Speech delivered in 1990 (or possibly the end of the year before)
I welcome the opportunity to address you this morning on the subject of ‘Trade Unions and Financial Participation’.
For some years now trade unions in New South Wales, and more recently the ACTU, have turned their attention to the possibilities and pitfalls of employee financial participation in the enterprises for which their members work.
The main focus of this attention has not been on workers co-operatives, worker buy-outs of companies or crude profit sharing schemes.
The approach which has received the most detailed attention and support from the Labor Council of NSW and the ACTU, not least as a result of the continued efforts of the Association for Employee Ownership, is based on the self financing schemes usually known as Employee Share Ownership Plans (ESOPs) and incorporates Employee Share Ownership Trusts (ESOTs).
Under this form of employee ownership an Employee Share Ownership Trust (an ESOT) is usually established by a company. The ESOT obtains a loan either from a supportive company or from an external lending institution.
The ESOT uses the money borrowed to acquire a significant equity stake in the company through buying the company’s shares. These shares may be purchased from other shareholders, either directly or through the market, or they may be newly issued.
Dividends on the shares together with any realised capital gains and any profit payments made by the company to the ESOT, can be used to pay off the loan.
It is not surprising that the “self financing plan” is the scheme most strongly supported by the Labor Council because under such ‘plans’ the employees share only in profits and not in any losses because there has been no financial outlay by any employee to buy shares.
It is probably also not surprising that unions have a number of concerns with ESOPs and these include the following:
1) Companies introducing ESOPs should continue to work within the arbitration system.
2) ESOPs should not be installed as a trade off for wage increases or as a concession for wage cuts in a distressed business. Wage levels must be independent of financial participation schemes. The wage rates of employees are established by reference to a range of factors and principles and wage levels justified for employees should not be affected by financial participation schemes.
In particular, unions reject proposals for a discounting of wage rates in return for an indefinite additional sum through financial participation.
3) ESOPs must be installed in an affordable and financially equitable fashion to the employees.
4) ESOPs need to operate in a non-discriminatory fashion, i.e., participation will be open to all employees on a non-discriminatory basis. All employees must be eligible to participate. A number of schemes have been confined to certain categories of employees (generally managerial and executive categories) and this is unacceptable to the union movement. Financial participation schemes must be available to all employees regardless of rank.
5) ESOPs should only be established in conjunction with programmes for employee participation and workplace democracy, and with the support of trade unions. The introduction of ESOPs should be part of a comprehensive approach to greater participation. Positive benefits of greater participation are not achieved through narrow proposals to introduce ‘financial participation’ whilst maintaining traditional management approaches in other areas.
Research clearly suggests that in practice financial participation in the absence of workplace participation has little or no impact on productivity or company performance.
“The critical factor appears to be the degree of employee involvement both in the design and implementation of schemes and in other enterprise activities” (Australian Department of Industrial Relations, Sharing Profits and Growth, A.G.P.S., 1987, p. 11).
6) There should be a positive role for trade unions in developing ESOP proposals, and in representing the employees involved in ESOP proposals.
Schemes must be the subject of full consultation and informed decisions. Trade unions should be involved from an early stage. Employees should be provided with a detailed analysis of the final proposal and given access to independent advice so as to enable an informed decision to be made, minimising any potential for financial loss.
7) Trade unions should be represented on Employee Share Ownership Trusts.
8) From the point of view of employees who will be the beneficiaries of ESOP, there is a need for:
– Simplicity in the design of the scheme;
– Sound communications regarding the implementation and provisions of the scheme; and
– Involvement, along with management and unions, in the initiation of any ESOP
9) ESOPs should provide for the fair and proportional distribution of benefits to any employee in the event of death, disablement, retirement, resignation or retrenchment.
Having outlined some unions concerns about ESOPs, Labor Council can see a number of potential benefits flowing from the successful implementation of such schemes. As a strategy for the labour movement, employee ownership can:
1. Combat job losses and unemployment
2. Prevent regional decline
3. Assist in industry regeneration, restructuring and rejuvenation
4. Increase productivity
5. Increase employee’s incomes and standards of living with higher quality and more stable jobs
6. Establish structures where capital, management and unions can more readily work together in democratically structured environments towards common objectives
7. Reduce industrial disputation, hostility and tension
8. In partnership with the trade union movement, allow further planning controls over the market economy
9. Allow for employees to share in profits and the decision making process, particularly in respect to investment.
Some, however, have argued that:
Within the company it should start people saying ‘we’re all owners now’. It can have an impact on quality, productivity, profitability, expansion and the changed perspective of employees and even on new and more challenging dialogue with trade unions mindful of the new status of their members. (Michael Marsden, ESOPs – A Fable for Our Time?, Industrial Participation, Winter 1987/88, p.12)
In relation to possible privatisations of government enterprises, some argue that unions and workers should reject offers of employee share ownership as some sort of “sweetener”. The Labor Council of NSW, on the other hand, argues that should government enterprises be removed from the public sector, unions should be seeking to install employee ownership as the alternative ownership structure. Indeed, a condition precedent for privatisation should be the introduction of democratic employee ownership.
For some time now, the Labor Council has been discussing ESOPs with the Association for Employee Ownership in Australia and a draft “compact” has been drawn up.
The Association and the Labor Council agreed on the following points of agreement regarding ESOPs:
i) All employees in ESOP companies should have the right to participate in the ESOP.
ii) Shareholding arrangements should, in preference, be via Employee Share Ownership Trusts (ESOTs) which can allocate shares equitably, and on a non-discriminatory basis.
iii) ESOTs should, as much as possible, be self financing.
iv) Voting rights must be passed through ESOTs to individual employees to enable them to vote their shares.
v) All matters involving the operation of a trust must be decided upon in a democratic fashion, i.e., each participating employee will have one vote.
vi) ESOPs should be negotiated at the company level by the workforce in association with their trade union.
vii) ESOPs should not be supported where they have not been introduced in full consultation with employees through their trade union.
viii) In order to enhance the effectiveness of employees as shareholders, full disclosure of company information backed up by education programmes should be available to enable full participation in enterprise decision-making processes.
ix) ESOP companies should adhere to awards, working conditions and practices and industrial rights as defined through the arbitration system.
The “compact” outlines an “approved model” for ESOPs but it should not be presumed that the Labor Council or the model is rigid in relation to its application.
It can be operated flexibly to suit local circumstances, and can easily be adapted to include a range of options including financial contributions by employees if that is so desired.
How The Approved Model Works
1) Employer and employees (and their trade union) agree to set up an ESOP.
2) The company forms “arms length” trust, an Employee Share Ownership Trust (ESOT).
3) With the backing of a guarantee from the company, the trust (ESOT) borrows money from a bank to buy a proportion of the shares (or in some cases all of them) of the company. Alternatively, a company can provide (if the other shareholders so approve) an interest free loan or an irretrievable grant of money to the trust to buy shares in the company.
4) The trust (ESOT) owns the shares, i.e., it can control a percentage of a public company), or all or part of a private company.
5) Management of the trust (“The Trustees”) is defined in the trust deed and the trustee manage the affairs of the trust. The trustees should be elected on a democratic basis. Arrangements for trade union representation on the trust can also be made.
6) Voting rights (to the equivalent of the number of shares owned) are passed through the trust to the employees in accordance with their entitlements. Entitlements could be equal or based on contributions (such as length of service).
The voting system will be democratic in the case of an employee buy-out as 100% of the shares would be owned by the trust and all the employees would be eligible to vote.
7) The votes in the company must pass through the trust to the employees because there are identified dangers in vesting the vote in the trustees. For instance, the trustees may be forced to accept takeover offers for a company when the majority of the employees may wish to forego a short term profit in order to secure their jobs. If trustees have the vote instead of the employees, the trustees can be legally forced to sell because they are only acting as an agent for the beneficiaries (the employees).
Special provisions can be included in the trust deed to define the powers of the trustees in the situation of attempted company takeover. The trustees need to be able to negotiate the continuation of the ESOP through any ownership changes.
8) The trust will be sharing in the asset growth of the company through the shares it holds. These shares, which have been paid for by the trust, may be transferred to (“vested in”) the employees after a specified period which is defined in the trust deed.
It is common for time restrictions to apply as they can ensure that shares are not sold until after a desired specified number of years. The shares then vested can only be sold back to the trust at the prevailing market price, usually upon retirement of the employee.
When the employee retires, the shares sold can enable a substantial retirement payment to the employee which is additional to superannuation.
When an employee leaves for reasons other than retirement and vesting has occurred then the shares will also be reacquired by the trust and payment made to the employee accordingly.
When an employee leaves prior to vesting in the particular cases of retrenchment or disablement, then fair provisions can apply to ensure graduated or proportional benefits are paid in line with reasonable periods of service.
9) When the trust obtains a loan it will be obtained on a basis which does not make employees personally liable for their repayment, as this will be agreed to in the loan document (a contractual agreement).
If the company becomes insolvent and a loan guaranteed to the trust has not been repaid, and the trust is unable to repay the loan, employees are protected under the terms by which the loan was obtained.
10) With regard to loan repayments, in the case of a loan obtained from a bank, the trust can pay back the loan from the dividends it receives from the company. These dividends now carry no tax if they are franked. The interest payments on the loan could also be paid by the trust through receiving a share of the profits from the company. The trust would pay no tax unless the share of the profits exceeded the interest costs, or the company had not fully paid tax on the earnings it distributes as a dividend.
In the case of loans provided by a supportive employing company, various arrangements can be made which can ease the loan repayment situation for the trust. Grants and/or interest payable on loans raised by the company to contribute to the trust are income tax deductible to the company.
The trust has the same rights to dividends, bonus issues and rights issues as possessed by any of the other of the company’s shareholders.
11) With regard to the trust repurchasing shares, sufficient funds are normally maintained in the trust to enable this to occur by the company:
– Continuing to support the servicing of the debt of the trust, and/or
– Providing tax deductible grants to the trust, and/or
– Releasing fresh issues of shares to the trust.
12) The system as described (the “approved model”) is called a “self financing” plan. It is comparatively very different to the “savings” plans operating in other employee ownerships such as worker co-operatives. In the “self financing” plan the employees neither use their own money, nor are they liable for the repaying of the loan used to buy the shares. Employees however, as in “savings” plans, do receive voting rights (control enabling broader participation and more formal influence on the policies and operations of a company), profit shares and shares in asset growth.
The widespread implementation of an ESOP system could be extremely useful for equitably spreading the wealth resulting from economic growth. As well, ESOP’s can ensure, through the legal foundation of share ownership, a more formal influence by the employees in the operations of an enterprise.
The Labor Council of NSW sees the potential for employee ownership to provide major benefits to the economy and working people of Australia. It can be developed in ways consistent with the traditions, principles and practices of the labor movement.
Positive outcomes in relation to increasing individual income, implementing industrial democracy and maintaining an identification with unions as representatives of workers interests can be achieved within this framework and the trade union movement can play an active role in the changes which are being promoted in the area of employee financial participation.