Update Magazine III/2018 › Download the complete magazine

Mr. Pross, you occupy a leading position in a global fund management company, you represent the entire German fund sector as president of the BVI, and in a book contribution¹ you recently argued in favour of promoting employee share ownership. Do these things go together?

Tobias Pross: Absolutely. The opportunities for employee capital participation are many and varied, and were summed up very aptly by the Federal Ministry of Labour and Social Affairs under its then Minister, Olaf Scholz: “Employees are better able to identify with ‘their’ company; this enhances solidarity, transparency and motivation, thereby strengthening the company’s financial basis.”²

But for me, while there are advantages for “governance”, I am far more interested in the benefits to society: the dividing line between capital and labour is done away with. Employees become owners who share in the company’s success not only through their salaries, but also indirectly through capital. They become partners in the company’s success, expecting to share in the risk premium on the capital invested in the business. Especially at a time when the share of wages in aggregate national income is falling in favour of capital income – a trend that’s apparent in all industrialised countries – participation in capital income should be promoted through share ownership. Ultimately, it is also a way of combating the much debated problem of “inequality” of both wealth and income.

But what is an active manager’s role in this? And, what’s more, one who has to think about risk diversification?

Tobias Pross: In two ways, I believe: through integration into the ESG screening process, and through the promotion of “shareholder funds” (Teilhaberfonds). Employee share ownership – defined as direct participation by employees in the capital of the companies which employ them – can only ever be a first step towards capital investment. But here too we have a part to play as an asset management company, especially one which pursues ESG as an integrative approach in its strategies. “ESG” stands for environmental, social and governance. Half of the globally managed funds of institutional investors are managed in accordance with the United Nations Principles for Responsible Investment (PRI), from which ESG is derived. These are worth around 60 trillion US dollars.

So my suggestion is that the benefits of employee share ownership should be integrated into the enterprise value analysis as standard procedure via ESG criteria. These would cover not only “governance” (the incentive structure), but above all the “social” criterion, with its subcategories “relationship with the community”, “fair working conditions” and “remuneration and benefits”. Consequently, companies that intensively promote employee participation in the business would have an advantage in the competition for capital.

But the cluster risk remains, of course…

Tobias Pross: Indeed. Employee share ownership as part of good corporate governance must be viewed critically in the context of the cluster risk of the shareholder-employee. In the worst case scenario, if the company goes bankrupt for example, an employee with a stake in the company he works for could lose both his job and his accumulated wealth.

What solution do you propose?

Tobias Pross: Arguing for the promotion of employee share ownership is one thing. Providing suitable instruments to balance risk and return is the other way in which the fund industry can contribute to this socio-politically important task. In my opinion, the solution lies in “shareholder funds” (Teilhaberfonds).

Shareholder funds are not an entirely new idea in terms of the basic principle. In 2009, the “employee participation fund” (Mitarbeiterbeteiligungsfonds) was included in the German Investment Act, creating a new fund category.

Fungible and non-fungible equity investments by employees of different companies can be introduced into funds of this type in order to spread the risk. This allows indirect participation using the fund as a vehicle. The fund’s assets have the status of separate assets (Sondervermögen), that is to say, it is administered by a fund company, but the units contained in the fund remain the property of the unitholders.

But these employee participation funds have never really taken off.

Tobias Pross: That is undeniable. Employee participation funds answer the need for risk diversification, but may be considered too inflexible, since the investment universe is limited to the participating companies. It is also questionable how employees can exercise their ownership rights when they contribute equity capital, and thus have a say in company decisions. Genuine participation also includes being able to exercise one’s ownership rights to capital.

But this isn’t possible with regular funds.

Tobias Pross: No, but in the age of digitalisation we must find a way of moving from “proxy voting” to “shareholder voting”. The fund’s unitholders would be given the right to vote at companies’ general meetings in proportion to the number of units they hold. They could exchange these with each other in order to exercise voting rights in the company for which they work and whose shares they have contributed, and do so wherever they want. All this could be achieved with an app. Diversification and the exercise of voting rights, i.e. ownership rights, need not be mutually exclusive. Let me cut to the chase: at a time of great technological disruption, which will not be without its effects on income and wealth distribution³, we fund managers have to rise to the challenge of enabling “prosperity for all”. Active management means allowing people across the board to share in the wealth generated by the economy as a whole.

1) The book “CSR und Mitarbeiterbeteiligung: Die Kapitalbeteiligung für das 21. Jahrhundert.” (CSR and employee participation: equity investment in the 21st century” will be published this October by Springer. The editors are Dr. Heinrich Beyer and Hans-Jörg Naumer, who conducted the interview.

2) Federal Ministry of Labour and Social Affairs; “Employee Capital Participation – Models and Support Paths”; 2009

3) See also the interview with Carl-Benedikt Frey in “Update II/2017”

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