Big Problem: Wealth and Corporate Power is out of Balance
There are two examples that I believe personalize and highlight the wealth disparity issue and the potential solution. The first comes from a colleague of mine. This individual was in sales and had joined the company when it was relatively small. He worked there for the better part of two decades. He was very successful and over the years he was one of the bigger producers who helped financially feed the organization as it grew exponentially. Then, a new mid-level manager was brought in to lead the division. This was normal as the company always tried to bring in new ideas from the outside. For whatever unknown reason this mid-level manager was completely unreasonable in his demands for performance. He was the type of crap manager who didn’t care about people nor was he logical in the goals he set for everyone under him . Eventually, this crap manager chased my friend and colleague, along with many others, away from the company and into another job. Fortunately for him, he made the decision to move, not the company, so he was able to move to a slightly better position in his career. Right after that the crap manager was let go before he could do any substantial long-term damage to the organization, but it was too late for the former long-term employee. The damage was done. Less than two years later the company was sold, in part, to an investment organization. Although there was no discussion on how much profit the partial sale generated for the shareholders in the organization, it’s reasonable to assume that it was substantial. I have no idea if any current employees at the company realized any of the profit from the sale, but I am positive that the former sales rep saw nothing from the divestment of the equity he generated over the many years he was at the company.
The second example comes from a brewery tour I was on a few years ago.
I get to do these whenever I go to Asheville as that town has more breweries per capita than Chatham County North Carolina chicken farmers have eggs. On the tour, the young female tour guide talked ebulliently about the company. She described what a great place it was to work; The pay was good and the working environment was fun. Everybody got a big gift after their first year of service, and after 5 years they got a month off with pay to do whatever they wanted. Then she got to the most important part. It was how the founders did the unthinkable and gave the majority company ownership to its employees. In effect it was an employee owned and operated company. It was a little socialist workers’ paradise. To me, the biggest part of the story happened earlier this year. The shareholders of the little regional craft brewery decided to sell out to one of the mega brewery corporations. Everybody in the company walked away with a huge check. The smallest payout for the lowest level and shortest serving person at the company was $100,000.
The immediate take away from this is that if you have equity, you make money. If you don’t have equity, then you get beat up at work and eventually, no matter how loyal you are or how good you were, you lose your job with nothing to show for it except for what you were able to save out of your salary.
I think these two stories truly demonstrate the core reason why there’s a growing wealth disparity. Wealth, for the average working professional, used to be something you accumulate over time. With corporations who desired long-term employees, Professionals and their counterparts in the trades would get more and more equity through seniority and growth in benefits. The unions and the employment trends the unions championed even if it was a non-union shop, all led to this end. That was from the turn of the last century until about the 1960s. Unions are now long dead as a driving force in business and politics. In addition to the loss of unions, the drive for greater productivity means more work and less pay for everybody in general. We can’t forget the effect of the great risk shift. In review the great risk shift is the trend of moving as much corporate risk as possible onto the individual. A good example of this is the move away from company cars to vehicle reimbursement plans. Since most cars come with multi-year payment plans, if you have to have a car for your job, the risk of the payment and its associated contractual commitment, is on the individual, not the company. If the company decides to let the worker go, the worker still has to pay for that car one way or another. You also can see the Great Risk Shift with retirement plans in the move from the defined benefit pension plans to the 401k as well as in many other areas where work and life intersect. Risk has a cost and that cost has moved away from the organization and onto the individual. Overtime, and in aggregate, all of these trends and others have driven wealth away from your average middle class working professional. That’s why the gap is getting wider.
Today, wealth, true wealth, is only available through actual equity in the organization. This brings us back to our opening story. The tour guide at the brewery got a payout of at least $100,000. Depending upon her longevity at the company she may have received much more than that. My friend, who had no equity, got to move to a slightly better job and potentially much more opportunity based upon his background with his former company.
It’s easy to see where one can think that a purely socialist solution is the best option. Unfortunately, it’s been tried and has been proven not to work. All is not peaches and cream with the brewery workers. The negative for the brewery owners is that the purchase resulted in a one time payout. If you were on the lower end of the equity distribution, that 100K won’t go very far in Asheville North Carolina where the cost of living is very high and middle-class homes can cost half a million dollars. Putting the payout aside, the workers are back at square one in their career regardless of what the new owners promise about keeping everything the same. In my experience that goes away after a few short years as the corporate need for continually enhanced profitability and productivity starts to rear its head.
When I look at these two stories, what I realize is that there are different mechanisms that must be in play. The first is that flexibility is needed. Yes, the company that hired the evil manager made a mistake, but in business you have to take chances on people and business opportunities. Some turn out okay and some fall flat on their face. The manager could have been great and driven productivity higher while keeping people engaged with their job but he wasn’t and was eventually removed. If the company was heavily unionized in today’s environment and didn’t have that flexibility to treat people however they wanted, my friend would have been able to push back against the bad management and keep his job. Unfortunately, longer term, the most likely outcome for the corporation with limited flexibility is to wind up like General Motors and eventually go bankrupt.
The brewery was not able to realize the equity unless they sold, but in selling out they lost their ability for self-determination with their work life. Pure socialism isn’t the answer because capitalism will always win out. Pure capitalism isn’t the answer because ultimately people become collateral damage in the drive for profitability.
Big Solution: Mandated Partial Equity
I think the big solution is an equity stake on the part of all employees. The equity stake needs to be universal but equitable in its distribution. If you work for the company, then you should have some substantial financial benefits, depending upon how much time you have in. The equity should also allow decision-making vis-à-vis seats on the board of directors for the corporation.
The equity stake should be structured similarly to the fix that is needed for the 401k. With the 401k anyone can liquidate it if they are willing to pay the penalty. I believe strongly that this is one of the reasons why we have a retirement crisis. Too many people do not have access to a 401k and many that do have one, sometimes liquidate it when life happens. You see this happen more frequently during the earlier years of one’s career when earnings are lower. The easy fix is to change the law so that 401K participation is mandatory for employers and employees and once a dollar goes into a 401k it’s much harder to pull it out until retirement age.
When you consider an employee stock ownership program, this means that the employees can own the entire corporation or just part of the corporation, but that part should never go below something substantial, like 30% or so. I believe this will have the same effect as the strong unions of yesteryear. The company must adhere to the needs of the employees at least as much as they do to the investors. In the case of our little brewery, everybody would have still gotten a huge payday, but they still would have maintained very strong influence over the company. For my friend who left his company, he would have gotten a very fat check. Considering the extent of his contribution, it could have been for millions of dollars.
You can look at this more broadly than my two scenarios. For example if private equity would buy a company in a mandated employee equity environment, wholesale layoffs would not be on the table as the first option. If it had to happen, at least the people who are let go would be in a position of financial strength. In truth, I think most private equity would go away or change its approach as to be unrecognizable compared to how it exists today.
There are problems with this solution. The one that I feel most keenly is that there is no analogous equity stake for public sector employees other than traditional benefits. The mechanism for wealth transference in our country would be in the hands of the private sector only. If you choose to work in the private sector, the odds are you will do well over the course of your career.
Another major issue is micro businesses. The equity stake for employees has to be phased in as a company grows so as not to hinder business expansion. It should still apply to private organizations, but the organizations have to get to a point where the process is almost automatic. I am certain many small business owners, even those with hundreds of employees, would fight tooth and nail to give up the least bit of control. The phase in timeframe also needs to be used for existing corporations that are publicly traded. This process would need a long tail to not shock their share price or cause a market crash.
One option to overcome this is to aggressively develop a culture of celebration when a company starts having to share equity with its employees. If the start of the ESOP program is seen as a coming-of-age for corporations, I can see where employers would look forward to when they can start the program. If structured correctly, this transition could potentially even boost the stock price so that everybody gets a nice bump as the company celebrates the start of its shared ownership and management. Sharing ownership and management at the very beginning could be mostly symbolic. Maybe the owners only have to give 5% of the company to the employees when they hit 50 and maybe it’s only 10 or 15% when the company hits 100 employees. Even with these answers there are many employers, at last count I think it was most, who fall under 50 employees. This means a great majority of the country would not see equity.
I’m certain that many business owners would try to find workarounds. As an example I can see where they would start many smaller businesses who are all doing the same thing and keep each at 49 employees. I’m sure there would be other workarounds as well. All of this would have to be addressed in legislation that mandated employee partial ownership of larger firms.
Complete socialism has been a failure wherever it’s been tried. Unfettered capitalism is also a failure wherever it’s been tried. Shared power and self-determination has a tendency to create the best outcomes in business and life.
If we look at the world, the business world, there has been the ongoing trend with the belief that the market will correct all wrongs. This has proven to not be the case, at least in the United States, We have allowed corporations to grow through mergers and acquisitions, to the point where most major markets are only controlled by a few players. These mega corporations maintain an iron grip over the work environment. The needs of their workforces have become an afterthought to profitability and are only given consideration when the demand for good workers outstrips the supply putting profits in jeopardy.
Big problems, big solutions articles are designed to be thought pieces. I tend not to do a lot of research when I write them, I just share what I’m thinking when I look around. When I look at the wealth gap in America, I don’t think the solution is a higher minimum wage or a return to mass unionization. To me, wealth today is all about equity in the company. I also see that much of the value in companies is in their ability to be flexible in all of their business elements including their workforce. There is definitely something great about companies being able to determine their own course.
But when I look at a company, I don’t just see shareholders, I see all the people that make up the company. In the last century the voice of the workers was heard through the unions. I think the voice of the workers today should be heard as shareholders. Everybody should have a seat at the boardroom table. If it’s in the best interest of the company for some people to be let go, they should be in agreement through their own representation. If there are massive profits to be realized by shrinking the amount of people working at the company, then those people should realize an equitable share of those profits. If a long serving individual is let go because a new manager is given flexibility to run their department however they want, they should receive their share of the equity they built for the corporation upon their exit.
Something to keep in mind is that many of the people who get a big payout will most likely invest their money into their own little businesses, some of which may grow into smaller firms. As those new companies get bigger, they will also have to share equity and the cycle of wealth for everyone will grow. More businesses, more wealth and more flexibility will work in concert to create a more dynamic economy.
Will any of this happen? Like most of my big solutions, I really don’t think so. I do know that if more company equity was shared, the people who worked for these companies would have more of the stability that wealth brings. That would eventually mean more stability in the world, and that’s something that we all would benefit from whether we had equity or not.
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