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[The prepared statements of the preceding panel follow:]

STATEMENT OF CONGRESSMAN PETER H. KOSTMAYER Our social and economic system is in the midst of great stress because of the loss of jobs and the shutdowns of plants and the dislocation in our society all of these factors cause. This leads to greater dependence on government.

Because of the breakdown or absence of many traditional forms of social fellowship and self-help, people want and require more and more support for their economic and social needs, but many people are at the same time against bungling big government. Because of increased concentrations of economic power in conglomerates and government, many citizens are powerless to effect their own economic fate. Now there is a paradox here. People are against high taxes and yet they want the special interest legislation to stop. They dislike impersonal bureaucracies, and yet they want the benefits the bureaucracy bestows. They want their problems solved.

Many, both in and out of government, are seeking alternatives to this dilemma.

Voluntary citizen cooperation, local self-reliance, new forms of neighborhood fellowship and social supports, economic independence from big government are the concepts of tomorrow's alternative social policy.

Employee ownership is one of the most proven examples of citizens solving their own problems. Access to property is fundamental to the American economic system and there has been a steady growth of approaches to allow this. Early Homestead Acts, aid to small businesses, credit unions and cooperatives are a few examples of “expanding ownership.” Through Senator Long's creative efforts in recent years ESOPs and employee ownership have taken their place as important options for economic development. Let's consider why it works.

First, capital formation is encouraged. A recent New York Times article (July 4, 1978, p. 25) noted that capital raised by stock offerings for small businesses fell $49 million last year while funds generated for large corporations surged. Employee ownership through ESOPs and other forms gives citizens a stake in business and a business a way to raise new capital. But employee ownership not only gives a firm more capital, it can make it function more efficiently.

The lagging productivity of American companies is gaining recognition as a serious threat to our economic growth. There is evidence linking employee-owned firms to increased productivity. For example, employee-owned plywood firms in the Pacific Northwest have consistently outperformed the rest of the industry. Their average output exceeds industry productivity by levels of more than 30 percent. Managers interviewed for the Economic Development Administration's study of employee ownership released last year saw the employee-ownership plan contributing to both productivity and profit. And they were overwhelmingly satisfied with it.

Employee ownership leads to greater profitability. When a sample of 98 such firms was studied in the same EDA project, higher levels of profit were found in the employee-owned firms than in comparable size conventional firms in the same industry. More significantly, however, the more equity the employees had. the more profitable the firm became. This relationship between ownership and profitability is connected with improvements in the quality of working life. The EDA report and others have found increased job satisfaction, lower absenteeism, fewer job grievances, better communication between workers and managers, an increased desire on the part of the employees to perform well and encourage others to work harder, and increased loyalty and commitment to the business in employee-owned firms. This can be a shot in the arm to a business faced with shutdown.

Social effects like lower absenteeism and better labor-management communication seem to be more related to employee participation in developing ideas and making decisions.

Employee ownership favors small business and local business which often knows how to run a firm better that the giant absentee corporations. In examining plant shutdowns a pattern of conglomerate mismanagement and sacrificing of small towns and cities is emerging. In many cases businesses are bought and sold like stock paper in order to keep the overall conglomerate profit lerels high and rising. They are then sold off not because they do not make a profit but because profits are not high enough.

But it does not matter if a business shuts down because it is a complete failure or not, there is suffering and havoc for employees, their families and communi. ties or cities.

Shutdowns point exactly to the applicability of employee ownership. As ESOPs and other forms of employee ownership spoke to the crisis of capital formation, they can now speak to the crisis of job formation. Corporate shutdowns are a major national problem affecting the entire domestic economy. Economists Richard Freeman and Robert Frank found a net American job loss overseas between 1966 and 1976 of approximately 1.06 million jobs. The Senate Committee on Small Business has estimated that less than one percent of the 9.5 million jobs added to the United States workforce between 1969 and 1976 was. generated by the largest 1,000 corporations. It would appear that the acquisition of small businesses endemic to conglomerates does not encourage employment growth.

The problem touches peoples' lives in every area of the country. According to the United Auto Workers, the state of Michigan lost more than 200,000 jobs to plant shutdowns in approximately the same period. Wayne State University economists estimate that Detroit lost nearly one-fifth of its major manufacturing plants in 1970–75 alone. Since 1960 New England lost nine percent and the Midwest 13 percent of its manufacturing employment. And the problem is not isolated. Concern is at a high point in New York, New Jersey and my own stateof Pennsylvania. In Watsontown, Pennsylvania last year Zenith decided to phase out 1,000 jobs at the last United States color TV plant in a community of 5,000 people. Ohio, the scene of another massive shutdown of Youngstown: Sheet and Tube affecting 5,000 workers, lost over ten percent of its manufacturing employment in the same period.

The effects of shutdowns spread like a cancer. The United States Chamber of Commerce tells us that every 100 new manufacturing jobs create 68 nonmanufacturing jobs for a locality. And as we can expect non-manufacturing unemployment has also spread in the affected areas. It is debilitating in Youngstown where one out of every 30 citizens lost a job in that shutdown.

Strangely enough the notion that the South gets these jobs and the Northeast and Midwest lose may be too simplistic. Some southern economists are now finding that while there is a net increase in jobs in the South, there is a massive problem of shutdowns which is simply covered up by migration from the Northeast and Midwest. One state official from that area wrote me that he supports the concept of employee ownership as one alternative to save shutdown plants because he was sure the problem would eventually reach his state. Indeed, as many conglomerates go overseas for workers and let the technology in southern plants go under, the South may be just a way station on the road to disaster.

Employee ownership is a fresh response to this problem, a way to create jobs without massive governmental expenditures. It relies on citizen initiative, the positive effects on the company induced by increased employee involvement, and loans which are repaid. In contrast, the aftermath of a plant shutdown is a story of increasing federal dependence. Unemployment compensation is just a stop-gapmeasure. It does not create jobs or help people get jobs or encourage work. The lost seniority, the stability of a familiar working environment that psychologists now tell us is intimately connected to a person's mental health cannot easily be replaced.

Congress is not likely to solve this problem by establishing yet another large bureaucracy or doling out more funds. The creativity of employee ownership is an alternative we shoud apply where it is feasible.

On March 1, 1978 together with Stanley Lundine and Matthew McHugh I introduced the Voluntary Job Preservation and Community Stabilization Act, H.R. 12094. This bill provides for a pilot project of loans to employee and" employee-community groups to purchase a firm planning a shutdown where a feasibility study indicates they could realistically save that firm. This legislation now has more than 60 co-sponsors in the House. I believe its emphasis on fiscal conservatism, self-reliance, and practical solutions to problems many of our constituents face makes it an acceptable bipartisan approach. The legislation would require the Secretary of Commerce to identify businesses that are in danger of ceasing operations. Technical assistance would be provided to employee or employee-community groups that decided they wanted to preserve those jobs, to get the loans and to design a program to improve the quality of working life and' greater participation in the firm.

This is not a giveaway program. It authorizes loans of two kinds : to the newly constituted firm for technical assistance for initial operating costs and to individual employees for the purpose of enabling them to buy stock in their own enterprise. The broadest use of employee savings, local investment and banking sources would be encouraged to get the funds for the purchase of the shutdown firm.

The government's role here is to encourage voluntary citizen cooperation and community self-reliance. Already the federal government spends hundreds of millions of dollars in grants. loans, credits, and tax breaks to help corporations and businesses stay in business. Employees and communities deserve their chauce to save jobs.

Employee ownership is a worthwhile alternative strategy to save jobs. In addition, it is an example of a different kind of dependence, a dependence on the ingenuity, volunteerism, the mutual social and economic support, and the hard work of people who desire to solve national social and economic problems if we only provide the guidance and encouragement. We cannot fund all the programs for all the people. Many of them may not work anyway. Democratic self-reliance and community initiative is the only direction in which we can go. My colleagues. Mr. Lundine and Mr. McHugh will address the success of employee ownership in saving jobs and the reasons why the legislation we have proposed is necessary to encourage this alternative.


I would like to begin with some personal observations about employee owner. ship. While the approach may sound novel, it has already demonstrated in a number of cases that greater worker participation can dramatically improve industrial performance.

In Jamestown, New York, where I served as mayor before coming to Congress, employee and employee-community ownership arrangements revitalized several failing local firms. In 1973, for example, the Jamestown Metal Products Company was about to be liquidated by its parent company, a conglomerate called AVM. With some help from local investors, 87 of the company's 120 employees—production workers as well as management-purchased the business and made it profitable again.

The new owners took over under pretty adverse conditions. The previous man. agement had committed the plant to an unrealistic pricing policy, forcing the firm to borrow at extremely high interest rates for the first two years. But despite the difficulties, the investment paid off. Between 1973 and 1977, sales expanded br 55 percent, while employment grew by more than 8 percent. Profits rose steadily, enabling the company in 1977 to make a large payment to its employee profit sharing plan. And compared to the 1973 figure, the book value of Jamestown Metal Products' stock has more than tripled.

Rahlstrom Manufacturing, another metal fabricating firm in Jamestown, made a similarly successful transition to employee ownership in 1974. Averting liqnida. tion and the loss of several hundred jobs, the new owners formed and received considerable help from a labor-management committee in reorganizing the aging plant.

Employee ownership arrangements have worked in many places besides Jamestown, and benefitted large firms as well as small ones. As testimony before this committee has already indicated, the South Bend Lathe Company in South Bend, Indiana, achieved stunning improvements in productivity and profits after a 100percent employee-owned corporation took control in 1975. And in Dunkirk, New York, an employee-community group bought a specialty steel plant that Allegheny. Ludlum had decided to close in 1976. Like South Bend Lathe, the Dunkirk group put together the necessary financing with the help of a low interest loan from the Commerce Department's Economic Development Administration. The new company. Al Tech Specialty Steel Corp., has significantly increased its operating capacity and added more than 400 new jobs, for a total of 2200 full-time workers. Despite the well-known problems of the specialty steel industry, Al Tech reversed a consistent pattern of losses under Allegheny-Ludlum and made a profit in its first fiscal year of operations,

In each of these examples, transition to a form of employee or employee community ownership proved a constructive way to cope with impending plant shutdowns and save jobs. But the approach need not be limited to cases of eennomic emergency, and can be viewed as one aspect of a broader effort to encourage worker investment and participation in decisionmaking.

Our evidence supports the theory that employee ownership enhances profitability by strengthening workers' motivation to do a good job. With a new financial stake in their enterprise, both workers and managers are encouraged to explore ways to increase productivity and make the business run better. In many of the cases I'm familiar with, cooperative labor-management efforts to restructure the workplace, develop skills, and generally improve the quality of working life contributed heavily to success.

In Jamestown, the existence of an area-wide labor-management committee gave considerable support to these undertakings. By emphasizing skill development, smoother labor-management relations, better working conditions and the like, the committee created a favorable economic climate which helped ease the transition to employee ownership and sustain the viability of the new firms.

Despite the promise of the concept, transfers to employee ownership have been limited by the availability of financial and technical assistance. Timing has also been a problem—especially in cases where plants will otherwise close. Often, prospective employee and community owners just cannot obtain financing and make all the necessary arrangements quickly enough.

The Federal government can clearly play a more active role. Our bill would begin on a small scale, with a $100 million in loan authority. But it should establish a federal commitment to help interested groups pursue this alternative, and provide new evidence that these ownership arrangements are good practical investments for employees and their communities.


Mr. Chairman, I would like to join in thanking you and the other members of this distinguished committee for holding these hearings, and in particular for providing Congressmen Kostmayer. Ludine and me an opportunity to testify on H.R. 11222. We are encouraged that you have taken an interest in our bill. which we believe would offer some meaningful help in meeting the problem of plant shutdowns.

As you know, employee and employee-community ownership of firms that would otherwise close is becoming an increasingly attractive alternative for coping with a very real problem that many of our communities face in these times of economic hardship. As Congressman Lundine has mentioned, in many communities plants have been kept open and jobs preserved in this way.

This being the case, we may well ask why this legislation is necessary. If employee and employee-community ownership has been emerging as a response to corporate divestitures in recent years, and has proved successful, why do we need new legislation?

The answer is that, despite the success stories, employee and employee-community groups face serious obstacles when they seek to assume ownership of a firm that corporate managers are planning to close down or transfer. At the same time, there is no single agency in the Federal government to which these groups can turn to obtain the help necessary to overcome these obstacles.

This legislation is designed to provide employees and residents of a community with the assistance they need, and to provide that assistance in a timely


As you can appreciate, transfers of ownership to an employee or emploveecommunity group are not easily managed. As we examined those cases where such a transfer has occurred, we found that it took extraordinary efforts and exceptional leadership to keep the firm in operation.

For every successful case, we found many others where employees and residents of a community have tried and failed, not necessarily because the plant could not be operated profitably but because there was no technical assistance available at the critical time or because the prospective purchasers lacked sufficient capital to purchase the firm,

Last year. for example, the New York-based owners of Kasanof's hakery in Boston decided to close the firm down. Although the employees were very interested in purchasing the bakery and keeping it in operation, their efforts failed when they were not able to come up with a $50,000 “buying option" that the owners insisted upon. Thus, one of the largest private employers in Boston's Roxbury section was forced to close down, and both the community and the workers were the losers.

As you know, Mr. Chairman, the Economic Development Administration of the Department of Commerce has done some work in this area. However, even

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in those cases where EDA loans were extended to keep a plant in operation, this help was provided only as a last resort and not as part of any permanent mandate.

In short, because there was no other way of stabilizing the community, some officials within EDA were willing to interpret their charge broadly enough to provide the necessary support for the transfer of ownership. However, that support was typically provided in a crisis atmosphere and on an ad hoc basis. "It was provided without the benefit of any comprehensive or well developed strategy.

Indeed, we have been told by EDA officials that they have received literally hundreds of telephone calls inquiring about the possibility of its providing financial and technical support for such transfers. However, those same officials 'have been very frank in informing us that most of these inquiries have never moved beyond this initial stage because the agency lacks the mandate and the funds.

That is likely to remain the case without the enactment of some type of legislation similar to H.R. 11222. Because it has no formal mandate to do so, except where the shutdown results from a marked shift in defense orders or from recently imposed EPA or OSHA regulations, EDA has no plans to help save jobs and stabilize communities through employee or employee-community ownership on a broader scale. Our bill would provide EDA with the mandate and the funds to provide some help on a continuing basis for a broader range of


By establishing a pilot program designed to provide loans and technical assist·ance to employee and employee-community groups, we would be helping to solve two of the major obstacles these groups face in effecting a successful transfer of ownership.

Other problems would remain, of course, problems that are not addressed di. rectly by our bill. For example, we believe that a transfer to employee or employee-community ownership is most likely to succeed when there is early warning by the owners of a firm of their intention to close down, and when these owners cooperate with the prospective purchasers by making financial and technical information related to the business avaliable to them.

These matters are not addressed directly by our bill, although we have discussed a variety of sanctions and incentives that might be necessary to encourage cooperation. Indeed, this committee may want to consider additional legislation in this connection.

However, our bill addresses two of the most serious obstacles that prospective purchasers face, namely, the need for technical assistance on how to transfer the employee or employee-community ownership and the need for capital to purchase the plant. We believe that, if not a complete answer, it is a good starting point.

As Congressman Kostmayer has suggested, it is our hope that EDA can become a repository of information and assistance to which community residents could turn when faced with a plant shutdown. At the same time, the loan provisions contained in our bill would provide the capital necessary to purchase the firm where it could continue to be operated profitably.

Mr. Chairman, we believe that our bill is in the best tradition of American free enterprise. It would not impose decisions from Washington upon local communities. Rather, it would encourage and support voluntary local initiatives.

It would not require a local community to pursue this alternative when a plant is about to close. Rather, it would provide employees and residents with the necessary assistance should they want to pursue this alternative.

It would not require employees and residents to adopt a particular form of ownership and control. Rather, it would aid them in making an informed choice among all of the options of ownership and control available under the laws of their state.

Finally, the bill would not require the Secretary of Commerce to provide held in cases where a transfer of ownership is not likely to be successful. It would merely give the Secretary the tools and the mandate to provide such heln in situations where the Secretary determines there is a reasonable prospect of success, thus saving jobs and stabilizing the community.

For these reasons, then, it is our hope that legislation similar to H.R. 11222 will be enacted as soon as possible. Given the economic impact that a plant closing can have on a community and on the lives of the employees directly affected, we believe that the Federal government has a responsibility to actively search for *new approaches for keeping plants in operation.

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