After privatisation was completed in the 1990s, many Slovenian companies ended up in the hands of their employees. Many workers later sold their shares, but many have kept them to this day. There are many such companies - providing thousands of jobs, usually well paid. 

At ED Institute we note that one of the major dilemmas for many companies today is what to do with ownership that is still in the hands of retired worker-owners. 

Employee ownership is responsible ownership. It has a positive impact on employee well-being and multiplier effects for other stakeholders and the local community. On the other hand, in the past, external owners have repeatedly proved problematic, as they have no interest in keeping the business out of urban centres or in running two separate businesses. They are slowly challenging management values, taking over client lists, perhaps retaining a few key people, and gradually transferring the business to an enlarged main company. They often protect or increase their profits by depleting the assets of the acquired company or by moving production to countries with cheaper labour.  

The negative consequences of such stories are obvious: the tendency towards deregulation and additional pressure on the environment and nature, lower paid work and job losses within the local environment, loss of revenue for municipalities, indirect depopulation, which already threatens places outside the major Slovenian urban centres. 

In many cases, the internal buy-out was also a safeguard to defend the company against a foreign investor or even a Slovenian competitor. Domel in Železniki is the best known example of this.  

Due to a lack of legislation, employee-owned companies do not have systems in place to ensure internal ownership in the long term. Sooner or later, employees retire and keep their shares. Once they step into the role of external owners, their attitude to decision-making on behalf of the company changes dramatically. They demand higher dividends and look at share price growth, not so much at employee incomes and working conditions. This is borne out by the testimony of many directors.  

Today we are in a situation where more and more former worker-owners are retired. As ownership has seeped out of the company, the defence against a takeover by an outside investor has weakened. With most owners looking to their personal financial interest, takeovers become an increasing danger.  

How to protect businesses and the local communities in which they are embedded? One of the strategies that some companies are using in the absence of appropriate legislation is to buy back their own shares. However, this strategy has a number of problems:  

• Retired worker-owners see shares as an ATM - dividend payments come in handy to cover their holidays. So, apart from the high price, there is no incentive to sell. Similarly, the recent change in the law which further taxes treasury shares has further reduced the price a company is able to pay to buy shares from outside owners. 
• If treasury shares are bought back, they do not provide dividends or voting rights. The result of treasury share buybacks is a concentration of ownership in the hands of the remaining shareholders, akin to boiling soup in order to thicken it.  
• Employees who have not taken ownership are well paid. Locally responsible companies pay high salaries and bonuses, so there is little incentive for new employees to take ownership.  
• Workers can only become owners if they themselves buy shares from salaries or other personal assets, which means that ownership would gradually shift to the employees with the highest income, usually management. This weakens the "we're in this together" culture, and internal ownership finally collapses when a generation of manager-owners retire, who, in the absence of an established model, sell their shares to an outside investor when they leave.

The Slovenian ESOP model, which we have based on the American experience and which we are already setting up at the ED Institute, addresses all the problems except that the retired owners are counting on a large external buyer to bring them a great price for their shares. A strategic buyer may indeed be willing to pay a premium on the price of ownership to consolidate the market, but an internal buyout is a much more responsible decision for all stakeholders. 

By selling the company at a balance sheet (rather than a dream) price, the retiring owners will get a fair value for their shares, while ensuring that the company remains in the local community, that economic activity keeps the local town alive, and that the company continues to operate in the interests of the local population. 

ESOP is a special fund through which the company channels earmarked funds to buy back external shares, similar to buying back its own shares. All employees have their own accounts in the fund, showing the number and value of shares under their name. Since ESOPs in companies that pay out the entire surplus to employees in the form of bonuses mean that some of these bonuses have to be diverted into ownership rather than direct payments, we can expect some instant resistance from workers and their representatives.  

It is crucial to note here that such resistance is extremely naive and short-sighted. With ownership solutions in flux, it is to be expected that the eventual investment owner (or even external retired owners) will have a very different view of accountability to employees than the current management. Will the American owner, who will demand a return on his investment, continue to pay a 13th salary, a Christmas bonus and a generous recourse? 

The ESOP ensures that ownership always remains in the hands of the current generation of employees, thus preserving the right of employees to the added value they create, through constant redemptions and allocations of shares within the fund.  

The key question is how to persuade retired owners to make the right choice for the good of the company, its employees and the local community that has provided for their well-being for many years. A sense of local responsibility and mission must play a central role in persuasion. It is also important to inform that the dream offer for diversified shares is unlikely to even come. Is the equity worth the equity limbo and the risk to the company? And thirdly, company management can motivate the most stubborn owners to sell to the ESOP by lowering the dividend.  

Once an ESOP has acquired controlling ownership, the possibility of the company being bought out by a foreign owner is reduced. At the same time, ownership - and with it the entrepreneurial interest - becomes anchored in the local community. Therefore, strategies that encourage external owners to sell shares to the ESOP and keep the business local make sense.  

For more information on the ESOP solution, see: https://ekonomska-demokracija.si/gradiva/