The Citizen’s Share: Putting Ownership Back into Democracy (Yale University Press, 2013) is a book title that will at once intrigue both the readers of The Distributist Review and distributists generally. Widespread ownership of productive property is the essence of Distributism, and, in The Citizen’s Share, authors Joseph R. Blasi, Richard B. Freeman, and Douglas L. Kruse present a compelling case that what they call “broad-based capitalism” is both workable and a central feature of the founding ideals of the American republic. Their work is supported by a ten-year study of worker-ownership and profit sharing arrangements in existing companies, and a historical review of the development of broad-based capitalism in the United States.Seeing the obvious interest that their work would have for the readers of The Distributist Review, I decided to interview the authors, and this I did during the month of March, 2016. The results are what follows, presented with the intent that readers will be incited to study this groundbreaking book for themselves, and also to suggest that the idea of widespread ownership of productive property might well be an idea the time for which has come to pass.Jack Quirk (JQ): For those of us unfamiliar with the idea, perhaps we could begin with an explanation of “broad-based capitalism”?Richard Freeman (RF): Broad-based capitalism is a form of capitalism where the majority of workers obtain some ownership stake of either the firm—for instance through owning shares of companies on the stock exchange, or through a trust fund or other fund that owns shares for the workers as a group—or of the firm's stream of profits through some profit-sharing plan; and where worker pension funds or other savings vehicles own equity in firms in which they do not work. The workers have a financial incentive to participate in decisions and to do their best to make their firm succeed through their ownership in the firm or its stream of profits. Pension fund and related worker investment in assets outside of their firm give them diversification and potential for affecting firms other than their own through those funds. Thus, broad-based capitalism makes workers owners in the economy, and moves the traditional capital-labor conflict toward greater cooperation, with workers having greater power to affect outcomes.Joseph Blasi (JB): Broad-based capitalism is a variety of capitalism where the concentration of capital ownership and the concentration of capital income (capital gains on equity and bonds, real estate and other assets, as well as dividend, interest, and profit-sharing income on these assets) that is typical of post-modern capitalism are more broadly available to workers in firms and citizens in the context of a private sector market economy. For workers, this means that firms have extensive broad-based employee ownership mechanisms to share capital ownership, such as ESOPs (Employee Stock Ownership Plans), grants of equity to workers, worker coops, and stock options, as well as extensive broad-based profit sharing and gain sharing arrangements in order to share capital income through ownership or dividend funds that own equity and bonds in the economy on their behalf, and pay these citizens annual dividends checks or basic income checks.In order to make this possible, Federal, regional, and local governments are encouraged to use tax incentives, educational and information programs, and special procurement rights in order to encourage both firms and governmental regions to consider setting up such arrangements.JQ: In the book you talk about profit sharing, ownership plans, and combinations of both. But am I wrong to think that there cannot be full ownership without having both management input and a share in the profits? Doug Kruse (DK): You're right that full ownership is often seen as involving substantial input into decisions. Technically, ownership is broadly recognized as a bundle of rights which can be disaggregated or limited in a variety of ways. Some of the common ownership rights are “usus” (the right to use or enjoy the property), “fructus” (the right to profit or gain rewards from the property), and “abusus” (the right to dispose of the property). While the legal definition may vary by type of arrangement, it's fair to say that the common conception of ownership includes “usus,” which encompasses having a say in how the property is used or managed. Therefore, while it may not be part of the legal definition in many ownership arrangements, many people see “full ownership” as having management input in employee-owned companies. In employee-owned companies in the U.S., all owners have at least a minimal amount of say through voting rights on issues that state laws say require shareholder votes, but these can be very limited (e.g., a right to vote on whether the company is sold). What we’ve found in employee-owned companies is that—not surprisingly—you only get positive effects on performance if employees have a sense of ownership, and that sense appears to be increased by employee involvement in decisions, training, and job security. So while it’s not technically part of the legal definition, we find that “ownership” has more meaning for employees when it does involve more than just “fructus” or sharing in the profits.JB: You are not wrong. A key empirical finding presented in The Citizen's Share is that employee involvement in decision-making about important firm issues and problems works together with broad-based equity and profit sharing by workers to improve the performance and the value of the firm. But it does not always function as people popularly imagine it! Most businesses today are trying to create value for their customers: with fewer hierarchical levels of management so that more workers are close to the customer and involved in critical issues, with self-directed work teams where multi-skilled workers—often from different departments—can quickly and efficiently bring all the relevant information to bear on solving important problems, and with more highly trained workers who are not just taking orders but actually have a lot to contribute. This does not eliminate the need for executive or strategic management, but it complements it. A more participatory workplace and a more team-oriented and training-rich workplace combines with broad-based employee stock ownership and profit sharing to give workers the tools they need to make the firm more valuable. We find that workers tend to collaborate more, and support each other more, and monitor each other's performance more, when a stake is combined with a say. To be clear, most U.S. stock market corporations do not have workers elected to their boards of directors, and most U.S. companies with significant employee ownership—which I would define as more than 10%—do not have workers electing their managers (as in pure worker cooperatives).There may be a day when works councils are common in U.S. stock market companies and larger private corporations, but our research shows that the meso-level of participation is very important. Certainly, if workers as a group, say in an ESOP trust, own more than 10% of a company, in a reformed corporate governance system in stock market public companies that are SEC-filing, one would expect that they would be able to elect some members to represent them as investors on company boards. But for the millions of closely-held family and small businesses with under a few hundred workers, mainly in the 50-100 employee sized range, these more informal participatory culture, low hierarchy, and high performance work systems (that combine high training, high access to equity and profit shares, teams, and job security) are likely to be more common, since in these firms private owners often want to be the majority owners. The Citizen’s Share provides many case studies and examples showing that a participatory corporate culture can work well in many kinds of large, medium, and small stock market and family businesses in the United States so that this kind of economy is realistically within our reach.JQ: Based on that, if I want to advocate for worker shares that have the same voting rights as any other, including the right to vote for the board of directors, would you caution me not to sacrifice the possible on the altar of the ideal? JB: There is no question that it would be best for all workers with shares to be able to vote them in any worker ownership system. I would like to focus on what we know or don’t know about this empirically, and the range of practices that are used. There is a lot of research on worker participation in management at the department, team, and job levels, and the results of this research are uniform that this participation has positive outcomes for the both firm and the worker. There is little or no research on whether electing board members directly per se is important for employee or firm outcomes, thus it is important not to generalize the worker participation research to formal voting rights on every decision or electing the board. The reason for supporting formal voting rights and workers directly electing boards of directors with their ownership shares is based on advocacy of a political-economic right (the principle that shareholders should have shareholder rights) rather than existing research.Even the purest model of worker ownership, The Mondragon Cooperation, the largest federation of worker cooperatives, offers an interesting field experiment on this score. It makes sense to ask how high employee participation in governance goes in Mondragon and how it is structured as a backdrop to this discussion. There is popular view that Mondragon's workers directly elect their managers and their boards, and if they do it, every form of worker ownership should do it.This is simply not true. According to Professor Fred Freundlich at Mondragon University, most Mondragon worker coops have over 350 workers requiring that almost all governance activity is representative democracy rather than direct democracy. This means that the worker-members meet once a year in a 2 to 3 hour general assembly that elects their board on a one worker–one vote basis. That board meets monthly throughout the year. It is this board that elects the CEO and can remove the CEO, not the workers. During the year, workers participate in upper level governance by talking with their board member, and by the board members interacting with the CEO. There is another important elected body, the Social Council that is elected by work area, and this is a representative body that discusses workplace issues with board members and the board. It is similar to a European works council. In short, Mondragon's worker coop members only meet in a general assembly typically 2 to 3 hours a year, outside of formal discussions, and depend on informal conversations and the Social Council for day to day communication of workplace interests. Research on worker cooperatives in the U.S. also suggests that they often use representative structures. However, on a day to day basis, “worker participation” at Mondragon is mostly about employee involvement at the department and team levels, with a lot of self-directed work teams.Now let's compare this to the U.S. ESOP (Employee Stock Ownership Plan). Some ESOPs in the United States do have direct voting rights that very closely resemble the Mondragon model. The largest and most interesting example is Amstead Industries, with 11,000 U.S. ESOP workers and $4 billion in sales [Amsted], where workers directly elect the Board of Directors, which, in turn, selects the CEO, just like Mondragon. Amstead shows that a large group of typical workers in the U.S. can successfully implement the Mondragon model. Amstead also has unions in some of its plants, and works at implementing some worker participation structures. Amsted was once a public company where workers were used to voting any stock they owned, so the full voting ESOP structure simply continued with that culture of formal governance participation. Some smaller ESOPs follow this model, which has resulted in complications only in the U.S. where the new ESOP company inherited very long-standing contentious union-management relations from its past. Workers in any U.S. company on the NYSE or the NASDAQ have, by federal law (the Employee Retirement Income Security Act of 1974 [ERISA]), the highest set of voting rights that any shareholder has.However, workers in closely-held companies, which are not on stock exchanges—namely, ESOPs that involve from 50 to 500 workers, and that make up most of the 4,000 closely-held ESOPs in the U.S.—have a choice about their governance system. There are Federally-mandated basic shareholder rights, with the option of having direct board elections. The ERISA law requires that ESOP workers in closely-held companies have full voting rights on all major corporate issues such as the sale of the firm, liquidation of the company, or bankruptcy. These votes must be conducted confidentially according to the principle of one share one vote, not one worker one vote (although ESOPS can adopt this voting approach if they wish).Aside from these major issues, when a company becomes an ESOP it typically selects a professional trustee (like a bank or trust company) that votes the stock on an annual basis on behalf of the workers. Typically, the only action of the trustee is to elect the board annually, unless there is a major transaction, and then the trustee will consult the workers directly. ESOPs also have some bodies similar to the Mondragon Social Council, such as the ESOP Administrative Committee that touches base with workers about the workings of the ESOP and the company.This approach to governance in U.S. ESOPs is a carry-over from the fact that most ESOPs grew out of family businesses that were bought by the workers and the managers in a series of successive transactions. I suspect that legislators were thinking that family businesses would be more likely to sell part of the business to an ESOP if more conventional management structures were in place. It is probably the case that this has helped ESOPs multiply rapidly in the U.S. However, now that there are a few thousand mostly closely-held ESOP companies that are majority worker owned, most of them 100% worker-owned, I do think that it makes sense for those companies to consider moving toward a lot more involvement in electing boards. I also see a hybrid model developing in the U.S. where worker cooperatives organize themselves as ESOPs to gain ESOP tax advantages, and also use the one worker one vote (versus one share one vote) model. In my opinion, a lot of this has to do with the fact that the U.S. is way behind European countries on the issue of works councils. This should not take us away from the important point that, just as in Mondragon, the most important worker participation in U.S. ESOPs is at the job, team, and department level.RF: Of course workers’ shares should count same as anyone else’s. They have more knowledge of company and a greater ability to improve performance than outside investors. And they are, in most cases, the key determinant of the value of the firm. In the Market-Basket protests,[note]https://en.wikipedia.org/wiki/Market_Basket_protests.[/note] where workers and top managers did not have shares but were paid profit-sharing, the protests of the workers forced a board to change its decision regarding the CEO. With shares, all the employees would have been able to stop the outside capital from firing the CEO in an effort to shift money from operating the company into the pockets of ownership. In general, any two tier voting system for a firm, as well as for a democratic polity, is dangerous and should be avoided wherever possible. As an outside investor I would consider having a worker-owned fund voting my shares on many corporate decisions.JQ: And, yet, as you have already pointed out, this is precisely where resistance is to be expected in closely held firms. The Market-Basket incident involved one side of the owning family trying to lay back and collect rent on the profits. What kind of incentives can be used to discourage behavior like that? Or will more directory and mandatory legislation be necessary at some point?RF: France has a mandated profit-sharing law, which stems from de Gaulle’s government. But I do not think government mandates will work well in the U.S. The types of policies that are likely to work in our country are these: (1) a strong commitment to greater ownership, ideally from the next administration in the White House, that would publicize this form and, perhaps, create a small group in Commerce Department to work with these businesses—an office of employee ownership and profit-sharing, with wider publicity about the success of these firms and the ease with which they can be set up; (2) modest increases in the tax advantages to these firms, and (3) some modest preferences in government procurement toward such firms. The private business sector can be a major force pushing in this direction. It would be great if, when CEOs met, they bragged about their receptiveness to workers increasing their share of the business rather than the size of their paychecks, which with bonuses and stock grants and options have reached levels unprecedented in our history. If union leadership were to face economic reality and try to make a better future for all workers through ownership, the labor movement could be a major force as well. Absent federal initiatives, states can try their own policies, as some have done.JB: I agree and want to underline that what one wants to see is that a lot of CEOs in many different sectors of the economy are trying out shared capitalism, perfecting models, talking about them at their conferences, and helping business schools do case studies on them. Moreover, the models are being discussed in the media, in communities, in schools, and, most importantly, by national political leaders. I do not think that incentives to discourage behaviors are the most important kinds of incentives. If one looks at the huge growth of ESOPs in the U.S. since just 1975, what has worked has been very modest tax incentives for businesspeople to consider ESOPs and the natural spreading of information about their experiences, as well as public education and academic research to shed light on those experiences. If you want to kill off ESOPs in the U.S. the best way to start is to introduce draconian Federal mandates such as “all ESOPs must be one worker, one vote” or “all ESOPs must have this particular governance structure.” Such mandates would reduce the growth of ESOPs in the U.S. to nothing. But there is room for certain minimum fairness standards on governance, like the required voting rights on major transactions and other similar ideas.JQ: But if states try it on their own, how do we avoid the race to the bottom phenomenon?JB: There is absolutely no evidence of a race to the bottom. Instead, the states that have set up and offered limited aid to establish better legislation to support worker ownership, and to support state centers to educate the population about these structures, have seen substantial growth. For example, Vermont and Ohio's state centers have really deepened worker ownership in those states, and now Pennsylvania's and California’s new state centers will do the same. Senator Bernie Sanders’s legislation to encourage state centers with Federal seed money makes a lot of sense. Iowa has new legislation passed recently with state tax incentives to accelerate ESOPs, and we have similar legislation moving through the Vermont and New Jersey legislatures now. There is a need for help from the Federal level to accelerate the creation of state centers in every state, and to support such state legislation in all 50 states. On cash profit sharing, I do think that it has a strong place in the U.S. because we need a policy that includes workers in wealth-building and wealth-producing for small family businesses where the family sees ownership as something it wants to hold onto. At various points in American history family businesses and privately-held businesses were the leaders in cash profit sharing. New policies should help bring this back to the extent possible.I want to underscore that the best and cheapest policy to spread shared capitalism would be to start 50 state centers to educate managers, firms, worker groups, and citizens. Where such centers exist the understanding and incidence of these ideas expands more easily. Senator Sanders has had a bill before Congress on this issue.DK: Joseph makes good points. I don’t think that’s a problem here as it is with states offering tax incentives to relocate, where there’s clearly a zero-sum game (even negative-sum). With EO (employee ownership) incentives firms are not getting something for free (as with most incentives to relocate), but have to be willing to share significant employee ownership with workers, and it can be targeted to EO transitions within the state (especially for retiring owners). If states start competing in incentivizing employee ownership there could be a “race to the top” to see which state creates the best structure for firms and communities to gain from more broadly shared ownership (better economic performance, fewer layoffs, less disruption of communities, etc.). The standard race to the bottom creates incentives for firms to leave their communities, whereas here the dynamic is in the opposite direction, because EO should increase options for firms to stay in their communities and increase stability for workers and communities.JQ: Is there a way that local governments could incentivize employee ownership in their communities? RF: Yes. State and local governments can incentivize employee ownership by giving preferences in contracts to firms that have some form of ownership. Imagine a city wants to build a new school or upgrade some road or its sanitation department. It inevitably will contract out some of the work to private firms and purchase equipment and supplies from private entities. Say that as part of its procurement policies, the city or state agency asked each potential supplier what they are doing in terms of employee ownership, profit-sharing, or any related policies, and told potential suppliers it would include the position of the firm in these areas as part of their contracting decision. Firms that were ESOPs or had profit-sharing plans would submit relevant data with little cost and improve their likelihood of winning a contract. Those that had not previously thought about establishing ownership or profit-sharing would wonder why the local/state government thought this important and what they might do to move in the ownership/profit-sharing direction. The local/state government could direct them to relevant public or private groups that would help the firms think about this form of organization. I do not think it would take much “nudge” to start firms going down the ownership/profit-sharing path. Tying the nudge to procurement would grab attention. And I believe citizens and taxpayers would favor this sort of affirmative action policy as strengthening capitalism and moving to reduce inequalities in a productive way.JQ: Something I don’t often see elaborated in discussions about ESOPs is the manner in which the amount of stock to be given each employee is determined. Is there a pattern that is followed by ESOP companies, or is it different with each firm?JB: The formula for allocating stock is generally not different for each ESOP firm. In ESOPs stock is typically distributed according to relative salary, although more egalitarian procedures are also allowable. Many ESOPs use this relative salary method. However, ERISA, the Federal law regulating pensions, legislates three sets of strict complicated rules to be sure that the tax incentives for ESOPS (and other retirement plans in general) do not get concentrated for the benefit of the top earners or a select group in any company. These fairness rules have serious impact in ESOPS since ESOPs divide up vast wealth and the rules have vastly contributed to the populist flavor ESOPs engender. First, ESOPs must include most employees (most ESOPs include virtually all full-time workers, but unions can opt out if they wish). Second, all ESOPs must pass a rigorous test to insure they are not essentially top heavy in their benefits to the highest earners. Third, as noted, ESOPs can only allocate/distribute stock up to a limit of about $250,000 each year, so a $300 k worker can only get 5 times more than a $50 k worker, not 6 times more. It is a stunning egalitarian circuit breaker in ESOPs. I should note that just as there are widely-held unrealistic “utopian” opinions about how extremely participatory and democratic Mondragon is, which I noted earlier are exaggerated, there are also opinions about Mondragon’s distribution of salaries and shares that often exaggerate what the reality is. In fact, the value of Mondragon's shares, just like ESOPs, generally varies with salary, and with similar upper limits. And Mondragon’s salary structure allows multiples from the lowest salary of about 5 with 6 to 8 allowed for managers. A recent study of ESOP salary structures showed an average multiple of 5. The highest manager of Mondragon, I understand, had a multiple of about nine. ESOPs, however, do allow non-ESOP added benefits to be paid to senior managers to recruit and hold them. The National Center for Employee Ownership has two studies on executive compensation in ESOPs.JQ: Before we end, I want to make note of the fact that the idea of broad-based capitalism is an idea that has roots in the founding of the Republic. This is something you explore to a great extent in your book. You also make the point that ownership of corporate shares has taken the place of land ownership as a basis for widespread ownership of productive property. Could you expand on these themes a little bit? JB: We tell the story of this American history in chapter one, read it at www.thecitizensshare.com.RF: The history is amazing in showing how employee ownership and profit-sharing is the American solution to making sure that economic prosperity is widely spread and beneficial to all. The Founders of the U.S. believed strongly that democracy and widespread ownership were intrinsically entwined. Madison, arguably the deepest analyst, wrote that whenever a majority of citizens lacked ownership and income from capital, “either they will unite… and become dupes and instruments of ambition, or their poverty and dependence will render them mercenary instruments of wealth… In either case liberty will be subverted; in the first by a despotism growing out of anarchy, in the second by an oligarchy founded on corruption.” His description of how special wealthy interests would use their money and power to make sure that laws and regulations benefit them fits with the observations of many on both the right and left today, that a crony capitalist establishment has indeed weakened our democracy and perpetuates inequality. The European solution to inequality has been the social welfare state, with strong trade unions representing workers. The American solution is widespread ownership of capital. In the 1770s the main form of business capital was land. The goal of spreading land ownership has been widely supported throughout U.S. history, motivating the Homestead Act enacted during Lincoln’s Administration, and uniting persons with otherwise differing political ideologies and party affiliation. Today the main form of business capital is ownership of shares in the company one works for, in shares of capital more broadly, and in sharing in the profit generated by one’s own work. We hope for support from your readers for public and private policies to spread ownership more widely, and thus strengthening our democratic traditions. In so doing, we will make Washington, Jefferson, Madison, Adams and all the other Whigged founders from the history books proud.—Jack QuirkDr. Joseph Blasi is the J. Robert Beyster Distinguished Professor at Rutgers University’s School of Management and Labor Relations in New Brunswick, New Jersey. The Beyster endowed Chair is the only permanent endowed professorship on employee share ownership in the world. A sociologist, Blasi teaches the undergraduate and graduate courses on corporate governance. He is also a Research Associate at the National Bureau of Economic Research. He is also Director of the Fellowship Program on employee ownership and profit sharing at Rutgers. The Fellowship Program grants competitive fellowships to young and emerging scholars researching employee ownership in universities in all fifty states and now has more than 120 Fellows and Faculty Mentors who participate in two conferences annually. Dr. Blasi earned his doctorate from the Harvard University Graduate School of Education in 1977, his bachelor’s degree from the University of Pittsburgh in 1972, and joined the Society of Jesus (Jesuits) in the late 1960s for studies in theology and classics. During that time he developed a deep interest in the Social Gospel and as a practicing Roman Catholic continues to have an interest in economic and social justice.Richard B. Freeman is Ascherman Professor of Economics at Harvard University, and Faculty co-Director of the Labor and Worklife Program at the Harvard Law School. He directs the Science and Engineering Workforce Project at the National Bureau of Economic Research. His research interests include the job market for scientists and engineers and the transformation of scientific ideas into innovations; Chinese labor markets; income distribution and equity in the marketplace; forms of labor market representation, and shared capitalism. His books include What Do Unions Do? (with James Madoff), Can Labor Standards Improve Under Globalization (with Kimberly Ann Elliott), What Workers Want (with Joel Rogers), and What Workers Say (with Peter Boxall and Peter Haynes). Website: http://scholar.harvard.edu/freeman/home.Douglas L. Kruse is a Distinguished Professor at the School of Management and Labor Relations (SMLR), Rutgers University, and is a member of the Graduate Faculties in Economics, Labor and Employment Relations, and Human Resource Management. He has a Ph.D. in Economics from Harvard University, and served as Senior Economist at the White House Council of Economic Advisers in 2013-2014. He is a Research Associate with the National Bureau of Economic Research (Cambridge, MA), a Beyster Faculty Fellow at SMLR, an editor of British Journal of Industrial Relations, and was appointed to New Jersey’s State Rehabilitation Council and the President’s Committee on Employment of People with Disabilities. His book Profit Sharing: Does It Make a Difference? won Princeton's Richard A. Lester prize as the year’s Outstanding Book in Labor Economics and Industrial Relations.