Sweden's Experiment with Economic Democracy
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Pontusson_Kurvuvilla_Wage_Funds.pptxSWEDISH WAGE-EARNER FUNDS: AN EXPERIMENT IN ECONOMIC DEMOCRACY
JONAS PONTUSSON and SAROSH KURUVILLA*
Introduction
In the mid-1970s, Sweden's powerful confederation of blue-collar unions (Lands-organisation, or LO) endorsed a proposal whereby the government would require corporations to share their profits with their employees by issuing new equity shares to "wage-earner funds."
Commonly known as the Meidner Plan (its principal author was Rudolf Meidner), this proposal entailed a gradual transfer of ownership from private individuals and institutions to collective entities, governed by union-appointed directors and providing for direct employee representation at shareholder meetings via stock holdings.
Introduction
The defeat of the Social Democratic Party (SAP) in the 1976 elections, however, preempted any legislation along the lines of the Meidner Plan, as it resulted in the formation of Sweden's first "bourgeois" (non-socialist) government since 1932.
This government strongly opposed to wage-earner funds.
After the Social Democrats returned to power in 1982, they introduced a much-watered-down version of wage-earner funds legislation, which was enacted in 1983.
Three Major Issues
Has the existence of WEFs facilitated LO's policy of wage solidarity?
Have the funds' investment activities resulted in meeting the industrial policy functions expected of them?
Have the funds provided employees and their unions with a significant voice in corporate decision-making?
Swedish Framework of Industrial and Economic Democracy
The Swedish view associates industrial democracy with the micro level and economic democracy with the macro level.
The Swedish view holds that progress toward economic democracy should be achieved via legislation that enhances employee influence at various levels within and outside the firm.
To empower employees at the strategic level of the enterprise, the Swedish Riksdag (parliament) enacted SAP-sponsored legislation on worker directors on corporate boards in 1972. Revised in 1976 and 1987, the legislation provides for the election of two worker directors (three in the case of companies with more than 1,000 employees) in all companies and financial institutions employing 25 persons.
Worker directors are Elected from among employees of the company. They have the same duties, responsibilities, power, and standing as other directors.
However, worker-directors should not be involved in decisions regarding corporate strategy with respect to collective bargaining.
Swedish Framework of Industrial and Economic Democracy
The unions regard the right of board representation primarily as a means for employees to gain information about corporate plans, and less as a means to influence such plans directly.
At the workplace level, numerous laws combine to provide Swedish workers with substantial protection against, and influence over, management decisions.
Examples
The Shop Stewards Act of 1974 - provides shop stewards with paid leave to undertake union work and provides detailed rules regarding working conditions and the seniority status of shop stewards.
The Security of Employment Act (1974, 1982) - limits the ability of the employer to hire workers for limited periods of employment, requires advance notification of layoffs and provides for mandatory layoff compensation and detailed safeguards against unfair dismissal.
The Work Environment Act of 1974 - mandates extensive employee rights with respect to occupational health and safety issues, seeking to ensure that working conditions are adapted to the physical and mental requirements of the employees.
Swedish Framework of Industrial and Economic Democracy
The legislative offensive launched by the labor movement in the early 1970s was capped by the Co-determination Act of 1977 (Medbestdmmandelagen [MBL]).
This act was conceived as the enabling legislation, to be followed up by collective agreements on the procedures for co-determination, but it specifies certain fundamental provisions.
Most important, the Co-determination Act requires the employer to initiate discussions with the union with respect to any change contemplated in the terms and conditions of employment.
Terms and Conditions are ambiguous and may include:
Questions of personnel reallocation.
Recruitment.
Managerial appointments.
New working methods and production.
Budgetary factors and other organizational changes.
Swedish Framework of Industrial and Economic Democracy
Requires the employer to keep the union's continuously informed about all such matters.
If co-determination negotiations do not result in an agreement, the company may introduce such changes unilaterally.
The act provides unions with a veto over certain issues regarding subcontracting, however, and states that in contractual disputes regarding non-wage issues, unions have a priority right of interpretation.
The Motivation for Wage-Earner Funds
The concept of collectively owned investment funds is neither new nor peculiarly Swedish. In fact, the original Meidner Plan of 1976 drew inspiration from a proposal for collective profit sharing put forth in the 1960s by German economist Bruno Gleitz.
Similar proposals were also advanced in Austria, the Netherlands, and Denmark in the late 1960s and early 1970s; these proposals were dropped in the face of considerable political opposition.
Collective capital formation in the form of pension funds is quite common in Western Europe. However, the legal rules governing the investment practices of pension funds typically restrict their ability to hold assets that involve risk or yield influence over corporate decisions.
The authors distinguish five basic motives behind the Swedish labor movement's pursuit of collective profit sharing and collective share ownership:
To facilitate the implementation of the "solidaristic wage policy.”
Reduce inequalities of wealth.
Reinforce and extend industrial and economic democracy.
Promoting the supply of investment capital to Swedish industry.
Link WEFs to the supplemental pension system (ATP).
The Swedish pension system has two components:
A basic old-age pension, financed by tax revenues, payable to everyone above 65 years of age.
An income-related supplementary pension (ATP), financed by employer payroll fees, payable to people over 65 years old.
Together, the two pension schemes provide a retiree with an amount roughly equal to two-thirds of his or her average earnings during the final 15 years preceding retirement.
Supplementary pension contributions by employers and self-employed persons are paid into the National Pension Insurance Fund, commonly known as "AP Funds," which invest savings generated by the pension system.
By early 1980, pension payments had caught up with pension contributions, and the pension funds began to shrink. In this context, shoring up the pension system came to be invoked as yet another justification for the introduction of WEFs.
The Wage Earner Funds of 1983
In 1983 Sweden passed legislation that established five WEFs organized on a regional basis. The legal provisions governing their activities can be summarized as follows:
Administration
Financing
Investments
Voting rights
The Wage Earner Funds of 1983 (Administration)
Each fund is independent, with its own headquarters and administrative personnel.
The government appoints the boards of directors of WEFs to reflect the regional affiliation of each fund.
Five out of the nine board members are to be "wage-earner representatives."
These representatives have been nominated by LO and TCO (the white-collar union federation).
The other board members have been appointed directly by the government.
The Wage Earner Funds of 1983 (Financing)
WEFs were financed by two revenue sources.
One was a tax of 20% on pre-tax profits exceeding one million SEK (about $150,000) or 6% of a firm's total payroll costs, whichever was higher, after appropriate allowance was made for inflation and other appropriations.4 This profit-sharing tax was paid by all Swedish companies (including foreign-owned companies incorporated in Sweden).
The second financing source was a 0.2% tax of total payroll costs of all corporations, private and public.
Each of the WEFs got one-fifth of the revenues generated from these two sources, although an inflation-adjusted ceiling (set at 400 million SEK [about $60 million] for 1984) was imposed on each fund.
Any revenues in excess of this ceiling were absorbed by the ATP system.
Most importantly, the WEFs were subject to a "sunset clause,” whereby financing was provided for only seven years following the 1983 legislation.
The Wage Earner Funds of 1983 (Investment)
The 1983 legislation permitted WEFs to invest in both listed and unlisted securities and in stocks of incorporated societies (cooperatives).
Investments are restricted to Swedish companies.
Beyond this legislative stipulation, the law provides that the investment activities of WEFs should be guided by three criteria:
Investments should be widely diversified (to spread the risks),
Investments should be long-term in nature,
Investments should generate a "good" rate of return on investments.
The Wage Earner Funds of 1983 (Voting Rights)
In an effort to meet the objective of providing workers with influence over corporate decisions:
50% of the voting rights associated with the WEF's stockholding in any company must be delegated to the employees or trade union locals of that particular company if the employees or trade union locals so request.
In the event that there is more than one trade union at that company, the unions must agree on how the voting rights are to be exercised, and in the absence of such agreement, the management board of WEFs shall apportion voting rights on the basis of the number of members of each union working at the company.
The Wage Earner Funds of 1983 (Voting Rights)
The legislated version of WEFs contains numerous departures from the original Meidner proposal.
Whereas the Meidner Plan envisaged the build-up of WEFs exclusively on the basis of profit sharing, the enacted WEFs relied on payroll tax (symbolizing wage restraint) as well as a tax on profits.
Whereas the Meidner Plan entailed the obligatory issue of new shares, the WEFs as enacted relied on market transactions as the mechanism whereby share ownership would be transferred from private individuals or institutions to WEFs.
The Wage Earner Funds of 1983 (Voting Rights)
The 1983 legislation also departed from the Meidner Plan in restricting profit sharing to "excess profits," confining the build-up of WEFs to a seven-year period, and imposing a ceiling on ownership of voting stock by WEFs. In contrast, the Meidner Plan envisaged the continuation of profit sharing ad infinitum, without any limits on collective ownership.
In the Meidner Plan, the dividends received by WEFs were to be used to finance adult education, wage-earner consultants, and other activities designed to help wage-earners and union leaders to learn to exercise the new ownership role bestowed upon them.
However, under the 1983 legislation, dividends were used for pension payments or further investment in the stock market (or both).
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
Due to an unprecedented stock market boom:
Each WEF realized a rate of return far in excess of the stipulated 3% during its first five years in operation.
Having received 15.2 billion SEK ($2.53 billion) in revenues (at 1989 prices), the five WEFs together held assets with a total market value of 22.7 billion SEK ($3.78 billion) at the end of 1989.
The WEFs also contributed 1.2 billion SEK (at 1989 prices) to pension payments during the period of 1984-89.
The annual deficit of the ATP system was 4.5 billion SEK ($0.7 billion) in 1989.
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
The Swedish labor movement originally viewed collective profit sharing as a means to facilitate the implementation of the solidaristic wage policy.
Subsequent WEF proposals explicitly linked this objective to the exercise of wage restraint.
When the Social Democrats returned to power in 1982, they opted for an economic recovery strategy that sought to raise corporate profits, and hence the rate of investment, by means of a massive devaluation of the Swedish Kroner and a sustained effort to keep the lid on wage increases.
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
As corporate profits soared, industrial investment, employment, and output grew at a steady rate in the mid-1980s.
However, this "economic miracle" was not sustainable.
The Swedish rate of inflation remained higher than the OECD average throughout the 1980s, and accelerated while the average OECD rate decelerated in 1988-90.
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
The reasons for this appear to be fairly straightforward:
High corporate profits generated wage drift and inter-union wage rivalries
This made it increasingly difficult for LO and the other union confederations to comply with the government's insistence on contractual wage increases below the rate of inflation.
The excessive wage drift contributed to widening wage differentials and a weakening of the solidaristic wage policy.
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
The experience of the Social Democratic governments of 1982-91 confirms that over the long run, it is impossible to reconcile full employment, high corporate profits, and wage solidarity.
The WEF legislation of 1983 did not enable the Swedish labor movement to escape this conundrum.
The limited scope of the 1983 legislation is perhaps best illustrated by the fact that Volvo's liquid assets were greater than the combined assets of WEFs and the Fourth AP Fund at the end of 1987.
Appraisal of Wage-Earner Funds, Economic Growth, and Wage Policy
By the end of 1989, WEFs accounted for roughly 3% of corporate assets listed on the stock market.
In comparison, in 1984, 25 private companies owned 17% of the stock market value and 8 insurance companies owned about 15%.
Wage-Earner Funds and Industrial Policy
In the 1970s, the labor movement conceived of WEFs as an institutional mechanism whereby the unions would be able to influence the allocation of new investment. Specific objectives that the unions would pursue through this mechanism, however, were never clearly specified.
The 1983 legislation defined the overarching goal of WEFs as providing risk capital for "the benefit of Swedish production and employment," and stated that the funds were to undertake long-term ownership engagements.
At the same time, the legislation emphasized that their fiduciary responsibilities required the WEFs to diversify their holdings and to avoid subsidization of inefficient production.
Wage-Earner Funds and Industrial Policy
Examination of the WEFs' financial performance, using the Fourth AP Fund as a benchmark, suggests that they partially met these legislative criteria:
On average, each WEF held shares in 62 listed corporations and 9 unlisted corporations.
The 5 largest holdings accounted for 33% of the total value of its portfolio at the end of 1989.
Wage-Earner Funds and Industrial Policy
Engineering and chemical firms were significantly underrepresented, and financial corporations over-represented, in the average WEF portfolio at the end of 1989.
The opposite was true of the Fourth AP Fund
The law does not impose any ceiling on investments in unlisted firms.
Therefore, such engagements often involve sizeable stakes, generally in the range of 15-35% of voting stock.
Wage-Earner Funds and Industrial Policy
Finally the authors examine the significance of the WEFs as a mechanism for employees and unions to influence corporate decision making.
Such influence is severely restricted by:
The limited financial resources of WEFs.
The ceiling on WEF investments in listed corporations (originally 8%, now reduced to 6%).
The highly concentrated character of share ownership in most Swedish corporations.
Wage-Earner Funds and Industrial Policy
Table 1 (columns 3 and 4) indicates that the percentages of holdings of capital and voting stock in listed corporations vary across the five WEFs, but their holdings are, on average, very small, ranging from 1% to 3.3% of voting stock and 1.7% to 5% in the case of capital stock.
Wage-Earner Funds and Industrial Policy
At the end of 1989, there were only nine listed corporations in which two WEFs each held more than 2% of voting stock.
There were none in which three WEFs each held more than 2% of voting stock.
In every one of the 20 corporations in which the WEFs and the Fourth AP Fund together held more than 8% of voting stock at the end of 1988, there existed a single private owner (or owner group) that held a larger percentage of the votes.
On average, the difference between the funds' share of votes and that of the largest private owner in these 20 corporations was 28.4 percentage points.
Wage-Earner Funds and Industrial Policy
On average, the WEFs delegated 50% of their votes to union locals in 37 out of the 43 listed corporations that they held during 1988.
More so than the Fourth AP Fund, the WEFs have actively encouraged union locals to exercise their right to be represented at shareholder meetings.
The unions appear to value such representation even if their voting rights are limited.
Conclusions
In evaluating the WEFs' behavior as institutional investors, the authors used the Fourth AP Fund, which invests savings generated from the pension system, as a benchmark.
There was no comparable experience in other countries that could be used as a benchmark at the time.
Their findings might be summarized as follows:
Conclusions
Financial-fiduciary stipulations of the 1983 legislation:
In terms of the Financial-fiduciary stipulations the WEFs have performed quite well.
The value of their assets has increased significantly, more or less in line with the rise of the Stock Exchange Index.
They have avoided risks through portfolio diversification.
They have made a substantial contribution to pension payments.
Conclusions
The WEF experience, however, falls far short of the broader, democratizing ambitions articulated by the labor movement in the 1970s.
The scope of profit sharing has been too limited to have any major impact on wage formation and wealth distribution.
The WEFs have played an active role in promoting small, innovative business on a regional basis, but the ways in which they have managed their portfolios of listed corporations do not differ very much from the practices of private investment companies.
As the case of the Fourth AP Fund suggests, the WEFs could have opted for an investment strategy more attuned to the long term.
Most important, the limited resources of the WEFs and the legal restrictions on their stock ownership have severely restricted the potential of employee representation through voting at shareholder meetings.
Conclusion
As a mechanism of industrial democracy, a delegation of voting rights commensurate with WEFs' current holdings is of small significance.
Although the original Meidner proposal had considerable potential to increase economic democracy in Sweden, the watered-down version that was finally enacted in 1983 falls far short of this goal.
In the context of the larger network of industrial and economic democracy in Sweden, the WEF legislation is of relatively small significance.
Therefore, the Swedish experiment with wage-earner funds can hardly be construed as a successful model of economic democracy. It is its shortcomings that are instructive
Summary
These funds were collective share-holding funds financed by special payroll and profits taxes. The authors' analysis indicated that the wage-earner funds generally met the financial objectives set by the 1983 legislation.
However, their significance in promoting "wage solidarity" (wage determination based on the work performed rather than on firm or industry profitability) and in providing workers with substantial influence over corporate decisions was limited by the size of their stock holdings and the seven-year (1984-90) restriction on the inflow of revenues into the funds.
The authors conclude that the funds achieved little in terms of furthering economic democracy when compared to the effects of the network of industrial and economic democracy legislation enacted in the 1970s in Sweden.
