Never look a gift horse in the mouth. Unless it comes from the Greeks who have been besieging your citadel of Troy. As they say, Timeo Danaos et dona ferentes (Beware of Greeks bearing gifts).
I mention this because, as a professional sceptic, I am duty-bound to look at the downside of even the worthiest corporate schemes. My question is whether the rash of new Employee Share Ownership Schemes (Esops) that black empowerment has created, have any drawbacks.
The Who Owns Whom website notes that three big companies — Italtile, Tongaat and Woolworths — all introduced empowerment deals in May with a substantial emphasis on staff ownership of equity. To this must be added the R1-billion Impala Platinum Holdings Esop announced this week.
All the Esops differ, but the common thinking seems to be: “If we have to do a broad-based BEE deal, let’s at least use it to give our employees a stake in the company.”
Esops can be done quite easily in most companies for all ordinary workers — without being racially based. So you can effectively distribute 10% of the company’s shares to all the workers and avert resentment among white workers about black colleagues being privileged.
So Woolworths, for instance, has created preference shares, equivalent to 10% of the company, for 17 000 employees, 90% of whom are black and 85% women. According to Woolworths, if all goes well and the company continues to grow at 20% a year, each employee should get R250 000 if they are still employed in eight years; R50 000 of that will be in dividends and R200 000 capital if they realise the ordinary shares into which the preference shares will be converted.
But the company is promising to pay at least R20 000 if all does not go well — if the company does not grow at least 10% a year in the next eight years.
The 10% Esop of Woolworths and other retailers is quite a high percentage. More common is the level of staff ownership entitlement in the Esop announced this week by Impala Platinum Holdings. The Morokotso Trust will hold 3% of Implats’s share capital, worth more than R1-billion, for the 28 000 workers (as defined by Patterson grades A, B and C) in Implats’s South African subsidiaries. After five years, the qualifying employees will be able to sell 40% of the shares to which they are entitled — and Implats has the right of first refusal. After 10 years, they can sell the rest.
Most Esops hold the shares in trust until the date when the employee becomes eligible to receive them. Esops (known as Employee Stock Option Schemes in the United States) represent a gift, from the company, of free shares. They are there to keep a lid on staff turnover and motivate staff to perform well.
The US Esop Association notes: “The first step in the process of establishing an Esop is to develop an idea of the type of plan that will best serve the company’s interests. Companies have created
Esops as an employee retirement plan, for purposes of business continuity, financing, enhanced employee motivation or as a combination.”
The National Centre for Employee Ownership, again in the US, states: “The employee stock ownership plan (Esop) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets.”
I guess this last idea was one of the motivations for the unions rejecting the concept of an Esop in 1988, when Anglo announced what was then a ground-breaking move in South Africa. That it came after a strike in which tens of thousands of workers were dismissed is another reason.
Then, the reason was strongly ideological. Anglo was trying to bring the flavour of “people’s capitalism”, championed by Iron Lady Margaret Thatcher, to South Africa.
Now that the Cold War is as cold as a corpse, the drawbacks of such schemes are not obvious. It’s a gift, right? The problem is that such schemes do not give the recipients of the shares any power over the governance of the company. First, the vehicles in which they are held, usually trusts, are not conducive to active participation in governance. Second, the stakes held are too small in the usual Esop, about 3%.
True employee empowerment would entail a role in governance and bigger stakes. This brings us closer to cooperatives, however, which is not common outside the agricultural sphere in South Africa. Certainly, it is too socialist an idea for many business people.
More important than issues of governance, perhaps, is whether the company could use the money better for other corporate social responsibility projects — to take a random example, crèches for mothers in the company’s employ.
It must be said in defence of Esops that they are a lot more efficient and make a lot more sense than many broad-based BEE schemes. The beneficiary group is easy to identify, easier than the members of a community, for instance, which might be fluid. There can be a direct link between the performance of employees and the performance of the company — barring management incompetence. And in the Woolworths Esop, to be sure, a substantial sum could be earned.
So let’s welcome Esops — cautiously — especially as they point to more sustainable methods of empowering ordinary people — but not if they come at the expense of general corporate responsibility to staff. And perhaps we should investigate cooperatives as a vehicle for new forms of empowerment.