Louis Kelso's Esop Crusade

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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.

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