For a pacifist approach to profit sharing

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History of profit sharing? – A call for a pacifist approach to social relations

Profit sharing is not an altogether new concept. For years,economists and entrepreneurs have been seeking the ideal structure for a company. They are continually looking to improve the contractual links that bind the various stakeholders to the company project. Companies have always strived to make the best use of the value that they create,to reward the resources upon which they depend,both in the capital and labor markets.

Before Marx,the proletariat was a sort of slave force,receiving in exchange for its labor a minimal “survival wage”. In order to validate politically his theory of labor as a valued asset whose price,or salary,would be determined by a labor market,Marx came up with class struggle. Effectively,in a society in which one layer of the population is reduced to subsistence,it is legitimate to think that only organized struggle would be enough to overcome social barriers.

Since then,Marx’s ideas have met with real success. Today,a labor market exists and many people prefer to sell their labor against a decent wage rather than create their own business. The notion of class is much less critical than it was in the day of this great thinker,and our social scale is starting to look like a continuum which goes from the unqualified laborer to the senior manager. One cannot deny that this continuum remains relative,and that it contains certain thresholds that are hard to cross. One also cannot ignore that one of the reasons the class structure endures is that some cultivate the antagonism between classes so that the combat may continue. For mercenaries in the class war,signing an armistice would be a sort of existential suicide.

It is not surprising that in the post-war period,some economists,company bosses and politicians have attempted to improve relations between social classes by creating a sort of truce between labor and capital.

In the 1960s,Marcel Loichot (economist,founder of the SEMA alongside Robert Lattès and Jacques Lesourne,the latter later running Le Monde) called for a pan-capitalist revolution,a sort of capitalism for all. He wanted each employee to participate in the company capital. But above all,he proposed a highly original profit-sharing model:A fixed rate of 5% paid to the capital and any surplus value created shared 50/50 between labor and capital. The allocation of the share paid to labor is divided in proportion to salaries and is paid in shares. So employees,if they hold onto the shares they receive,end up owning most of the company’s capital. This form of remuneration was applied by some companies with a certain success but,as far as I know,it is no longer used.

Marcel Loichot was one of Charles de Gaulle’s economic advisors,and his ideas were the basis for the adoption of laws in France that introduced employee co-ownership and profit sharing.

Later on,at the start of the 1980s in Britain,James Meade (Nobel prize for economics for his work on international trade) initiated a series of studies on profit sharing. Meade’s idea was to distribute non-voting shares to employees and thus allocate them a share of the variable remuneration in the form of dividends. Unfortunately,he came up against problems of dilution when faced with the arrival of new employees. The Discriminating Labor-Capital Partnership never really got off the ground. Meade’s work contributed to the movement encapsulated by the British Liberal Party in the theory of “Ownership for All”,notably through the statement that:“Labor and Capital Must Not Fight”. In practice,this led to the trend for cooperatives and the development of company buy-outs by employees.

Along the same lines as Meade,Martin Weitzman,economist at the Massachusetts Institute of Technology,argues for paying employees a fixed share of the profit generated rather than a fixed wage. This recommendation has not been followed any more than the prior suggested partnership.

And then agency theory came along,describing the relationship between a principal and an agent,the latter supposedly working for the benefit of the principal. Applied to a capitalist company,this theory analyses the relations between capital providers (principals) and the managers and employees (agents). Since peace was never declared between labor and capital,economists accepted the existence of the class system;they then analyzed each class’s respective methods of taking the best share of profit that its power of negotiation allowed it to obtain. Agency theory has the great merit of identifying the agency costs that the company must shoulder – for example the necessary cost for ensuring management loyalty (stock-options,bonuses,etc) or for monitoring the validity of information (audit). In short,these are the costs of mistrust between stakeholders,the price of class struggle in its 21st century form.

With the credit crunch and the supposed failure of capitalism,many solutions have been put forward to reconstruct the world. Among the latest crop of more or less apocalyptic books,two seem to hold some promise. Charles-Henri Filippi in “L’Argent sans maître” (Money Without a Master) opens the way for the reconstruction of a more virtuous and yet realistic capitalist economy. Rather than throw the baby out with the bathwater,he suggests cultivating the virtues of a liberal and democratic model,whilst containing the ill effects highlighted by the recession. Arguing from the observation that there are good reasons for capitalism to survive the crash,“Reinventing the Firm” by William Davies provides an analysis of the various alternative forms of corporate governance. He observes the beneficial effects of employee participation in company capital in Britain;he also observes that cooperative structures can be successful. He notably poses the question of the ownership of a company and its intangible assets (brands,expertise,etc). He naturally arrives at the question of identifying which out of labor and capital is the “principal”,in as much as there is a principal.

The answer depends fundamentally on the situation of each company. Here are two examples:In the pure capitalist company,capital is the rare commodity,it takes on the company risk,it relies on waged labor at the going market rate and all the surplus is attributed to the producer. Capital is then classically the principal. In a cooperative structure,the labor owns the means of production,it has only limited recourse to external capital,and then usually in the form of bank debt. Labor is in that case undeniably the principal.

The reality of any company is fortunately more complex than these two examples,both of which are characterized by high agency costs. Every company should position itself between these two extremes,and every company boss should seek the conditions for peace between the classes. Reading William Davies,one understands that some manage this better than others.

The first decade of this century will be notable for the war which serves to remind us of its exorbitant cost. “Labor and capital must not fight”,the recognition of a community of interests between labor and capital is most definitely in the interests of all parties. This decade will also be marked by the financial crisis. We will not emerge from it totally powerless;the excesses of the system are much better known and,above all,progress in financial techniques today allows us to overcome technical obstacles which made the pacifist approaches of Loichot and Meade fail. Recognizing the value of human capital,of profit sharing and employee participation in ownership are nowadays among the various instruments that allow managers to reconcile the interests of their human and financial resources,to the benefit of all.

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