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Can we start new employee-owned companies in Ohio on a mass scale? Tools from Spain

By John Logue  Posted by David Kendall (about the submitter)     Permalink
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This article was first written for "Owners at Work", v. 20, no. 2 (Winter 2008/09). 

Dateline: December 2, 2008. National Bureau of Economic Research announces that US in recession since December 2007.

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Another recession in Ohio? We are still in the last one! Between January 1, 2000, and November 30, 2007, Ohio lost 255,200 manufacturing jobs -- 25% of our manufacturing base. Total Ohio employment dropped 154,700 or 2.8%. Since the "new" recession began on December 1, 2007 through October 2008, we’ve lost an additional 23,800 manufacturing jobs and 41,700 jobs over all.

The employee-owned sector is less likely to shed jobs. If we compare the performance of Ohio’s Employee-owned Network companies for which we have employment data in 2000 and 2007 (24 manufacturing companies and 37 total companies), the manufacturing firms have shed 1% of their jobs – not 25% -- and total employment has grown by 15% -- not dropped 3%. If Ohio’s manufacturing sector had matched Network companies, we’d have 230,000 more manufacturing jobs than we had in November 2007 (the 2008 data aren’t available yet) and close to one million additional total jobs in the state. Now, Network companies aren’t representative of the entire employee-owned sector: They are more participatory, more likely to communicate how the business is doing, and more likely to provide training. Moreover, the employee-owned sector as a whole is less likely to shed employment than their conventional competitors, far less likely to offshore or outsource, and more likely to reinvest in new plant, property and equipment in Ohio.

Yet despite these advantages, the employee-owned sector has grown only slowly over the last 15 years.

What can we do to encourage greater growth?

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Why we should start new employee-owned firms

One of the big holes in American employee ownership is the absence of employee-owned start ups. ESOPs are far too expensive for start ups. Co-ops don’t cost too much, but they are virtually unknown. What Small Business Development Center knows enough about them to suggest a co-op when you come in announcing "My buddy and I want to start a new business"?

Besides, they are hard to capitalize. They aren’t designed to include outside capital from non-members.

We need new tools for creating new employee-owned businesses. The most promising come from Spain. They were developed initially to deal with the massive economic dislocations that accompanied Spain’s entry into the European Union in 1986. Since then they have been developed sequentially to meet the needs of the times and they have become a substantial source of new business and job creation.

In the Basque region alone, which has a population of 2.1 million, or roughly that of greater Cleveland, between 100 and 150 new employee-owned firms are established annually. Over the last three decades, Spain has developed three new employee-ownership mechanisms for responding to economic dislocation which we should consider.

The first is a new form of corporation: the Sociedad Laboral (SL), or "Corporation of Labor." It is a form of corporation majority-owned by employees but based on stock ownership and able to include non-employee capital (unlike cooperatives). It’s a simple, flexible, and cheap way for employees to buy troubled companies or to start new ones. Since 1997, when Law of Labor Corporations changed, about two-thirds of new employee-owned companies have used this legal form.

The second is a way to capitalize new SLs and co-ops through lump-sum distributions of unemployment compensation and severance pay. This approach not only capitalizes new employee-owned businesses, it tends to preserve "social capital" – more below. Both make business success more likely.

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The third is an intense support system that helps new start ups and provides economies of scale for small, employee-owned businesses.

Labor Corporations

The Spanish system of "Corporations of Labor" (Sociedades Laborales, SLs) offers a unique tool to recapitalize companies under employee ownership and to start new companies out of the wreckage of the old. As a form of incorporation, it’s also inexpensive. As a result, there are about 20,000 of these Labor Corporations in Spain today, employing about 130,000.

In October I visited with the general director of the Basque regional association of Sociedades Laborales, Josetxo Hernandez Duñabeitia, in Bilbao, Spain. Hernandez was one of the pioneers of this form of share-based employee ownership in his company in the 1970s, and has worked since 1982 with the Basque regional association of Corporations of Labor ASLE (Agrupación de Sociedades Laborales de Euskadi). Although the initial SLs were, says Hernandez, all industrial companies, today there are about 1000 SLs with a bit more than 13,000 employees in the three Basque provinces in all sectors of the economy.

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