This essay is taken
from Chapter 6 of Helen Alford O.P. and Michael Naughton, Managing as if Faith Mattered:
Christian Social Principles within the Modern Organization (Notre Dame: University of Notre Dame Press,
2001) pp 152-176. The chapter examines the question of ownership embedded
within a Christian ethic of property.
6
Corporate Ownership:
Temperance and Common Use in Finance[1]
Michael Naughton
Helen Alford O.P.
The paramount
problem is not how to stop the growth of property, and the building up of
wealth; but how to manage it so that every species of property, like a
healthful fruit tree, will spread its roots deeply and widely in the soil of a
popular proprietorship. The paramount
problem is not how to crush, or hawk at, or hamper the corporation, merely
because it is a corporation; but how to make this new form of property
ownership a workable agent toward repeopleizing the proprietorship of the
country’s industries. [2]
Peter
S. Grosscup
Judge
of the U.S. Circuit Court of Appeals
|
W |
ritten in
1905, Judge Grosscup’s comments capture both the free-market system’s
strength--its ability to create wealth--and its weakness--its inability to
distribute wealth equitably. The
ownership of the corporation, according to Grosscup, lies at the heart of the
distribution problem in free market economies.
Since the corporation is the main generator of wealth in a free-market
economy, those who own corporations will share more fully in the distribution
of that wealth. For Grosscup, a
principal issue for corporations is how to structure ownership so as to
distribute more effectively the wealth of society, without sacrificing the
corporation’s wealth-generating
ability.
The problem of wealth disparity that
inspired Grosscup’s comments at the beginning of the twentieth century burdens
us in a particular way as we enter the twenty-first century. This is particularly true on a global basis. The United
Nations Development Program, for example, concluded in 1996 that 100 countries
found themselves worse off than they had been 15 years earlier. It is estimated that the combined wealth of
the 224 richest individuals in the world equals the combined annual incomes of
the poorest 47% of the world population, that is, of some 2.5 billion people.[3] A variety of evidence indicates that even in
the U.S., where there has been significant economic growth over the last two
decades, the gap between the most affluent Americans and everyone else in the
nation is the widest it has been since the end of World War II.[4]
Although the average income for
households increased 10% between 1979 and 1994, 97% of that growth was claimed
by the top 20% of households. This has resulted into widened economic disparity
where the net worth of the top 1% is now greater than that of the bottom 90%.[5]
And while mutual funds and 401(k) plans have fueled much-celebrated gains in
capital participation, one recent study nevertheless showed that 71% of U.S.
households hold no stock or hold stock valued at less than $2,000.[6]
For the reader who may find these
numbers too abstract, Jeff Gates cites the rise of “Tiffany/K-Mart” marketing strategies. K-Mart and Tiffany, which represent the low- and high-end retail
markets, reported increased earnings in 1997, while midscale chains such as
J.C. Penney suffered significant losses.
National retailers are setting up two-tiered, high-low marketing
systems, as advertising and investment houses warn of the erosion of
traditional, “middle-class” mass-markets.
Retailers “on the ground” see that a shift in income-patterns is
polarizing markets to the disadvantage of operations aimed at a shrinking class
of middle incomes.[7]
For some, wealth disparity simply
represents a “natural force” we must accept in a free market economy. Paine
Webber Inc., for example, simply readjusts its investment flows by advising
investors to “‘avoid companies that cater to the ‘middle’ of the consumer market.’”[8] Others, however, see wealth disparity more
in terms of choice than market determination.
William McDonough, President of the Federal Reserve Bank of New York, insists:
Issues of equity
and social cohesion [are] issues that affect the very temperament of the
country. We are forced to face the
question of whether we will be able to go forward together as a unified society
with a confident outlook or as a society of diverse economic groups suspicious
of both the future and each other.[9]
For McDonough,
unless we take seriously the common good as it relates to wealth distribution,
we may find our cultural and political arenas too fragmented to support a
healthy free market system.
Many complex causes account for
widening income disparity. One key cause, particularly in the U.S., has
been the interplay among productivity
gains, wages and capital. Since 1974, productivity in manufacturing
increased by 68% and the service sector increased by 50%. During this same time
period, employee wages stagnated. The
rewards of productivity consequently went to capital. With the richest 25%
owning 82% of corporate stock in the US, the clear winners were capital owners,
and the consequence was increased income disparity.[10]
·
The United
Nations Development Program (UNDP) reported in 1999 that the world’s 200
richest people have more than doubled their net worth in the four years to
1998, to more than $1 trillion. That’s equal to the combined annual income
of the poorest 47 percent of the world’s people (2.5 billion).
·
The wealth
of the top three billionaires now exceeds the combined GDP of all the least
developed countries and their 600 million people. The
assets of the 84 richest individuals exceed the GDP of China with its 1.2
billion people.
·
UNDP
reported in 1999 that 80 countries have per capita incomes lower than they were
a decade ago. Sixty countries have been growing steadily
poorer since 1980.
·
In 1960,
the income gap between the fifth of the world’s people living in the richest
countries and the fifth in the poorest was 30 to 1. By 1990, the gap had widened to 60 to 1. By 1997, it had grown to 74 to 1.
·
Over the
past three decades, the poorest 20 percent of the world’s people saw their
share of global income decline from 2.3 percent to 1.3 percent.
·
In 1996, the Census Bureau reported record
levels of inequality, with the top fifth of U.S. households claiming 48.2
percent of national income while the bottom fifth gets by on 3.6 percent.
·
The United
States leads all OECD nations in the disparity in both wealth and income.
The problem, as Grosscup suggests,
is not the magnitude of capital owners’ gains, but the system’s tendency to
restrict rather than to promote participation in capital ownership. When the
power of the ownership of productive capital is highly concentrated in the
hands of the few, the non-owning majority’s incomes grow uncertain; when
capital is disconnected from labor,
its uses are determined without regard for their impact on labor or on society
at large.[12]
As Peter Drucker put it, “a change
in property ownership always results in a change in power. We’ve had a change
in property with the emergence of institutional investors. That is a change in
power.”[13] Power in this case has gone to
depersonalized capital markets, which have no concern for employees or
particular communities beyond their ability to increase wealth. The markets’
relentless pressure for maximum investor returns leads corporations to “unleash
what the Wall Street Journal
characterizes as the ‘four horsemen of the workplace’: (1) downsizing; (2)
moving operations to low-wage countries, (3) increased automation and (4) the
use of temporary workers.”[14] Most people—certainly most wage-earners—might
concede that firms can use one or more of these expedients legitimately to meet
economic crises, but few would describe their combination as legitimate,
ordinary business practice.
Nevertheless, they have become staples of “disconnected” capital’s search
for ever-increasing returns, regardless of the social effects.
In order for people to participate
most effectively in the market system’s distribution of wealth, they need
access to two main sources of income: labor and capital. Restricting their income effectively to one
source--labor--through the concentration of ownership, increases the
probability that their access to goods will fall short of their needs. This effect is intensified in an economy
such as our own, where capital income increases faster than labor income. For
many people, wages--even the wages of two earners--are alone no longer adequate
to secure a just share of wealth over the long-term. When
John A. Ryan wrote in 1935 that an employee’s rise to ownership “relieves him
from complete dependence upon his wages,”[15]
he already understood “relief” to mean
relief from bearing an inequitably large share of the market-economy’s risks
and an inequitably small share of its rewards.
We need, then, a view of capital
property that asks the fundamental questions: What is property for? Whom does it serve? Within our diverse society, answers to these
questions will differ significantly. As
we saw in Chapter 2, a prime source of these differences will be the
respondents’ views of the purpose of the corporation. Within the last thirty years in the U.S., two men have played
critical roles in addressing these questions, bringing about two important
financial trends: mergers and acquisitions on the one hand, and employee
ownership on the other. These two men
place property and finance within two different philosophical paradigms, one
individualistic and the other communitarian.
Understanding how they answer questions concerning the nature and
purpose of corporate property provides a context in which to appreciate a
Christian ethic of property and ownership as it bears on the modern
corporation.
1. Two Conflicting Views of Property: Individualistic
and Communitarian
The first of our two figures is Jerome Kohlberg. The founder of
Kohlberg, Kravis, and Roberts & Co. (KKR), and often considered the father
of leveraged buyouts (LBOs),[16]
Kohlberg’s main concern was the separation of corporate ownership and control.[17] As corporations have grown larger, capital
holdings have been dispersed among larger numbers of shareholders, reducing
shareholders’ ability to control the company.
The largest shareholder at a company such as General Motors may own only
1% of the shares and, most likely, this owner will be a pension fund or some
other institutional shareholder. This
dispersed ownership structure diffuses shareholders’ influence, preventing them
from taking a decisive hand in maximizing the return on their capital. Kohlberg’s solution to this problem is
acquisition through the leveraged buyout.
By replacing diffuse public shareholders, who exercise little control
over the corporation, with a small group of highly motivated investors who
exercise considerable control over a small group of highly motivated
executives, owners will be in a better position to maximize their wealth (this
in part describes why executive bonuses are so high, since there is an
alignment between stock price and executive salary).[18]
In the terms of our discussion in
Chapter 2 on the common good, Kohlberg understands property primarily as a
private and particular good—a tendency shared by many of us in the western
world. For him, a corporation is an
investment that should maximize the particular goods of individual shareholders on the basis of two dimensions: risk and
return. It has no inherent or “natural”
common purpose of wealth creation for
distribution, let alone of building community or promoting virtue. Finance serves as a technique to maximize
the particular wealth of individual shareholders, who in their private lives
can determine what they want to do with it. Thus, corporate property is reduced to a
“financial asset owned for its return/risk characteristics and with a view to
its eventual sale.”[19]
Underlying Kohlberg’s understanding of corporate property is a philosophical individualism
that implies at least two things: a) exclusivity of ownership, or in other
words: “this property is mine and not yours”; b) control, that is, “since it’s
mine, I alone determine what it is to be used for.”[20]
Our focus now turns to another man, and
to a very different response. Often
considered the father of employee ownership, Louis Kelso viewed property in communitarian terms. Kelso maintained that Employee Stock
Ownership Plans (ESOPs) would serve as an effective corporate financial
technique to distribute wealth in the economy.[21] Based on his two factor theory (that income
derives from one’s labor and/or one’s
capital), Kelso wrote in the 1960s
and 70s that, owing to increasing use of technology and to international
competition, capital would play a greater role in wealth distribution than
wages from labor.[22]
Kelso saw the capital ownership of
corporations as the main vehicle for wealth distribution, which for him is a
necessary condition of human development (promotion of the common good). Financing companies is a means to a social
end, namely, to build enterprises capable of long-term growth so as to create conditions for a just distribution of wealth. For Kelso, then, corporate property has an
important social purpose: to make capital accessible to all, especially to
those without the financial means to ensure access to credit. An ESOP is one way to finance wider
ownership, or in the words of Judge Grosscup, to “repeopleize” corporate
property (in Europe cooperatives have been the main means to that end).[23] As a financing device, an ESOP turns labor
workers into capital workers, which in turn links the structures of ownership
with social equity. (The mechanics and
problems of ESOPs are examined in greater detail in the last section of this
chapter.)
|
|
Kohlberg |
Kelso |
|
Definition of Problem |
Lack of Control by the Few |
Lack of Participation by the Many |
|
End of Property |
Individual Gain |
Just Distribution |
|
Means of Finance |
Leverage (LBOs) |
Leverage (ESOPs) |
Historically, the lives of Kelso and
Kohlberg are entangled, making their different views of property all the more
striking. In the 1960s, Kelso
supposedly introduced the technique of leveraging corporations to Kohlberg. To leverage a company is to buy the company
using borrowed money, with the company itself serving as collateral. Kelso envisioned leveraged financing through
an ESOP as an effective means for employees to participate in the ownership of
a company, thereby creating the conditions for a more just distribution of
wealth. Since employees would never be
able to save enough money to buy shares, they would have to borrow. Kohlberg adapted Kelso’s technique of
leveraged financing, but applied it to a different end, based on his different
view of property. Indifferent to wealth
distribution and income disparity, Kohlberg leveraged companies so that outside
investors or executive management (that is, his clients) could buy the company
and exercise control for the sake of maximizing shareholder wealth.
Kelso and Kohlberg used the same technique of leveraged financing for two
radically different ends based on two
different philosophical traditions of property. As we mentioned in Chapter 3, techniques, such as financial
leveraging, become an opportunity for virtue only when they are ordered toward
the common good. For Kelso, the technique of leveraged financing can be a
powerful means for expanding ownership in the interest of a just distribution
of wealth. For Kohlberg, however, this
technique serves the particular, private good of shareholders and nothing more.
Kohlberg’s use of leveraging
infuriated Kelso: “I taught them [Kohlberg and others] the art of the leveraged
buyout. Now they’re just using it for
the wrong purposes, to make
themselves and a few people richer.”[24] Kelso saw leveraged financing in the service
of concentrating wealth as an abuse.
His case is not unlike that of the researchers who developed the drug
methotrexate to fight cancer and save lives, only to see other researchers
adapt it to take lives as one of the main ingredients in abortifacients. Techniques can be used for good or ill. For Kelso, to make the technique of
leveraged financing into the means for private gain only is a perversion, since
“instead of making economic power more democratic, they [Kohlberg and others]
make it more plutocratic.”[25] In other words, Kelso’s difficulty with
Kohlberg’s use of leverage is that it finances capital for an existing “elite”
of owners only. It does nothing to extend the ranks of capital ownership.
This conflict between Kohlberg and
Kelso represents a conflict over answers to the questions, What is property for? Whom does it serve? Kohlberg represents an individualistic understanding of
property that denies an authentic social and spiritual purpose to the corporation.
Kelso, however, represents a communitarian vision of corporate property that
fits well in the Christian social tradition.
We begin to see in two men the concrete and practical implications of
philosophical beliefs concerning property.
It is important now for us to go deeper into the roots of the
communitarian understanding of property underlying Kelso’s goals, as it appears
in the Christian tradition. By
retrieving this tradition about property, and on employee ownership in
particular, we can provide a solid basis for reexamining the ownership and
distribution of productive capital. It
is precisely here that an investigation informed by the Christian social
tradition can help to answer why a
just distribution of income in terms of capital and labor has a great claim on
all people.
2. A Christian
Property Ethic As It Relates To the Ownership of the Corporation
It is important to recognize that the idea
of ownership is one of the signature-ideas of Western civilization. Most major
philosophers and theologians have written about property, and all economists
and business people are dependent in one way or another on these philosophical
principles. At root, the way we
organize property is a way of organizing social relations, and so has a
powerful influence over the goodness—or otherwise—of people’s lives. We can
characterize an understanding of property on four levels.
The Christian understanding of
property is, first, theological. It arises out of our belief in a God who
created the world “and saw it was very good,” and who, as part of that
creation, gave humankind the gift of dominion over the earth. In other words,
the basic, core idea that grounds the Christian understanding of property is
the reality of gift, that it is a gift from God.
While we are familiar with the
experience of gifts, we tend to see them as private and individual exchanges.
This understanding of gift, however, is not universal. When Native Americans encountered
Europeans in the gift encounter, they were baffled by their possessiveness over
gifts given them. Native Americans expected their white visitors to give back
their gifts so as to keep them moving. This idea of setting gifts in motion
equally baffled westerners negatively characterizing Native Americans as
“Indian givers.”[26] Yet, what
Native Americans understood, and what we should take heed of, is that when a
gift is not shared, it corrupts the holder.
The one who makes the gift an occasion for selfish hoarding, who fails
to put the gift in motion, becomes corrupted by the gift itself.
In Western culture, we tend, like Kohlberg,
to see property as a so-called private matter:
“So long as it doesn’t hurt anyone, I have the right to do whatever I
like with what is mine.” Yet, our
“private” interpretation of property, however, should give us pause for
thought. St. Augustine pointed out that
the word private comes from
“privation,” a certain loss of meaning or substance.[27] To understand property only in private terms is to refuse to recognize its inherent
“giftedness.”
Since we do not create anything, but rather inherit
everything from God and others, human ownership does not consist in absolute
dominion over property (absolute dominion belongs to God alone), but in a
limited and responsible dominion which should be characterized as
stewardship. A merely private
understanding of property, then, asserts a dominion human beings neither do,
nor can, exercise.
If we are to understand property, we
must face the universal experience of property, namely, in the end, everything
is given back. The story is told of a
rich man’s wake. When someone asked, “How much did he leave?” the simple,
conversation-stopping answer came back:
“Everything!”[28] Property--all wealth--is a gift of which
ownership makes us no more than temporary stewards. We neither arrive in this life with property nor leave with it,
and as owners we will be called to a steward’s account for our use of
property.
A Christian Property Ethic
Christian managers and
entrepreneurs, if they manage as if faith
matters, need to be convinced that their property and their work are not
ultimately theirs and that they will be accountable not just to stockholders,
but to Him “who knows how to ask questions.” [29]
They need to keep in mind that they will be judged, with mercy but also with
justice, to seek out whether they have been stewards or exploiters of the
property and wealth committed to them.
If to possess property is ultimately to have received a gift, then
ownership inherently involves our taking on board the second level of the Christian property ethic, summarized in the
principle of “the universal destination of goods.” This follows since
possession is for the sake of use, and the gift of created goods is made to all
human beings alike, not only to the brightest or the richest, nor yet to one
country rather than another, nor to one generation rather than another. Inscribed within the very make-up of
property, of useful goods, is a “universal destination”: their goodness is for
all alike, so that all people can benefit from God’s creation. To put the matter in the terms we developed
in Chapter 2, the fruits of creation must be made available to all human beings
at the level of use. St. Ambrose, with
the directness and confidence that marks the Fathers of the Church, declares,
“The earth belongs to all, not to the rich.”[30]
Embedded in God’s gift of creation
is, then, the right of all people to the common
use of created goods. To subdue the
earth is to command its fruits not only for oneself, but also for others,
through increasingly comprehensive spheres of community: for one’s family and
for one’s friends; for one’s co-workers, and for one’s fellow-citizens and
colleagues in the political enterprise; for one’s fellow-members of the body of
Christ, and for one’s neighbor—that is, for anyone in human need. The duty to
subdue the earth, then, cannot be realized unless all people can share in the
means of dominion (raw material, technology, education, credit, etc.), so as to
gain a decent standard of living.[31] Consequently, any idea of an absolute right
to the possession or use of property is alien to Christian social thought,
since property is neither the creature of its owner nor destined unqualifiedly
for its owner’s use.[32]
The third
level of a Christian ethic of ownership and property asks what conditions
foster greater common use of God’s creation. We argued in the first several
pages of this chapter that a wider distribution of productive property or capital is a necessary component of greater
common use.[33] Property and capital, in order to serve
labor, must be reconnected to labor through ownership. This is why within
the Christian tradition, and as the subject of special attention in Catholic
social teaching, it is strongly emphasized that employees should participate in
the ownership of business organizations.
As John Paul II has stated, while various employee ownership plans may or may not be
applicable in specific situations, “it is clear that recognition of the proper
position of labor and the worker in the production process demands various
adaptations in the sphere of the right to ownership of the means of
production.”[34]
Jeff Gates points out that the more connected (through ownership) capital
can be to labor and to the communities which supply labor, the more it can
serve the common good (he and others propose not only ESOPs but also
CSOPs—Customer Stock Ownership Plans, RESOPs—Related Enterprise Share Ownership
Plans, and other stock ownership plans to reconnect capital to the communities
that generate it). Gates aims at an
“up-close capitalism” in which those who stand to be affected by the uses of
corporate property consider those uses from the perspective of owners, and
speak for or against them with the voices of owners.
Thomas Aquinas made a similar point
over 700 years ago. He explained that
private possession can serve the principle of common use because it creates
three important conditions within society at large and within particular
organizations: personal initiative,
productivity, and peace. [35] These three criteria do not guarantee the
common use of property. They do create
conditions tending to ease the individual’s access to the goods of creation by
overcoming the disparity in wealth we described at the beginning of this
chapter. Examining these three
conditions in light of employee ownership can help us to see how a Christian
ethic of property ownership can function.
A)
Personal Initiative and Motivation: When people own something, they are more likely to use
it in a considered, enterprising way.
The person is more likely to dedicate time and talent to caring for and
developing his own property than to caring for another’s, and is more likely to
show consideration for properties that are owned by some agency than for those
which are not known to be anyone’s special concern. For example, one shows more initiative for the care of one’s
house than for one’s rented apartment, and people generally treat city parks
with more consideration than vacant lots. For
the individual employee, worker ownership can serve as a means to a greater
sense of self-direction at work, since when people “know they are working on
what belongs to them, they work with far greater eagerness and diligence.”[36] Many employees are not concerned solely with
the foundational, financial goods they receive from their labor. They also want to know that they are working
for themselves, and that their work is a matter of personal achievement and
even an occasion of excellence.
Employees who do not participate in the ownership of the company find it
more difficult (although not impossible) to make a personal connection with
what is not their own. Worker ownership
can serve as an aid to employees’ development by fostering responsibility and
accountability.[37]
B)
Long-term Productivity and Efficiency: This personal initiative tends toward greater
productivity and efficiency, and less waste.
CEO of Springfield Remanufacturing Company (SRC), Jack Stack, brings
this point out in favor of his company’s ESOP.
In his view, employee owners tend to reorient themselves to the whole
question of what it means to benefit from the company. They think of “sacrificing instant
gratification” for long term stability and longevity. Stack explains:
[If] you have
equity and understand it, you know why it’s important to build for the
future. You can make long-term
decisions. You will pay attention to
the day-to-day details, but you’re doing it for the right reason: because it’s
the best way to achieve lasting
success.[38]
C)
Social Peace: When people possess, as their own, the things they need to meet their
responsibilities, keep their promises and realize their ambitions, they are
simply more at peace and more disposed to harmony with others than they are in
the opposite case. This homely fact has
become very evident in the downsizing of corporations. Employees may have large pensions at stake
in the aggregate, but--because they are not owners--lack any control over the
disposition of their company. In such
cases, employees’ anxiety and hostility are likely to run in direct proportion
to the size of their stake in outcomes over which they have no say. The more people who participate in the
ownership of property, particularly productive property, the better the chances
that wealth will flow, like blood through the human body, as a force for social
cohesion.[39]
When employees are not enabled, or
fail, to participate in the ownership of their own organization, a divergence
of economic interests is created, making peace more difficult. When shareholders and management seek higher
profits, lower labor costs and greater efficiency, while employees seek higher
fixed wages and stringent work rules, the ownership structure fosters distrust
between employees and management. This weakens a company’s competitiveness in
the marketplace and inhibits mutual cooperation for the good of the whole
organization.[40] A house divided against itself, as the
Scriptures note, cannot long stand—let alone prosper.[41] Isolating the means of production “as a
separate property in order to set it up in the form of ‘capital’ in opposition
to ‘labor’” makes the possibility of peace ever more difficult.[42] Stack explains, “[Y]ou have to knock down
the barriers that separate people, that keep people from coming together as a
team.”[43] At SRC, he saw the lack of shared ownership
between management and workers as a critical barrier to overcome. By aligning
the perceived goods of employees and managers through stock ownership, SRC
could act as a unit in the increasing confidence that people were working for
each other.[44]
Personal
initiative, long-term productivity and peace are necessary conditions for
making corporate property common in use.
They do not, however, complete a Christian property/ownership ethic. The common use of property requires further
that we not regard property as something to be distributed and used merely for
our own particular ends. We need to go
to a fourth level that calls us to
use our property for the building up of “a community of work,” established by
participation in common ends and virtues.
All property, as Aquinas explains,
should be seen “as common so that, in fact, a person should readily share it
when he sees others in need.”[45] A more equitable distribution of particular
goods by individual ownership is not enough: employees and management alike
must understand and treat their shares in the ownership of the company as
instruments of others’ good, and not merely of their own particular
interests. This necessary regard for
others’ good is twofold: it involves participation in seeking the good of each
and every member of the firm by promoting the firm’s success; it involves ordering the activities of the
firm so as to promote the good of the wider community and its members (among
whom, of course, are the members of the firm).
The fact that a company is widely
owned by employees, or that its financial success is otherwise immediately
distributed among its employees, does not in itself entail that the firm is in
pursuit of the common good. Nor is the
enthusiasm of a company’s employees, or their dedication to its business plan,
a sure mark that they form a genuine communion. Pornography and tobacco companies can be employee-owned, and
criminal enterprises often generate considerable élan. By comparison to the overall good of the
(political) community, the common
good, the ends of even the largest business organization are private, as are the ends of individual persons. Like private individuals, business
organizations’ fundamental contribution to the common good is observance of the
law. And like private individuals,
their more mature contribution involves becoming a participant in the promotion
of the goods of the whole community (we will examine the social role of
products and services in Chapter 7).
Real ownership by employees of the
organization offers, so to speak, an occasion of virtue. When an employee sees
her contribution to the organization as the source of benefits not only for
herself and her family, but for her co-workers, and when her contribution to
the success of the firm is also of clear service to the community at large, she
participates in a fuller way--through virtue--in her work. In the words of Aquinas, “a man’s will is
not right in willing a particular good [such as property], unless he refer it
to the common as an end.”[46] The equitable distribution of corporate
property is welcome for its own sake, but much more for the sake of
establishing a community of work through which the firm’s success promotes at
once the employee’s individual good and the good of the whole community. Employees are connected not only on the
level of economic gain, but also on the level of organizational purpose that is
social at its core.
This discussion of property suggests the answer to a
scriptural question that should particularly unsettle those of us in the rich
West: Why is it hard for the rich man to
enter the kingdom of God? If we
fail to order our own particular goods to a common life, our lack of intent to
build community is not neutral; it is a positive refusal to take up a duty
incumbent upon citizens of the kingdom of God. This theme is particularly
strong in Luke’s Gospel. Jesus tells
the story of the rich man’s quandary over what to do with his surplus harvest.
“What
shall I do?” he asked himself. “I have no place to store my harvest. I know!”
he said. “I will pull down my grain
bins and build larger ones. All my
grain and my goods will go there. Then I will say to myself: You have blessings
in reserve for years to come. Relax! Eat heartily, drink well. Enjoy yourself.”
But God said to him, “You fool! This
very night your life shall be required of you.
To whom will all this piled-up wealth of yours go?” That is the way it works with the man who
grows rich for himself instead of growing rich in the sight of God.[47]
The
parable is clear: the use of property must be directed to the good of others,
if property is to serve as a means to the rich man’s development, especially to
his ultimate development—salvation and happiness with God, the ultimate end of
our human existence. When property is
not directed and used for the common good, property becomes a kind of evil, the
occasion for regression from human virtue.
As the rich man’s failure to use his full granary for those in need has
corrupted him, so our property, whether individual or corporate, can corrupt us
if we fail to use it for others.
This idea of property as it relates
to common use and virtue may sound to some too idealistic, too communitarian,
or too impractical. Yet, we should ask:
Why should this understanding strike us as a foreign intrusion into our usual
way of looking at property? Is it
because we live in a culture that reduces all “goods” to commodities for
particular, private consumption? Or is
it because we have privatized our faith to such an extent that we no long see
its social and practical implications?
Whatever the reason, we should take care to reexamine how we view our
property, since it affects how we see other dimensions of our life.
To adhere to a strictly private,
strictly individualistic view of property’s uses is like holding that personal
pleasure is the only use of sex. While
abundant pleasure naturally accompanies healthy sexuality, the quest of sexual
pleasure alone--sexual hedonism--has always been a token of personal futility,
and a mortal affront alike to the human dignity of the hedonist and to the
dignity of the objects of his desire.
So with wealth: while it “naturally” accompanies healthy enterprise, the
quest of wealth alone is an affront to the human dignity of businesspeople, and
a slur on the integrity of the broader community, which alone makes the
ownership of property possible and meaningful.
The habit of avoiding a “myopic”
focus on one goal such as profits or wealth maximization is necessary for
understanding the ownership of the modern corporation.[48] We call this habit the virtue of temperance. As we mentioned in Chapter 3, temperance is that virtue which
curbs and restrains our desire for various objects such as wealth. The amount of wealth to be gained or lost in
market economies is of such enormous proportions that St. Paul’s warning for
love of money as a root to all kinds of evil should not be far from our minds.[49] The individualistic view of property has no
resource to curb the “all-consuming desire for profit” borne in all of us.[50] If the generation of money-denominated
returns sums up for us the whole purpose of corporate property, then the recipe
for intemperance, the excessive pursuit of wealth at the expense of other goods,
is in the making.
Kenneth Goodpaster describes this
intemperance in terms of teleopathy. Combining the Greek roots for end or
purpose--telos--and for disease or
sickness--pathos, the term teleopathy he defines as an “over
emphasis on limited purposes by individuals and corporations.”[51] Wealth generation is a limited goal; it
should not be an overarching purpose.
To use our earlier language, wealth generation is in the nature of a
means, and cannot serve to guide us as an end of action.
In business, as in any other
profession, the practitioner is constantly tempted to value certain limited
goals, such as wealth, over larger goals, such as human development. In the case in point, teleopathy or
intemperance is the bad habit of looking to wealth maximization “as supremely
action-guiding.” Wealth, or the
possession of goods--like sex, power, fame, food, drink, and so forth--is
corrupting principally in the direction of excess, and so needs an extrinsic
limit; the limit of right possession is the need of one’s family, friends,
coworkers, neighbors, fellow-citizens. Or to put it another way, the limit of
one’s possessions is the opportunity to distribute them for the relief of the
common need and the promotion of the common good.
Augustine states that “the temperate
man finds confirmation of the rule forbidding him to love the things of this
life, or to deem any of them desirable for its own sake.”[52] Wealth generated from property is not to be
maximized for its own sake; rather, the generation of wealth, if it is not to
become a “pathology” or sickness, must be directed to the common good. Temperance, as it refers to our property and
wealth, helps us to overcome our fixations and addictions by resisting our intense desire for a narrow goal, such
as profit maximization either for the company or the individual, in order to
redirect us toward a much broader one, such as the common good. By
seeing this broader goal of the common good that we explored in Chapter 2,
managers have a better chance of creating conditions within the organization
whereby a real community can develop.
Yet, without temperance, companies become hazardously focused toward
financial goals and cease to use capital as a tool for a broader social purpose.[53]
Taking seriously the Christian understanding
of property provides a deeper analysis of what is at stake in the
corporation. The following ESOP case
illustrates in more practical ways some possible concrete implications of a
Christian property ethic and the ownership of an organization.
3. Case: Phelps County Bank
All kinds of US companies have
ESOPs: large companies, such as United Airlines and Cargill; smaller and
medium-sized companies, such as Wierton Steel and Springfield Remanufacturing
Company. To give an idea of how an ESOP
works, and to illustrate its benefits and problems, we focus on the Phelps
County Bank (PCB), an independent community bank in Rolla, Missouri with 60
employees.[54]
PCB has a leveraged ESOP.[55] The leveraged ESOP can be described through
the following four stages:[56]
Stage
1:
The board of directors and representatives of the current owners agree to sell
part or all of the company to the employees.
They appoint the trustees of the ESOP who set up the ESOP trust.
Stage
2:
A financial institution lends money to the ESOP trust, usually at a reduced
rate because of U.S. tax advantages to banks.
The ESOP is subject to the same feasibility standards and corporate
guarantees as direct loans to the corporation.
For example, the credit for the loan is secured by and repaid from the
existing capital and future profits of the company. The ESOP trust in turn buys the stock from existing owners and
sets up a temporary stock account.
Stage
3: As
the loan is paid back, shares are released from the temporary stock account and
distributed to individual employee stock accounts. Norman Kurland explains that “Shares of stock are allocated to
the individual accounts of workers only as blocks of shares are ‘earned’, i.e.,
the company contributes cash out of future pretax profits to the trust. The cash, which is treated as a
tax-deductible employee benefit, is used to repay the stock acquisition loan.”
Stage
4:
When employees retire, they usually sell their shares back to the ESOP, from
which new employees can then purchase them.[57]
When PCB’s
management presented the ESOP to employees, they were not greeted with a
standing ovation or a thank-you. What
they received was skepticism. From the employees’ perspective, nothing
noticeably changed in the organization, except that the ESOP would replace
future wage increases with shares of stock.
Most of the PCB employees were raised in homes where incomes were earned
through wages.[58] Apart from this cultural dependency on
wages, younger parents found the deferred income idea difficult to take. Faced
with real economic pressures, and liable to “consumerism,” many employees--and
particularly younger employees--“have a relatively strong preference of current
over future consumption; they do not wish to save 25% of their compensation to
secure future pension benefits.”[59]
Yet, through its ESOP, PCB has
created more wealth and has distributed that wealth more justly throughout the
organization, over the long term. In
the first year of the ESOP (1980), a junior officer’s total contribution to the
plan was $456. In 1994, that same
officer’s contribution to the plan was $29,300, with an accumulated account
balance of more than $200,000. An ESOP
is like a house mortgage. At the
beginning, payments to the loan take very little off the principal, but as the
house appreciates and as the interest is paid off, equity in the house
increases at a faster rate.[60]
A critical underlying problem in
setting up the ESOP at PCB was resistance to the culture of ownership. For the ESOP to take hold at PCB, education
predicated on an ownership philosophy was imperative. Ownership must exist not only on the books, but also in the
culture: employees must take ownership over their own work; they must be
equipped with knowledge and skills to be “real owners” of the firm. PCB undertook an educational program soon
after initiating its ESOP. All
employees became more familiar with PCB’s own products and with the firm’s
financial status, and they developed a wider understanding of the banking
industry in general. The new training and education were very
costly and time-consuming. They
required more meetings and new job duties, which added more hours to the day
for most employees.
Not everyone found ownership
appealing. Initiating employee
ownership demanded additional time and energy from all employees, which, at
PCB, caused problems in transitioning.
It took people out of their “comfort zone,” creating resentment. Between 1986 and 1988, PCB experienced a
turnover of approximately 40% in non-management and 25% in management staff. As PCB’s new culture became more widely
known, however, the firm began to attract employees who wanted to learn and
grow with the ownership of the company.
Existing employees who remained with PCB found the transition from a conventional
to an employee-owned corporation painful, but in the end also found that the
change had made their work more rewarding and fulfilling. The transitional
problems at PCB appeared not because of the ESOP itself, but from a change in
the culture of the bank. The initial, high turnover of employees came about
principally from employees who objected to allocating a larger share of their
energies and time to their work.
Management at PCB realized that for
the ESOP to be successful, employees needed to participate to the fullest
extent possible in their work.
Education is critical to this participation. By training their employees
and sharing more information about the company and the industry, PCB increased
participation in three ways:
1) Giving more authority to employees over
their own jobs (subsidiarity): CEO Emma Lou Brent explains,
“Employee-owners were given authority to use their own judgment to do what they
felt necessary to retain a customer’s goodwill. This included the right to negotiate interest rates, refund
charges, or use creative options in solving customer problems.”[61]
2) Providing more opportunities to participate
in group decision-making: Because all employees are now owners, they have a
greater stake in all areas of the company, including the board of
directors. At PCB, employees are
elected by their peers to be members of the ESOP committee that oversees the
communication and implementation of the ESOP.
Committee members attend the national ESOP meeting to educate themselves
in the broader ideas and philosophy of ESOPs.
3) Better communication throughout the
organization: As Brent noted, at PCB more upward communication began to
occur. “Sometimes it isn’t what you want to hear, but you’re making progress
because now you’re hearing it. It’s
been there all along. Employees just
made sure it didn’t get back to management in the earlier stages.”[62]
By increasing
accountability and responsibility in the organization, PCB has effectively used
their ESOP to set conditions that allow employees to develop in their
work. In other words, by putting the
ESOP technique at the service of excellent ends, PCB has given it a “soul,”
based on the full participation of their employees.
The
Common Good Challenge: ESOPs, however, are not without their problems.[63] In some organizations, the sole principle
guiding ESOPs is utility; they serve, for example, as a technique for
increasing productivity by motivating employees to work harder and more
efficiently. While utility has to be
one guiding factor, not only of ESOPs but also of any organizational program,
we should remember that utility itself is only an estimate of the efficacy of
certain means; ultimately, utility must be measured against an organization’s
highest or “final” ends. For example,
one CEO we interviewed argued that he instituted an ESOP strictly for the
strategic purpose of stable employment; his end, that is, was to reduce
turnover through an ESOP that would make it more difficult for employees to
leave the company. Any other reasons,
he thought, were not “good” business thinking, as if to assume that “good”
business reasoning must be instrumental reasoning.
When ESOPs are used in organizations
simply as a productivity technique or a tax shelter, the full moral vision of
an organization is truncated by what we called in Chapter 2 instrumentalism,
whereby employees are seen primarily as means and not first as ends. To see ESOPs only in terms of productivity
tricks or tax advantages misses the larger end of establishing an ownership culture
that both distributes wealth justly and develops the person. ESOPs can create conditions for human
development only if the common good in its fullest sense animates the whole
business.
While we have found PCB to be a
successful ESOP both morally and economically, the company, like all companies,
faces continual challenges in maintaining a principled approach with its
ESOP. In Chapter 2, we criticized the
shareholder model for instrumentalizing the purpose and mission of business to
the maximization of shareholder wealth.
Employees, as owners, are not beyond the pale of the shareholder model. They
can adopt a financial philosophy of maximizing their own shareholder wealth,
causing what could be called the “financialization of ESOPs,” leading to among
other things overworked owners.
One issue causes us to raise some
questions for PCB as it relates to instrumentalism. Here our analysis is more hypothetical than factual; however, our
hypothesis serves to bring out how an ESOP, if it is not grounded in a social
understanding of property, can decline into one more expression of economism.
Management at PCB felt that if the
bank could increase the ESOP contribution from $100,000 to $250,000 in one
year, they could emphasize the importance of ownership in the bank through
larger contributions to employees. In
order to do this, the company would have to increase its revenue. Management’s
target was to increase its loan portfolio by moving funds “from the lower yielding
investment portfolio to higher yielding loans.”[64] By encouraging customers to take out higher
yielding loans, employee payouts improved dramatically. By linking employee equity with employee
activity, PCB was able to meet its strategic goals.
Certainly, there is nothing wrong
with strategically targeting financial goals and achieving them. There are,
nonetheless, other important questions to raise, lest financial goals become
“teleopathic.” Are customers any better off from the higher yielding
loans? They may be. Yet, one can easily see a possible conflict
between the credit needs of the customer--particularly in a rural, typically
lower-income area, such as Rolla, Missouri (where PCB does business)--and the
higher yielding loans which simultaneously served management’s strategic goals
and employees’ personal interests. For
example, pushing consumption loans through credit cards over production loans
with lower interest rates might well serve the financial interests of
employees, but might not serve the good of the community of Rolla in general
and of PCB’s customers in particular.
The point here is that even employee-owners are subject to the
“maximizing,” strategic mentality that pursues the firm’s interest at the
expense of the customer, the community and the common good. This same maximizing mentality can lead to
overworked employees, which at the beginning of PCB’s ownership venture, was
one of the reasons why some employees left. While ESOPs are a powerful—and to
that extent, a “good”-- technique, they do not guarantee that employees will
order their particular goods toward the common good.
There is, however, a caveat to be
noted here. Unlike an investment
financier, the PCB employee sees the customer regularly and is confronted with
a face, a family, a fellow-parishioner—a real person. The PCB employee’s stake in the ESOP is what Gates calls
“connected capital,” and relations with PCB’s customers generally involve
Gates’ “up-close capitalism.”[65] It is easier, for example, to say, “I’ll
maximize my wealth, and let the customer look to himself,” when the customer is
faceless and the community a set of demographic profiles. The proposition is rather different when one
shares with the customer the ordinary relations of community, besides and
before a business relationship. Gates’ “connected, up-close capitalism” may not be
virtue, but it is certainly an occasion for virtue.
Conclusion
This
chapter rests on the belief that a wider ownership of productive property
promotes employees’ development and ultimately serves the common good. We see ESOPs as a particularly effective way
of converting corporate workplaces into work communities open to the deliberate
promotion of common goods. ESOPs are
capable of being conducted in such a way that employees and managers become
conscious participants in a reordering of productive property towards the
development of the members of the firm and the strengthening of the wider
community.
Employee ownership supplies an
indispensable condition for employee-management solidarity, namely: shares in
an undivided good. It guarantees that
management and employees alike can cultivate their individual interests only by
building up the organization as a whole.
As Charles Avila reminds us: “[W]ithout something materially concrete to
share, we could no longer speak of a koinonia
[community], a sharing in common.”[66] However, even given something materially
concrete to share, cooperators in a business organization will fall short of
community unless they also share some ends of action that cannot be reduced to
a dividend, converted to a price, or otherwise realized singly. That is to say, ownership in the sense of
commanding a share must be completed by ownership in the sense of taking
responsibility both for cultivating the good that the firm is, and for pursuing
the good that the firm is capable of doing.[67]
Worker ownership is consistent
within the Christian social tradition in general, and is advocated in the
Catholic social tradition in particular, because it tends to serve the end of property by not only distributing
wealth in service to human needs, but also by fostering a real community of
work. Put another way, the very
difficulties involved in making the transition to a organizational culture of
ownership are occasions for training in the habits of solidarity, that is, of
considering one’s own good, and of deliberating and acting, in the light of the
common good.
While ESOPs as a means will not magically transform
organizations into the very incarnation of the common good, they can certainly
move them in the direction of greater community. Employee ownership provides a
condition for employee/management solidarity in creating a community of work.
Any such community must rest on a sound economic basis, which makes
competencies in finance, marketing, operations, and so forth, essential
preconditions. ESOPs provide wider ownership of productive property in a
workable fashion, correcting a market economy’s inherent tendency to
concentrate ownership. However, ESOPs
are doubly attractive in terms of moving us closer to the common good because
they tend to make responsible participation in the ends of enterprise the “flip
side” of distributive ownership.[68]
The circumstances in which ESOPs can be implemented will be contingent
on a variety of factors. The
implementation of an ESOP is rife with details, each of which is a potential
source of friction: the current culture of the company, access to credit,
future cash earnings, board representation, diversification of risk for
employee retirement, assessment at sale, and so forth. These
details and the specific circumstances in which they arise call for practically
wise managers and employees, who can evaluate the situation as it is, and avoid
plunging ahead with a “cookie cutter” approach. This, of course, is no easy task, but the Christian vocation was
never said to be easy.
Study Questions:
1) Describe the
fundamental differences between Kelso and Kohlberg on property. How do their
understandings of property shape their use of leveraged techniques?
2) Summarize the
Christian view of property. Does this Christian view of property match your
view of property? Where are the points of convergence? Where are the points of
tension?
3) How does PCB
manifest a Christian understanding of ownership? Where do they possibly fall
short?
Video Suggestions:
The ESOP Advantage see
http://www.esopassociation.org/prodcat/audiovis.html
The Anatomy of a Corporate Takeover (PBS )
The Mondragon Experiment (BBC Documentary
“The Third Way.”)