Bargaining: Should we grab the money while we still can?

Should we grab the money while we still can?

Gavin Hartford* argues that employee share ownership schemes (Esops) give workers an opportunity for an additional savings income stream. They are not about worker control of companies in a capitalist economy!

Why is the issue of black ownership and esops so high on the agenda?Up until 2015, 25% of the economy is for sale to blacks. Black economic empowerment codes give further guidance on this issue. Currently this ownership opportunity is being divided up between designated groups (women, youth, disabled etc), workers and the emerging black business elite. We have a choice – do we want a few black faces in the economy or do we want to participate in the worker ownership arena?

What is black business’ view on ownership?Black business is pushing that broad-based empowerment (for example shares sold to workers or designated groups or community trusts etc) is not real empowerment. They argue that these groups cannot influence board level decision making and therefore constitute what they call “soft empowerment”. They support a 10% ownership cap put on broad-based ownership. For example of the 25% of the business that can be transferred, black business wanted broad-based ownership to be capped at 10%. This cap has now been placed in the codes so that the sellers of the equity can realise 8 points of the available 2 points on the score card for broad based schemes (unless they comply with a set of additional requirements contained in annexure 100b of the ownership codes).

When you talk about workers owning shares in their company, should every worker, if offered, buy shares in their company?Worker ownership has to be targeted at those companies that have real value. In family owned businesses you must first ask the question – is there value in this company? For example Satawu approached us. Workers at one of their companies were offered 15% of the company’s shares. When we looked at this deal we advised that the deal does not make sense since there was no chance of real value passing to workers in their lifetimes. Each case needs to be considered on its merits from a financial point of view.

What benefits can esops offer?If properly structured they can deliver cash, social benefits, shares that can be sold for cash when a worker leaves and/or new savings vehicles for workers..

How does the financing of an esop work?

All employee ownership is financed by the company providing a loan to the workers trust to buy the shares. As shares gain in value or as dividends (profits on the shares) are earned, the workers trust uses these proceeds to pay off the loan so that workers walk away with the shares that they own after the debt has been retired. In some deals, during the process of paying the debt off, dividends trickle through and are paid to the workers. But the real value for workers is in the long term growth of the value of the shares and if this value appreciates the workers sell their shares to secure the cash.

Isn’t there a danger that the share price will fall and workers will not be able to pay off the loan?

Yes there is always this danger. However, there are ways to structure the ownership deal to reduce the risk of this eventuality. For example in the Anglo Gold employee ownership deal the company gave one quarter of its shares for free so that workers would be protected to some degree if the share price fell completely.Another way is to negotiate a discount off normal interest rates so that workers (or the trust) can buy shares with money borrowed at less than prime interest rate (2-4% below prime).Yet another mechanism is to secure the right of the trust to sell shares back to the company when the share price spikes so that money can be put in the bank to pay off the loan.The greatest protection is to diversify the investment once the shares are owned by the workers trust so that if the company fails, workers will still have shares in a diversified portfolio just as retirement funds do.

Questions for discussion:

Should Numsa engage in the employee ownership process or leave it alone?
Will owning shares in the companies we work for compromise wage bargaining? If not how can we engage with it?
If we decide to go the esop route, how do we protect workers against the value of their shares dropping?
Is there value in trying to engage in this process for workers?

How can we use esops to build worker control and influence in collective agreements?All of the trusts that run the esops are 80 plus controlled by workers and independent trustees. It’s not like a provident fund which is 50% management and 50% workers. In most esop trusts, the majority are worker trustees with 3-4 independent people.However, most esops typically own less far less 25% of the shares of a company. This is not enough ownership to have veto rights (ie to have the final say over a decision.) You need at least 50% ownership in order to get control over the decisions of the company.

So would you say that having an esop is less about worker control of ownership and more about putting more money into workers’ pockets?Think of it like this. There is a BEE train coming along in this stage of the transformation process. There is a carriage marked in most empowerment deals saying the company wants to allocate x% for the workers. The choice is yours – do you want to jump onto this carriage or not? We live in a social democracy and this is an opportunity to enhance the benefits of employment for working people. This is not socialism!

Won’t having shares in a company influence the workers not to want to fight for improved wages and conditions?

That is the workers’ choice. Typically, the world over there is no correlation between worker militancy and employee ownership, except in those companies that are wholly worker owned which is not the case here. At best we can secure a small part of the total ownership and we always have the option to not participate in board deliberations (if we are even offered such positions) or to participate and remove ourselves when the issue of deciding on workers’ wages and conditions arise.

How could negotiating esops actually work?Esops are negotiated on a company by company basis. It is a voluntary process since the company has the right to offer its shares to any black person. There is no obligation on companies to offer shares to workers. Numsa could promote engagement in employee share deals by agreeing to sign a broad framework agreement on the ownership issues with Seifsa, for example. However this could only be an enabling guideline since each company would have to be approached individually to determine whether a share ownership deal for workers is possible and viable. Organisers would then have to negotiate the finer details with each and every company that was interested.

What about multinational companies (MNCs)?Government has agreed with them that they would not be compelled to comply with the ownership criteria of the BEE codes, and instead they must do equity equivalents. So instead of MNCs selling off their shares in the company itself they could sell other assets like catering, property, transport, retail chains or other non core parts of their business to worker-owned trusts.

This article combines questions and issues put to Gavin Hartford from The Esop Shop in the Numsa Central Committee in December 2006, and again in the February 2007 National Policy Workshop..