Inštitut za ekonomsko demokracijo

The succession problem for Slovene employee-owned companies

Author: David Ellerman

27 Day Cash Buffer

As a result of the privatizations in the 1990s, there are a number of Slovene companies that are employee-owned with shares directly held by individual employees. But that was almost a quarter-century ago. Many of the employees have now retired still holding their shares. A “share” could be a fixed percentage of ownership in a d.o.o. (like one-hundredth of one percent) or a share in a d.d.. Employee ownership brings many benefits to a company in a smaller city or town in Slovenia. What is the succession strategy for the company to remain employee-owned in the future?

One likely possibility for the company is to be bought by a competitor who would thus gain a strategic advantage (getting the company’s set of customers) with more monopoly power in the market. That means a competitor would be willing to pay a higher price for the shares of retired or current employee-owners—than the company might otherwise be worth.

But the competitor does not want to run two companies in different towns or cities so they would take perhaps some of the top people in addition to the customers and slowly expand their current business while shielding their additional profits by depreciating the assets in the purchased company (and without replacing those assets). Thus not immediately, but in a number of years, the purchased company would be wound down and closed eliminating the jobs, incomes, and taxes for the local community. Yes, the retired and current owners might get a higher price that way but at the eventual cost to the community. This is why companies like Domel have strongly resisted buyout attempts by foreign (or domestic) competitors.

There is another way that these employee-owned companies slowly lose their employee ownership. The retired employee-owners dream of a big pay-day by selling their shares to a German, Italian, American, or maybe even to a cash-rich Chinese company looking for a launching pad inside the EU. The new employees in the company, of course, cannot individually buy their shares even at a much-reduced price, not to mention the dream prices. The new employees are trying to build a family, buy a better car, and maybe even buy an apartment so they could hardly afford to buy shares from the retired employees to maintain the company as an employee-owned company. Slowly the company becomes less and less employee-owned as the retired shareholders continue the search for their dream buyer.

This is why employee-owned companies, just like family-owned companies, need a succession plan that will give the exiting shareholders a fair price and will keep the jobs, wages, and taxes in the local community. In the United States, there has emerged a unique legal mechanism, the Employee Stock Ownership Plan (ESOP) that is often used to solve the family succession problem. Although only legally implemented in the late 1970s, there are now about 7000 ESOPs in the US covering fully 10% of the private workforce.

The Institute for Economic Democracy has designed and is now implementing a Slovene version of the American ESOPs—even making some improvements that were only artifacts of the way the US ESOP was legally implemented. In an ESOP (the US or Slovene), there is a separate legal entity that holds the employee shares that are internally assigned to employee-owners in their individual share accounts. The shares in ESOP are not directly owned by the employees, current or retired, so they cannot be sold to someone trying to take over the company. As the shares ‘mature’ and as employees retire, they are bought back by the ESOP and reassigned to the current employees—so new workers will work their way into ownership without having to individually buy shares from retired employees. Thus, the ESOP maintains employee ownership over generations of workers. The jobs, incomes, and taxes stay in the community. That ESOP mechanism seems to be the best succession plan for employee-owned (or family-owned) companies that is fair to employee-owners and beneficial to the community.

The ESOP mechanism is not a miracle. The cash used to buy back retired employee shares does not descend from heaven. It may mean a temporary reduction in extra pay for holidays, in the 13th salary, or in profits paid out in dividends. But the reduction in cash to current employees is not money thrown out the window; it is replaced by the equity in the company that will lead to even bigger cash payouts in the future. It is similar to when an employee takes out a bank loan to buy an apartment and has the loan payments deducted from their wages. Is that a reduction in wages? No, it is a reduction in cash wages that is balanced by an equal increase in the equity in the apartment. An ESOP will probably involve the same sort of short-term reduction in employees’ cash income/benefits in favor of increasing equity in their own company—while providing a fair price to the retired employee-owners. The ESOP mechanism may involve that sort of short-term “cost” but it is a solution to the succession problem that benefits retired and current employees and their local community.

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