Employee Ownership and the Next System
PARADIGM CHANGES, 25 Sep 2017
Joseph Blasi, Thomas Hanna and Dana Brown | The Next System Project – TRANSCEND Media Service
29 Aug 2017 – What role should employee ownership and profit-sharing play in the next system? Are they part of that system itself or part of the strategy to help create the transition to it? Can they be both?
In order to begin to answer those questions, we sat down with Dr. Joseph Blasi, preeminent expert on employee ownership and a Distinguished Professor at Rutgers’ School of Management and Labor Relations. Professor Blasi has an extensive background in economic sociology, the social and economic history of the corporation, and public policy—particularly broad-based employee stock ownership. He has written thirteen books including Employee Ownership (1988), A Working Nation with various co-authors (2000), Shared Capitalism at Work with D. Kruse and R. Freeman (2010) and most recently, The Citizen’s Share: Reducing Inequality in the 21st Century (2014). Professor Blasi is also a regular contributor to the Fifty by Fifty initiative, which seeks to ensure we reach 50 million employee owners in the United States by the year 2050.
His most recent paper on the subject, Having a Stake: Evidence and Implications for Broad-based Employee Stock Ownership and Profit Sharing, co-authored with Douglas Kruse and Richard Freeman, outlines the history of employee ownership in the U.S. all the way back to the founding of the nation. The paper highlights the broad support employee ownership once garnered and the more recent changes in federal policy that have hampered its growth. Making the explicit connection to inequality, the authors argue for a broad package of reforms that would encourage expansion in employee ownership and profit-sharing.
After considering his paper, we wanted to ask Professor Blasi for his view on employee ownership and the next system. As we seek to understand both full-scale models for a more just, equitable, and sustainable political economy as well as the transition pathways that may lead us to a new system based on those values, we hope conversations like these will be instructive.
Thomas M. Hanna: Could you just give us a sense of why employee ownership is important, and also why it’s not more widespread in the United States at this point?
Joseph R. Blasi: Sure. In articulating what the next social and economic system should be, employee ownership is important because capital shares—by which I mean broadening the ownership of capital and broadening access to capital income—are essential to keeping a middle class and avoiding the current system becoming a form of feudalism. For any real form of financial inclusion, capital ownership and capital income are an essential part of the next system. There’s just absolutely no getting away from it, and the reasoning is this: both capital ownership and capital income are highly concentrated in the United States. More than about 80-90% of both are concentrated in approximately the richest 10% of the population.
It’s really quite a serious problem and this would not be an essential part of the next system if it was a case that middle class and working class families saw their wealth and their income expanding as a result of real wage growth. The problem is the economic situation now in which real wage growth is essentially flat or declining and the families that are prospering in the United States are mainly those families who have outsize wage incomes—like movie stars, investment bankers and such—or access to capital ownership and capital income by owning significant amounts of stocks, bonds, and real estate or receiving meaningful grants of profit sharing or employee share ownership in the firm where they work.
If there’s going to be a next system designed in the context of a market driven economy, a broadening of capital ownership or capital income has to be part of it.
The point is that the families that have access to some form of ownership of a business or ownership of financial assets, with capital income, interests, rents, or dividends on those capital assets—those are the families that are doing well. If there’s going to be a next system designed in the context of a market driven economy, a broadening of capital ownership or capital income has to be part of it and we have to think through the details of that carefully.
TMH: We know that you share the goal of Fifty by Fifty and The Democracy Collaborative to bring about a massive expansion of employee ownership in the United States by 2050. What are some of the opportunities, strategies, and mechanisms for getting employee ownership to scale in this country?
JRB: I want to talk about both employee ownership and profit sharing because in American history both have become important ways to broaden capital ownership and capital income. Employee ownership is important when you’re talking about the roughly 5,000 corporations on the NYSE and the NASDAQ and when you’re talking about the tens of thousands or hundreds of thousands of privately owned small business corporations that have succession problems (where you’re hoping the founders will sell to the employees). Profit sharing should not be forgotten because profit sharing has a long history in stock market companies and family businesses in the United States and it can potentially represent 10-20 percent of additional income on top of fair wages, as we observe at unionized auto companies such as Ford and airlines such as Southwest.
There will be a lot of family businesses that would do profit sharing if it were encouraged by federal and state governments who would never do employee ownership of any significant amount because the families want to continue to own these businesses 100 percent, so we have to focus on both.
I think the principal strategy is to change around the entire system of tax incentives and tax expenditures in the United States so that the trillion dollars in tax expenditures that the Federal Government gives to corporations every five or six years, that those tax expenditures, those tax incentives, are conditioned on companies having broad based employee ownership. I justify this in Chapter One of The Citizen’s Share by reviewing the tradition in American history popular among many Founders that broad-based property ownership is necessary for a democratic republic to exist and to sustain itself.
If broadening capital ownership is an important goal, then a tax system that spends 99.99 percent of its tax expenditures encouraging something else needs to change.
Let me give you a little perspective, ESOPs (Employee Stock Ownership Plans) have a lot of favorable tax treatment in the US and I go over that in our book, The Citizen Share, and in our policy report, Having a Stake, costing taxpayers about a half a billion to a billion dollars a year, and some years less, in tax expenditures. Whereas in contrast we spend something like a thousand billion dollars—a trillion dollars—every five or six years on tax expenditures just for the existing format in corporations, so you can see it’s just really clear if broadening property ownership, if broadening capital ownership is an important goal, then a tax system that spends 99.99 percent of its tax expenditures encouraging something else needs to change.
All forms of broad based employee ownership need to be a part of a complete restructuring of the tax system, not just ESOPs, but a form of employee ownership that can deal with every kind of business entity. For example, worker cooperatives have a very important part to play in small and medium sized business and I think it’s really a moment for the future of worker cooperatives to be a way to buy family businesses where there isn’t a family member to take over. I think in public stock market companies we need to encourage ESOPs, such as the ESOPs that exist at Proctor and Gamble where workers own 15-25 percent of that company. We need new legislation to do that. In high-tech companies, we need to encourage grants of stock, stock options, and profit sharing to workers such as exists at companies like Google and Microsoft.
A major part of what I’m saying is that the strategy should first address the tax system in total and second it should address all the different formats of broad based employee ownership, no matter what they are—as long as they are based on grants of equity or profit sharing to employees and not workers buying company stock with wages or concessions—and it should address all the different sectors of the economy where those formats can be useful.
Any notion of a utopian one-sized fits all strategy is doomed to failure.
We’re not going to use worker cooperatives exactly as they are organized in small firms as a format for broad based employee ownership on the New York Stock Exchange. Sorry to tell everybody, that’s not going to happen right now. But we may use ESOPs, grants of equity compensation, and broad based stock options. It is possible we can adapt the worker cooperative structure using platform cooperativism (see the books of Trebor Scholtz of the New School University) in such companies or the representative governance structures of Mondragón in larger firms. In the near future, worker cooperatives will have a very essential role in converting existing small businesses where the founder wants to retire to broad based employee ownership. Any notion of a utopian one-sized fits all strategy is doomed to failure.
TMH: In the past as you’ve mentioned, in the book and in the paper, employee ownership and profit sharing have been able to command pretty broad support across the political spectrum in the US from Ronald Reagan to Theodore and Franklin Roosevelt and beyond. What do you think the new Trump era means for employee ownership efforts? Are there any particular new opportunities or threats in your view? Is this potentially a hindrance to the effort to scale up employee ownership in the way that we’ve been talking about?
JRB: I think in the short term a lot of progress can be made at the Congressional level, because there are large groups of Senators and Congresspeople across the political spectrum that have an interest in broad based profit sharing and employee ownership. They have often times made themselves known by co-sponsoring legislation in this area and there has been a strong history of bipartisan support for ESOP legislation and broader coop legislation for decades.
The problem is that I don’t think that Congress has been given enough information about how central a revision of national policy on employee ownership or profit sharing is to saving the middle class. That’s why Richard Freeman, Doug Kruse, and I wrote this Having a Stake policy piece for the DC think tank Third Way in order to provide a twenty-five page overview of this issue.
TMH: At The Democracy Collaborative, one of our stated goals is to move this country to a very different place, one in which outcomes are truly and genuinely equitable, democratic, and ecologically sustainable. Can employee ownership and profit sharing lead or contribute to such outcomes in your opinion?
JRB: Yes, to a great extent—but with some limitations. Let me explain why. To the extent that there are large groups of the population working in companies that have profits and where the ownership of these corporations has a lot of value, then employee ownership and profit sharing make a lot of sense.
The next system really requires a strategy to try to maximize all forms and all formats of employee ownership and profit sharing in all sectors of the economy where there are workers who can get access to them.
This potentially involves tens of millions of adult workers in the population. However, we also have a lot of people that have dropped out of the labor market; who are under skilled; who are disabled; or who are senior citizens whose working life has mostly already taken place. We also have poor and needy children and adult workers in the nonprofit or public sector like the military, people in law enforcement, and teachers in kindergarten, elementary school, high school, day care centers, and universities. These groups account for tens of millions of more people. Employee ownership, broad based ownership, and profit sharing is not going to help them increase their wealth at all.
So, the next system really requires a strategy to try to maximize all forms and all formats of employee ownership and profit sharing in all sectors of the economy where there are workers who can get access to them. Then, we need to focus on things like universal basic income and what I call, “Citizen’s Trusts,” which are privately managed trusts where citizens can receive the dividends of capital ownership—capital income just as the citizens of Alaska receive dividends from the Alaska Permanent Fund.
We should encourage every state to set up a Citizen’s Trust, fund it with seed money from the US Government, and provide the billionaires of the country tax incentives to contribute some of the billions to these trusts. The trusts could use leverage/debt to buy assets and pay for them out of the income on these assets as Louis Kelso proposed in his book Democracy and Economic Power. Such trusts would be professionally managed and they would pay out, like the Alaska Permanent Fund, significant dividends to residents and workers who are not in the for-profit sector where employee ownership or profit sharing is relevant. I would like to see such trusts initially benefit the very old and newborns. As robotization and tech unemployment expands, they would be central to the income of most citizens. These privately-owned trusts must own the robots.
TMH: Some theorists have long suggested that employee ownership may not necessarily produce the egalitarian outcomes anticipated or desired. Or that, in fact, it may exacerbate some economic and social inequalities. Often some of these people argue that some form of social ownership or joint community-worker ownership alongside worker control or self-management of the enterprise itself would be preferential to pure forms of employee ownership. Do you have any thoughts on that debate?
JRB: Oh sure, I have a lot of thoughts! If you look broadly at all the employee ownership in the United States, the degree of ownership is largely correlated to salary levels. That is unlikely to change and it exists in worker cooperatives too.
At a Proctor and Gamble, for instance, someone making $150,000 year roughly may have three times the employee ownership as the person making $50,000 a year, or six times more than the person making $30,000 a year. In stock market companies, which use grants of stock and stock options for employee ownership, that may even be greater. While I know a lot of progressives worry about how employee ownership functions in the ESOP form, it is important to note that the ESOP is actually the only—and I stress only—form of employee ownership in the United States which has a certain egalitarian circuit breakers built into it. This is because ESOP’s are in ERISA (Employee Retirement Income Security Act) and have to grant employee ownership according to two strict rules.
The first is that ESOPs cannot benefit the highly-compensated employees or people who hold a lot of stock because they’re founders or family owners in the company. Secondly, they have to be at least as fair as according to salary.
To go to your broader issue, however, there are salary differences in worker cooperatives and there are salary differences in ESOPs, and I will claim to you that in an advanced and developed worker cooperative sector as we do not yet have in the United States—I wish we had one—but as we have in parts of Europe like Mondragón and such, the notion that the stock ownership varies with salary is pretty well accepted.
For example, in Mondragón they have an agreement that’s something like the highest person can’t make more than six or eight times than the lowest paid person. I will tell you that in general in ESOPs in the United States, because ESOPs are mostly in closely-held firms that used to be family businesses, we don’t typically see even these kinds of extreme salary differences.
I think that it is unrealistic, utopian, and counterproductive to think that we would have a big employee ownership sector where we wouldn’t have salary differences. If you look at Mondragón, which is the most developed example that we have in the world of a whole region trying to do employee ownership, they struggle to maintain their highest salary not more than eight times the lowest salary. They’ve even had to make exceptions in some cases.
In general, it’s my view as a private citizen and as sociologist, that one should be able to run most companies with less extreme salary differences than we have now in stock market companies (where we have outrageous and unsustainable salary differences). But the notion that we’re not going to have any salary differences is counter-productive. But if an intentional cooperative’s members desire that, they have the right to do it. Frankly, the issue of whether many millions will even have a salary or a stable job is more important for our nation. This is why Citizen’s Trusts are important. If jobs decline we will see a shift to many citizens having their—I hope—required non-profit work separated from their income. Many wealthy and so-called retired people function like this responsibly.
If we’re going to get tens of millions of people in the United States into thousands and thousands of firms which have significant broad based employee ownership, then we are not going to get there by having some purist, utopian, direct democracy form of worker control in many of those companies.
Now, let’s talk about worker control. I think that if we’re going to get tens of millions of people in the United States into thousands and thousands of firms which have significant broad based employee ownership, then we are not going to get there by having some purist, utopian, direct democracy form of worker control in many of those companies. It ain’t going to happen and it ain’t going to happen for the following reasons.
First, it ain’t going to happen because if you look at the worker cooperative sector as it is, you only have a very small number of worker cooperatives that hold to that model. The larger worker cooperatives tend to have representative participation in management and not full direct democracy.
Secondly, the largest example of worker cooperatives in the world, Mondragón, contrary to what many ill-informed progressives think and continually misrepresent about it, focuses on representative forums of participation at the workplace and not direct forms. They elect representatives and their focus is more on teams and involvement at the workplace level.
Thirdly, most American adult workers don’t yet have the training and the skills to run highly participative workplaces. They would need to receive that training and skills. Do I think it’s possible? Absolutely. But I think if I had to choose between having only purist versions of broad based employee ownership and worker control only versus having more of a diversity of formats which would get to scale more quickly and broaden ownership meaningfully, I would go for diversity of formats.
TMH: I just wanted to pick up on the last point that you were making and bring it around to the question of democracy more broadly. Many arguments made in favor of employee ownership suggest that it can contribute to a reinvigoration of political democracy. And beyond the purely distributive elements of this argument, many theorists have suggested that the experience of participating in the economic decision making in the workplace could play an important role in this revitalization. Do you have any thoughts on that?
JRB: Absolutely. Carol Pateman wrote about this in her famous book, Participation and Democratic Theory, and we see in Northern Italy and in Mondragón that employee ownership has had a real impact on participatory democracy. I think this makes a lot of sense. I think that the concept of just voting as the only form of democracy is a ridiculous notion as democracy means lots more civic participation than the important act of voting.
Employee ownership has had a real impact on participatory democracy.
I think that what social scientists call the “spillover impact” of participation at the workplace is most pronounced when employees have a lot of impact on how their job is organized, where they have self-directed work teams, where they have self-management—which is finally becoming more common in industry—and where they have a lot of participation at the department and division level.
I also think that it’s very important that when there are people who have ownership interests in a firm at any level, they should be able to vote for members of the board of directors, whether it’s a worker cooperative or Proctor and Gamble. Those are very, very important norms of governance that we have to move to consider them seriously. Shareholder governance rights are entirely consistent with private ownership.
I would like to see at least every form of worker ownership have the ability to elect with their ownership interest members of the board of directors of their company. I simply make a difference in terms of whether all workers at all work places should elect their managers. I’m not sure that that is a realistic approach except in very tightly knit workplaces where there is a lot of education and training and a lot of social capital between the workers. In Mondragón, worker representatives do not elect managers. For me, the best achiever needs to be the manager and diversified boards need to decide that.
We have a completely non-democratic form of corporate governance in the United States in general, in our 5,000 stock market companies. I ask my students in my corporate governance class, “What do you call an election where the number of winners of the election equals the number of candidates?” That’s how our Boards of Directors are elected in publicly traded stock market companies. We have to reform those first. We have to get to the point where the shareholders of stock market companies can nominate a broader slate of people to run for the boards and also where the employee shareholders can also nominate employees to run for the boards.
In those stock market companies, and even Silicon Valley companies, that have five percent, ten percent, twenty percent, fifty percent employee ownership, the employees should be electing people to the board. We have a really completely, undemocratic system of corporate governance in our stock market companies which is really, in principle, a violation of the norm of shareholder democracy in joint stock corporations legally.
TMH: You mentioned in Having a Stake that it’s time to examine how ownership and profit sharing policies can help make US capitalism more efficient and equitable in the current economic environment. What would you offer to those that may argue that we have to begin thinking of political economic alternatives beyond the way that the current American economic system works? In your opinion, what role could and should employee ownership play in such visions for a more community-sustaining system?
JRB: I think that the Federal Government should encourage employee ownership with tax incentives so that in general our stock market companies should be around fifteen to twenty-five percent employee owned, just as a rule of thumb.
I think that that there should also be a huge sector where small businesses of fifty, a hundred, five hundred employees are largely employee owned. I do note, as one of my friends has told me, that many family owned businesses and sole proprietorships are essentially employee owned because the employees and the owners are one and the same. Don’t forget that. The notion of the family farm and the small family business, which is essentially a worker/owner ownership situation, is still part of broad based employee ownership.
My problem with employee ownership, as I said earlier, is it doesn’t do much for the kindergarten teacher and the high school teacher and the soldier or the fireman or firewoman, and there we need to think in terms of these broadly owned citizen’s trusts which own the robots and own the capital of the country and pay dividends.
In our next system, we have to think about the chance—and it’s already happening—where our work is disconnected from income. We’re going to have situation where we’ll have so much technological unemployment that we will have a lot of people who will be receiving dividends, like the Alaska Permanent Fund, and some forms of universal basic income. We will also need to be thinking about different types of work: reading to the blind, helping children, helping senior citizens, and doing the kind of citizen participation that you alluded to at the town and city and county level.
People will need to think about their income coming from some sources, but doing social work, too. I think that’s a very important part of the next system. We may, in fact, have a certain part of the economy—not small—which is employee owned. But that part of the economy may not have most of the working population in it because of the large public and nonprofit sectors, and those receiving incomes from Citizens Trusts.
Proponents of alternative systems can’t have this one-size-fits-all view about employee ownership. And we will also need to develop this new idea about pro-social work so that people begin to feel that it’s important work, but not necessarily work that provides your income.
TMH: Sam Gindin, professor and former research director of the Canadian Auto Workers, has made the argument recently in Jacobin, and I quote, “ESOPs were introduced to undermine workplace democracy and worker power, not enhance it” and “the stock holdings offered to workers involve no redistribution of power, and what workers generally ‘share’ in terms of corporate revenue is merely a slice of what they recently gave up.” You addressed some of these concerns in Having a Stake but I wonder if you had any further thoughts and comments about that?
JRB: Yeah. He is partly wrong in general but he has a good point. The classic ESOP idea of Louis Kelso in his books is simple: a firm sets up an employee trust which borrows money on the credit markets to buy the company’s shares and as the loan is paid back by the firm (not by individual workers) the shares are granted to workers without any concessions. It only works in profitable companies. Federal law on ESOPs does not specify any required legal mechanisms that undermine workplace democracy. ESOP law requires workers to have a mandatory confidential vote on major corporate transactions, a feature not even required for worker cooperatives. It requires that the ownership be distributed at least as fairly according to salary and that “highly compensated managers/employees” access to stock is limited within the ESOP. It is true that ESOP law does not mandate that workers have voting rights on other issues, especially to elect the board of directors, that is optional. ESOP law does not mandate informal worker participation. My opinion is that more ESOPs should move in the direction of electing some, but not all, board members especially when the workers own a majority of the firm. But if ESOP law mandated that every ESOP be a worker cooperative very few would have been set up, especially by retiring business owners who sell the company gradually. He may be influenced by the fact that in some bad ESOPs the former owner tries to have an ESOP and maintain more control than is fair. I think there are some “best practices” industry norms that address this. My view is that each group of managers and workers should decide how much workplace democracy they wish and can realistically implement with the actual workers they have. Mandating pure formats would lead to many fewer employee-owned companies being set up, but I recognize honest observers can disagree on this.
But if ESOP law mandated that every ESOP be a worker cooperative very few would have been set up, especially by retiring business owners who sell the company gradually.
Please note that many ESOPs set up by unions also do not mandate that the workers elect the entire board. Even the UAW withdrew its support for having a board member on the Chrysler board with its 25 percent Chrysler ESOP. Moreover, there were and are a number of ESOPs that were not classic ESOPs that were set up, mostly by trade unions, that did so when the company was failing and the ESOP trust traded worker concessions for stock in a weak company. First of all, it’s about time that we are honest about the fact that it was often trade unions that set up the ESOPs that traded wage cuts and benefit cuts for stock. The classic ESOP is an employee trust where the worker does not have to pledge his or her assets as collateral, the company is collateral. It’s using credit to buy wealth for workers. In the classic ESOP, there are tax incentives to do that and there is no expectation that there will be reduction in wages or benefits. Unions used this method to do their best to rescue workers in difficult situations, like Weirton Steel, but it is not the classic ESOP idea and sometimes, as in Chrysler, the union was not in favor of workplace democracy.
The main example in the United States of the non-classic ESOP, the United Airlines transaction, was also in fact a trade union effort. I happen to be a union member and a strong supporter of unions, but it’s about time that the people in the union movement recognize some responsibility for what they have done themselves.
Dana Brown: What is it that gives you hope about the future of employee ownership and profit sharing in the United States? Are there particular examples that you think are inspiring and that people can learn from as they produce strategies to expand employee ownership and profit sharing?
JRB: Yeah, I think that there are two things that give me hope. There are currently thousands of fifty-to-hundred percent employee owned firms where an employee ownership trust has used credit to build significant wealth. As we discuss in our policy report, there is no evidence that wages are lower or that benefits are lower. On the contrary, these firms, to the extent we’ve been able to measure it, have more defined benefit plans than non-ESOP firms. They have higher wages and they tend to have second diversified pension plans. That gives me hope.
The second thing that gives me hope is that I think we have entered a new moment for worker cooperatives. Worker cooperatives in the past have tended to be concentrated in low-wage service industries, and while they have achieved a lot in local communities, they often have not had high enough wages and benefits to be able to build up large amounts of worker wealth. The average worker wealth for ESOPs in most of the 50 states is many many times the incomplete data I have seen on worker cooperatives. But I believe that will change and we will see ESOPs continue to get more participatory and have stronger “best practices” norms (in some cases responding to DOL enforcement) and worker cooperatives become more worker wealth and employee benefits and high wage oriented.
I think one of the most positive developments is that the traditional conflict between the ESOP format and the cooperative format is starting to fall away. If we can begin to have worker cooperatives that have the governance and participation norms of cooperatives and yet also use access to credit and tax incentives so that the cooperative is not founded using worker savings, but is founded using credit like ESOPs are, then we could have a hybrid form, a hybrid ESOP/cooperative form. It won’t necessarily be called that, but it will be a form of worker cooperative which can buy more valuable companies, offer higher wages, offer higher benefits and where the total value of employee wealth will be higher.
It’s very hard to start a worker cooperative with worker savings when you’re dealing with citizens who don’t have many savings and don’t have much wealth.
One of the things that a supporters of purist forms of worker cooperatives need to admit to is that worker cooperatives have often been in low wage industries, have had bad benefits, have been non-union, and have had very small wealth accumulation by workers. The worker cooperative movement has to own up to that. I think this has largely been a result of the fact that it’s very hard to start a worker cooperative with worker savings when you’re dealing with citizens who don’t have many savings and don’t have much wealth. It’s very, very risky.
If you could create a hybrid model where you’re using credit, like credit is used in the ESOP model, together with the worker cooperative model then you could have companies that have higher wages, higher benefits, and greater wealth.
TMH: Is there anything else you would like our readers to know or to think about?
JRB: I think the main thing I would like to say is that when I look at the thriving worker cooperative sector now, which I believe is on the brink of huge expansion of growth, and when I look at the ESOP sector, and the sector of tech firms and science based firms which are using profit sharing and employee share ownership in other formats, and when I look at the increased use of technology in all of these situations, I do think that we’re converging towards a next system business format where there’s profit sharing, where there’s member ownership, where there’s a lot of participation, where there’s very, very low hierarchy, and where there’s a more egalitarian compensation arrangement than we read about in the big Fortune 500 companies. And that’s positive.
I think it makes a lot of sense to stress the commonalities of all these formats and I think this current generation, the Millennial generation, is more open to diversity and participation and member rights and respecting the freedom of the individual and team work. In a way, this new generation is kind of built for this new future of work.
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Joseph Blasi – Preeminent expert on employee ownership more
Thomas Hanna – Director of Research at The Democracy Collaborative more
Dana Brown – Deputy Director of the Next System Project more
Go to Original – thenextsystem.org
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