One of the most surprising aspects of the recent federal budget is the announcement of new financial incentives for employers who sell a stake in their company to their employees.
This measure was adopted fifty years after the closure, by an American multinational, of a pulp and paper mill in Temiscaming. At the time, fishing boats blocked the Ottawa River for five weeks to prevent the company from floating its logs further than the closed plant. Their efforts forced the company to sell the factory to the employees, and Tembec was born. This cooperative movement subsequently spread to other regional sawmills in Quebec.
In the 1990s, in the midst of an industrial crisis, the NDP government of Ontario also embraced the idea of employee ownership. But rather than incentivize companies to sell stock to employees, he focused on the possibility of worker buyouts. This approach saved Algoma Steel in Sault Ste. Marie, which became the largest worker-owned company in North America. Several paper mills in northern Ontario have been saved from closure in the same way, at least temporarily, including that of the Franco-Ontarian town of Kapuskasing.
The new federal legislation, however, has more to do with the practices of American and British companies, which favor employee share ownership plans (ESPs).
The RAS are the work of Louis Kelso, an investment banker from San Francisco for whom this system was “the only effective technique since the Homestead Act to allow employees to accumulate capital without deducting anything from their salary, while helping businesses finance their growth and achieve other conventional goals. For Kelso, the RAS heralded nothing less than the rebirth of American capitalism. For their part, the unions were much more skeptical.
In 1974, as part of its pension reform, the U.S. Congress approved generous tax credits for RAS, giving employers a good reason to sell a stake in their company to their employees. The number of companies with such a program rose from 300 in 1974 to 7,000 in 1990. And when the state had to intervene to bail out Chrysler in 1979, Congress demanded that the union make concessions in return of a minority stake in the company.
Employee ownership, however, rarely translated into real influence by workers, whose shares were held in trusts that they generally did not control.
Instead, we have witnessed a multitude of notorious abuses by employers using SARs as a tax shelter and an effective means of extracting concessions from their employees. In some cases, defined benefit pension plans have even been abandoned in exchange for company stock, an often disastrous choice. While a defined benefit plan constitutes a legal commitment by the employer to pay a regular benefit to its employees, the RAS offers no such guarantee. Workers risked losing their jobs and their savings or retirement funds all at once.
For years, the South Bend Lathe RAS has been a model in the United States. The employee buyout saved 500 jobs in Indiana, making it the largest industrial RAS of the 1970s. The company operated out of the former Studebaker plant, which closed in 1963, shockingly leaving to its employees barely a fraction of their pension plan. In exchange for major concessions, including the liquidation of its defined benefit pension plan, the South Bend Lathe union obtained all the shares of the company, but no real control over its activities. The company was managed by the management, which one day simply decided to relocate most of the production to South Korea. American-style employee ownership has taken a hit!
Yet the RAS offered desperate unions a legal and financial mechanism to save their factories from closing. The best-known example is that of Weirton Steel in West Virginia. Worker buyouts, however, accounted for only a small proportion of employee-owned firms, and few survived more than a decade.
Given these shortcomings and history of abuse, company-driven employee stock ownership plans strike me as a misnomer. Are Federal Incentives More Than Another Boon to Business? Only the future will tell us !