The Washington Monthly, October 1983
SEVEN YEARS AGO, at the age of 34, I decided to become a socialist entrepreneur.
It seemed like a logical calling to pursue. As a muckraking journalist, I’d flung my share of arrows at the big corporations, although I inwardly feared they were invincible because no one else could deliver the goods — the cars, stereos, bananas, etc. — we’d grown so accustomed to. If the left rejected corporate capitalism, I reasoned, we had to develop some workable alternatives — and a body of people who could carry them out.
I had also come to believe that revolution, in the apocalyptic sense, was not likely to occur in America in my lifetime, nor was it the proper way to transform American society. Rather, it seemed to me that democratic alternatives to corporate capitalism would have to emerge within the womb of capitalism itself, much the way capitalist institutions sprang to life inside a withering feudalism. This might take decades, perhaps even centuries, but it seemed like the best way to preserve our democratic political heritage, and a realistic way for our economy to evolve
On top of all this, I concluded that I could never bring myself to hold a straight job. Ergo, why not create my own job? Or better yet, the kind of enterprise I would like to work for?
To be sure, I could see a few obstacles. First, there was my general innocence about business matters: I’d never deciphered a financial statement, much less met a payroll. Second, there was the matter of start-up capital, an especially sticky wicket when (a) you aren’t rich, and (b) you believe that labor should control capital, not the other way around.
Hand raised art Finally, there was the question of how to embody non-capitalist values in the actual operation of a business. I liked to think of myself, quietly, as a democratic socialist, but I had only the vaguest idea of how democratic socialism might work in practice. I was not particularly attracted to most countries that called themselves socialist, nor was I an ardent believer in state ownership or centralized planning. My concept of democratic socialism was based primarily on a set of simple values: privilege is generally a bad thing, economic activity should be based on something more than maximizing the return on capital, and the workplace — where most people spend a half of their waking hours —should blend democracy with efficiency.
Could these values be translated into a business that would survive in a capitalist environment? I decided there was only one way to find out. So, along with five other like-minded souls, I started a business called The Solar Center. For start-up capital, we each chipped in $5,000. I took some basic business courses at a local community college and at the New School for Democratic Management — and into the void we headed.
In retrospect, our naiveté in those early days was astounding. We thought we would sell a little of everything — solar greenhouse kits, do-it-yourself “breadbox” water heaters, photovoltaic toys, books — and that our biggest problem would be turning away thousands of solar enthusiasts who would beat a path to our door. We expected to rotate jobs and take a month off every summer to run rivers together.
As it turned out, our eager innocence was in many ways a blessing, for it spurred us through a myriad of obstacles that would have deterred even the shrewdest capitalist. We encountered endless corollaries to Murphy’s Law, but stuck with every bug-ridden job until we made our customers happy. When well-meaning but muddle-headed public agencies issued rulings that interfered with reasonable ways to conduct business (for example, widely varying code requirements in neighboring communities, or a proposal to put the electric utilities into the solar contracting business), we fought city hall and Sacramento and usually won. When we needed more working capital than we, as employee-owners, could provide, we persuaded several kindly individuals to make unsecured loans totaling $70,000. When cash flow dried up, some of us went on unemployment and continued to work as volunteers.
In this stout-hearted, somewhat stumbling way, we led a kind of dream-like existence, working hard but exuberantly, playing and socializing after work, celebrating each other’s birthdays, even rafting some spectacular rivers in the mountains of Idaho and northern California. Then, after about three years, the dream ended and the business began.
We learned that, despite our eclectic proclivities, the only way we could make a steady living was by concentrating on doing one thing, and doing it very well. At first the “thing” we did best was installing small solar water heating systems in the homes of affluent liberals. Then we discovered a market for larger systems — central solar water heating systems for apartment buildings — that made economic sense in urban and suburban San Francisco. Since these systems could be quite expensive, we pioneered several ingenious ways to finance them so that apartment owners would enjoy immediate savings. We quickly learned how to bid, design, and manage projects costing hundreds of thousands of dollars; how to use cranes and computers and sub-contractors and tax-shelter brokers. And our business grew.
Annual sales climbed to about $2 million. We moved from a small office and miniscule warehouse to an 8,000-square-foot building with drive-in access for our six trucks. By 1983 we had become a modestly successful business employing 25 people, all of whom were owners or on the track to becoming owners.
FROM THE BEGINNING, what most clearly distinguished our enterprise from traditional capitalist ones was ownership. While technically a stock corporation, our enterprise was founded on the principle that ownership should be tied to labor. We believed that people feel better about their work if they own and control their workplace — in short, if they work for themselves. We also wanted to revive another aspect of ownership that is fast disappearing in modern capitalism: responsibility. Most corporate stockholders today are passive owners. They buy their stock, sign their proxy cards, and hope for the best. Management pretty much runs the show. By tying ownership to the workplace we hoped to give owners the experience of direct responsibility, and managers the experience of direct accountability.
One error we made was to underestimate the importance of sharing risks. The founders had invested $5,000 apiece and countless hours of unpaid time. Newer workers — who hadn’t made an initial investment — tended to want maximum short-term pay, while our eyes were focused on the long haul.
For several years we went back and forth about whether new employees should be required to make a cash investment in the business, and if so, how much. Eventually, despite much hesitation by employee-owners who had gotten aboard for free, we agreed on a required minimum investment of $3,000. This amount was substantial enough to help the business and to be felt as a risk by owners, but not so large as to be prohibitive. To make it possible for workers without savings to become owners, we established a payroll deduction plan that allowed the investment to be spread over two years.
This decision was a life-saver. It not only improved our balance sheet at a time when we were deep in the hole, it also brought us together in a way only shared risk can, and made the concept of common ownership more of a reality.
We also had to grapple with the problem of how, in an on-going business, new owners would be admitted and old owners disposed of. For the standard stock corporation, this isn’t a problem: anyone can become an owner simply by buying stock on the open market and cease being an owner by selling the stock to someone else. Since ownership carries little responsibility or power, frequent turnover of owners doesn’t affect the normal functioning of the business.
As a worker-owned business, we had to be more careful. On the incoming end, we needed to be sure that new owners were also good workers, and that they would not abuse the rights of ownership. On the exit side, we had to reward the investments made by owners without allowing our stock to be sold to absentee investors, or draining the company of cash. In between, we had to deal with the question of whether workers who were also owners could be fired.
In practice, our hiring priorities alternated, and the results were good and bad both ways. Many of our strongest people were, when they started, low on skills and high on commitment to the kind of business we were running. Perhaps our greatest success story was the very first person we hired: a 19-year-old woman, recently graduated from a Quaker high school, who began as an apprentice installer and four years later was running all our field operations and serving on our elected board.
Many skilled but nonpolitical employees quickly adapted to our structure, too. In fact, our general manager at one point was a Harvard MBA and veteran of several large corporations who adapted almost more than we wanted him to. We hoped for strong, decisive leadership; he moved slowly, out of concern for “process” and not hurting people’s feelings.
After hiring new employees, the next question was how and when they would get to share in ownership. Initially, we established a probationary period of six months. As the business grew in size, it took longer for old workers to get to know new ones, so we extended the probationary period to one year.
Before an employee became an owner and made an investment, it was understood that she or he could be fired, but confusion persisted about whether the company could fire people after they became owners. In fact, we shared a strong bias against firing or laying off owners, partly because we believed in giving people a chance to redeem themselves; partly because, as a worker-owned business, we felt more obliged to preserve jobs than to earn profits; and partly because we were simply afraid to fire people.
Over time, however, we came to accept that becoming an owner in a small, thinly capitalized business could not be a guarantee of lifetime employment, and that firing people directly — after honest evaluation and due process — was better than the inevitable alternative of firing them indirectly through “bad vibes” and pressure to resign. (Despite this recognition, when a longtime owner actually was fired this summer for not cooperating with the chief executive, spirits plummeted among some of the other owners. “We’re just like any other business,’ said one. “Any of us could be next.’)
To be sure, getting fired was rarely a reason people left The Solar Center. But whatever the reason for departure, we still had to have a method for “cashing out” exiting owners without de-capitalizing the business. We accomplished this through an Employee Stock Ownership Trust. When an owner leaves — voluntarily or involuntarily — the ESOT redeems his or her stock at its book value, in monthly payments spread over several years, with interest on the deferred portion. This money comes in part from investments by incoming owners, and in part from the ongoing cash flow of the business.
WHEN WE STARTED The Solar Center, the founders had an idealistic sixties-type faith in “participatory democracy’ — whatever that was. We ran the business this way for about three years, and it worked pretty well. For example, our single most critical business decision — to concentrate only on solar water-heating systems for apartment buildings, which no other firm was doing at the time — was made, after much discussion, by consensus. One key to this success was that our core group members were all dogged workers who trusted each other implicitly. Another was that we held policy meetings on unpaid “owners’ time” after regular working hours. This preserved daily productivity and helped keep meetings short and businesslike.
Eventually, however, our consensual democracy began to break down. At staff meetings, an individual or a small minority would object to a policy or personnel decision, and prevent or delay the forward motion of the business. In daily operations, people who had responsibility for “getting things done” would feel frustrated by their lack of clear authority.
In retrospect, our experiment began to sputter after we added people with differing viewpoints and clashing ambitions — and got tired of so many meetings. Nothing ignoble was involved in this sputtering; it simply reflected our need for a more sophisticated structure that blended our democratic values with the way the business had evolved.
Towards the end of our third year, we embarked on what amounted to the writing of a constitution. It made me appreciate what the Founding Fathers had accomplished in Philadelphia; designing a system of self-government is no simple matter. We sought a permanent process to admit new owners and buy out old ones; to delegate authority to people who were elected by and accountable to the employee-owners; to distinguish between policy decisions, which would be made by the elected representatives or by all the owners, and administrative decisions, which would be made by managers; to prevent “tyranny of a minority” while assuring that consensus on major decisions would be sought before voting would occur; and to equalize voting power, regardless of how much stock people owned.
The legal vehicle we used to implement these goals was an Employee Stock Ownership Trust, or ESOT. We required the company’s stock to be entirely owned by the ESOT on behalf of the employees. Within the ESOT, all employee-owners were given separate accounts to hold both their purchased stock and additional “sweat stock” that would be distributed each year. Under our plan, ESOT-held shares carried voting rights (normally they don’t), but each owner had one vote, regardless of the number of shares in his or her account. We would try to reach consensus on important decisions, but if consensus could not be reached after all views had been heard, a two-thirds majority, with no proxies, would prevail.
At the same time we changed our ownership and voting structure, we also streamlined our management and administration. Staff meetings became monthly instead of weekly. Twice a year, we held full-day retreats at which goals for the following six months were set and major issues were discussed.
At other times, direction of the company was put in the hands of an elected board, which hired (and could fire) a chief executive officer. The CEO, in turn, hired (and could fire) department heads, who were responsible for running their departments in accordance with overall business objectives. Our operating philosophy became: If someone is responsible for getting something done, she or he must have the authority necessary to carry out that responsibility.
These changes were adopted over time, amidst grumbling that as worker-owners we were disenfranchising ourselves and becoming a more hierarchical and management-run organization. In fact, we did become more hierarchical and management-run, but after the initial shock wore off almost everyone agreed that the business ran better, and that what we had done was not abandon democracy but make a necessary shift from direct to representational democracy.
Having workers on the board, as directors, evaluating the CEO’s performance, while the CEO evaluated the board members’ performance as workers, could have created paralysis. But we became adept at wearing several hats and remembering which hat we were wearing at any given time. In fact, the experience of frequently putting on our “owner’s hat” — of having to balance long-term objectives with the desire for immediate gratification, of practicing self-restraint as well as self-reward — was educational for almost everyone. We consistently denied ourselves pay raises, expense accounts, and other dreamed-of perks — including a company hot tub — because we knew full well the limits of our financial resources.
ONE EXTREMELY SENSITIVE issue in organizations and societies is how much money people get. The questions, if taken to the limit, are profound. Are some people worth more than others? If so, why? By how much? And who decides?
In standard capitalist enterprises, these questions rarely get asked in any depth. In our company, by contrast, we raised them continually. When we started, the founders thought that all workers — installers, sales people, engineers, managers — should receive the same compensation. The debate that raged in the early years was whether some workers should receive more than others on the basis of need, which we defined mainly by the number of children a worker had. The prevailing view at the time — perhaps because most of us were single — was that pay should be tied to a person’s contribution to the workplace, not to outside needs.
As time passed, it became evident that some people were working harder, had greater skills, assumed more responsibilities or risks, and/or could command more money on the outside than others. In the ongoing debate over compensation, the primary tension that emerged was between “blues” and “whites” — i.e., between our trades people (who saw themselves as physical risk-takers, the “backbone” of the company, and underpaid compared to union plumbers) and our sales people (who saw themselves as financial risk-takers, the “engines” of company growth, and underpaid compared to sales people elsewhere). We came to appreciate that, outside of a purely market context, it is excruciatingly difficult to assess the comparative worth of people who labor in such disparate ways, so we developed a compensation policy based on the following principles:
• Pay differentials were justifiable, based on skill, performance, and degree of risk and responsibility, but no member of the enterprise could receive more than two times what any other member received.
• Installers would be paid hourly, office people monthly, and sales people on commission, but wages, salaries, and commission schedules would be designed so that comparable performance received comparable compensation. (In other words, an excellent installer would earn approximately the same as an excellent sales person, while an apprentice installer would earn less than an experienced installer.)
The effect of this policy was that people at the lower end of the two-to-one range tended to earn about what the market would pay them elsewhere, while top sales people, plumbers, engineers and managers tended to earn less than their market potential. Inevitably there were dissatisfactions, and two owners (in more than seven years) did leave in hope of finding greater remuneration elsewhere. But the dissatisfactions were offset by the overall feeling of solidarity that our compensation policy gave us, and by the fact that we’d established our differentials democratically.
A related issue was how to handle our slumps. When a capitalist firm faces a downturn, it instinctively responds in a number of ways, such as laying off production workers, shutting down plants, and acquiring companies in other industries where sales are rising.
Our worker-owned business suffered from the seasonal nature of solar work, as well as hot and cold performance by our sales staff. Instead of firing owners, we struggled for sales, shared what work we had, and took across-the-board pay cuts.
This slowness to fire unquestionably hurt our bottom line, but it also kept us ready to rebound when sales picked up — which, at least so far, they always have.
Distribution of profits was a less controversial subject, probably because for many years there were no profits to distribute. We never doubted that profits — despite their capitalist connotations — were a good thing. When after five years we finally recorded a respectable surplus, we rubbed our eyes in astonishment — and set to work figuring out what to do with it.
Committees were formed to research the various options. Then the entire staff met one evening to decide the final profit-sharing formulas. The discussion was orderly; no one was blatantly greedy; the decisions were responsible and fair. We agreed to retain 70 percent of our profits in the business, distribute 25 percent to ourselves and 5 percent to progressive community groups such as a center for battered women and a food program for the needy. The 25 percent distributed to ourselves was divided according to a formula designed to equalize disparities in regular compensation; to reward people for their “sweat” investment during unprofitable years; and to provide an incentive for cash investment.
What was more significant than the actual formulas was the sheer phenomenon of the debate itself — the act of a group of workers sitting down at the end of a year and deciding how to divide the fruits of their labor. I remember thinking to myself how extraordinary this scene was, how unthinkable within the context of capitalism as we know it, yet how logical, how satisfying, how right! In a very real sense, this was what socialist entrepreneurship was all about.
CHANGE IS NEVER-ENDING. We recently decided to add outsiders — non-employee-owners — to our board to gain some detachment and expertise. We also lifted our two-to-one compensation policy to attract a talented marketing manager for new products. But the ultimate question in my mind when I hung out my shingle as a socialist entrepreneur — can it really work? — has been answered to my satisfaction. My conclusion is that it can. It isn’t easy, but it is possible.
During seven years in the solar industry, I watched many capitalist businesses come and go. By contrast, our little “socialist island” turned out to be remarkably sturdy. In part this was due to luck, in part to some good business decisions, but in part it was due also to our structure. We had less turnover, more creativity, and more commitment from our work force than did most of our competitors. When the going got tough, when the profit margins disappeared, our worker-owners hung in there, because their jobs, their investments — their baby — were at stake.
There remains in my mind a question about the ability of worker-owned firms to respond rapidly to market changes. Beginning in 1982, with the softening of oil prices and the sharp attacks on solar tax incentives by President Reagan and California Governor George Deukmejian, we began to diversify into new product lines, a process we discovered to be much slower and more problematical for worker-owned firms than for capitalist ones. We not only had to identify new products and markets that were potentially profitable, given our firm’s particular strengths and weaknesses, we had to find products and markets that would fit the skills of our current owners and that they’d feel good about working with. As I write, we haven’t solved this problem of diversification, though we’ve narrowed the choices considerably and are quite clear that job preservation — not maximum return on capital — is still our main goal.
I’m pleased to note that a new infrastructure of cooperative-minded sources of capital and business expertise is developing, sparked in no small part by the realization by capitalists that worker participation in management can help beat the foreign competition. Even the business schools are turning out a few MBAs who are eager to work in cooperative environments.
When Business Week editorializes that “teamwork and worker participation are not only possible, but imperative if the U.S. is to compete in the world market,” it’s clear that something is stirring inside the capitalist womb. Widespread worker ownership is decades down the road, but at least the road is visible.