Is Employee Ownership Really Better For Business?

Is Employee Ownership Really Better For Business?
RMEOC
July 9, 2021

From bakeries to auto shops to home health care networks and everything in between, employee ownership is a rising strategy in the movement to create a more equitable and inclusive economy.

While some businesses are formed from the start with some type of employee ownership built in, many employee owned businesses didn’t actually start out that way. Instead, a lot of small businesses and traditional firms go through a process of transition or conversion.

You might be asking, “Why would a business owner pursue employee ownership?”

Whether you’re selling your business to retire or looking to establish a more equitable relationship between yourself and your employees, becoming employee owned can help your business thrive now and in the future.

So if you’re curious about employee ownership but don’t quite see the benefits, we’ve broken down a few empirically-backed reasons why you might want to consider it for your business.

Note: We help businesses at every stage of their journey with employee ownership — whether you simply want to learn more or are ready to convert. Schedule a free consultation to talk to one of our specialists today.

Companies with employee ownership and participation see greater results

In a 2005 article from the Harvard Business Review, the authors argue that “companies that reserve equity compensation for executives and leave the rest of the workforce out of ownership plans are bound to suffer in the long run.”

They outline the “right way” and the “wrong way” to go about employee ownership, noting that worker participation is a key element to lasting success.

The exact type of participation proved to be unimportant in comparison with these four factors:

In general, most full-time employees must hold equity.

Employee shareholders must think the amounts they hold can significantly improve their financial prospects.

The plan needs to be aligned with managerial policies and practices.

Employees must feel a true sense of company ownership, “owning” their responsibilities once they own equity.

Financial ownership by itself is a necessary first step, but meaningful participation is a key element in reaping its rewards. As the authors write, “a plan that gives meaningful and growing amounts of stock to employees within a culture of ownership can profoundly transform attitudes and behavior—and, in turn, financial results.”

Similarly, participation alone isn’t enough to improve performance. Many studies show that participation loses much of its impact without ownership by its side, suggesting that ownership, while insufficient on its own, may be the key that holds everything else together.

The National Center for Employee Ownership conducted a study in 1986 that found that companies that converted to an ESOP grew sales 3.4% higher and employment 3.8% higher than they would have expected as a traditional firm.

However, when these companies were divided into three groups based on participation, only the ones with the highest degree of participation showed a gain: 8-11% faster growth, with the middle group doing about the same and the bottom group actually declining in performance.

This was confirmed later in 1994 by a study from economists using updated data from New York and Washington State.

The researchers found that companies in Washington that combined ownership and participation surpassed employment growth expectations by 10.9% and sales growth expectations by 6%, with companies in New York showing similar trends.

“In both studies,” the NCEO reports, “employee ownership per se had little or no impact on corporate performance, but a substantial impact when combined with participative management.”

A sense of ownership makes workers more productive

One reason for the growth numbers above might be the simple fact that workers become more productive when they own a personal, financial, and legal stake in their organization.

In an article published by IZA World of Labor, Douglas Kruse of Rutgers University reported that over 100 studies across many countries link employee ownership to better productivity, pay, job stability, and firm survival. Even when financial risk is a concern, studies show that it’s generally minimized by higher pay and job stability.

“Not only is employee ownership linked to higher company performance on average,” Kruse writes, “but it may also add to worker pay, employment stability, and company survival.”

Stefan Stern notes in a report picked up by The Guardian that the freedom to operate by means of employee ownership comes with “responsibility, accountability and a genuine sense of ownership.”

In other words, there’s a sense of seriousness that comes along with the benefits of employee ownership. Being an owner means thinking harder about how you work to make your company a success, and directly seeing the payoff of good company performance in your own life.

Employee ownership works across industries and cultures

You might think that ESOPs and co-ops are better for certain industries than others, but a 2016 meta-analysis in the Human Resource Management Journal found that employee ownership offers benefits across a variety of contexts.

“We found no differences in effects on performance in publicly held versus privately held firms, stock or stock option‐based ownership plans or differences in effects across different firm sizes (i.e. number of employees),” the authors write.

They do note, interestingly, that the effect of employee ownership on performance seems to have increased in academic studies over time and that studies that analyze firms outside of the United States tend to report a stronger effect.

One reason for this might be that collective ownership in the United States, while not a new phenomenon, has gained popularity only in recent decades. Places like the Basque Country of northern Spain or the Emilia-Romagna region of Italy have had cooperatives in particular baked into their culture for generations.

Employee ownership lets your legacy live on

Many selling owners want their legacy to continue long after they retire or otherwise exit the industry. In order to do that, their business has to actually stay in business — something we call “firm survival.”

A comprehensive study from Rutgers University on the link between employee ownership and firm survival found that companies with employee ownership stakes of 5% or more were only 76% as likely as firms without employee ownership to disappear between 1988 and 2001. (They ran data from all publicly-held U.S. companies as well as a closely matched sample without employee ownership.)

The authors note that, “while employee ownership is associated with higher productivity, the greater survival rate of these companies is not explained by higher productivity, financial strength, or compensation flexibility.”

Instead, the key to firm survival in this study was job stability, suggesting that the greatest strength of employee owned companies is its effect on employment. When people are taken care of, the business is taken care of, too.

This was a major concern for the selling owners of Flyin’ Miata, a small auto parts business in Palisade, Colorado, that RMEOC helped transition to a worker cooperative.

After 31 years in business, the original owners wanted to make sure that all of their employees would be left in good hands once they retired. Employee ownership turned out to be exactly what allowed their legacy, values, and the culture of the business to live on into the future.

Conclusion

Productivity, longevity, resilience — they’re all connected to employees having an ownership stake in the business.

Employee ownership empowers workers, improves company performance, and plays a major role in creating an economy that works for everyone.

If you’re interested in exploring how a conversion to employee ownership can help your own business flourish and prosper, schedule a free consultation with us.

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