Employee Ownership

An ESOP Fable

What's good for the workers is good for the bosses.


La Perla is a 9,000-acre coffee and cardamom plantation in the northern Guatemalan province of Quiché, a rebel stronghold. For more than a decade, leftist guerrillas have been attacking both farm workers and farm owners, destroying crops, buildings, and lives.

Enrique Arenas runs La Perla. Ten years ago, his father was killed by the guerrillas. Other farm owners in the area were attacked; almost all of them abandoned their farms. In 1979, due to the frequency of rebel attacks, the banks refused to grant the Arenas family further credit. Still they stayed, opting in 1981 for a radical path—the family set up an employee stock ownership plan (ESOP).

The family set up a trust in which they allocated 40 percent of the stock to a workers' association. The stock will be paid for out of the future profits of the farm, although the employee association immediately gained full voting rights. Of the estate's 500 workers, a full 97 percent chose to stay at La Perla. Some of the handful who left have since returned.

Although the estate hadn't shown a profit in 10 years, the first harvest under the plan yielded an increase of more than 100 percent—this despite the lack of extra inputs of such goods as fertilizer and insecticides.

The losers in all this have been the insurgents. In March 1985, 120 rebels attacked the estate. This time, the guerrillas were driven off the farm by 200 armed workers, leaving several dead on both sides.

In the wake of this attack, the estate's 300 unarmed worker-owners petitioned the Arenas family for additional rifles to defend against future attacks, volunteering to help pay for the guns through a payroll-deduction plan. As one of the founders of the plan observed: "There is no greater significance to the concept of defending the free-enterprise system than a worker laying down his life to defend the company in which he is a co-owner."

Some might wonder why the Arenas family was willing to give up 40 percent of their farm, but the beauty of the plan is that it helps both workers and landowners. Workers get voting rights and 40 percent of the profits. As co-owners, the workers protect the Arenas family's property against both rebels and possible future land reform of the collectivist variety, as is so often imposed in Third World countries. Mr. Arenas, for one, believes that his family "will gain more with 60 percent than with 100 percent."

It is ironic that workers are becoming co-owners under capitalism, not communism. In the United States, ESOPs have increased worker efficiency and profits and improved the work environment. In Central America, they may be the only way out of the region's economic and political morass.

Since La Perla became an ESOP, 30 other companies in Guatemala have done likewise under the "Solidarity Plan," which is based on the "Solidarity Movement" in Costa Rica. The Costa Rican program was instituted in 1948 and has been a smashing success: over 700 companies and 120,000 employees (42 percent of the urban work force) now participate in the Costa Rican plan.

Former Costa Rican President Luis Alberto Monge, an ex-union leader, once observed: "The Solidarity Movement has already demonstrated with concrete action and progress its efficiency in promoting the general welfare of the working class and their consistency and determination toward building a more just and prosperous Costa Rica.…The Solidarity Movement has taught us all that the revolutionary goals of protecting individual liberty while striving for the common good need not exclude one at the price of the other.…Solidarity offers a way to obtain both through peaceful means rather than through armed insurrection."

ESOPs' rise to prominence could not have come at a better time. Economists of all political persuasions have undergone a humbling experience in Central America. Leftists generally believe that political unrest is fed by poverty—which, in agricultural societies, is a result of landlessness. Within this framework, leftists in Central America have naturally called for land reform. But as David Luft of the US State Department notes, under land reform, "everyone is worse off."

In El Salvador, for example, the original landowners were compensated with long-term bonds that are now trading for only 50 percent of their face value. The new landholders have not been given titles to the land, and they cannot sell the land for 30 years. Land reform seems to have contributed to the decline in production of such vital crops as coffee, sugar, and cotton.

Land reform in southern Guatemala has been equally unsuccessful. The new landholders promptly resold their land to a few men, creating a situation similar to that of the pre-reform period.

Free-market economists, on the other hand, have concluded that Central America's economic troubles stem from excessive government control. They suggest that governments sell off state-owned enterprises to private concerns.

Unfortunately, this approach is sometimes unrealistic. Who wants to buy a company that continuously loses money and owes millions of dollars to banks?

Privatization is also difficult for political reasons. J. William Middendorf II, former US Ambassador to the Organization of American States, points out, "There are still many in Latin America who would view selling off parastatals [government-owned firms] to 'transnationals' in the same way as they view foreign direct investment—selling off their 'national patrimony.'"

These profound difficulties have led many observers to write off Central America as an economic basket case, doomed to poverty, war, and communism. Yet Mr. Arenas and his co-owners at La Perla have demonstrated that alternatives to that bleak future do exist. Employee stock ownership plans have worked elsewhere—witness the approximately 8,000 corporations in America organized as ESOPs. Foremost among them are People Express, Lowe's (hardware) Stores, and Weirton Steel.

Employee-owned firms have consistently experienced higher productivity growth, greater resilience during recessions, higher returns on investment, and more job creation than similar firms that are not employee-owned. These companies also have fewer problems with absenteeism, theft, and labor relations.

President Reagan has called for "developing countries to experiment with the growing variety of arrangements for profit-sharing and expanded capital ownership that can bring economic betterment to their people." And some Democrats and Republicans agree. Third World ESOPs are supported by congressional conservatives such as Paul Laxalt and Phil Crane as well as liberals like Michael Barnes and Christopher Dodd. Rep. Barnes has written, "I think the President is absolutely correct.…The Employee Stock Ownership Plan could help spearhead a restructuring of development processes in Central America and the Caribbean."

Employee-owned firms are a revolutionary approach, but the Third World requires drastic measures to improve its many stagnant economies. Socialism and state capitalism have been tried and have failed; it's time to try real capitalism. And the best means of doing so, in the words of one analyst, "is not to make enemies of the owners but to make owners out of the nonowners."

Robert K. Rauth, Jr., is a student at the American Graduate School of International Management in Glendale, Arizona.