The inventor of ESOPs talks about how hard it is to put a theory into practice.
The inventor of ESOPs talks about how hard it is to put a theory into practice.
It's one of the most important discoveries in the history of mankind," claims Louis O. Kelso. The "discovery" is his own, capital theory, which Kelso, 68, says he made public back in 1943. The Temporary National Economic Committee, he explains, had studied the causes of the Great Depression and announced that it didn't know what the causes were. But Kelso thought he did. "We should have asked, 'Why are people poor?' Because that would inevitably have led us to the right answer: People are poor because they are not rich; people are poor because they do not own capital."
So Kelso took it on himself, he says, to develop ways for people to acquire capital. The only one of Kelso's ideas that has actually made it into practice is the ESOP, the Employee Stock Ownership Plan.
Politicians have, from time to time, taken up Kelso's cause. Sen. Russell Long (D-La.) has repeatedly sponsored legislation embodying several of Kelso's capital-creating devices. And President Reagan came out in support of Kelso's theories, by name, six years ago. But Reagan hasn't mentioned capital theory since he's been in the White House. Kelso admits that, politically speaking, he's currently getting nowhere with his ideas. "Congress has bought the message of the economists that the economists alone are authorized to speak," he says.
But if Kelso thinks there's a conspiracy of silence against his ideas, he's not remaining silent himself. He sat down with writer Michael Rozek for an interview in the San Francisco offices of Kelso & Co. Inc. The firm makes its money, Kelso says, "designing, selling, and installing ESOPs. We're a closely held company, without any publicly held stock, but we do have an ESOP."
INC: What kinds of companies should get into ESOPs?
Kelso: Every kind. There are no exceptions.
INC: How about a smaller, potentially less secure firm?
Kelso: The purpose of an ESOP is to make a healthy company healthier. An ESOP will not cure a borderline or a submarginal company. It was never designed for that purpose. Nothing else will cure it either, except good management.
INC: Okay, if you have a healthy company, what things should you consider about ESOPs -- to start moving in the direction Louis Kelso wants you to?
Kelso: You have to understand that it is not the tail that propels a dog. And any particular business is a mere hair on the tail. The structural defects in the national economic policy are the problem -- all the techniques of conventional finance that use savings as the basis for financing new capital formation or changes in the ownership of capital. As long as those transactions are tied to accumulated savings, the effect of finance and growth is to make the rich richer and to keep the poor poor and to require the government to redistribute income by taxation, by boondoggle. Meanwhile, the Hunt brothers have perhaps $20 billion of capital under their ownership. If employed shrewdly, that capital could produce affluent incomes for over a million people.
INC: Could you assure the Hunts they'd be just as rich?
Kelso: What are you trying to say? I'm trying to take their wealth and put it...
INC: Yes, but it's their wealth.
Kelso: And it's the society's mistake for letting them get it!Nature will take it away from them, don't worry about that... none of 'em are going to take it with 'em. Besides, do you want to motivate a million people or demotivate three? That's why our educators are part of the problem, and not the solution. Then, too, the answer has to come from the press, and as long as the press buys the bull of the economists, you're not going to get the problem off the ground. You need to change the laws so it's impossible, for example, for a man to pass a morbid estate on to any other person or group. The society has to finger him, and it's not fingering him now. The business schools, the law schools, the public interest lawyers all say, "Let him have as much as he wants -- it's perfectly all right to finance new capital formation and changes in capital ownership so that it all gravitates to the already righ." The hell it is -- it's like genocide, except it's a hundred times bigger.
INC: So, if you own a company, what can you do?
Kelso: Believe me, the Supreme Court listens to what the little guy says. He should step up to them and say, "I'm entitled to equal protection under the Constitution, and access to credit is a matter of law. The 5% who own all the capital have that access -- and the 95% who don't own any capital don't get equal protection. I may happen to have a good business, but the 95% -- the people that I want to sell to who don't own capital -- aren't as good customers as I would like them to be. Because they don't receive wages on their own capital as well as on their own labor, the economy forces us to overprice labor, eventually pricing U.S. products out of the market. We turn our customers over to the Japanese and others. So Congress needs not only to broaden ownership of capital, but to tighten up the laws of property, so that capital owners collect the wages of their capital. Give me and others the power to buy capital and pay for it out of what it produces -- the power I'm entitled to under the Constitution."
INC: So the major, the pure use of ESOPs is capital formation?
Kelso: No, changes in capital ownership, too. Take Conoco, for example. Instead of letting itself be swallowed by Du Pont, it should have sold $10 billion worth of stock to its employees, who could have paid for it over the next few years. Conoco could have used that in its capital formation processes, while putting the voting power in a group whose interest would certainly not have been swallowed by Du Pont.
ESOPs are also a marvelous way to liquefy closely held companies. The point is, very few people who use ESOPs understand capital theory. If they did, they wouldn't classify ESOPs alongside pensions and profit-sharing plans.
INC: One objection to ESOPs is that employees, though they supposedly have a stake in their own company, don't translate this feeling into increased productivity.
Kelso: "Productivity" is a kind of active operating universal lie by which the conventional wisdom pretends that capital amplifies the productiveness of labor -- even though labor doesn't own any capital. So, there really is no relationship between productivity and real productiveness. How could there be, under the circumstances?
INC: But we're talking about an ESOP situation -- where there should be a relationship.
Kelso: Then it's purely a communications matter. When workers really understand that they are acquiring a share in their company and that what they do makes it more valuable, makes it produce more income, makes it beat hell out of the competitors, you don't have to worry about productiveness. When tangible rewards stop motivating people, the human race will die.
INC: Is this why the South Bend Lathe situation has not been a successful use of an ESOP?
Kelso: It has been successful.
INC: But hasn't it had deleterious aftereffects on the relationship between the union and management?
Kelso: Problems with South Bend Lathe came when the president didn't understand what the ESOP was. Or why it was. He tried to imitate, in all his actions, a guy representing a corporate parent. He treated the ESOP-owned corporation as though it were a subsidiary. But he is one of the men who acquired ownership through the ESOP, just like all the other employees. He did not share information with the employees. He should have treated his employees as owners -- which they are. He should have let them vote their stock; he should have made it perfectly clear what all the salary ranges were, instead of keeping key salaries totally secret; he should have communicated to the employees the effect of the ESOP in financing growth, and what it would have cost them had they done it any other way. If employees are not constantly aware of the fact that they are owners, and of what they can do as owners, they can't use their ESOP to improve business.
INC: If I'm a worker, and my employer's installed an ESOP, what do I have to look forward to?
Kelso: If it's done right you're going to get rich.
INC: But isn't my wealth all tied up in stock -- not translatable until I retire?
Kelso: Dividends can be paid in pretax dollars, if the ESOP is designed by someone who understands an ESOP. And the ESOP can be designed so that you can cash your stock in at any time -- every 10 years if you want it.
INC: What's your view of the economic situation now, and of "Reaganomics"?
Kelso: The supply-side fellows have persuaded the Administration to accelerate new capital formation with generous tax write-offs and lower taxes. What that does is just accelerate the concentration of wealth. And if they understood capital theory, they would realize that the most dangerous thing to do to the economy is to increase the productive power of the already overproductive and to further insulate the underproductive from access to capital. It's got to blow sky high. And it's going to blow up much faster than the 50 years it took Keynesianism.
INC: What will happen?
Kelso: First, rampant inflation. Hyper-inflation. They're going to have to rush back in and restore the welfare props that have held the thing up. And as they do that, they will not solve the employment problem. What Mrs. Thatcher has in England is very likely the scenario for the United States, except that in the United States public reaction is usually more violent than in Great Britain. So I think we'll have anarchy, violence in the streets. Because when the workingman wakes up and finds out what's being done to him, it's hard to predict what he's going to do. And I'm not going to limit it to the workingman.
INC: Well, what is going to trigger him?
Kelso: He's going to hear Kelso tell the truth.
INC: So -- one more time -- what should the owner of a growing company stand to gain by listening to Louis Kelso, and embracing capital theory by moving to a properly used ESOP?
Kelso: Whatever you're spending on pensions or profit sharing, you can save. And we can show you how to get three and four times the financing efficiency out of every dollar that you spend on both. In the end, the economic security of your employees will be vastly greater than it could be with pension plans or profit sharing. Your business will be more profitable because you will have saved millions on taxes and millions in lost capital-raising opportunities. Raising capital through stock is a terrific thing, when you put that stock in an area where, if there is any dilution, you can offset it by negotiation with your workers. You'll have happier employees. And you'll avoid being taken over, as long as you have a well-run business. You'll be stabilized, right down to the guys in the shop. Your employees will work as a team, beat the brains out of your competitors.
So there's hope: Just as the ability to destroy the civilized world has accelerated, so has the ability to communicate wisdom.
INC: What's it like, being a legend?
Kelso: It's a pain in the neck.