In an article that would delight a former regular and much-missed commenter here, Noah Smith writes about cooperatives at Bloomberg:
Corporate profits now represent about 6.6% of U.S. gross domestic income, while labor compensation is 43.2%:
That means that if profits flowed to workers instead of distant shareholders, the average worker could get a raise of about 15%.
What’s more, cooperatives might help reduce inequality. Workers in a cooperative can vote to pay executives less and pay themselves more, making the compensation structure more egalitarian for the entire company. There is some evidence that this happens. Mondragon Corp., Spain’s largest worker-owned business, pays its chief executive officer just nine times as much as the average worker — a much lower ratio than most companies in the U.S.
It’s hard to measure, but flatter corporate hierarchies might yield intangible benefits, too. Instead of feeling like rented labor, workers who own part of their employer might feel a greater sense of ownership, pride, control and loyalty.
The former commenter regarded such organizations as a form of socialism; I think it a form of capitalism.
Such organizations have been studied. They have advantages and disadvantages:
Data on this question is mixed. A landmark 1995 study of plywood manufacturers by economists Ben Craig and John Pencavel found that in terms of output per hour, conventional businesses had higher productivity than cooperatives, but in terms of total factor productivity — which measures the efficiency with which companies use all their inputs — the co-ops had the edge. This suggests that cooperatives don’t encourage greater effort, but they do organize production in more efficient ways. A 2012 paper by economists Fathi Fakhfakh, Virginie Perotin and Monica Gago found a similar result for cooperatives in France.
A final benefit of cooperatives is that they might be less subject to asset-stripping by short-term investors and shed fewer workers in recessions. There is some evidence that cooperatives have higher survival rates than other businesses, especially during the recent recession. These effects might be magnified in the U.S., with its more rapacious private-equity industry.
I would ask different questions than Mr. Smith does. My question would be why do so few private sector unions hold their pension funds in the stock of the companies for which their members work? I think doing that would align incentives much better. I presume that participatory labor practices, like those employed in Japan, are responsible for the “total factor productivity” benefits suggested above.
Whose interests does a starkly adversarial relationship between management and labor promote?
Well, the Teamsters don’t control the fund, The Dept. of Labor seized it and turned management over top Goldman Sachs and Northern Trust.
A few observations, more or less in the order the issues come up in the text above.
“That means that if profits flowed to workers instead of distant shareholders, the average worker could get a raise of about 15%.”
Its a rare situation when workers can assemble sufficient capital to obviate the need for outside capital. I come out of (broadly) an industry, metalworking, that had its share of ESOPS. The only reason workers could participate meaningfully in ownership was the bargain basement prices of the enterprises. They were troubled and near worthless.
Second, (and I’ve commented on this numerous times) workers tend not to have the risk appetite, or financial wherewithal to wait many years for their return. Those profits are not distributed annually. That’s not a value judgment; its just an empirical observation. To be sure, there are some companies with an employee set willing and able to do so, but not very many.
I would also note that employee owned companies (at least in American culture) tend then to make employee-centric decisions to the detriment of the enterprise as a whole. As owners its their right to do so, but they tend to either get sober and make the tough decisions in the face of reality, or go under, the academics opinions aside. Further, citing asset strippers shows their ignorance. Those days of the 80’s have all but vanished. And unspoken is the fact that when an enterprise must be downsized to fit its revenue realities it needs fewer physical assets and less working capital. Its not driven by rape and pillage, although that makes for good storytelling.
“My question would be why do so few private sector unions hold their pension funds in the stock of the companies for which their members work.”
Regulatory prohibition, and concentration risk. I understand the seductive nature of the alignment of interests concept, but its one thing for someone like me to hold a large position in a high risk asset, quite another for someone’s retirement funds to be concentrated. Over the years I’ve heard every rationalization known to man justifying investment concentration. But its a river boat gamble and I, for one, couldn’t live with myself for recommending it. Shit happens. Its bad enough that so many people have their retirement tied up in their homes.
We seek out management teams who can express a credible vision for the businesses we acquire, and ask that they put their money where their mouths are. Generally no more than 5-9 senior executives opt for it. We find that it loses all meaning for the rank and file. It that economic, cultural or individual personality? You tell me.
“and concentration risk. I understand the seductive nature of the alignment of interests concept, but its one thing for someone like me to hold a large position in a high risk asset, quite another for someone’s retirement funds to be concentrated. ”
Agree with this quite strongly. Look what happened with Enron where they actually did that.
Steve