Sunday, May 22, 2011

The Worker Capitalist delusion.

What is this economic mutant called a “worker capitalist”? On the surface it seems to be an attempt to merge the employee and shareholder interests and create a new hybrid of fired up, loyal and committed actors on the company stage. In one swoop, it seems to say, the “inherent conflict” between capital and labour can be countered if not eliminated.

The idea has found favour with no less an influential capital investor than Elias Masilela, the new head of the Public Investment Corporation (PIC). As the chief of an entity controlling close to R1trn in assets, one is bound to sit up and listen. American Lawyer and Economist Louis Kelso is credited with designing the concept in the late 1950’s and being the architect of instruments such as the ESOP (Employee Share Ownership Plan) and CSOP (Consumer Share Ownership Plan). But it has only been since the mid seventies that wooing labour into the shareholder camp has gained momentum and has given rise to a whole array of schemes with some of the most complex, costly and imaginative forms of accounting targeted at the whole spectrum of employees from executives to the general workforce.

Reluctant to tilt my lance at the formidable windmills of economists, financial journalists, accountants, and remuneration consultants, I decided to delve a bit deeper. In the end, I must admit defeat. There are as many champions as detractors. The accounting conventions are still not fully understood, polished or even universally supported. Returning to simple logic, I ended with a similar conclusion to that of Warren Buffett who a few years ago ruled that they were based on “fuzzy maths”. Of course, he was talking about executive remuneration, although the principles are the same as when applied to a group of employees as a collective.

The principles may be the same, but the nature and behaviour both intended and unintended are quite different for the two groups. It has become common cause among remuneration experts that as an incentive, share options and share ownership appear to work better at the more senior level of employment than at the general workforce level. Both are questionable. Those for general staff are of suspect value and those for executives perhaps even an evil. This article focuses on the schemes for general staff and I will come back to executive schemes later, which may be the more controversial and challenging topic.

I also do not discount the value of such programmes in facilitating leveraged “empowerment” actions and management, employee, or customer buyouts. This was the intention of Kelso’s original design. Most ESOPs today do not have that as their purpose.

I may be a poor “Googler” but as far as general staff are concerned, nowhere have I found definitive, conclusive and comprehensive evidence that ESOPs do what they are supposed to do – create a more committed and involved group of employees. The evidence is sketchy, anecdotal and largely sourced by vested interests. The point really is that from a simple cost benefit point of view, there is more evidence to show that ESOPs do not prove their value against the elaborate provisions needed to put them in place such as the formation of trusts, individual accounts within the trusts and the accounting dimensions of “expense” or liability against equity.

If ESOPs are created as an employee incentive, they will clearly fail and there is little evidence to contradict this. Certainly in South Africa they cannot claim to have tempered wage demands or labour unrest. The value of most ESOPs to the participants depends ultimately on the share price and for quoted companies this can be very far removed from operational performance, especially labour productivity, The value of each employee account is mostly only a fraction of what they earn in normal wages and compromising the latter for an improvement in the former would not make sense to anyone. Also, the full value for the employee is mostly only realised on retirement or departure, becoming little more than a supplement to their pension or provident provisions. These seldom motivate people in their day to day work.

But ESOPs fail as an incentive in one of the key requirements – line of sight, or visible and tangible evidence of performance improving an outcome. They are far too remote at an individual level. This means they can never serve as an instrument for gain sharing or flexible pay. A far more tangible, direct line of sight trigger is value-added or wealth created which in turn forges a common focus on service and creates empathy for common fate. These are ideal conditions for fortune sharing and pay flexibility.

The champions of ESOPs defend more vehemently the role of such programmes as a tool for involvement. Of course, this is firmly rooted in classic capitalism’s obsession with ownership. It’s an important feature in economic philosophy and even psychology. We steadfastly adhere to the belief that owning something is more important than doing something, that we only do things to own things and that ownership and not action or behaviour is what gives us our real worth. From this perspective, ESOPs are an insult to the nobility of work.

ESOPs assume that ownership ensures involvement. Even if this were true, ownership is not a blanket, indivisible entity. The more ownership is shared the more it is diluted. Owning one cell in one body of a crowd of shareholders becomes meaningless especially if these shares have no voting rights in the company. Then rather have the German system of appointing a labour representative to the board. At least you can claim to have listened without necessarily having heard.

Incentives seldom guarantee genuine involvement, whereas genuine involvement mostly creates incentive. Genuine involvement comes from behavioural things such as service, customer care, sound leadership, shared values, ethics, trust, transparency, developmental communications and nurturing aspirations.

Of course it is not a bad thing to create an understanding of and empathy with shareholding. But it pales into insignificance in terms of understanding the real value of work and real labour issues that should still be addressed in most companies.

Trying to mix shareholding and labour to create a “worker capitalist” is like trying to mix oil and vinegar. It only works when they are shaken up to serve on a salad – when they serve a purpose greater than themselves as individual components. In companies the salad has to be customers. You cannot change the molecular structure of each to achieve this. Left to focus on their own needs, they return to their separateness.

Of course “worker capitalists” do exist. I know many. They include the likes of Raymond Ackerman, Johan Rupert, Bill Gates, Steve Jobs, Koos Bekker, Brian Joffe, Adrian Gore and many others. They are the creators and builders of business.

But they were not created by a construct of ESOPs or narrow financial incentives. They created themselves out of a passion for making a difference.

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