Ownership of Corporations

Employee ownership is a key ingredient for a just deserts economic system. There are two other novel concepts that are related and needed here.

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The same arguments that hold for ownership of real estate leading to unearned income also hold for ownership of other things, including shares of corporations or companies. Corporations sometimes have large changes in their valuation, leading to higher values. If a person purchases some share of the corporation, and the workers and those in close relation to it are successful in increasing its value, the person with the share would reap the benefits.

If this is thought to be a bad idea, there are two solutions, at least. One is to tax the capital gains resulting from the sale of a share of the corporation, so that the capital gain could be recovered, in part, and distributed to those whose efforts led to this gain. Another is to ban the sale of shares of corporations. Taxation is a well-known factor in almost any economy, and its advantages and disadvantages are known to some degree. However, if the sale of shares of corporations were not allowed or were restricted somehow, how would such an economy function?

Many corporations and companies are owned privately, and many were originally the property of the founders. This arrangement can be described, persuasively but not properly, as the owners reaping the gains of their efforts. This is quantitatively not true. Their effort may have certainly contributed to the increase in value of the corporation or company, but as the effort of a human is limited in value by the time spent and the value of the mental and physical labor contributed, the increase in value of the corporation can be many times the value of the labor hours. Founders also could be taking a salary, would be another recompense for their time and effort, meaning that the increase in value of the corporation would be duplicating that payment.

Corporations and companies which are privately owned by the founders are often passed via inheritance to the heirs of these founders, and they maintain ownership possibly without being involved at all in the corporation or company. This is the exact recipe for unearned income, and the just deserts socio-economic system is supposed to reduce this, while increasing earned income. Furthermore, the heirs might simply sell their shares, leading to another variant of unearned income.

One variant that partially alleviates this is the employee-owned corporation or company, where the employees all own shares of the entity. There can be many different ways in which employees share in the value of the company or corporation, but the core idea is that instead of extra salary or wages being given to the employees, shares of the entity are. They might be forced to sell them when leaving the company, or not, depending on the particular rules that the entity sets up. The contribution that the employees make toward the success of the entity can be considered some justification for any capital gains flowing to them. One nice point about employee-owned corporations and companies is that it provides additional motivation to the employees to do whatever they are capable of to increase that success and thereby increase their own total received value. Motivation is a key ingredient to any socio-economic system, as the system’s overall productivity is directly related to how industrious those who work are, including those who work on improving the various entities, networks, organizations and other features of the system.

There are many other factors which influence the value of a company or corporation, besides the contributions of those who work within it. Sometimes abrupt changes happen, such as the failure of a competitor, the new availability of a useful invention or resource, or a new appreciation of the value of its products by whoever is consuming them. These can result in a large capital gain, which does not appear to be the result of the effort of the employees. They should receive some of this capital gain, but the rest should be returned to those outside the entity, which by default are the various levels and agencies of government and public institutions. One concept which might be suggested is a progressive tax, amounting to zero for gains below some percentage and increasing as it exceeds this.

The other side of an abrupt increase in value is an abrupt decrease in value. This can happen for the same reasons as an increase, and more besides. If there was an inverse tax for these situations, a soft-landing could be provided for the corporation suffering the reduction in value. Sudden changes prevent individuals within such an entity from adapting. A company which was specialized in producing a product for which demand was rapidly diminishing, or which uses a resource which was rapidly depleted or became more costly, might need such a soft landing, so that it could downsize without the trauma of a collapse. The progressive tax, with both a positive and negative side, could accomplish that without eliminating the motivation for those in the entity to solve their problems by themselves. If the tax was fed into an insurance fund, it might be able to mitigate these situations.

Thus, two of the tools that might be used for a just deserts economic system are employee ownership and a two-sided progressive tax on the capital value of any business entity, corporation or company to be used for an insurance fund. There are very many ways in which these two concepts might be implemented, and a just deserts economic system might allow large numbers to be present, as long as they do no disservice to the concept of just deserts. Somehow there must be a balance between what might be called luck, meaning the sum total of outside factors, and successes due to the deliberate actions of the employee-owners. Luck cannot be eliminated, just kept from being disastrous or miraculous. Sometimes luck and internally-generated successes cannot be quantitatively separated, and so if the progressive levy could accommodate both, it might eliminate this discrimination problem.

Thus, the prescription for capital gains is that, whatever the cause, it is untaxed, negatively or positively, if the annual change is under some percentage, such as five percent, and then increases gradually at first and finally steeply. This does not discriminate between luck and success, and perhaps these two causes are too often mixed together. This also has the advantage of being fairly simple in its description and implementation.

Are there other aspects of employee-owned entities which might lead to some amendments to the very simple concept promoted here? One is that employee ownership might inhibit the inter-entity mobility of employees, which would mean that the best use of personnel would not be happening. If a person leaving one entity wound up with zero initial ownership of the new entity where he was now working, they might not make the transfer. One way to alleviate this is similar to that done with portable pensions. With a portable pension, there is some net value which is ascribed to each employee, and when they leave a company for another one, the value of the pension transfers over. As long as the company cannot make use of the pension amount for business uses, it would not matter to the departing or arrival company that this happens. This would happen with a pension system which covered more than one company, perhaps being regional or otherwise extensive. The ownership rights might also be somehow transferred from the departure company to the arrival company, but this must be a bit more carefully done so that there is not a great loss or gain.

If an amount equal to the transferee’s share of ownership was transferred to the arrival company from the departure company as well, then this amount might be used to reduce the debt held by the arrival company and increase that held by the departure company. This would change the value of the two companies by exactly this amount, in an accounting sense. There might be other schemes which also reduce any additional inhibition to transfer between companies or corporations. There will be many factors which affect a decision to transfer between entities, including uncertainty about the nature of the new position, other employees and their willingness to accept a new employee, change of locality and its affect on a family or relations, and many others. These are not the subject of a socio-economic system, at least not initially, but the financial incentives or disincentives can be reduced so that they do not form an additional feature.

Government organizations can have similar value associated with them, which would expedite the transfer of individuals between government agencies and private entities. One often-discussed fault of government organizations is that there is little motivation to improve and excel. If a value fund could be established for each government agency, which would increase if the agency was able to meet its goals or exceed them, then there would be some motivation for employees to work to accomplish that. This value fund could be transferred to the ownership fund of a private company or vice versa, so there would be less inhibition to transfers. Government agencies would become, to an extent, analogs of employee-owned private entities.

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