1. Foreword

For several years now the Great Recession of 2008-2013 has besetted in Europe, hitting particularly hard its southern countries and Ireland. Analysts speculate about the causes and duration and although at times it seems the economies are gaining strength, the numbers are not sufficiently or consistently positive, nor do they grow at a rate to indicate that European economies are on a firm trajectory to recovery. The problem is not a cyclic crisis, but a systemic crisis of human and social values such as greed and competition, both between individuals and between social groups. The roots lie in very profound political, social and economic processes, such as the effects of globalisation on national models of capitalism and welfare state models, the governability of Europe, and intellectual paradigms of models of society. And if we wish to do something about it, we must start to look at values differently.

As an illustration, at the World Economic Forum in Davos in 2014 experts presented figures on “growing tide of inequality” from Oxfam’s International new report called, “Working for the Few”. The report states: “Almost half of the world’s wealth is now owned by just one percent of the population and the 85 richest people in the world have as much wealth as the 3.5 billion poorest.” Obviously, this is an issue that concerns the whole world. But they are particularly relevant to the European Union. In the past 20 years the radical reforms of the European legal and economic order in the process of the EU’s eastward enlargement, together with privatisation and globalisation, have led not only to economic progress but also to widening social fissures. While enterprise profits have been on a steep rise for more than a decade, wages have been stagnant and the economic lives of many have been rendered insecure. The growing discrepancy between the few who are rich and the many who are the so called “working poor” (i.e. people who work, but their wages are so low they cannot sustain themselves nor their families) needs to be addressed.[1]

[1] The Social Economy in the European Union, Report drawn for the European Economic and Social Committee by the International Centre of Research and Information on the Public, Social and Cooperative Economy (CIRIEC), Jose Luis Monzon & Rafael Chaves, 2012


1.1 European Union & Employee financial participation (EFP)

These facts give legitimacy to the current discussions of new forms of employee financial participation. For the first time The European Union (EU) expressly commits itself to the European Social Model as one of the pillars of its policy in the European Reform Treaty signed in 2007 in Lisbon. In 2006 the European Commission (EC) stated in the PEPPER III Report (Promotion of Employee Participation in Profits and Enterpise Results – initiative of the EC since 1990’s to promote employee financial participation in all member states) that a stronger link between pay and performance is one possible way to reform the labour markets.

As Jaen Claude wrote in the Foreword to the The PEPPER IV Report from 2009: “One can furthermore witness a significant number of trends in the labour markets that constitute serious challenges to a further broadening the scope of financial participation schemes. A ‘hire and fire’ mentality is a hardly compatible with the long-term motivation financial participation of staff is supposed to achieve. Employment is not only about labour needs of companies, it is also about family life, long-term personal projects, the basic assurance that also in three months time, mortgages can be repaid and weekend trip planned.”[1]

However, there is a lack of general support to the EFP approach by governments, trade unions and employers’ association, and therefore we propose the following strategy to support EFP and change this dismal state:

  1. Focus on reducing the lack of information / Education.
  2. Promotion of the positive experiences via case studies / Best practices.
  3. Initiation of steps to conquer the ideological myth.
  4. Identification of legislative obstacles & drafting of relevant legislative changes.

[1] The PEPPER IV Report: Benchmarking of Employee Participation in Profits and Enterprise Results in the Member and Candidate Countries of the European Union, Jens Lowitzsch, 2009

1.2 Czech Republic & Employee Financial Participation (EFP)

The Czech Republic, as a member of the EU, should support the trend of building a European social model. We need to fully realise the necessity of a change in the labor market to achieve its greater flexibility under certain conditions. Taking into account the almost complete loss of citizens’ trust to the economic policy of the state, in market mechanisms and corresponding fair distribution of economic results, caused by the latest political and economic developments, a recovery process is required. This process must work up from the bottom of the economy and the labor market so that it citizens will be able to clearly see and evaluate its progress and merits.

In order to revive the support of enterprise based on three main pillars: environmental and economic sustainability and social responsibility, it is necessary to encourage the development of social enterprise, as well as various other forms of innovative enterprises, including the cooperatives. Related to it is also support of small and medium-sized companies (SME, firms with 0-249 employees) to which the formerly mentioned types of enterprises mainly apply to. SMEs are the engine of economies and in most EU countries that is true, however, CR is a big lagging behind the EU average. Although according to the EC report Small Business Act on the CR from 2013[1] the number of SMEs and the number of jobs they create is even higher than the average in EU, their performance and added value for the whole economy is lower. EC also finds alarming that the number of SMEs closing down their businesses after more than 15 years on the market, is rapidly growing. Out of all SMEs that folded their business in 2012, 50% had 15 years of recorded history. Also, there is a remarkable difference between how the entrepreneurship is perceived in CR compare to EU from the SMEs or of potential start up entrepreneurs perspective. Mainly in terms of state support to start ups, financing, insufficiently responsive administration, law enforcement, etc. “The biggest problem in the CR is unstable environment for doing business, very frequent and essential changes in legislation and taxes, often last minute before the dates of application.” (Eva Svobodová, general director, Association of Small and Medium-sized companies and entrepreneurs of CR, AMSP). Due to these and other barriers the number of new entrepreneurs is stagnating, according to the Association’s survey.

The support of SMEs and other forms of innovative enterprising can result not only to strengthening of the whole economy on the macroeconomic level, but also to building up the middle class, which is historically quite weak here and the situation lasts for several generations. Also, it can contribute to balancing of economic differences among individual regions. For instance, while Prague reported average unemployment of 7.68% in 2013 and 170 SMEs per 1000 inhabitants, at the same time the unemployment in Usti region was over 11%, in Moravian-Selesian region it was 9.77%, and the number of SMEs per 1000 inhabitants in both regions was only 80.[2]

In accordance with that one of the natural solutions how most efficiently approach the issue of support of entrepreneurship is the support of cooperative principles. Not only could it help to finance start ups, but also an argument of Czech liberals can be taken into account: the essential difference between the risk that an entrepreneur-employee is undertaking versus the risk-less life of a regular employee working for a wage. Why? Because in a cooperative (almost) every employee is an entrepreneur.

We think that the cooperative concept is a valid and actually modern way of doing business and therefore it needs to be addressed in the Czech Republic; discussion of it needs to be revived, not only because it corresponds with the European Social Model, but because it has a great potential. Companies where employees are financially participating prove to be more stable in the long-run as opposed to firms owned by one or a few individuals. Due to their representative democracy they allow for a certain consensus in times of crisis. For instance, as explained in the theory of Share Economy developed by Weitzman in 1984, during economic crises these companies favour wage adjustment mechanisms rather than reducing their employment levels. This corrects two major market failures: first, by assigning their production resources they achieve lower unemployment levels and, second, by maintaining greater business stability they manage to offset economic cycles.

It has been and will always be natural for people to group together and join their skills, knowledge and capital in order to prosper. And social economy can play an important role in the future. Unfortunately, the Czech Republic (and elsewhere in the Central and Eastern European region) due to the historic exploitation of the idea by communist parties. In order to re-establish it as part of today’s economic life in our country, the concept needs to be clear of its historic stigma and adopted by broader spectrum of political parties, thereby shifting the concept towards the left-centre of the political spectrum.

On the case study of the Mondragon Cooperative Corporation in the Spanish Basque Country, we can demonstrate and prove that the concept itself has very little to do with the ideas of “collectivisation” or “expropriation” as imported to our region from Russia after the World War II. Mondragon was not chosen as example by chance–as you will see in the discussion of the case study, there are several parallels between the Czech Republic and the Basque Country.

[1] EC, Report on SBA 2013 in CZ (Evropská komise, Přehled údajů SBA (Small Business Act) 2013 v ČR)

[2] Ministry of Industry, Report on SMEs and its support in 2013 (Ministerstvo průmyslu a obchodu, Zpráva o vývoji malého a středního podnikání (MSP) a jeho podpoře v roce 2013) and data from the Czech Statistic Office

2. Employee financial participation in Europe and the Czech Republic

The increasing influence of EU social law on European national labour systems makes inevitable to the discussion of Employee financial participation (EFP) from a European perspective, taking into account the main issues that have been raised at community level. This includes European Economic and Social Committee (EESC) initiatives to draw up a framework concept promoting its economic and social cohesion and facilitating the EFP at various levels.[1]

[1] Opinion of the European Economic and Social Committee on Employee financial participation in Europe, 2010

2.1 Summary & Recommendations on EFP in Europe

  1. The debate on EFP at the European level and in the Member States must be re-launched, awareness raised and social partners encouraged.
  2. Businesses operating across borders, particularly SMEs should be offered help, especially in overcoming tax obstacles in specific EU/EEA countries.
  3. The introduction of EFP must be voluntary; it must be in addition to existing remuneration systems and not a substitute, independent of pension schemes while not impeding collective wage bargaining.
  4. EFP may bring desirable benefits such as:
    • a proportion of company profits distributed to employees locally, which in turn helps to increase regional purchasing power and can boost a company’s chances of success in a given region,
    • a good corporate governance and improvement in corporate management which helps to improve incomes through participation in a company’s success,
    • a motivating effect and thus a contribution to a greater sense of identification with the company, thus reducing staff turnover.
  5. Examples of best practice should continue to be publicised. Related activities should be supported by the EU budget through a dedicated budget heading.
  6. Information sources on the implications of EFP for businesses and employees as well as training and advisory services by impartial bodies, i.e. qualified NGOs, should be established.

2.2 Initiative of EC on EFP – The PEPPER Reports, 2.2.1 Results on the EU level. Positive dynamic of EFP

2.2 Initiative of EC on EFP – The PEPPER Reports

2.2.1 Results on the EU level. Positive dynamic of EFP

The PEPPER Reports underline the continuing importance of this subject for European policy. PEPPER-IV notes the significant rise in EFP in the EU-27 over the last decade.[1] In the period 1999-2005 the proportion of firms which offered employee share ownership schemes open to all employees grew by five points, from an average of 13% to 18%. In the case of profit-sharing schemes it grew by six points, from an average of 29% to 35%. In the same period the number of employees actually participating in these schemes also grew, although less rapidly.

The PEPPER IV Report calls for a European Council Recommendation on a European platform for EFP. The basis for a common framework is the Building Block Approach, a perspective promoted with a study sustained by the EC to link the many and varied EFP models which exist across member states, including profit-sharing (cash, either deferred or in shares), individual share ownership (employee shares or stock options), and ESOP (Employee Stock Ownership Plan) concept (collective employee share ownership model financed from a profit share additional to remuneration).

While tax incentives are not a precondition for EFP, they have proved in the past to be a positive and important leverage in those countries which offer them. Without prejudice to Member States’ competence on taxation, coordination, streamlining and mutual recognition may help to stimulate EFP in cross-border operating companies. The calculation of “effective tax rates” for standardised scenarios could permit direct comparison between the EU-27 and thus ensure further harmonisation. As long as European measures remain optional, conflicts with national law should not arise.

[1] The PEPPER IV Report: Benchmarking of Employee Participation in Profits and Enterprise Results in the Member and Candidate Countries of the European Union, Jens Lowitzsch, 2009

2.2 Initiative of EC on EFP – The PEPPER Reports, 2.2.2 Results in the Czech Republic. Stagnation.

The Czech Republic is the country whose privatisation policy has granted by far the fewest concessions to insiders. Despite some tradition of both financial participation of employees and employee participation in decision-making, the Czech privatisation framework did not include any special price reductions, credit arrangements, or pre-emptive rights for employees. Czech policy opted for the voucher concept, with no specific and enterprise structures. It was—and in general it remains—unfavourable to employee participation. Under voucher privatisation, only about 1.5% of the total shares privatised were allocated to employees. Currently, profit–sharing plans are rare, and those which exist are mostly found in foreign-owned companies. Of the existing, rather restrictive, regulation on employee share ownership and (share-based) profit–sharing, only the former have been implemented, but just to a very limited extent.