By Joseph R. Blasi
Last week Chobani yogurt founder Hamdi Ulukaya gave his workers a taste of capitalism by granting them a share in the value of the company. Ulukaya, who is also the CEO of the company, promised 2000 employees ten percent of the value of the entire corporation if the company goes public or is sold in the future. The potential value of this stake is quite significant since the media reported Chobani's potential estimated value as high as $ 2-3 billion. The announcement led to almost two hundred articles in the press, an NBC Evening News exclusive interview with Ulukaya by anchor Lester Holt, a People Magazine story, a light-up on the Facebook and Twitter universes, and commentary on many TV and radio stations across the nation that has gone on for days and is still continuing. Why did this story strike such a cord around the country and why did Hamdi Ulukaya become such a CEO rock star overnight?
The reason for all the attention is that this share of capitalism could possibly add up to something significant, by some reports an average of $150,000 per worker or in the neighborhood of a million dollars for workers with long tenure, in the young company in the future. The stake is a form of potentially consequential profit sharing since it will depend on reaching certain performance goals that will tie back to every individual worker's personal responsibility. Another reason the story got so much attention is that we are used to hearing about such stories from Silicon Valley companies like Google or Facebook or Twitter, not about factory workers. Ulukaya, the majority owner of Chobani, spoke about the yogurt factory's workers with the same concepts used by many Silicon Valley billionaires calling them "partners" and underlining that the ownership represented "a mutual promise to work together with a shared purpose and responsibility." Are yogurt makers the new software engineers? The New York Times reported that a private equity firm might end up owning a minority stake in the yogurt maker as a result of stock warrants it may have. Could the culture of Silicon Valley be relevant to Main Street in the Chobani case with Wall Street as the midwife?
The unique news here is that Chobani went beyond simply announcing "we're doing worker shares" to the next step where the company and its leaders and communications claimed that this arrangement was what corporate social responsibility is all about. When you taste that next teaspoon of Chobani, you may be tasting a new corporate ideology of shared capitalism, inclusive prosperity, and profit sharing. America's morning ritual of yumminess may now be an actual sharing of profits between the consumer and the workers, a sharing of wealth between the entrepreneur and the workers who helped build his dream, a sharing of responsibility between the executive/manager partners and the worker partners, and a promise that any future Chobani shareholders will not simply be those who play the stock exchanges but will also include those workers who help create the broad wealth that stock markets are supposed to be all about.
Wall Street meet popular capitalism. If Chobani ever does do an IPO, last week's announcement means that the Wall Street investment banks that promote the deal and the private equity firm that could have a stake in the company, will both be telling a story about sharing the wealth with the workers. Mr. Ulukaya has just changed the national conversation about corporations and Wall Street and private equity and the economy as a whole and sparked economic sociology debates in classrooms in colleges across the country. It is quite a policy voice he has developed in just a week.
The Chobani story comes at a time when the economic plight of the middle class is fueling strong interest by voters according to primary exit polls. High passions and vigorous debates by both politicians and citizens characterize the rhetoric swirling through both the Republican and Democratic primaries. This issue has clearly scrambled the entire electorate in a way that is nothing short of historic and in every way volatile.
The underlying reasons are so widely accepted that they are now repeated in political speeches and commentary by newspaper and TV reporters across the entire ideological spectrum. Wages for most sectors of the middle class adjusted for inflation have been flat if not declining for decades. The typical solution of a higher education does not uniformly solve the problem. Many new jobs added since the Great Recession generally have paid less and had worse benefits than those that were lost. The main families whose wealth has been expanding are those families who have access to meaningful capital ownership and capital income through equity or profit shares of business or positions in the financial system. Indeed, the richest 10% of families control well over 80% of all capital ownership including stocks and bonds and all capital income including all capital gains, dividends, and interest. If technological unemployment grows, it will only worsen the situation of those who own no capital. Capital shares might represent the type of "new property structures" that French economist Thomas Piketty mentioned in his ground-breaking book. They are a possible alternative to expanding tax redistribution or going straightaways to the economic feudalism that some fear. There is a lot to think about and to study here without jumping to conclusions. The whole area is not very simple at all.
A hard-headed objective evidence-based assessment of this story needs to examine several tough and complicated questions: Are middle class capital shares likely to spread in this way? How widespread are generous worker shares today? Are worker shares too risky for workers? What public policies have held back the growth of worker shares? What does the academic research say? If it makes sense, what can be realistically done to expand the idea as part of the American economic system? The answers to these questions are much bigger than the Chobani story which might be as small as a feel-good journalistic report in retrospect or as large as a lightening rod of national sentiment and deep public interest. There is in fact some evidence that the former is true. As the middle class wage economy has tanked for decades, repeated national surveys that take the temperature of the middle class show a consistent strong support for the idea of broad-based profit sharing in American business. Ulukaya hit that nerve spot on. But the answers do not go all in one direction or another. It's complex.
Are middle class capital shares likely to spread in this way?
The answer is no. The particular Chobani approach of granting workers a large chunk of stock or equity in one major announcement or transaction by a generous CEO is atypical. It is more typical of a fast-growing business like Microsoft in its heyday or Google and Apple in their recent run-up or Facebook and Twitter in their IPOs where large grants of stock or stock options to workers take place year in and year out. If the CEO of a public company did a 10% grant he or she might face shareholder resistance. Only the majority owner of a private company can make this specific move happen. Moreover, most of the companies in the U.S. are small businesses that are largely family-owned where cash profit sharing or gain sharing is the most common approach to capital shares with workers. Historically, family businesses who traditionally have closer ties to their workers and who committed to the shares-for-personal performance idea have generously shared 10-20% on top of wages year after year with cash profit sharing, but they generally want to keep 100% of the equity ownership to themselves.
A realistic approach for a large public company is that of Procter & Gamble which years ago set up a large Employee Stock Ownership Plan (ESOP) by using credit later repaid out of company profits to buy new shares that were granted to all workers. Typically in ESOPs workers like the Chobani middle class workers do not have to use their much-needed wages or savings to buy the stock. This leads to the next critical question.
Are worker shares too risky for workers?
Yes and no. Yes, they are definitely too risky if workers have to buy shares in the company where they work with their wages or retirement savings without any significant discounts and end up sinking most of their savings-based invested portfolio in company shares. Not a good idea. Remember Enron which lured workers to buy stock in its 401k plan. That needs to be limited. But, no, since access to capital ownership and capital income is what determines new wealth in the post-modern economy, it would be short-sighted to say that capitalism is only safe for the rich and the executive suite in companies. Companies are the common venue where workers can have this opportunity. For this reason, worker stock ownership that focuses on grants of stock and is entirely based on such grants that workers do not buy with their wages or savings provides an upside opportunity and some insulation from risk, especially if workers are paid fair wages and have a separate diversified retirement plan. Profit sharing, which may be the ultimate way Chobani workers experience this program, is less risky. Ultimately, in order to address the disappearance of the middle class, the U.S. may have to examine ways to further incentivize companies to grant shares - like ESOPs and restricted stock -- and other approaches such as diversified dividend and investment funds such as the Alaska Permanent Fund that are separate from the workplace and also not based on worker savings or wage contributions. That might help moderate the risk profile of citizen capital shares.
How widespread are generous worker shares today?
The answer is not very widespread because the actual public policies of both political parties have been generally unfriendly to capital shares for the middle class for decades despite all the political rhetoric to the contrary. The 2014 General Social Survey conducted by the National Opinion Research Center of the University of Chicago found that 19.5% of adult workers own some stock in the companies where they work, 9.5% hold some company stock options, about a third have access to cash profit sharing, and about a quarter have access to cash gain sharing -- which tends to be based on workers achieving certain performance goals different than company profit. At the median for those who have such shares, employee ownership is only worth about $10,000 in total and cash profit or gain sharing of only $2,000 is paid out every year. The really sizable profit and gain sharing stakes are in companies that have made a public long-term commitment to the idea every year such as Southwest Airlines which shared $620 million dollars in 2015 annual profits with all of its employees constituting a significant proportion on top of their wages. Southwest says it is more than 4% worker-owned and that it has shared $3.4 billion in profit sharing with all its workers in the last five years on top of contributions to their retirement plans.
The sizable employee stock ownership stakes, aside from companies such as Procter & Gamble and Internet companies, as a rule, are in closely-held companies with ESOPs (Employee Stock Ownership Plans) where the retiring entrepreneur-founders sold all or a large chunk of the company to the workers and managers in a worker leveraged buyout that typically uses credit to finance a purchase of a majority of the shares without any worker contributions from their compensation or savings. Publix Supermarkets in the south, W.L. Gore, the maker of Gore-tex, the footwear maker Dankso, the fashion house Eileen Fisher, the brewery New Belgium, the Illinois unionized metal forging manufacturer Scott Forge are well-known examples. Where the companies are valuable and the stakes are large, workers can accumulate real wealth. According to the National Center for Employee Ownership, there are about 6,000 such ESOPs in privately-held firms that cover about 3 million workers and retirees.
The current situation is that if a President and a Congress wanted to expand capital shares, many U.S. businesses have the capital share infrastructure to do so since the General Social Survey also found that 45% of all adult workers in 2014 had one or more versions of profit and equity sharing in the company where they work. Capital share programs for citizens not tied to workplaces, such as the Alaska Permanent Fund, which, by the way was initiated by Alaska Republicans, are virtually unknown in the United States, although there is growing interest in this possible private sector response to inequality.
What public policies have held back the growth of worker shares?
The answer is that after a spate of public policies in the late seventies and early eighties, successive Presidents and Congresses have done little to expand capital share policies for the middle class. ESOPs were created with tax incentives in the retirement legislation ERISA in 1974 with bipartisan support based on the work of Democratic Senator Russell Long of Louisiana and investment banker/law professor Louis O. Kelso. President Ronald Reagan and Senator Long worked together to broadly expand ESOPs during his administration so every company, public or private, would consider them. ESOPs then took off in public stock market companies like Procter & Gamble until the tax incentives and accounting rules encouraging them in such companies were totally removed from 1989-1993. From 1993-2002 after gutting tax incentives for broad-based employee stock ownership in stock market companies, a bipartisan Congress then allowed those same companies virtually unlimited tax deductions for employee ownership, profit sharing, and gain sharing plans focused only on their top five executives under Internal Revenue Code 162(m).
Broad-based stock options, somewhat similar to the Chobani promise of equity grants allowing sharing an increase in the value of the company, covered 30-50% of workers in the manufacturing and technology industries in 2002 with changes in government support from 2001-2009 leading to the almost total demise of grants of stock and options to broad groups of workers. These equity instruments are now concentrated among the top 1% of executives and managers. Certainly, many economists would be wary of expanding stock options in the future, arguing that they create too much risky behavior, but stable stock ownership is a well-known way to address principal-agent problems. Virtually all of these policies that dismantled broad-based capital shares went forward with bipartisan support and virtually zero dissent by politicians on both sides of the aisle who evidently believed that public policies supporting wage growth could succeed to save the middle class, which obviously has not taken place.
What does the academic research say?
Certainly, if decades of academic research in the post-WWII era indicated that broad-based capital shares for workers did not lead to better worker outcomes for workers or to the same or better economic performance for the companies, there would be little basis for any future public policy on these issues. In fact, there are strong evidence-based arguments supporting the rationality of capital shares over many decades based on multiple studies, multiple researchers, multiple methods, and the examination of multiple forms of capital shares. A ten-year study by the National Bureau of Economic Research with support from the Russell Sage Foundation and the Rockefeller Foundation reviewed previous empirical research and conducted new research and replicated these findings. A recent study, based on data from the Great Place To Work Institute (GPTW) examining applicants to the Best Company to Work For competition of Fortune magazine from 2005-2007, has also replicated these findings. This study appears in the March 2016 issue of the British Journal of Industrial Relations and covers businesses representing 10% of total sales and employment and 20% of market value of the NYSE and NASDAQ. The stark gap between the research on inclusive capitalism and public policy suggests that there is a profound disconnect between policy-making and constructive legislation that needs further critical examination.
If it makes sense, what can be realistically done to expand the idea of capital shares?
There is no question that adjustments to the national paradigm on the wage system and the middle class are necessary. It is not reasonable to assume that the usual suspects of public policy, from tax cuts and protectionism on the right or labor legislation and the expansion of entitlements on the left can be individually sufficient to bring back the hollowed out middle class. Policies on capital shares are certainly not a panacea but they should be explored in all business sectors and be a priority for serious research on work, on stratification, on inequality, on corporations, and on government initiatives throughout the social sciences. Capital share policies both within the workplace and for citizens in general, outside of workplaces, similar to the Alaska Permanent Fund, should both be explored.
The contingencies of when capital shares work and when they fail require a lot of work and dialogue in executive education seminars. Business Schools, which virtually totally ignore capital shares, now have a role in presenting case studies on the programs and finally starting research on the issues after being silent for a century on such questions as they almost exclusively study and promote executive compensation. One encouraging empirical finding from the GPTW study is that corporate executives who implement capital shares are more likely to invest efforts in implementing the necessary supportive corporate culture of "shared purpose and responsibility" that Chobani CEO Hamdi Ulukaya emphasized as critical alongside the economic incentive in his announcement last week. They develop self-directed work teams, cross-functional teams, low hierarchy organizations that share information and try to spur innovation with knowledge sharing and financial education. That is encouraging and suggests that if there are government incentives for executives to notice and to consider the idea, there may be a possibility of some constructive change. History has shown that tax incentives can get capital share programs noticed and implemented or canceled and forgotten. Why? Those who have many incentives to concentrate wealth at the top are those who are called upon to both legislate and install capital share programs. There is a lot of room for Ulukaya's brand of ethical education here.
The Chobani story is just starting to echo in the national political chamber with Hillary Clinton, who announced a policy to encourage cash profit sharing in companies last July, tweeting "Love this. Great to see Chobani sharing its success with the employees who helped make it possible." Chobani's workers may gain a share based on their performance in the future, but it will be far more important if the Chobani story starts a serious national discussion about the broader issues and the research and policy necessary to find a reasonable and measured course forward on these questions.