Employees Share Ownership Scheme for Democratization of Wealth and Finance

In the democratization of finance and wealth, ownership of shares by many in the society may help, especially in easing the tension between haves and have nots as it also helps bridge the wealth gap between the rich and poor. But, understandably despite many benefits that may be brought by a company accessing fairly priced capital from the public and hence allow for democratization of ownership, access to finance and wealth, most companies owned by individuals and families prefer not to allow strangers to part own their companies or to stand the scrutiny of the market. Hence, many companies would not pursue efforts to access capital via Initial Public Offering (commonly known as IPO) and/or thereafter list their companies to the stock exchange.
However, the key issue to contemplate and which is the topic for today’s article is that, we can somehow understand the idea and sentiments that it is difficult to share benefits and secrets of the company with strangers and outsiders, yes – even if we need that capital. But then, why is it that owners of companies do not consider giving access to ownership of their companies even to those who are not strangers and probably are closest to the company? i.e. employees –these are generally not outsiders or strangers.
And just in case, one would want to pursue this idea, how can it be implemented and why? I will explain.
The easiest way to allow employees into the ownership of the company is by way of Employee Share Option Plans, popularly known as ESOPs. This is a concept used by companies as a scheme of selling shares to the employees by which they become a shareholder in the company and thus hold a certain small level in the ownership of the company.
ESOPs are generally awarded to employees based either on performance or tenure of the employee with the company thus, it serves a two-fold purpose for both the company and the employees.
First of all, for employees it acts as a tool of motivation for a basic reason that once they own shares to the company that they serve, they therefore will feel even more responsible for the good performance of the company, which then determine the value of the shares of the company. If the company performs well, the value of the shares rises and vice-versa.
Second, it helps the employer to still retain the company but also being assured of a good level of performance from employees who are also co-owners of the company and who knows they direct benefit from the company not only in the form of salaries and wages, but also in sharing company’s profits. This will under normal circumstances enhance their efficiency and that of the company
So, in addition to ESOP being a tool that is commonly used by employers to either reward employees or as an exit mechanism from business ownership, what are other direct benefits? (i) it helps in aligning the interest of employees with those of the owners of the company; (ii) it is a non-cash compensation tool that helps the company to compete for the best human resources and attracting good talent to the company while also serving as a talent management mechanism; (iii) it gives an opportunity for corporates to pay its employees without necessarily reducing its book bottom line/profits; (iv) it provides a sense of ownership and belongingness amongst the employees; and hence (v) it significantly help in boosting the morale of employees and their commitment to the company. Further to these benefits ESOPs. as I indicated at the beginning, helps also in bridging the wealth gap and in democratization of finance and wealth.
In his research paper titled: “Employee Ownership, ESOPs, Wealth and Wages” of 2016, Jared Bernstein (the Chief Economist under Vice President Joe Biden), concludes that ESOPs do have the potential to equalize wealth and wage distribution. He further demonstrates that minimum wages, though a useful policy to reduce the gap between low and middle wages for the high-end inequalities it is found to be a n inadequate means. By this Jared suggests that ESOPs hold the potential to bridge the wealth gap.
He points the following key reasons in arguing for his proposal: (1) ESOPs have shown to reduce income inequality, he argues that since ESOPs transfer capital ownership to employees who in normal circumstances are less likely to own businesses via capital contributions; (2) companies in ESOPs appear uniquely resilient in recessions relative to companies that does not operate ESOPs schemes, Jared essentially argues that companies that do not operate ESOPs schemes its employees progress appears to be trapped in ways that may or may not improve the companies output and efficiency especially in the long run, and (3) he says – since wealth inequality is considerably less equitably distributed than wage inequality, ESOPs present the opportunity to less the overall inequality.
And when the company opts an ESOPs schemes it is recommended that it goes hand in hand with listing of the company to the stock market, even if it is by the way of introduction (i.e. listing shares in the stock exchange without IPO) which then provide a market, fair valuation and pricing for those shares issued to employees via ESOPs scheme.

Advertisements

Why It might be an Opportune Time to buy DSE Listed Stocks, and how?

Year-on-year the domestic market capitalization and Tanzania Stock Index is down by 13 percent following the sell-off pressure which is partly informed by some factors, such as the real liquidity need by some investors, market psychology for some, declining expected returns and looking for alternative better returns by some investors, and/or just following sentiments and becoming emotional to some investors. While this may be case especially on the securities supply side, such pressure hasn’t been matched by similar pressure on the demand side — hence the decline in stock prices almost across the board which then impact the market capitalization and indices, relatively — this is not a good sign.
As it stands the market looks vulnerable and should this pessimistic view and bear run continue, more market swings could become prevalent. But as I wrote a few weeks ago, there are many reasons to be upbeat on some of the listed stocks and for the market in general even as the market battles its way to stay optimistic and probably return to the bull run not long time to come.
Yes, though the sell-off may have knocked down a significant part of investors worth over this past one year or so, but the more extreme overselling conditions could actually put the market back on track – why? When darkness increases – the light is near, but of course this can be possible if also supported by other pro-active measures, such as the recent changes of DSE rules in order to motivate liquidity and volatility in the market.
All said and done though, this is actually the good time to be on the market, for those who understand the concept of “value-investment” – the Warren Buffet way. This is the time to put your money to work. And so, in this article I share a few tips on how to turn the current weakness into great opportunity, as you buy on the cheap.
First, do your analysis and a bit of research, if you can’t – request this from your stockbroker or investment adviser, then focus on picking those stocks which embed quality brand names but are selling at compelling prices. Look to buy on the dip, while concentrating on the underlying principle that behind that cheap stock is the strong business performance, growth in profits, strong balance sheet, stable cash flows, good management and foreseeable demand of that company’s products and services. I sometimes wonder, why don’t somebody see that it is too cheap to be true for one to buy stocks of a strong bank at a price earning ratio of 2 times. It is in very rare cases that your luck will meet such an opportunity. In such stocks, you may be in the pain for a short while, but you surely will come out of it strong – so then, why the run from it?
Secondly, I will encourage you to also take a deep look into those stocks which are currently undergoing transformation – whether a managerial transformation or an operational transformation or a strategic transformation – either way, just search and analyze, see what is around you – sector-wise, company-wise, etc. Some investors may have overbrowned their concerns and in the process have pulled many other investors through under the name of market psychology and/or market sentiments. The key point to note here is that, if you are not in some liquidity constraints and pressure, just stay positive and hang in there and if you are not under liquidity constraints accumulate your holding position on these stocks. As you do this, it fair that you also take a keen interest on companies that have lost their competitive advantage, these may not go back into their glorious days.
The third and last important point to note is that, during this time is also a time for rebalancing your investment portfolio. This can be achieved in two ways – one: selling some of the good stocks which still trades fairly relative to their fundamental values and buy those selling on the cheap; and two: if you bought stocks of a similar counter during the time when they were selling on the high, i.e. during bull run where the market was optimistic – you may now rebalance by buying on the dip targeting to achieve a weighted average value or price that is closer to the current underlying fundamental value of that company.
What have I just said, I was trying to draw our attention and submit into us that yes, these may seem like pessimistic moments for the market, but this same moment provides a good environment and opportunity to be on the buying side – that is what is called “value-investment”. You do not unnecessarily have to follow the village, the village may be on the wrong path, and just do not be emotional. However, as I say this, I also urge you to be deliberate in your choices. Your need to be selective, basing your selection on the fundamental analysis and research of the company and the stock you consider to be a good buy.