Stock Quid Pro Quo:

 Insinuating the Idea into the Policy Debate

Discussion Paper Prepared for

Capital Ownership Group

Kent, Ohio

May 7, 2001

Carla Dickstein

Coastal Enterprises Inc.

Introduction

In the COG Industrial Homestead Policy Discussion Group, Deborah Olsen and Alan Zundel have defined a stock quid pro quo (SQPQ) as follows:

In exchange for government benefits granted to a business for providing jobs, or government grant of licenses or permits enabling extraction of natural resources or use of collective resources, such as air and water for business purposes, the business shall provide a quid pro quo at fair market value to the commonweal (i.e., private or public entities that protect the long term economic, social, ecological and/or cultural interests of the local citizens). 

These trust funds would “build a diverse stock portfolio for every citizen over a generation” and “create a source of non-wage income and a vote in corporate decisions from a diverse citizenry.”  A modification of this concept introduced by Shan Turnbull is an equity quid pro quo (EQPQ) that would include land buildings and other non-stock assets as well as stock to these trusts. 

Some of the issues raised in the discussion group were how the SPQP/EQPQ should be portrayed?  Should it be offered as a carrot or a stick?  Could it be justified in addition to the existing quid pro quo of creating jobs, providing markets, paying taxes, or exacting other concessions from companies that receive public subsidies?  Should the stock/assets  be held by individuals or by trusts?  

This paper discusses the SQPQ/EQPQ concept primarily in the context of working on state policy to broaden ownership in Maine businesses and introduce new ownership models.  The concept has only been raised tangentially in Maine economic development policy debates, but our efforts to get ownership on the table as a policy issue also speak to the specific problem of raising the SQPQ/EQPQ model.   In the course of working on ownership policies, I have become aware of other efforts to promote concepts similar to the SQPQ/EQPQ that may inform our strategic discussion.  This discussion paper will review the contexts in which the concept has been raised, the barriers, and based on our experience in Maine, what steps COG could take to help the SQPQ/EQPQ concept and other forms of ownership gain support. 

THE MAINE CONTEXT

Bath Iron Works Tax Concessions

The SQPQ/EQPQ idea was raised in 1997 when Maine’s largest private employer, Bath Iron Works (BIW) sought city tax rebates of $81 million and state tax concessions totaling $60 million in order to finance an expansion and modernization of its shipyard that was projected to cost $600 million.  Without the concessions, it threatened to leave the state.   With the cutbacks in defense spending, BIW had been downsizing its employment from highs of 12,000 workers in the 1980s to 7000 workers by 1997 and was anticipating continued cutbacks of as much as 3500 more jobs.   So, the social benefit it was proposing was retaining the company and the high quality union jobs that would remain with no guarantees on levels of employment.

The company is a wholly owned subsidiary of General Dynamics and part of its most profitable division.  The company reported first half earnings in 1997 of $151 million on sales of $2 billion, with a work backlog of $10.3 billion.  The CEO of General Dynamics, headquartered in Virginia, was paid $11.3 million in 1996. [1]  

Opponents to the tax concessions voiced a number of concerns:  the inequity of poor Maine tax payers subsidizing a wealthy out-of-state corporation, whether the same investment in small locally owned businesses would generate as good if not better social return on investment, the wisdom of subsidizing defense companies in a declining industry.  Opponents mobilized and organized a petition drive to create a “people’s veto” before legislation could pass but failed to convince legislators.  They also filed a lawsuit attacking the constitutionality of the subsidy package, claiming the case represented “public expenditures for private benefit.” [2]  

No one could deny that BIW had a huge impact on the state’s economy.  In 1997 the annual BIW payroll was $285 million, they bought from 1100 suppliers within the state, they paid $18 million in payroll and income taxes and $3.6 million in property taxes.  The state anticipated netting $245 million in revenues beyond the amounts the state would rebate. [3]   

During negotiations with BIW, former Maine State Senate Majority Leader, Rochelle (Chellie) Pingree (now a candidate for US Senate), proposed an idea similar to a stock quid pro quo.  She suggested that if BIW wanted the state to invest, the state should be treated like a partner that takes a risk but, should BIW do well, the state should also benefit from the upside of its investment through an equity position in the company.  The suggestion did not get serious play in the room although the other policy makers understood the idea well.  Nor did the SQPQ idea get any coverage in the media or wider policy arena.  In retrospect, Pingree felt the timing was wrong for introducing the idea of an SQPQ/EQPQ.  Rather than raising it in a negotiating context, she felt it needs to be a policy model written into law. [4]   

In the end, BIW got even more tax breaks ($183 million over 20 years).  They made some efforts to give back to the state and community in more familiar ways than an SQPQ/EQPQ.  They financed the removal of a dam on the Kennebec River that environmentalists had been seeking for many years; they created new wetlands to compensate for land filled in the river for their facility, and they pledged to build a new 10 acre park for the City of Bath. 

But questions remained whether the concessions were the right policy response.   After the BIW experience, Pingree sponsored an Economic Development Accountability bill that established an Economic Development Incentive Commission to review the social and economic returns that the state received for its subsidies to business.  The Commission became deadlocked, and the only area of agreement was that businesses that receive a state subsidy must disclose information on their job creation.  There was no discussion of job standards, much less the state taking an equity stake as a return on investment. 

Legislation to Broaden Ownership in Maine Businesses

The experience with BIW and the Economic Development Incentive Commission helped Coastal Enterprise Inc. (CEI) [5] interest the Speaker of the Maine House of Representatives, Steven Rowe, and Sen. Pingree in sponsoring legislation to broaden ownership in Maine businesses.  Specifically, CEI hoped to create resources to support its efforts to do more outreach and technical assistance in employee ownership as part of its small business technical assistance and financing programs.  Several other factors also made the timing conducive for introducing legislation: 

• The growing gap in income, assets and ownership between the rich and the rest of the population was familiar to policy makers and had received a far amount of press.
• A number of plant closings in declining industries and attempts at employee buyouts (one successful) had raised the visibility of employee ownership as an option.
• Jeff Gates, who spoke at CEI’s annual meeting in 1999, promoted the rationale for broadening ownership and specific policies in meetings with our legislative leadership before his talk. 
• Growing number of mergers and acquisitions of Maine- based businesses had led to out-of-state corporate control, a change in corporate culture with fears based on some evidence of a decline in local civic involvement and charitable giving. (Speaker Rowe had recently seen his own employer, Unum Insurance company, one of Maine’s few Fortune 500 companies, merge with Provident Companies, Inc., a Chattanooga, Tennessee firm where decisions were now made.)

In January 2000, Speaker Rowe introduced “An Act to Broaden Ownership in Maine Businesses” with Sen. Pingree as co-sponsor.  The specific objectives were to 

1.      Support employee ownership, and especially ESOPs through a feasibility fund and an outreach and education program, and  

2.      Establish a Commission to Study Ownership Patterns of Maine Businesses in order to assess the impact of different transitions in ownership structures on the economy, environment and civic society; assess alternative models of community, consumer, and employee ownership; and make recommendations whether the state should be more proactive in supporting policies that would broaden ownership in Maine businesses.

The SQPQ/EQPQ was not specifically named as one of the models for the Commission to study but we anticipated the Commission would include it as part of its mandate to assess alternative ownership structures as well as looking at sources of investment such as labor managed funds.

Even with leadership championing the legislation during a year with large budget surpluses, it was very difficult to gain broad bi-partisan support.  Nor were we able to create a strong vocal constituency.  We had support from the usual suspects of progressive groups including Maine Center for Economic Policy, Maine Businesses for Social Responsibility, the Maine AFL-CIO as well as a couple of local economic development organizations facing plant closings, but in the end, the bill was only a priority for Coastal Enterprises.  

The bill passed last year with the Ownership Commission surviving, but without the funds to do a comprehensive study.   Members of the Commission were appointed too late to do their job, and legislation had to be resubmitted this year to reauthorize the Commission.  With a weaker sponsor in 2001 (Rowe and Pingree had been term-limited) and with a large budget deficit, a modified bill passed in committee that authorizes the commission to assess whether the state should provide more support for employee ownership through a feasibility fund and outreach program.   The Committee dropped the wider issue of studying ownership patterns in the state as well as assessing other forms of broadening ownership.  However, if a Commission were established, it would at least have a foothold to expand its inquiry.

Analysis of the Legislation

Our first objective to support employee ownership had a familiar context and models from other states that lent credence to the concept.  This piece survived, but it has a long way to go to become a funded program.  The second objective to study the impact of ownership and consider a more proactive state policy role to broaden ownership proved to be unfamiliar turf and ultimately raised more ideological questions whether this was a proper role for state intervention. 

Without a large democratic majority in the legislature, the sponsors positioned the bill as another set of tools that the state should have in its arsenal in order to respond to changes in the global economy and preserve jobs and local ownership options.   They did not appeal to more equitable participation in wealth creation as a rationale for the bill.  We had some Republican support when we talked about employee ownership in crisis situations, like a plant closing or as a possible solution to succession in small family businesses.   Conservative legislators reacted to any suggestion that the state take a proactive role in encouraging new forms of ownership.  In their mind, government would be playing an improper role in influencing workers to buy businesses that are rightfully owned and controlled by private owners or establishing community owned businesses that would compete unfairly with private enterprise

Although both Democrats and Republicans responded to the growing loss of our larger locally-based companies, it was not easy to link how broadened ownership and more stakeholders from Maine and local communities in Maine businesses could begin to solve the structural problem of mergers, acquisitions and the growth needed to compete in the global economy.  We may have had a stronger case if we could point to research that showed the economic, social and environmental impacts of various ownership structures and the pros and cons of local ownership.  We did use the research on employee ownership.  One of the tasks of the Ownership Commission we originally proposed was to gather data to make a case for alternative forms of ownership. 

This research is very expensive.  Data are not collected relating ownership structures to the employment, environmental practices, charitable contributions or civic involvement of firms.   We also know that the size of a firm is often correlated with ownership patterns.  Thus, many firms that are owned and controlled out-of-state are larger enterprises that create better quality jobs and can afford to implement proactive environmental practices.   The literature that was available was largely on how the characteristics of publicly traded firms influence corporate responsibility and charitable giving. [6]  

We also need a way of conveying how alternative ownership can create an active stake in a company especially when stakeholders have minority positions.  Does it really create voice?  Will community/employee/ consumer stakeholders make different decisions than businesses without broadened ownership that affect the social return on investment?   Under what conditions?  

Other Models to Popularize the SQPQ/EQPQ Concept And Broadened Ownership

As we move forward introducing ideas like the SQPQ/EQPQ and the general concept of broadening ownership, other contexts may be more conducive for implementing the idea than economic development policy.  Two other areas where the concept has been raised are utility bailouts and resident ownership mechanisms in inner city development.  

Utility Bailout:  the Rate Increase Case for Green Mountain Power

In the fall of 2000, utility experts from Vermont and Maine testified before the Vermont Public Service Board (PSB) on Green Mountain Power’s (GMP) request for a rate increase to offset an unprofitable contract the company entered into with Hydro Quebec. [7]   Peter Bradford, the former Chair of Maine’s Public Utility Commission and Richard Silkman, an economist and utility specialist, argued that if the PBS permits the utility to recover imprudently incurred costs or the costs of excess capacity through rate increases, then rate payers should receive an equity interest in the utility sufficient to ensure that they receive all or a significant portion of the value of any subsequent sale of all or a portion of GMP in excess of its book value.  When ratepayers assume the financial obligations that are the responsibility of shareholders, then they should receive commensurate compensation.  This principle of regulatory symmetry is well established in utility regulation. 

Bradford and Silkman recommended that ratepayers should get options to purchase non-voting stock in the company that they can exercise at their discretion.  Their goal was to adjust for any asymmetry of the risk/reward to ratepayers and shareholders, but not use a bailout as an opportunity to give ratepayers a voice in the company. In their opinion, shareholders were a different class of stockholders.  The PSB did not endorse the idea of a stock option but did accept implicitly the idea that the ratepayers would recapture any sale of the company in a price above book value.  In California, they had informal discussions with the Speaker of the California State Assembly and again argued that ratepayers should get an equity stake in the utilities in exchange for a government bailout.  Instead California translated the argument into acquiring the transmission assets. [8]

The principle of implementing regulatory symmetry through some type of SQPQ/EQPQ is difficult because of resistance to mixing regulatory and ownership activities.  Nonetheless, the idea of symmetry measured in financial gain or loss is a clean argument to justify a SQPQ/EQPQ and may be easier to understand than an SQPQ/EQPQ for a business subsidy.  Utility deregulation may create more opportunities to test the concept. 

Resident Ownership Mechanisms 

The SQPQ/EQPQ idea was featured at a recent meeting in Washington on Resident Ownership Mechanisms or ROMs sponsored by PolicyLink, a policy/research organization in Oakland, California and funded by The Department of Housing and Urban Development (HUD) and the Fannie Mae Foundation.   ROMs are a term that PolicyLink coined for strategies, tools and instruments to enable low-wealth residents to gain an ownership stake in the revitalization of their communities. [9]   Here an SQPQ/EQPQ model is justified on equity grounds and closing the growing wealth gap as well as building the voice of residents in development decisions that affect their lives. 

ROMs build off the concept of “value recapture” to designate an income stream from private development for public purposes. [10]   It is similar to developer mitigations where the quid pro quo is that a developer finances additional services, affordable housing, or infrastructure to balance the impact of a new development.  Fannie Mae Foundation has been interested in how value recapture can benefit existing community residents directly.  There is some experience using a Value Recapture Trust (VRT) “that directs an income stream from market-rate investment in a low-income area to uses that assist current residents and strengthen community infrastructure.” [11]   A ROM “would include an opportunity for residents to own an equity stake in the trust in a way that offered clear financial benefits and voice in the decision-making process.  No model yet exists where there is a transfer of equity to residents. 

The concept only works if the neighborhood is attractive for investment.  But, given the fact that there is already a history of expecting a quid pro quo from developers and there is some institutional and government momentum to promote an SQPQ/EQPQ type mechanism for targeted populations, this may be a promising area for COG to explore. 

PROPOSALS FOR COG

Mainstreaming concepts of SQPQ/EQPQ and other models of broadened ownership into public policy requires better research and concrete models.  COG could support this work through:

Policies to require that governments track ownership as part of data collection and reporting.    Assess how government currently collects data on business ownership and how various ownership characteristics of firms could be incorporated into reporting requirements of firms, such as wages, payroll, and environmental compliance. 

A research project to examine existing ownership patterns and new models of broadened ownership in terms of their economic, environmental and social impact in the community.   Review existing literature and pick several locations to do a more comprehensive examination of ownership structures. 

Exploring opportunities in the utility industry or the ROM concept in order to create concrete models of the SPQP/EQPQ idea even if they are not pure models.  Can COG add value in terms of how to promote and structure these models?