strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Apocalypse 2010?

“Russell Long was considered the brightest guy in the Senate, the best liked, the best debater, the most powerful,” Mr. Gates says. “LBJ used to say, ‘There are only three people needed to get things done in Washington: the president, the chairman of the Senate Finance Committee, and a messenger.’ And I was hired to help think up the ideas that were [Senator Long’s] passion.”

Mr. Gates cut his policymaker’s teeth there by writing many of the laws giving tax breaks to pensions, 401(k) plans, ESOPs, and ESOP investors. “Mea culpa,” he now says, because many of those laws had the unintended consequence of giving pension-fund trustees and corporate managers incentives to focus only on short-term returns instead of long-term social and environmental benefits.

In 1985, when Senator Long retired and went into law practice with Paul Laxalt (a former Republican senator from Nevada), Mr. Gates went along for a few years, just long enough to discover his distaste for “influence peddling.” From there, he joined an ESOP-oriented investment banking firm, and then went into law practice and international consulting.

Over the years, the impact of ESOPs on business culture in general has been minuscule, especially compared to the hype. And yet, there are now about 12,000 ESOPs in the U.S., and their track record is good (setting aside some high-profile failed-hope stories such as Avis’s). Such companies as the SRC Holdings Corporation (see “Jack Stack's Story Is an Open Book,” by Art Kleiner, s+b, Third Quarter 2001), United Parcel Service Inc. (despite its 1997 Teamsters strike and current labor tensions), and the Science Applications International Corporation (the defense contractor and high-technology firm commonly known as SAIC) have all thrived through the recent market doldrums, with ESOPs getting a fair share of the credit for sheltering these companies from the economic turbulence.

Environmental Impact
In the 1990s, Mr. Gates began to work closely with governments of former Iron Curtain countries, helping them write new finance laws. Then Stephan Schmidheiny, founder of the World Business Council for Sustainable Development, asked him why cross-border capital flows were so deadly for the environment. Mr. Gates offered to write a book if Mr. Schmidheiny, a billionaire, would fund it. That became The Ownership Solution. Written with a deliberately nonpartisan outlook, it is probably the only book in history to have been endorsed by a mix of leaders so eclectic: Senator Long, Senator Laxalt, Ralph Nader, Jack Kemp, and Mikhail Gorbachev.

The Ownership Solution is full of nuts-and-bolts political prescriptions. Mr. Gates argues that government contracting should favor broadly owned companies. He proposes more stringent antitrust action to discourage ownership concentration, pension-fund laws that favor investment in broadly held ESOP-based companies, and in-depth “ownership education” to help people at large become more sophisticated capitalists. But he stops short of calling for wholesale social change.

In Democracy at Risk, published two years later, Mr. Gates changed his tune. During his research for the second book, Mr. Gates discovered that the movement toward a “haves” and “have nots” society was bigger, was faster, and was gathering more momentum than he had imagined. Thus, he began writing more impassioned pleas against “legalized looting,” as if he had personally discovered the Snopeses, Mr. Faulkner’s corrupt merchant family, made real in the form of CEOs, pension-fund managers, and coupon-clipping wealthy families — or, as Mr. Gates puts it, “an hereditary aristocracy unlike anything ever seen in human history, financed with our tax-subsidized retirement savings.” He calculates that at least $2 trillion has already accrued from pension funds into the bank accounts of just a few hundred wealthy families and senior executives. Mr. Gates assumes that baby boomers will erupt politically when they discover exactly how little prosperity is waiting for them, and how much has been extracted from their retirement portfolios.

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.