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Observations on Employee Ownership

Are We Stepping Away from Democratizing Capital?

Corey Rosen

January 2003

(Corey Rosen)Michael Lewis' article "In Defense of the Boom" (New York Times Magazine, October 27, 2002) should be must reading for anyone reflecting on the rise and fall of the Internet economy, and particularly its implications for broadened employee ownership. While acknowledging the excesses of the time, Lewis also points out that the 1990s saw a tremendous democratization of capital. The 1990s boom, he writes, took place largely without Wall Street. "The big Wall Street firms would never have the nerve," he says, to invest in all those Internet start-ups. Instead, it seemed anyone with an idea could get a business going. In retrospect, the ones that failed all seem like obviously bad ideas. But lots of those unlikely start-up companies remain today as major players in the economy. While the Internet has not become what some of its most ardent advocates suggested, a major economic sector has built up around it.

More important, Lewis argues, is that these companies helped create a very different model of a corporation. "The most forward-looking companies in America experimented with a corporate structure based on worker ownership. It made a whole lot more sense than the old-fashioned corporate structure." True, a lot of options are underwater these days. But it is also true that some remain valuable and others will become valuable over time. Meanwhile, lots of employees cashed out their options and made a bundle. Some of them went on to start their own new companies.

Unfortunately, Lewis writes, in the wake of Enron, WorldCom, and others; the bursting of the Internet bubble; and the fall in the market, "the old thing is back." "The big issue in capitalism," he writes, "is who gets capital...And when the little guy does not get capital, the big guy usually does. Look around. Who is winning in the bust? The old guard. Corporate authority of the ancient, hoary kind..."

Babies and Bathwater

Lewis' article covers a range of issues besides employee ownership, but it is a timely rejoinder to what is becoming a growing consensus among the pundits that broad-based employee ownership as practiced in the technology sector in the 1990s was excessive. We keep hearing consultants and business writers say that we can now come back to our senses and just give ownership to the "key performers." Conveniently, these "key performers" include most generously the people paying the consultants for telling them just how important they really are.

This new rhetoric won't wash. For a decade, companies have been telling their employees that "people are our most important asset." It turns out that studies consistently show that this is exactly right. But a company's "people" are not just a few superstars and a bunch of replaceable parts. To the customer, the receptionist who answers the phone is the company. To the irritated user of a technology, the service repair worker is the company's link between keeping and losing that client. To the supplier worried about not getting paid on time, the reassuring accounts payable person is helping the company avoid a major supply problem. More important, all these people have ideas companies need. To be sure, doling out equity will not in itself generate these ideas, but withholding it, especially after having already made a big deal of providing it, will help bottle them up tight. After all, your message could not be clearer: only some people really matter here. Your ideas and effort just are not that important. Act like owners; just don't expect to be one.

If corporate culture were not enough, there's also demographics. The labor market has eased considerably of late, but that will change. The population is aging. Public investment in education is lagging. More of the work force does not speak English as a first language (or at all). When the economy recovers, demographers tell us, it is again going to be very difficult to attract and retain good people. Companies could pay more, of course, but global competition will make that difficult. So what will companies do? Probably what they already did. Pay in stock as well.

When times get tough, as Lewis notes, we tend to revert back to old, comforting models. In this case, the old model is an elitist view of who should be allowed to take risks, who should have access to capital, and whose ideas and efforts matter in a company. That model produced recessions and depressions too. The new model of the 1990s won't prevent economic slumps or corporate malfeasance, but it can create a more productive and more equitable economy than the old one ever could.

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