I have decided to start a “series” of articles to reflect on ways in which we can move beyond the current economic and political system’s dead end. Now is the time, if ever, to share “bold” proposals and avoid an infernal descent into “populism”, economic collapse, environmental disaster, you name it. The following reflection draws heavily on the works of economist Richard Wolff, co-founder of Democracy at Work (http://www.democracyatwork.info/) , who proposes a critical view on today’s economic and financial system and whom I warmly recommend that you follow. The idea of promoting worker owned cooperatives is gradually gaining ground, as exemplified by the UK Labour Party’s leader, Jeremy Corbyn’s proposals.

In this part, I will address what I believe to be the biggest priorities of all: addressing shareholder value maximization and more generally, the shareholder ownership model which has become a virtually monopolistic way of company ownership.

Shareholder value maximization has many issues but the most important one is that it “drains” a large part of the profits from companies both because shareholders control the board of Directors and thereby dictate how the profits are redistributed (to their advantage), and also in a desperate attempt to retain shareholder. Given the ever increasing free flow of capitals, investors can shift their capital allocations continuously to seek the highest return on investment at the lowest risk. This “free market” environment encourages a “race to the bottom” and a skewed allocation of profits between dividend payouts, investments inside the company, and investment in human capital (working conditions, wages…)[1] In an economic system which relies heavily on consumption as the main driver of growth, squeezing human capital investments is tantamount to suicide (and no, credit is no substitute for a decent pay).

There are many other considerations like the issue of morality (investing in “ecocidal” companies like Monsanto[2], investing in weapons manufacturers) and liability (disconnecting investment from taking responsibility for the actions of companies, taking only interest on return on investment and profits which may create moral hazard), but let’s focus on the main point above.

Needless to say that with compounding interest on capital, the wealth of the richest people on this planet grows continuously and the inequalities rise. Three main arguments are raised in defense of a “status quo”: (1) anyone can buy stocks so if workers were “smart” and made sound financial decisions (as opposed to wasting money on alcohol and women as Jeroen Dijsselbloem, President of the Eurogroup, pointed out) they could also enjoy a nice return on their investments, (2) dividends and return on investment is a “just” compensation for the “risk” taken by investors, and (3) this system allows for the “smart” allocation of capital to the most productive enterprises and millions of independent decisions in a “free capital market” cannot be “controlled” anyways so we may as well suck it up.

And of course, these can be easily countered with:

- (1) Given the stagnation of most lower/middle wages, many households do not have spare savings to invest and even if they do, a return on investment of a couple thousand euro cannot be compared with return on investment on millions. Take two investors, one of them has €100 million, the other has 50.000€. If we postulate that they both get 5% dividend payout on their investment, the first one gets €5 million and the other gets 2.500€. Now, spending €5 million takes imagination, while spending 2.500€, especially for a poorer household, is instantaneous. This means that if the first one spends €1 million and reinvests €4 million, next year, it’s 5% out of €104 million and so on. As for the second one, even if the money is reinvested, by the end of his/her life, that person will barely have enough to cover his financial needs at retirement, get his/her kids through college and perhaps help them out financially here and there before dying and leaving hardly anything in terms of wealth. So no, given the cost of living, anyone investing below a certain threshold will never enjoy the benefits of being an “entitled” rich investor living off of return on investment. As the saying goes, it’s always the first million which is difficult to make, then it gets relatively easy…

- (2) The argument of “risk” is an illusion. First, let us compare the “risks” taken by investors and workers. An investor, unless he/she is really stupid, hedges risk by spreading the investment across multiple companies and financial products. This diversification is even accessible to a “novice” investor in the form of ETFs which track well known indices like the S&P500, providing investors with instant diversification at very low costs (management fees, buying/selling). Even if such a product like an ETF looses value (due to systemic risks which everyone faces), for very rich people, this seldom matters. Most of these have financial managers who are well informed and with high capital mobility, they can protect their wealth from a crash rather easily (move it to gold, or even short the market). Even in the case of a loss of value, historical data on indices such as the S&P500 show that an investor can simply “wait it out” and get his money back within a decade or less. This may seem like a “terrible thing”, a “lost decade”, but for people that have a few millions or more, make no mistake, it’s not like they urgently “need” that money (as opposed to a smaller investor). Now with regards to workers, they are the ones that take the most risk since their livelihood depends 100% on their monthly salary. When they work for an employer, they usually specialize which means that even though they gain experience, if their expertise is no longer needed on the labor market, and they lose their job, they are basically screwed. Any employee working for a company takes a risk equivalent to an investor investing in a single company: if something goes wrong (bankruptcy), they lose everything or nearly everything. Now to push the comparison, to achieve the same “level” of risk hedging, a worker would need to “spread” his/her working hours across several companies: working one hour (out of 35–40) each week for a different company. Thereby, if one of them goes bust, the worker still has all the other working hours from other jobs which by the way, may offer him/her an extra hour of work to compensate for the loss. Since that is impossible in real life, then workers are indeed the ones that take the highest risk (and get paid very little in compensation as opposed to investors).

- (3) Once wealth is accumulated into the hands of a few, we can no longer talk about a “free market”. Given the massive fortunes that a handful of rich investors have accumulated, they have become “market movers”. Wherever they move their money moves the market, allowing for speculative attacks such as those during the Asian crisis in 1998, which prompted the creation of larger institutional players by the Asian States. Besides, even smaller investors usually call upon big hedge funds or private banks to manage their investments and these also are huge and can make/break markets. Most interestingly, there is the famous “TINA” argument (There Is No Alternative). Most people will recognize that there might be problems with shareholder value maximization, but will just shrug their shoulders and say “meh, it’s the best we can do”.

But maybe there is an alternative after all: worker owned cooperatives.

Worker owned cooperatives rest on the principle of democracy inside the workplace: one worker, one vote. This is in opposition to the logic of shareholder owned enterprises, one share, one vote, which, in a world where the 1% wealthiest own 1/3 of the shares[3] thereby controlling the board of directors, composed of the most important shareholders, basically means that the 1% of the richest dictate every bit of how companies work and especially how they redistribute profit. It is a vicious circle of auto-consolidation of the richest individual’s grasp on the economy since each year they get wealthier thanks to return on investment, each year they can buy more shares, and so each year they get even more voting power etc… (Note that even if 2/3 of stocks are still in the hands of less wealthy people, these stocks are usually pension funds or hedge funds, which are managed by… very wealthy managers most likely part of the 1% richest).

But first, even if worker owned cooperatives could be a solution to many problems facing today’s economic system, how to get there? Here are a few modest reflections on the necessary regulatory measures for a smooth transition:

- Each year, workers from companies that meet certain criteria (above a certain number of employees, of a certain turn-over or higher and older than 10 or so years to exclude very young start-ups and regardless of whether the company is publicly traded or not) vote on whether they want to buy back the company/take it over. Alternatively, each time owners/shareholders of a company want to close it down, each time a company wants to go public (sold to shareholders) or whenever a company wants to transfer ownership to someone else, the workers also get to vote whether they want to buy back the company. The voting must be anonymous and organized in a secure way to prevent any tampering with the voting (a voting mechanism set up by the government, using e-ID and modern technologies such as blockchain).

- Should at least 50% or more workers wish to buy back the company, the government gives a loan to workers to buy back the company from shareholders. In essence, this would be akin to a Leveraged Buy Out (LBO), something widely used on publicly traded companies by investors. The transition from publicly traded company to private company (removing a company from public stocks) has also been done multiple times, as was the case with Dell some years ago.

- There should be a transitional period during which the top management is obliged to stay (for instance 6 months) to ensure a smooth transition while retaining all their benefits (same pay, bonuses etc). In most cases, there are already conditions for quitting a job with a minimum notice period to ensure smooth transitions for the replacement of staff and ensure continuity of the work. During this period, management can be held accountable for any “wrong doings” to avoid situations where they would purposefully run the company into the ground for ideological reasons.

- During the transitional period, the government sends out a specialized team to help workers with the transition (educate them about decision making inside the company, how cooperatives work, set up various bodies to replace the vertical management structure into a horizontal one etc)

- The cooperative pays back the government loan at 0% interest or very low interest. The payments level is negotiated with the workers but could approximate what the company used to pay shareholders in dividends.

- Workers can also democratically decide to “sell” their cooperative to investors and be run again as a shareholder/privately owned company. Note that there has to be a very strict law to ban the possibility of a worker from profiting financially or via any other means (work promotions…) by voting for selling the cooperative.

- The transition from privately owned company to cooperative must be carried out progressively. If there is too much simultaneous demand for such transformation in too many companies, a waiting list should be set up and more resources should be allocated to the government body helping with the transitions. In case the government is overwhelmed with the current transitions, any subsequent votes from workers will receive a notification, regardless of whether they wish to transition to a cooperative or not, that they will have to wait. This is to avoid company owners from knowing in advance that their workers wish to take over the company before they can get any help/assistance.

- In case the cooperative is in financial difficulty and the loan has not yet been fully repaid, an independent mediator should be appointed to assess the situation and make decisions on the way forward (take-over by the government, debt restructuring in case the financial difficulty is due to an unreasonable servicing level of the loan…)

There are several advantages to these proposals:

- Let’s start with the most cynical one: most top managers, board of Directors, CEOs and the likes boast at how “good” they are in managing their company, how they care about the “well-being” of their employees, and on and on… Well, if what they claim is true, then they have no reason to fear the implementation of these proposals! There is no reason “happy” and decently paid employees from a company so well managed by top executives would vote for the transformation of those companies into cooperatives! :-P

- In many cases, workers have been willing to buy back their factories/company when the owners want to close them, but have been prevented from doing so for ideological or administrative reasons, either by the owners or by government officials.

- Cooperatives, since they are owned by workers, cannot be delocalized unlike private companies or shareholder owned companies since the owners are the workers.

- There is much less risk of tax avoidance or tax evasion since profits inside cooperatives can only serve two main purposes: reinvest them into the cooperative (new machines, factories…) or increase worker’s wages. And since worker’s wages, at least in many countries, are withheld at the source, there is a much lower probability of fraud.

- Arguably, cooperatives have a higher incentive to act in an ethical and moral way, since the consequences of their collective decisions on how to produce goods/services will affect them directly. For instance, workers will have to breathe the air contaminated by the pollution created by their own factory (which is not the case for shareholders, or even private owners, since they can be thousands of miles away while their workers have to remain close to the production site).

- The proposals above take into account the legal and pragmatic aspects of converting privately owned companies into cooperatives by respecting the principle of private property (as opposed to a nationalization by force) and a commonly accepted way of transferring ownership, and the fact that not all workers are necessarily willing or capable (at this stage) to transition to a cooperative.

- The proposals above are rather simple to put in place, much simpler then the patchwork of laws and regulations trying to address the myriad of issues stemming from shareholder/privately owned companies such as tax avoidance/evasion, working conditions, social dumping, ecological footprint etc; a game of whack-a-mole at which private companies are extremely good, not only by circumventing laws but also via the revolving door between the private/public sector, lobbying and other ways to corrupt government officials.

- Many people argue that shareholder/privately owned companies are the “best” and most efficient system for a thriving economy. By putting these measures in place, we will be able to put that claim to the test. Besides, these proposals also tick one of the boxes that many of the proponents of shareholder/privately owned companies advocate for: competition! Finally, they will have an opportunity to “compete” against an alternative company ownership and production model.

- And lastly, introducing a democratic way of functioning in the workplace directly reinforces the knowledge and skills necessary for a healthy democracy. It is completely absurd to believe that a majority of citizens which, in their daily lives are in a condition of subordination to their bosses, will be able to fully and efficiently participate in a democratic society.

Cooperatives, of course, will not solve all the problems. There is no doubt that there will also be cooperatives that will fail, or that will behave in a non-ethical manner, but perhaps we will find that there is a “least worst” system to overthrow the current one; and given the desperate (and so far unsuccessful) attempts at fixing the crisis of our economic and financial system, there is no reason not to try.

[1] https://www.cgt.fr/IMG/pdf/Document_-_Cout_du_capital_CLERSE-5.pdf

[2] https://phys.org/news/2017-04-people-tribunal-accuses-monsanto-ecocide.html

[3] http://www.salon.com/2013/09/19/stock_ownership_who_benefits_partner/