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The Employee Ownership Update

Corey Rosen

October 15, 2007

(Corey Rosen)

Leland Stanford and Employee Ownership

"Robber baron" Leland Stanford (who started Southern Pacific Railroad, served as U.S. Senator, and founded Stanford University) is not much remembered these days as a strong advocate of employee ownership, but, in fact, as he got older, it was central to his thinking. In founding Stanford, Leland Stanford directed that the university dedicate itself to studying worker cooperatives. He also pushed a bill in the U.S. Senate to foster worker coops. The bill was widely debated and earned Stanford something of a reputation as a "socialist," a view he strongly denied. In a newspaper interview on his bill, Stanford said:
"The one remedy for this tendency, which to all appearances has been ineradicable from the industrial system, is the cooperation and intelligent direction of labor. What I believe is, the time has come when the laboring men can perform for themselves the office of becoming their own employers; that the employer class is less indispensable in the modern organization of industries because the laboring men themselves possess sufficient intelligence to organize into co-operative relation and enjoy the entire benefits of their own labor. With a greater intelligence, and with a better understanding of the principles of cooperation, the adoption of them in practice will, in time I imagine, cause most of the industries of the country to be carried on by these cooperative associations."
Stanford worried that the accumulation of capital in too few hands would ultimately threaten capitalism itself, as well as be unfair to working people. His views presage the writings of Louis Kelso almost a century later in arguing for employee ownership. Stanford's bill was favorably reported out of committee, but illness prevented him from taking it to the floor and it never went further. At the university, there was a course in worker cooperatives in the first year, but Stanford's health problems prevented him from pushing the idea further. After he died, his successors quietly buried the idea. A fascinating article detailing this history can be found at this link.

Special Offer on Robert Beyster's Book About How He and Employee Ownership Built SAIC

Science Applications International Corporation (SAIC) is arguably the most influential employee-owned company in the world. The SAIC Solution: How We Built an $8 Billion Employee-Owned Technology Company, a new book by J. Robert Beyster and Peter Economy (John Wiley & Sons, 2007) traces the development of SAIC, the 44,000-employee research and development company Beyster founded in 1969. Beyster has been a passionate advocate of employee ownership since the company's beginning. SAIC went public last year. Between 1969 and 2006, the company's stock grew at an annual compounded rate of 34%. Beyster's core principles were simple: "Hire very smart people, encourage their entrepreneurial spirit, let them focus on customers, and reward them for their contributions." The most important reward was ownership. Beyster's share of the company dropped to 10% after the first year and to 2% by the 1990s. Ownership was shared broadly through options, stock purchase plans (including an in-house stock market), an ESOP, and a 401(k) plan. Beyster said he was never concerned about what percentage of the pie he owned but rather how employee ownership could better serve employees and thus customers. Employees were given considerable freedom to develop their own projects, albeit within firm parameters about business success and ethical behavior. The book is a valuable resource on a company that the business press has largely ignored.

Holdings in Company Stock Continue to Fall

According to data from the 2006 Employee Benefit Research Institute/Investment Company Institute Participant-Directed Retirement Plan Data Collection Project, the percentage of 401(k) assets held in company stock declined to 11.1% in 2006, down from 13% in 2005 and a peak of 19% in 1999. Not all plans offer company stock, however. In just those plans that do, the percentage of holdings in company stock is 21.1%. Very little company stock is held in companies with fewer than 1,000 employees, but 15.4% of all 401(k) assets in companies with more than 5,000 employees are held in company stock.

Newer employees are less likely to invest in company stock. Just 9.3% invested in company stock in 2006, compared to a peak of 23.6% in 1999, when companies were more likely to require employees to hold company stock in their 401(k) accounts. Where company stock is offered as part of a retirement plan, only 15.5% of employees invest more than half their assets in company stock.

The data are based on information from almost 54,000 plans managed by members of the Investment Company Institute, covering 20 million participants.

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