The Employee Ownership Update
December 22, 1995
Promising Developments in China on Employee OwnershipProspects for employee ownership continue to look promising in China. As we have already reported, several local governments have been privatizing enterprises they own through employee ownership. Employees are also being allowed to buy limited numbers of shares in enterprises owned by the central government (very large or politically sensitive business, for the most part). The central government has been reluctant to privatize these enterprises, however. Now a report in the Wall Street Journal (12/19/95) says that of the 100,000 enterprises owned by the central government, only 1,000 will be preserved on the socialist model. The rest will be sold, merged, or closed. That process will probably move slowly, but the first experiments in it have occurred in Zucheng in Shandong province (one of China's most economically active areas). Enterprises there are being transferred to their employees.
The NCEO is coorganizing a large conference on enterprise reform in China next May. It is being cosponsored by major international accounting and employee benefit firms and the leading organizations in the Chinese enterprise reform effort. For more information on the conference, contact Veronica Manson at the NCEO.
Another New German Model for PrivatizationWe recently reported on a new model for employee ownership developed for Continental AG, one of Germany's largest firms. Now Deutsche Telekom AG, the German telephone monopoly, has come up with yet another approach. Each of Deutsche Telekom's 250,000 employees will be able to put 300 marks into a trust, which will buy stock for them. The trust will then borrow 1,250 marks for each 300 it receives to buy additional shares. In six years, the trust can put the stock back to the company at its original price should the share value fall. Employees would then get their 300 marks back and would have no obligation on the loan. If the share price goes up, the employee can keep all the shares at their appreciated price. The trust will be financed by dividend payments on the stock (which will not be passed on to employees) and a subsidy from the company.
The plan would only acquire about 5% of the company's stock, but is seen as a step towards encouraging Germans to become more interested in owning stock, something few are currently interested in doing, and in buying labor peace.
Section 133 UpdateSection 133 of the Internal Revenue Code allows commercial lenders to exclude 50% of the interest income they receive from loans to majority ESOP companies that pass through full voting rights. The Budget Reconciliation bill now being discussed between Congress and the White House would eliminate this provision. President Clinton vetoed that bill, but the ESOP provision had the support of both Houses.
The impetus to pass it came largely from a Joint Tax Committee estimate that removing section 133 would save $1 billion over seven years. ESOP practitioners were unanimous in saying this number was exaggerated immensely. Senator Simon (D-IL) has been leading a fight to restore it in whatever new negotiations might emerge on the budget. Simon's office told us that the tax loss estimate was developed, in part, by using the NCEO's "100 Largest ESOPs List." Of the firms on the list, 57 are majority employee owned. The committee then projected these numbers onto the 9,000 ESOPs. That made two fatal flaws. First, the NCEO list includes only employee ownership companies with more than 30% ownership. However, only 20-25% of ESOP companies are majority-owned by their ESOPs. Second, the committee assumed that all majority ESOPs pass through full voting rights. The real number is probably 25-30% (another 10% or more pass through more than the required minimum but less than the complete rights required by the law). The NCEO developed more realistic numbers for Senator Simon's office, finding about $18 million savings in the first year. Hopefully, these more realistic data will take some of the impetus away from changing the law.
On an encouraging note, Mark Zuckerman, Senator Simon's aide on labor issues, told us that the issue was almost purely financial. If the politics of the issue had been more the substance of ESOP tax benefits, he believes the measure never would have passed. Only the very large tax savings estimate made it so appealing.