The Potential for Employee-Owned Businesses in the AI Era

Richard Freeman (00:00)

Ronald Reagan was a huge fan of employee ownership, and so too were most of the Democrats. So, everybody sort of says yes, and in the Citizens Share one of the points was you get back to the founding of the country? The vision that Jefferson, Madison, and Washington had was one of all of us would be small, employee-owned farmers. That was the America that they saw. And they would have been much in favor of employee ownership of the kind we have today if they couldn't have seen what we have.

Announcer (00:50)

Welcome to Paychex THRIVE, a Business Podcast, where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks.

Gene Marks (01:08)

Hey, everybody, it's Gene Marks. And welcome back to another episode of the Paychex THRIVE podcast. Thank you so much for joining me. And by the way, before we get started, just want to remind you, if you want any tips or advice, help, links to prior podcasts that we've done, come and join our newsletter list. If you go to paychex.com/thrive, you can sign up for our free newsletter. You'll really get a lot of insights to help you run your business. That's paychex.com/thrive. So anyway, thanks for joining us.

I have a very special guest today. It is Dr. Richard Freeman. He is the Herbert Asherman Professor of Economics at Harvard University, and he serves as the Co-Director of the Labor and Worklife Program at Harvard Law School. Richard Freeman, Dr. Freeman has written a number of books over the years, and he specializes in labor economics. And, Richard, is that a fair way to call you? I mean, would you call yourself a labor economist?

Richard Freeman (02:05)

Yes. Although recently in the last ten years, I shifted some of my interests to the economics of science and technology because it affects labor so much. And, and about China because that also affects the whole country so much by moving from a poor country to a wealthier competitor of ours.

Gene Marks (02:31)

That's great. It's funny, I write about AI, artificial intelligence, for Forbes like six to seven times a month. And I do a lot of speaking on it. And I've been speaking a lot about it this year. And to your point, that presentation that I'm doing right now on AI, it's all about how it's impacting businesses. It's a business conversation, but I see it doing exactly what you just said. Ultimately, I see my writing and my presentation evolve into more of a workplace thing because technology is all about getting more productivity out of your people. So, I definitely understand why you're focusing on that.

Richard Freeman (03:10)

Yes, there's a key point about the AI and other technologies, but this is the one that I think is most compelling. It's about who owns the benefits from it. And that's where employee ownership kind of things come in. Because if the AI can accomplish some of the things that they believe it will in the next five or ten years, there will be a lot of workers who have problems. Skills that they had can now be taken by the machine, and it's not obvious what other things they will end up doing. They'll end up doing something. And if it's more of a tool that workers use, so it's, they are the owner of the technology, I think it's a better chance that it would be beneficial to workers and not harm a sizable number of workers.

Gene Marks (04:13)

I want to stay on this topic. I do want to talk about employee ownership, and we will get to that in this conversation. But we are talking about AI, and I'm curious. You say you're teaching it right now; you're doing some work in that field and how it impacts the labor force. Do you feel like you have enough data right now to come up with any types of conclusions as to what AI's impact is on the workforce?

Richard Freeman (04:40)

Well, the OECD thinks they have enough data to do that. So do some other government and international organizations, and I don't think that that's true. And they do calculations, and they tell us what they think, and it's useful. I view the AI as this. Three possible effects on us, on the workers, and I'm not sure which is right. So, I'm very agnostic. One is there are a set of people, including, like, young computer science students at my university and elsewhere, and experts in AI, who are really scared about that it's going to have tremendously negative effects on us. That, and us now being white collar people in particular, because blue collar people, the robots, are the kind of things that do physical work. They're still way behind what the artificial intelligence can do in the digital world that we live in.

So, there's a legitimate fear here that something is going to go really bad. The second view is what you see you'll find in the government documents and the international documents. Well, there's some occupations that will be substantially affected, but there'll be other occupations that will benefit. And every time in the past we had automation scares, and depending on the age of the audience, people may or may not have remembered some of them, but they occur. Every 20, 30 years there's a fear. And every time the economy has turned out and the people have turned out to be resilient and they just shift what they do and some people obviously lose and some people benefit. But in the end, we're all better off because it's more productive. That's, I would say the view you would hear from mainstream groups. And the third thing is that actually, it's going to be a savior for us. We are faced with tremendous problems, the climate change, we need more resources, more output to, you know, clean output, let's face it, that way things to clean the planet.

There are other problems of in a whole lot of poor countries where people really are still very poor, and that breeds bad stuff. And so we would like to see those economies move. And there the AI could just be an incredible help to us. It makes us all more productive, or hopefully all of us. Some people will always lose. I've proposed that we should think about it as a possible savior, the great technological advance that will help us through a very difficult period of time with climate change and other things going on.

Gene Marks (08:09)

Those three things are not really mutually exclusive, are they? I would think all three of those things could ultimately happen, don't you think?

Richard Freeman (08:18)

Yes, you're right, but you kind of need to get what's the main thrust. If most of it is that it's threatening to us and it's being used in bad ways and we're losing our jobs, the fact that it's helping deal with other economic problems is less important. And if it goes the way past automation technologies go, which is it takes a long time to really spread and affect everybody. By that point, people have adjusted, schools will have adjusted. Then it'll be a reasonably positive bump in the road, and what will be neither a monster, I call it a boogeyman, kind of the monster that scares us, or a savior. But I wouldn't rule out the boogeyman and the savior response. Last year...I teach a class that deals with some of these issues. A group of computer science students really didn't attack me or anything, but they sort of said I was way too positive on the AI. And they then laid out and wrote their class papers about how we really should worry. I took that very serious. Young students studying this, they obviously know the technology better than I would, most of us would. And if they were really troubled and it's their futures, of course, they're looking forward, "Oh, 20 years from now, will I have a job where I can be a leader and do things? Or is the leader going to be an artificial intelligence program that accesses way more knowledge and information than any human can have in their hands?"

Gene Marks (10:23)

You know, you're a student of history and you study labor economics and you teach it. You out of anybody know that there has been jobs that have been replaced by technology since the beginning of society. I think it was like 19th-century London. Weren't there people climbing up on street lamps to put out the gas lamps at the end of each night? Or there were people, I saw one photos of people tapping on people's windows to wake them up in the morning because there wasn't like alarm clocks. You know, there's no blacksmiths around nowadays. There's, I don't, I don't think I see any typing pools anywhere unless I'm watching an episode of Mad Men, you know? So, I mean, you out of, anybody knows that technology changes. It replaces jobs, but people adapt, right? It creates new economies. I'm curious then, like, based on all the years that you've been studying labor and what you've seen with technology in the past, what do you think the opportunities will be? What jobs do you think will AI, a technology like this, replace going forward? And what opportunities do you think specific opportunities could be created?

Richard Freeman (11:35)

Well, the history is that the technologies tended to replace blue-collar manual labor jobs. And the white-collar people were sort of protected in some sense. And so we've seen the whole economy shifted from very blue collar to primarily white collar. The blue-collar people deal with the real world. You build a house, you've got construction, you have to do real things. What's happened has been the white-collar work has shifted to the computer. It's been digitalized. And so this is the first time we're going to have a major change in technology in a space where, let me phrase it this way, the AI in any algorithm, computer algorithm, lives happily on digital space. That's its home. It's not your home and my home. It's younger people are probably closer to being their home if you brought up with cell phones and this and that. But it's still not our home. And so I do think it's going to have some very strong effects on the white collar people, and we are going to have to be very, companies have to be very careful how they define jobs so that the people can do something creative that the machine can't do. But in the end, I always think about, do I want to have an expert doctor deal with my ailment, whatever it is, or would I rather have an NAI program that has in its database every single ailed person in the world and their diseases way more knowledge than my doctor would have? And my doctor has one good thing. He could see me, but now the computer can see me also, and it can... I mean, they're doing one of the things they're doing with AI, which is very interesting, I suppose, are good. They're looking at your pupils, and they can now have programs that will try to tell what diseases you might have by just looking it in your eyes, seeing a, you know, and then they're going to put more sensors in our bodies so they will know if this organ is failing. I suppose if I had a choice between a doctor and that new AI-driven healthcare, I would personally choose the new AI-driven health care.

Gene Marks (14:24)

I agree.

Richard Freeman (14:25)

And that creates a problem for the doctor.

Gene Marks (14:27)

I agree. And yet you just mentioned, like, you know, we would have algorithms that could detect things by looking in somebody's eyes, or... And then that would lead to more sensors, maybe being put in a body, like what Elon Musk is doing with Neuralink, you know, right now. But then I also think to myself, okay, well, there's going to need to be procedures and controls. There's going to be companies that are going to manage this type of technology that's going to be used in the medical profession, and there will be companies that will need to still make those sensors and sell them and develop them and market them. And I think, like, all right, and these are companies that don't really exist now, but will exist and will be needing to employ people to, you know, to run those companies. So...

Richard Freeman (15:12)

I agree. I  think we're going to have so many. That's why I'm more in the savior.

Gene Marks (15:16)

Me, too.

Richard Freeman (15:18)

There's so much things we want to do and we can do, and science now makes possible for people to live much longer, and they're doing all kinds of miraculous, what I call miraculous, stuff. And that just needs a lot of effort. It needs effort from the machines and from people, but it's got to be worked out in a careful way. And there's always this danger that, oh, more, the boogeyman or the AI will have so much more tap knowledge in its head, because it taps into giant databases that it'll be tough for us to find a good space. Now, if that were to occur, and if we had employee ownership of that asset, everybody would be getting very nice checks because they're owning the capital. If the capital, if the AI is owned. You say you met Mr. Musk, if he owned all of the AI in the world, I think we'd all be scared and worried. I mean, there are other people and they're competing companies and they're competing countries. So, we're far, far from that outcome. But it's not an unimaginable outcome that we could end up in something like that.

Gene Marks (17:00)

Well, you brought up employee ownership, and I'm glad you did. You wrote a book back in 2013 called the Citizens Share: Putting Ownership Back Into Democracy. So, Richard, first of all, just to position this next part of our conversation, I personally, now this is anecdotally, I'm seeing a strong interest that I've never seen in employee ownership from business owners because business owners themselves. The average age of the U.S. business owner is about 55 years old. Of course, according to the Small Business Administration, we're getting older. A lot of people are thinking of succession planning and exiting, and they look to find a buyer for their business. Some are having less success than others and they've got a pool of employees to sell shares to. But then also there have been numerous studies that have shown, including your analysis, that have shown that companies that are employee owned tend to be more productive and more profitable than other companies. So, putting that all into a framework now, give us your thoughts on employee ownership, Richard, like why? You seem like you're a very strong advocate of it. Tell us why.

Richard Freeman (18:15)

Well, I mean, I'm an advocate of it because one, it is economically successful. Obviously, not every employee-owned operation succeeds, but on average, it succeeds with higher productivity, and it distributes the benefits of the higher productivity and its profits much more evenly. I was going to use the word fairly, but. Fairly. We have some, I don't know, that's.

Gene Marks (18:45)

Up to whoever defines the word fairly.

Richard Freeman (18:48)

Yes, exactly. Exactly. But it's clear that people who are employees in an employee-owned company, when they leave, they leave with a sizable capital, amount of capital. And when we talk about inequality in the U.S. and probably every other country in the world, capital is much more unequally distributed than labor income. So, lots of people have no, very little or no capital. Maybe you have your house and everybody, almost everybody, has a job and works. Everybody has some income coming in from labor. This changes the picture for those workers. And since the company is being made more, more productive, profitable, it's good for the company as well. It's, to me, a yes-yes situation. And it is strangely, or maybe not strangely, but it is the one economic policy on which Democrats and Republicans have traditionally agreed on. Ronald Reagan was a huge fan of employee ownership, and so too were most of the Democrats. So, everybody sort of says yes. And in the Citizens Share, one of the points was you get back to the founding of the country. The vision that Jefferson, Madison, Washington had was one of all of us would be small, employee-owned farmers. That was the America that they saw. And they would have been much in favor of employee ownership of the kind we have today if they could have seen what we have.

Gene Marks (20:57)

I'd like to even throw out some other things to even compliment what you just said. As an accountant, as a CPA, the tax advantages of an employee-owned business are significant because, again, you deduct principal and interest when you're paying back the bank who buys a portion of your shares. Plus, I think that whatever percentage that the employee-owned entity owns is nontaxable. The income of it is not taxable. I did a piece on this for the Philly Inquirer and the Chicago Daily Herald. I probably interviewed about 20 business owners that ran employee-owned companies, all maybe 30% to 100% employee-owned. Every single one of them said it was the best decision they ever made. There's all these good things. And then you just mentioned the productivity and the profitability. Employees are better when they have a little piece of the pie and retirement benefits. Yet a very small percentage of companies our employee-owned still, you know, and I wonder why you think that is. And what, what can be done about that?

Richard Freeman (22:04)

Well, the, we, if you take ESOPs as the bedrock of the thing, it's, it's a small number of companies, but it's, it's about 10% of the U.S. workforce.

Gene Marks (22:17)

Sure.

Richard Freeman (22:18)

So. And that I tell my friends in the union movement, I say, in the private sector, the employee-owned is 10% and you are 6%. They, in some sense, can do more, and you ought to be more friendly and whatever the right word is, supportive of employee ownership. And some unions actually go in, see that, but some don't because they have collective bargaining is their mode of doing business. Why hasn't it grown more, given the advances? If I knew the answer, I would rush off and say, this is what we've got to do. The tax benefits were reduced under President Clinton when he and Newt Gingrich felt that cutting budget deficits mattered. And this is what they would sacrifice. Which one of the worst decisions you could make. And so, there is that. There's a lot of, to form a business, to set up your company as an employee-owned, you've got to learn some new things. You've got to go to accountants and lawyers. States have set up now special state offices to help you, which are free advice from the state because they're favorable to this, and I think it'd be great if we saw a big burst, but we don't. Your comment about the aging of the owners, and it would be just wonderful to see this take off in a way. It's been at about 10% of the workforce for 30 years, but that's not. We're leaving out ownership through non-ESOPs. In this business, there is... There are people who own through stock options. That gives you an ownership stake. You can have employee share programs that give you an ownership stake. If you add all those in, you're getting to a higher amount, obviously. But the reason the ESOP is considered the bedrock, it is that you have ownership and you have some decision power, whereas some of the other forms of ownership, yeah, are more like profit sharing. Yes. The company does well. I get something, but I can't really affect decisions of the company. And that loses the thing of getting the workers really grooved up and being able to affect change if they want.

Gene Marks (25:22)

Yeah. I think everything you said makes complete sense. And I think any answer to a complicated question, there's always many answers, you know? And like, you know, like you said, it's a... The number as a percentage has held on its own for a long time. But for a lot of the clients I talk to, first of all, there's a lack of awareness. Some people are also. They're afraid of the expense of doing it. You mentioned you have to get the accountants and the attorneys involved, the appraisers, the bankers. You know, it's hard, you know, and it can be expensive. And then, of course, culturally, dealing with your employees, a lot of us as business, I mean, I own a 10-person company, and in my company, it's a dictatorship. It's my way of the highway. I'm not saying that's the best management style. It's just the way I am. I think there are a lot of people like me, so sharing financial data and decision-making with your employees is an obstacle, I think, for some of us. I don't know. There's a lot of obstacles.

Richard Freeman (26:26)

Yes, I agree. And that people are making, trying to reduce the obstacles, but we haven't seen it growing greatly, even with what people have done so far. Now, the 10% of the Americans who, through owners, through the ESOPs, or something just like an ESOP, co-op, or something else. Yeah, yeah, exactly. That's the biggest number in the world. So, I like to tell Europeans, I say something like, you know, you guys talk about socialism, we've got more worker ownership, and that's clearly the best kind of, quote, socialism you could imagine.

Gene Marks (27:20)

Don't say that, please. Oh my God. People start realizing that here and all of a sudden there's a revolt against ESOP.

Richard Freeman (27:32)

That's why the citizens here, we're back to the forming of the country, and that's what our leaders are for. Our founding fathers wanted was that they all thought about it. Everybody's got their plot of land because that's the technology at the time. And Madison even did this calculation. He was very sharp kind of character. He did calculations. Gee, the businesses were growing. Businesses that had employees. So it wasn't your family farm. They were growing. At what rate were they growing? And he said somewhere around 1920, American democracy would end because we would no longer have the family farmer as the basis of democracy. This happened more quickly, but we still managed to keep our democracy. So luckily, Madison wasn't totally, you don't need independent farmers to have a democracy.

Gene Marks (28:37)

I agree. All right, final question. We have, and again, I have so many more questions. I'm not even going to get to. We have to do a part two to this conversation. But Richard, listen, over the course of your career, you have written so much about workers and labor. I mean, you have a book called America Works. You have a book called What Workers Want. A book about unions goes all the way back to the eighties, now I'm taking it back in time, What Do Unions Do? I know you've been in academics all of your life, but if you were your own business owner and you had a company of 50 employees or 100 employees, what kind of an employer would you be knowing what you know about the American worker? What works, what doesn't work, what they want, what they don't want, whether a union is, you know, good or bad for your business, what kind of a, what kind of employer would you be? What kind of a, what kind of a company would you run?

Richard Freeman (29:35)

It's a good question. First, I'd say what I wouldn't be. I wouldn't be dictatorial.

Gene Marks (29:43)

Sorry. Fair enough.

Richard Freeman (29:46)

Yeah. And that's just because I do employ people. But of course, it's postdocs and graduate students and research people. And I do think I generally know more than they do. That's why I'm in my position and they're learning or whatever it is. But I also know that they will be creative if they have their own leeway, and it's better that they make a mistake, perhaps, or try something that I don't think is fruitful at all cost. Us some time and money because they also will come up with something I didn't think of that is much better. And so now when you said to 50 employees, that's a little different than the small-scale operation I would be.

Gene Marks (30:39)

And usually, if I can just say, like, usually the tipping point is when you have to hire an HR manager. And that's somewhere I found around that 50-employee mark. You know, then your business becomes a different kind of business, you know, when it comes to your relationship with your employee. Now it's really important to have policies and procedures and you know all of that, right?

Richard Freeman (31:01)

That's probably correct. 50, you may still be able to deal with it, but. So, it's 100. Whatever number it is. There's a, there's a number, but then it's a question of if you're the top of the hierarchy is that you divide things so that there's still this opening. Let me give you an example of this in the…Sorry for being so academic, but the academic world, when you look at a paper written by, on astronomy, it will have, could have a thousand names, meaning it's a huge operation. It's a big business. There are people who will go to Chile, wherever the telescope is, and watch it and take notes and just take digital notes, of course, whatever they're doing. And then there'll be other people who have some mathematics who can take the data and turn it into something. So, it's a thousand people. So how could they possibly incentivize all of them? Well, the way the work is broken up, there's a team that does this and it gets down at the bottom level team of, let's say ten people responsible for x. And that's true in lots of companies. And so, it's a question of, you've got to trust the team that's a level or two levels or three levels below you if you're the top manager and you've got to, which means you've got to, HR or somebody's, got to make sure that the leaders of those teams are very good and open and, you know, dot, dot. And that you have on the people on the team that they're, when they're hired, they're told you're expected to speak up, do this, that we, you know, and if I were the CEO, I would say, “and if I say something stupid, I want you to stand up immediately and say, ‘Sir,’ do it nicely, don't say, you idiot, but say ‘Sir, I think you're wrong for the following reason.’” And then everybody that the culture would be yeah, we all are in the same boat. We all want to succeed together.

Gene Marks (33:26)

So, if you’re running your own business or large organization, you would break it down into teams and it would all be about the leaders of your teams, and you would empower them to do what they got to do to get the most productivity and satisfaction out of your employees. Is that correct?

Richard Freeman (33:45)

Yes, and in the hiring thing, the key thing I would ask in the hiring thing is if you see something wrong that you think is wrong, are you willing to stand up and say something? Or are you going to say, I'm working for this machine. I don't give a damn. I'll do whatever the boss says as long as I keep my job and you leave me alone. That's not the kind of people, the culture you would want.

Gene Marks (34:10)

That's great. Well, Richard, in the past 30 minutes we've talked about AI's impact on the workforce. We've talked about the employee, the importance of employee ownership. We've talked about what you would do if you could have another life and run your own business, what kind of a manager you would be. Fascinating, really helpful. And I hit like 10% of the questions I wanted to ask you, so I apologize for that. But I greatly enjoyed this conversation. Thank you so much for joining me.

Richard Freeman (34:35)

Okay, well, thanks a lot for having me. It was loads of fun and it was interesting to hear your perspective on the, particularly on the employee ownership and the companies run from the top down.

Gene Marks (34:47)

Yeah, it's a different type of perspective, but I do see a lot of business owners out there that I just don't think they appreciate employee ownership as much. But hopefully, that will change. Anyway, thank you for joining me. Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR, payroll, benefits, or insurance services, see how Paychex can help. Visit the Resource Hub at paychex.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care.

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