The Gift That Keeps On Giving: The Employee-Owner

Originally published in the Informanté newspaper on Thursday, April 23, 2015.

On the 16th of April, on the occasion of his 50th birthday, Quinton van Rooyen gave a rather remarkable gift to his employees – part ownership of the Namibian conglomerate Trustco. And while this is not the first of its kind, it does have several unique features not usually associated with Employee Stock Ownership Plans. First amongst these is that the cash-value of the gift is a flat amount – not linked to current salary, performance or any other considerations usually applied to plans of this nature. Every employee with one year of service, from the janitorial staff to the highest level executives, receive the same cash value of shares.

This plan, crucially, does not replace any existing employee stock compensation plans – indeed, the standard bonus schemes that award shares remain in place. But it does provide every employee the same, standard base going forward from which to grow their ownership in the company. And while the shares granted is a restricted share (meaning it cannot be transferred or sold for a period of 5 years except on the death of the shareholder), it is not a different class of share. This means that these shares have full voting rights at the company’s Annual General Meeting, and that dividends declared still accrue to the shareholder. All in all, it seems to be a pretty good deal for employees of Trustco.

But what about Trustco itself? If you were an existing shareholder, would you have welcomed such a scheme? And how will this affect its performance going forward? Luckily, existing shareholders do not need to speculate on this matter – academic studies have vindicated this approach for years already.

Indeed, already in 1987 a study conducted by the Toronto Stock Exchange found that public companies which are employee-owned reflected an increase of 123% in 5-year profit growth, and managed to maintain 95% higher profit margins than companies without a similar plan. And in the United Kingdom it was found that UK companies with 10% employee ownership or higher outperformed the London FTSE All-Share Index by more than 10% per year over 20 years.

Share Performance of 10% Employee Owned Institutions vs FTSE All-Share

Essentially, the theory behind companies issuing shares to employees have always been quite simple: If the share price increases, employees’ wealth increases – incentivizing employees to focus on making the company more successful and profitable. 

But new research from the Wharton’s Center for Human Resources cast doubt on this traditional view. In fact, their research showed that workers frequently see the shares not as an incentive, but as a gift they felt compelled to repay by working harder. The reciprocity effect they found was actually larger than the incentive effect. 

Indeed, they found that when a company does well and the share price increases and the people therefore make more money, their performance in the next period goes up as well. Other studies have also found higher levels of job satisfaction and greater worker loyalty in companies that are partly employee owned. 

Still, there are some steps to take to ensure success in plans such as these. For employee ownership to work, there needs to be trust, and full disclosure of financial results. Companies should ensure that their worker-owners are financially literate and can, for example, make sense of its financial statements. 

It seems the more information you disclose – the more you teach your staff to understand the main value drivers that create value for the company, the easier it becomes for them to generate new inventive ways to provide even more value for your business. 

It seems that Mr van Rooyen has always incorporated these aspects in his business model. And given the growth of Trustco, it is working quite well. It should serve as an example for more Namibian business owners to follow his example. After all, economic prosperity for one cannot be achieved without economic prosperity for all.

Deflating Foreign Economies

Originally published in the Informanté newspaper on Thursday, April 9, 2015.

In the wake of the credit crunch, central banks worldwide have embarked on a strategy on ‘Quantitative Easing’ and lowering interest rates – all in an attempt to relax and extend credit to bank who were then wary of extending any credit at all. With lowered cost of lending and borrowing, the theory went, there is less risk, and a greater appetite for credit. But there is another side of the coin that was not considered, and this is now starting to rear its ugly head after years of artificially low credit. 

It is understood generally that banks generate their revenue by the spread between their lending rates, and their deposit rates, the deposit rates being lower than the lending rate. However, if the lending rate has been pushed lower and lower, it is obvious that the deposit rates followed likewise. Hence the return on savings have dropped as well.

People generally save mostly for their retirement – and retired individuals live off the savings they made during their lifetime. Consider a person who saved N$ 1 million during his or her career over 40 years. (That’s about N$ 25 000 saved for retirement per year.) At current rates (4.75%), a fixed deposit investment would net them N$ 47 500 interest per year, or about N$ 4 000 per month. It’s not a lot, but if you have no other expenses, with your house and car paid off, that is enough to support you.

Now consider that the lending rate in countries such as the United States have dropped to 0.25%. For that same investment of N$ 1 million, this translates to N$ 2 500 interest per year. Or only N$ 200 per month. This is even less than our current government pension. And this means you will probably start to live of your capital, instead of your interest income. You will be spending your savings.

You will start living quite frugally – not spending much, perhaps even start working again. Multiply this by an entire economy, and you’ll find economic growth slowed, increased unemployment amongst the young, since the elderly are no longer retiring, and ultimately… deflation. 

A basic principle of investment management is that your savings should grow at a rate greater than inflation – otherwise, the purchasing power of your savings is eroded. And in most of the so-called developed economies, this is no longer possible, even with record low inflation. And this is pushing those economies into a deflationary spiral – they’re in a liquidity trap. 

First conceptualized by John Maynard Keynes, it refers to a situation where interest rates bottom out, and cannot be used to stimulate the economy anymore – after all, who will lend 100 dollars if they cannot get at least 100 dollars back. The Nobel Prize winning economist Paul Krugman has stated repeatedly that much of the developed world is currently in a liquidity trap – after all, the tripling of the US monetary base via quantitative easing over the past few years have failed to affect either US price indices or dollar-denominated commodities.

And this deflationary effect can quite clearly be seen in the government bond markets in Europe. Buying government debt in Austria, Sweden, the Netherlands, Finland, Denmark, Germany and Switzerland can result in you having a negative yield. In other words, you are literally paying the government for the privilege to lend them money. Inflation is thus expected to be negative, or deflationary. And as the economy of Japan has shown over the past two decades, a deflationary spiral is both crippling to an economy and very difficult to break out of.

Deflation means money is worth more tomorrow – and thus consumers put off spending now, and would rather spend tomorrow. There is thus lower demands for goods and services, which results in lower production and lower prices, continuing the spiral.

Namibia and the Southern African economies still appear safe from these effects, but we should remain wary. Africa remains a very export-oriented economy, and with an integrated global financial system, the effects could soon be felt here as well. And if you’re saving for retirement, perhaps now is the time to start focusing on more local, rather than off-shore, investments.