Thursday, May 19, 2011

Finding the Right Negatives, Part XI: The Vehicle for Change, A National "Capital Homesteading" Strategy

Why should a national "Capital Homesteading" strategy capture the attention of those now residing on the West Bank and the Gaza Strip? The answer lies in the fact that the universal right to own property (Article 17 of the Universal Declaration of Human Rights) is frustrated systematically by every nation today. This is especially true within modern industrial societies where less than 1 percent of their citizens directly own and control most of the industrial capital.

Economic justice in a modern global economy depends on widespread individual access to ownership of technologically advanced agricultural, industrial, and commercial enterprises, and the means to finance their acquisition, operation and expansion. Fortunately, precedents are now well established for creating new enterprises, with skilled management and advanced technologies, whose ownership is shared by all employees.

In the United States, over 10,000 companies with a total of over 10 million employees have adopted employee stock ownership plans or "ESOPs," 1,500 of which are majority-owned by their employees. Most of these have been adopted since 1972. Employees with no savings or credit have used an ESOP to become owners of their companies in some cases with up to 100 percent of equity participation. (See Miller, John H. Curing World Poverty: The New Role of Property, Social Justice Review, 1994)

There are some cases where the ESOP did not work, and many cases where ESOPs are not living up to their potential. This happens when management and labor fail to create a justice-based culture that respects the property rights as well as the ownership responsibilities of worker-owners.14 (Kurland, Norman, "The South Bend Lathe Story: What Can We Learn from an ESOP 'Failure'?" in The ESOP Association, Journey to an Ownership Culture: Insights from the ESOP Community, Scarecrow Press, 1997, pp. 41-49. Available at www.cesj.org.) However, the most successful ESOP companies are world exemplars of "Justice-Based ManagementSM," a leadership philosophy that incorporates social justice in corporate management.

(See "Organized for the Common Good Through Value-Based Management" by William Nicholson, on the successes since 1983 of the ownership system at Western Building Products, Milwaukee, Wisconsin. Available at www.cesj.org. (The term "Value-Based Management" has been changed to "Justice-Based ManagementSM to reflect its governing principles of economic and social justice and to differentiate this new leadership philosophy and management system from what is now referred to as "Value-Based Management" by business schools and Wall Street investment banking firms, which merely seeks to maximize long-term stock values for shareholders.) Where principles of Justice-Based ManagementSM are applied, corporate boardroom and workplace behavior embody and reinforce high moral standards. Loyalty between top management, workers, outside shareholders, customers and suppliers, is a two-way street. And corporate governance is structured to achieve the transparency and accountability that was lacking in Enron, WorldCom and other flagrant cases of executive abuse. Further, executives of the best companies have long-term investment horizons measuring their success by dividend levels for all shareholders, profit sharing distributions for all workers and value they bring to their customers. They avoid trying to manipulate their share prices in public stock exchanges. And the differential in compensation levels between the highest paid executive and the lowest paid worker is generally no more than 3 to 5 times a tolerable level for maintaining a sense of community but not over 500 times as in some American corporations.)

More widespread encouragement of this leadership model by lawyers, accountants and consultants, in this author's opinion, would be far more effective than passing more laws and hiring more government regulators, for preventing future Enrons, WorldComs and similar Wall Street scandals.

Twenty laws have been passed by the U.S. Congress since 1973 to encourage the expanded use of ESOPs, including the reorganization of the Northeast rail system, pension reform, tax reform, trade policy, foreign economic development policy, as well as other measures designed to greatly accelerate the adoption of ESOPs by major U.S. corporations. The credit privileges and special tax advantages that the U.S. government has given to workers who adopt ESOPs, allow workers without savings to purchase shares on credit wholly secured by the future profits of the company. Because employees are directly linked to productivity increases and profits through their ownership rights, studies indicate that firms financed through ESOPs, when combined with participatory management and gain sharing, generally perform better than their competitors.

The ESOP is no longer a mystery in the Middle East. In 1989, the $160 million Alexandria Tire Company was launched in Egypt, creating the Middle East's largest radial truck tire plant, in a joint venture with Pirelli Tire of Italy and other investors. Thanks to the US Agency for International Development, over 600 worker-shareholders are benefiting from this transaction, "earning" their ownership stakes through the most advanced ESOP in the developing world. (See Kurland, Norman and Brohawn, Dawn, "Beyond Privatization: An Egyptian Model for Democratizing Capital Credit for Workers", paper presented to the American Bankers Conference on ESOPs, New York City, June 12-13, 1989, as revised by authors, 1993. Available at www.cesj.org)

The key to broad-based ownership is the democratization of capital credit, going beyond micro-enterprise lending, as in the Grameen Bank, to macro-enterprise lending. In the case of the Alexandria Tire Company, this was supplied through a unique application of Islamic banking principles. In the future, the discount mechanism of central banks can supply such asset-backed, self-liquidating credit to commercial bank lenders for financing growth of broadly owned productive enterprises. (See Kurland, Norman, "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation," Journal of Socio-Economics, vol. 30, 2001, pp. 495-515; also available at www.cesj.org.)

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