The Employee Ownership Update
August 18, 1995
Employee Ownership Rising in China, Falling in RussiaTwo researchers report in a new NCEO publication that the tide of employee ownership is receding in Russia but rising in China. A new report by Joseph Blasi of Rutgers University for the NCEO's Journal of Employee Ownership Law and Finance, to appear in the fall 1995 issue (available in October), indicates that broad employee ownership of Russian firms continues to erode. Russia is the only country in the world to undertake a successful mass privatization program. Almost all state-owned firms have now been sold. In almost every case, employees, including management, bought a majority stake in these companies, through a combination of vouchers and purchases of shares at artificially low prices. Initially, the management stake was low--5-10%. Because the employees are free to sell their shares, however, there is a gradual erosion of broad employee ownership, both from sales to outsiders and to managers.
Blasi, who is an advisor to the Russian government, reports that employees and their unions have been lax in exercising even the legal rights of ownership provided them, much less pushing for additional rights. As a result, management has been able to dominate most firms, even violating various laws intended to limit their control. Outside investors are also beginning to take more control. The result, Blasi believes, will be that employee ownership will recede to a level similar to that of public companies in the U.S., with employees typically owning 5% to 25% of their companies. Some firms will remain majority employee owned for a substantial time, however.
Meanwhile, George Tseo of Penn State reports in the same issue of the Journal that the Chinese government is looking more favorably on employee ownership. In one medium-sized city, most city-owned enterprises have been sold to employees. The central government's committee on economic restructuring, which had favored a very limited role for employee ownership in the economic transition for large state owned firms, now appears ready to allow employees to own an unlimited percentage of company shares.
Roth Court Rules That Stock Is Not "Adequate Security"In Roth v. Sawyer-Cleator Lumber Co. (CA 8, No. 94-3368, 7/27/95), a U.S. Court of Appeals revisited a case that has been the subject of a number of rulings. Sawyer-Cleator had an ESOP that paid departing employees over 10 years in equal installments with interest. The stock of the company was used to secure the promissory note. The company went bankrupt and was unable to pay on the notes. Two participants sued. The trustees prevailed in district court, arguing that the bankruptcy of the company meant employees would have suffered a loss in any event, but the court ruled that had the trustees obtained better security, participants would have obtained payment.
TWA Bankruptcy Agreement Approved; Employee Ownership Drops to 30%TWA, which continues to advertise itself as "employee owned," has received approval for a Chapter 11 bankruptcy reorganization that it and its unions believe will lead to a recovery. As part of the agreement, however, employee ownership will drop from 45% to 30%. TWA has already successfully initiated a variety of employee involvement programs and operating results have improved, although most analysts still believe the airline's future is shaky.
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