A couple of weeks
ago, we got a request for help from a member of the CESJ “Board of Counselors,”
the advisory board of the interfaith Center for
Economic and Social Justice. The
Counselor, a Catholic “permanent deacon” (whom we shall call “Deacon John”), had
gotten into a discussion with a former member of the CESJ Board of Counselors
and an associate of the former Counselor. The former Counselor had withdrawn from the organization after making a number of
unsubstantiated claims concerning various individuals in general, and the Just
Third Way in particular,.
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| Belloc: Distributism is not socialism. |
What was
interesting is that the former counselor, whom we shall call “Tom Steele,” and his
associate, whom we shall call “Joe Wide,” both claim to be
“distributists.” Steele, in fact, has been described as a "distributist economist." “Distributism” as more
or less defined by Gilbert Keith Chesterton and Joseph Pierre René Hilaire Belloc, is a policy of
widespread capital ownership, with a preference for small, family owned farms
and businesses. When an enterprise must
be large, however, Chesterton said it should be owned “on shares” by the
workers, meaning the workers should own equity shares in the company.
Both Chesterton
and Belloc were adamant that distributism was not to be construed in any way as
either capitalism or socialism. “Widely
distributed” did not, according to Chesterton, mean “widely RE-distributed.” True, a number of distributists and others
have been trying for some time to “have their cake and eat it, too” by claiming
that Catholic social teaching advocates “democratic socialism” and that only
“totalitarian socialism” is condemned. A greater number of distributists
and others, however, have expressed doubts and serious concerns about this claim.
Oddly, a
significant number of well-known and prominent distributists and Chestertonians
either claim that distributism is a form of socialism, or remain silent. This makes it appear as if they approve of,
or acquiesce in, the claims about distributism (and Catholic social teaching)
being compatible with socialism.
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| George: the State should effectively own all land. |
One of these was
Tom Steele, who claims to be a “georgist,” that is, a follower of the agrarian
socialist Henry George, who attacked Pope Leo XIII on the grounds that he,
George, understood Catholic social teaching and the pope did not (George was
not a Catholic, but by his own admission a “Jeffersonian Deist” who dabbled at one time in spiritualism).
One of Steele’s quarrels with CESJ was that we said he sounded
socialist, which made him angry. His
current claim is that he is a socialist, and socialism is consistent with
Catholic social teaching, so CESJ’s advocacy of the Just Third Way (which agrees with
the popes) makes Tom angry.
In sum, Steele was
angry in the past because he said he was not a socialist, and now Steele is angry because
he says he is a socialist. (We’re just a
bit confused over why he is angry.)
The specific
issue about which Deacon John asked, however, was a technical question about
finance and the operation of the ESOP:
June 30, 2017
Dear Deacon John:
This is in
response to your request for input into your discussion with Joe Wide and Tom Steele. The delay was the result of the scope of the
erroneous assumptions and assertions Wide and Steele make that are fundamental
to their particular worldview.
Assuming that Wide
is speaking in support of or in substantial agreement with Steele’s position, the
main issue is that Wide and Steele assert that, in order to have a just
transaction, it is impossible for workers to purchase a company on credit through
an ESOP and ever repay the principal of the acquisition loan. This necessarily implies that in their view, ESOPs
cannot work unless some unfairness or injustice is inserted into the transaction,
so that no one can gain without someone else losing. Either the seller (the current owner or
owners) is shortchanged, or the buyer (an ESOP trust on behalf of the workers) is
cheated.
Anyone who
understands basic finance, however, can refute Wide’s and Steele’s logic with
ease. The best answer, however, is
empirical evidence: the fact that ESOPs are working successfully in the real
world.
There are at
present approximately 8,000 ESOPs in the United States alone, covering around
10 million workers. Many of these ESOPs
are or were leveraged, allowing the workers to purchase shares of the company
on credit, and repay the loan out of future pre-tax (or untaxed) earnings of
the company.
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| Trick question: can you even define a bank? |
If Wide’s and Steele’s
claim that ESOPs cannot work justly is correct, every one of the millions of
workers who are participants in leveraged ESOPs managed to get away with
cheating the selling owners or “the banksters” who lent them the money to
purchase the company without any one of
the millions of sellers or the thousands of crafty “banksters” being aware they
were cheated!
There may have
been some dishonest transactions, and some workers, sellers, or even “banksters”
were cheated. Most ESOPs, however, are
the result of honest and straightforward transactions carried out to the mutual
advantage and satisfaction of all parties.
In our over
thirty years of professional experience in the field of ESOP design, finance,
and administration, we have witnessed how the advantages of an ESOP have
enabled the selling owner(s) to receive the high end of market value. At the same time — and in the same
transaction — the new worker-owners paid off the acquisition loan from the bank
years ahead of schedule.
As a result of a
worker buyout (we are referring to a specific case, one of our professional — i.e., not related to CESJ — clients),
the number of workers in one company increased by nearly 337%. Participants with less than ten years’
service have average account balances of over $13,500, those with more than ten
but less than twenty years’ service have average account balances of over $91,500,
while those with twenty or more years of service have average account balances
of nearly $450,000. It is significant
that in this particular plan, almost 12% of the participants have accumulated
ESOP account balances of over $1 million.
These amounts do
not include what participants have accumulated in their 401(k) accounts,
personal IRAs, non-qualified (i.e.,
non-tax deferred) investments, or Social Security entitlements.
The average ESOP annual
allocation to each active participant is approximately $4,000, not counting
reallocations of forfeited account balances (averaging $400 per participant) or
earnings on Plan assets (averaging $3,300 per participant), with vesting
beginning after two years of credited service.
This is a total average annual addition to each participant’s account of
over $7,500 per year — approximately the same as the annual per capita capital growth ring in the
United States in a slow-growth economy.
While the facts
alone refute Wide’s and Steele’s claim, it will be useful to examine their
assertions and logic in their own words.
Specifically, in your exchange with Wide:
Deacon John to Wide: As I indicated at the outset,
my interest is in fostering ownership of productive capital on a broader and
deeper basis. That may require a broader understanding of, and agreement on,
what may constitute “productive capital.” I understand that in any particular
case, ESOP may be or may not be an effective way to accomplish this. I have
personally benefited from an ESOP while employed by AT&T, but I understand
there are concerns about using it — especially in the case of a buyout. I am
not arguing about that; in fact, I am not arguing at all. What I might be
inclined to argue as indicated earlier, but perhaps not, are methods of
“valuation” for the purposes of compensating employees, lending to, investing
in, or the acquiring of, a business enterprise or portion thereof. And, since I
have already addressed the latter purpose from a buyer's perspective, i.e., the sale price, then I believe
that I have been responsive. It takes a buyer and a seller to agree on a sale
price, economic theories of considerations notwithstanding. If there is
agreement between a knowledgeable buyer and knowledgeable seller, with full
disclosure, i.e., a fair trade, do we
not therefore have a "proper valuation" in practical terms?
Wide: Sure — if you have a proper valuation on these terms, there
would be a fair trade, on strictly Capitalist terms. What would motivate it?
The hopeful new owner/operators would have to sell enough bonds to buy ALL the
anticipated, agreed-upon future free cash flows of the firm. Plus, now they’d
have to pay the bond coupons. But if they could pay the bond coupons, why, that
ability to produce is priced-into your fair trade value, so they could never
REDEEM the bonds. That's Steele’s point. I am less pessimistic about the idea
than I think he is, but it is a very good point, and I do not think CESJ
address it. You're not addressing it either; you're just telling us yet again
where your interests lie. That's all very nice. What about the point? I think I have an answer for Steele, which I'll
try to remember to discuss with him at the Chesterton conference. Of course, if
I think about it long enough to have a discussion, I may well discover that I'm
wrong. But right now I'm feeling
clever. ;-) The ESOP you enjoyed at AT&T was not
Kelsonian: the shares of a Kelsonian firm are never traded at all, much less
publicly traded.
First, however,
we need to correct a few facts — which we will do tomorrow.
#30#
