESG professionals.

Ownership Opportunities

In most of the book, the authors lay out their arguments and evidence that employee ownership has many advantages over other reform strategies.

  • Employee ownership has bipartisan support.
  • Broad-based employee ownership is common among publicly traded companies.
  • Unlike European models of co-determination, which mandate board representation for employees, employees with stock have the same voting rights as other shareholders. If they coordinate their votes and work with like-minded shareholders, they could have substantial influence.
  • ESOPs offer a convenient vehicle for reshaping the ownership and power structure.
  • Some private equity investors, like KKR, are using shared ownership as a way of boosting productivity.
  • Impact investing has largely ignored employee ownership as a strategy.

Spreading Employee Ownership

The authors have several suggestions to help spread employee ownership, including:

  • Load and loan guarantees through Small Business Administration and other current and suggested government programs.
  • Tweaking the tax code to help seed and feed employee ownership.
  • Tax credits
  • Procurement opportunities
  • Creating outreach/educational programs. (I used to head a Cooperative Development Program for California.)
  • Prevent regulatory overreach. such as DOL rules that discouraged ESOPS.
  • Reinforce the S in ESG

That last one especially struck a chord with me. Shareholders and even exchanges and regulators have asked companies to report their progress towards meeting ESG goals. Pete Stavros of KKR told the authors that companies should report on how much equity a company shares with its employees below the named executive officers (NEOs), which they are required to report to the SEC. Of course, I agree and asked for such reports from Microsoft, Cisco Systems, Broadridge, Proctor & Gamble, and others. Each company sought “no action” relief from the SEC and was granted permission to exclude my proxy proposals on the subject. Rule 14a-8(i)(7) allows companies to exclude proposals that do not transcend “ordinary business matters.”

Stavros, and readers of this post, should join me in requesting the SEC require such disclosures through rulemaking. See my comments, seeking the expansion of a petition by the Working Group on Human Capital Accounting Disclosure, which includes two former SEC commissioners. How to submit comments.

Employee Owners Should Build Coalitions and Run Board Candidates

I don’t know how many employees at Starbucks own Bean Stock or how much they own. However, those shares give employees a potential voice in how Starbucks is run, including oversight of management, the CEO, and how it responds to efforts to unionize. The new Universal Proxy rules make it much easier to run board candidates. Starbucks employees could be forming a coalition with sympathetic members of ICCR, CII, and others to advance candidates that will promote worker ownership, voice, and empowerment. As Michael R. Levin notes, “Imagine an activist seeing how a shareholder voted, seeing the incumbents it supported, and contacting them to vote for activist nominees…”

Take a look at the section in the last Starbucks proxy that discusses board candidates. It is all well and good to include a matrix describing Experience/Qualifications/Skills/Attributes. I also like that each nominated director discusses the work and other relevant experiences. However, they don’t tell us anything about what they stand for. What do they hope to accomplish? Imagine if political candidates ran without a platform.

My own pension fund, CalPERS, attempted to muzzle candidates from discussing the issues after I accused board members of accepting gifts and of other forms of corruption. Fortunately, I was able to use public pressure to reverse those regulations and indictments followed years later. Unfortunately, like many elections, money from independent expenditure committees often decides elections.

Challenging corporate directors will also be expensive, and corporations can spend freely to elect board-nominated directors. The company treasury is like an independent expenditure committee, without legal spending limitations. However, Universal Proxy rules now make it feasible to run independent candidates. It won’t be easy to win one or two seats, but it is now within the realm of possibility. I would be happy to help assist employees at Starbucks, or any other public company where I own stock, with efforts to run board candidates.


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Employee Ownership 2022 Proposals

Meta Platforms: Address Inequality Through Ownership Culture

The Making of a Democratic Economy: Review Essay


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