Shared Business Ownership: One essential step to economic justice

The text of a webinar presentation courtesy of Wits Business School and the South African Employees Ownership Association on 28 April 2022. One day after Freedom Day, the intention was to explore how we might create some economic justice to go along with the attainment of democracy 28 years ago. Most if this is drawn from articles I have previously published on LinkedIn. It is the importance of the issue, and excitement about Wits and SAEOA co-operating to raise the profile of shared ownership that prompted me to publish this.

“Seek first the political kingdom and all else shall be added to you” said Kwame Nkrumah before Ghana’s independence in 1957,?suggesting that economic justice would follow.

28 years ago we stood in those snaking queues and claimed the political kingdom with crosses on the ballot.?We have learnt (again) that economic justice does not just follow, and that we have to find a new path. This is true globally, and in South Africa, which feels in some ways like the global political economy, distilled into one country.?We know that South Africa is reputedly the most unequal country in the world – at least of those countries that keep reasonably accurate information. And we know that unemployment rates, by the expanded (meaning more accurate) definition is above 45% according to Stats SA.?

Poverty and hunger are on the rise again after retreating somewhat, in the first decade or so after 1994. In 2019, according to one source if your earned R7400 a month you were in the top 10% of income earners.?That pretty much tells you all you need to know about levels of inequality and poverty. And as we know, things have got worse, not better since 2019.?Much worse.

The case I want to make today is that progressively achieving substantial employee ownership in enterprises in South Africa could play an important role in reversing these inequalities and giving many more South Africans a real stake in the economy – and that it should be possible to mobilise support for this across a broad political spectrum and even across a broad range of economic perspectives.

We certainly have to do something different.?When politicians and business leaders speak about poverty and inequality, the term you will hear most often, is that we need to have “inclusive growth”.??Then there follows a long list of things that should be done to achieve growth; attract investors, improve governance, reduce bureaucracy, fix the infrastructure and lots more.?No-one ever tells us what “inclusive” means, still less how you “do” inclusive growth.

In fact it’s hard to avoid the conclusion that “inclusive growth” is just a re-incarnation of the discredited “trickle down” theory which as we know is just a joke.

Only it’s not funny.?The neo-liberal school of economics, assiduously nurtured by Milton Friedman and his colleagues in think tanks and universities for decades before Reagan and Thatcher uncorked the bottle, swept across the economies of the world unleashing the doctrine of small government, unfettered business, privatisation of public assets, and the notion that the only business of business is to maximise profits for shareholders.?These ideas also captured the multilateral institutions such as the World Bank and the IMF, with their structural adjustment programmes wreaking havoc and poverty around the world.

And the loud sucking noise you hear is not the gentle sound of wealth trickling down, but rather the whoosh of wealth being extracted from the middle and working classes and the global south into the vaults of asset managers and private equity establishments that increasingly own the world. And the loud banging noise you can hear is the sound of those vault doors slamming shut as opportunities for social mobility shrivel across the world.

There are many problems with the notion of inclusive growth.?I will focus on just two:.

1.?????Can we grow our way out of poverty?

I don’t have any figures for South Africa but let me share the conclusion of some very detailed work done on eradicating global poverty (by achieving the very mean goal of US$5 per person per day).?In a very detailed paper written for UNCTAD by David Woodward

He calculates:

i.????????????????If you wanted to get everyone in the world to live on $5 a day without changing how the benefits of growth are distributed, (and assuming 4% annual global growth) then it would take until 2222,?(yes two centuries!)?and the world GDP would have to grow to more than 170 time its present size.?We can call this the “trickle down model”. Note that inequality would get worse, and the world would have fried and run out of resources – but no-one would live in extreme poverty.

ii.???????????????If you wanted to achieve the same result quicker, then you could intervene in the global economy to ensure that the poorest 10% of the population benefited proportionately from growth.?In other words, inequality would neither get worse nor better.?This would allow you to get everyone over the $5 a day target by 2128. That's a gain of a hundred years?and you would “only” have to grow the global economy 19 times. Inequality would stay the same.?I guess this might be called “more inclusive growth”.

iii.??????????????If you wanted to move even quicker, you could direct a significantly larger share of growth to the poorest 10% of the population – so that they would benefit more than the rich.?Using Woodward’s assumptions, we would get beyond $5 per person per day by 2076 and “only” have to grow the world economy by 6 X - so 55 years from now, without considering the effects of such growth on climate change, nor the enormous setback that the COVID 19 pandemic has caused.?

Woodward himself calls this third option “pro-poor growth” and notes that achieving it would require “a reassessment of the current models of the global economy and of development in terms of their impacts on the poorest, and of their long-term viability and sustainability in a carbon-constrained world, and a real willingness to make fundamental changes in both to maximise their poverty impact and sustainability." (p60).

If eradicating poverty by 2076 is good enough, and you believe that growth that benefits the poor more than the rich is really possible for the next half century, then I guess that pro-poor growth would be the way to go – although the kind of “re-assessment” that Woodward is talking about would certainly require radical restructuring of the global economy way beyond the intentions of those who most frequently use the term “inclusive growth”.

Which brings us to the second problem with the idea of inclusive growth as a way of eradicating poverty

Always the income statement, never the balance sheet

The notion that “economic growth” in the future, measured by that very imperfect instrument GDP, is the only way to reduce poverty and inequality, is a really one eyed and shallow way to think about this.?The world has an abundance of riches, stored up over centuries of industrial development.

And at the risk of provoking some loud groans, it is true that globally, and in South Africa, those riches have been accumulated through slavery, colonial pillage, and the creation of rules of trade and commerce that favour the rich.???In South Africa, segregation and then Apartheid was not just institutionalised racism, but a way of depriving people of access to land and driving them into the mines and ancillary industries as cheap labour.?This is typified by wars over land in the 19th century, the Land Acts of the first half of the 20th century, restricting black South Africans to 13% of the land, and the forced removals of the second half of the previous century, by which 3,000,000 people were evicted from their homes, and often moved to rural dumping grounds, or places where they had no roots.

And, from this legacy, a few people got very rich, a few more lived very well and the vast majority were impoverished. The enormous inequality created then, still exists.

Which is why I say we cannot just rely on a fairer share of the income statement, that mythical 4% growth per annum, to grow us out of poverty and break the planet in a couple of hundred years.?We have also to look at a fairer distribution of the national balance sheet which has been accumulated over centuries.

And that brings me to the issue ?income statements and balance sheets for a second time.

Escaping poverty is not just about social grants or slightly higher wages putting little bits of money into people’s pockets, although it helps – it is also about the transgenerational creation of assets in families and in communities.

And South Africa’s assets, (its balance sheet) be it productive land, company ownership, shareholding or property, remains very, very unequally owned.

How do we change that???Well there are a lot of quite controversial topics that emerge when we talk about that.?From wealth taxes to basic income grants, to land expropriation – and they tend to get us quite heated up.

However, one important element of a total strategy really need not be so controversial.

Giving employees a stake in the companies for which they work is one way of addressing both the family income statement (through dividend payments) and beginning to grow ownership assets in families who have always survived from hand to mouth, and from month to month.

I say it need not be controversial, because what used to be seen as a dream of wild-eyed socialists has been moving ever more into the business mainstream. There has always been a tradition of employee-owned businesses inside the capitalist economy.?

The John Lewis partnership the largest employee-owned business in the UK with total trading sales of over ￡12.3bn and a workforce of 80,000 Partners.

In Spain, the Mondragon network of co-operatives employs more than 70,000 people in Spain, making it one of the nation’s largest sources of pay checks. They have annual revenues of more than 12 billion euros making it Spain’s 10th largest company.

In the United States KKR is a giant amongst private equity firms with a reputation for predatory buy outs.?In recent years, led by one partner, Pete Stavros, KKR has granted $500 million in shares to workers in eight industrial companies that it owns.?And Stavros has created a non profit called “Ownership Works” to promote the idea in the economy as a whole.?Recently that icon of rugged individualism Harley Davidson, granted shares to it 4?500 employees.

The United States surprisingly, has a tax regime that rewards the creation of employee share ownership schemes.?As a trillion dollars’ worth of baby boomer businesses come onto the market, a number of funds are being created to assist employees to buy them out rather than have them sold at bargain basement prices to asset stripping investors.

In the UK, Canada and Australia, there are business led associations promoting employee ownership as a better way to do business.

They all emphasis that, in addition to benefiting workers’ income and asset growth, employee ownership increases productivity, improves cohesion in the company and resilience in times of crisis.?Certainly through both the global financial crisis, and the COVID lockdowns, groups like Mondragon were able to find collective ways to protect workers’ income and jobs far better than most of the Spanish economy.

Employee ownership begins to reverse the privileging of financial capital ahead of all other economic actors, which has increasing dominated the global economy since the neo-liberal genie was let out of the bottle.

The idea of employee ownership has the support of elements of the business community and does not have to conjure up the bogeyman images of expropriation and workers seizing the means of production.?Properly done, it gives a real stake in economic growth to those who have been impoverished by the drive to maximise the profits of remote shareholders – and it offers a way for people to be given a share of already accumulated wealth.?The income statement AND the balance sheet.

In South Africa there have been a number of not always successful ventures into share ownership schemes – in mining and agriculture and tourism.?Some have been funded by State Owned Enterprises some by the private sector.?There are lessons to be learnt about the complexity and cost of these schemes, which often result in workers seeing no benefit at all for years.

There are successes, and there are lessons to be learnt.?In the South African context I would urge that we consider how both the state and the private sector can contribute to a rapid and ambitious growth in employee ownership.?Ideally there should be agreement on policy and tax incentives to encourage and support employee ownership.?

But I would like to suggest also that the private sector give serious consideration to share transfers to employees as a form of restitution for the desperate past injustices on which the South African economy was built.??This is not about guilt or blame or shame.?It is about a demonstration of goodwill and understanding the danger of such extremes of wealth and poverty, and a commitment to justice and reconciliation in the economic as well as the political kingdom.

And it is something the private sector can do on its own to create something new and exciting in South Africa – it does not need to wait for government.

Those share ownership schemes of KKR and Harley Davidson include substantial free grants of shares.?I would like to believe that in South Africa there is the capacity and good will to kick start the process in a similar way, leading to a wave of interest in the idea, and the benefits and resilience that it brings for everyone. And then we should be ready to ride the wave, with policies, funding mechanisms, and support for companies that embark on an employee ownership programme.

Does it sound like pie in the sky??Perhaps, but let me ask you this: If we all agree that the economy needs to include far more people – how else do we do this? ?And tell me how growth alone will rescue us from the economic and social catastrophe that already confronts so many in the society.

Another investor conference perhaps – or another small business loan guarantee scheme that has almost no takers.??If the answers were easy, we would have found them already.

We need to try something new and ambitious and genuinely transformational. I believe it is within our reach, and I congratulate the SAEOA and Wits Business school for launching this initiative.