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Why employee ownership?

Posted on May 09, 2016

Employees racing to the finish line

RM2 clients are already convinced about the case for employee ownership. But prospective clients might need some reassuring. Here are some of the arguments in favour. Entire books have been written on this subject so no attempt is made here to be rigorous or to delve into the detail of what types of employee ownership might work better than others in different circumstances.

It’s best to look at the arguments on four levels:

  1. At the level of the individual employee. What effect does EO have on an individual’s behaviour?
  2. At the level of the team. Do teams of employee owners work differently?
  3. At the level of the firm. How do groups of motivated individuals and motivated teams affect the performance of the business as a whole?
  4. At the level of the whole economy or society. Why should governments promote employee ownership and support it with tax reliefs?

Health warning: The studies deal in averages, there are always exceptions to the rule, some are old or are based on small samples, and it is difficult to isolate the EO effect from other factors. Correlation does not imply causality.

1. At the level of the individual employee [1]

  • Employee owners are more likely to be satisfied with their company than non employee owners (75% versus 65%). They are more likely to believe their company is a good place to work (73% versus 66%). They are more engaged.
  • As a result:
    • They are less likely to take unplanned absence (2.1 days versus 2.7 days).
    • They are more likely to provide discretionary effort such as voluntary overtime (52% do at least 10 hours of overtime a week compared to 17%).
    • They feel more loyal (69% versus 63%) and are less likely to be looking for another job (14% versus 21%).
  • Competitive labour market: the most talented people now expect to be offered shares so ambitious firms must offer employee share schemes.

2. At the level of the team

  • Teams of employee owners are more collaborative and creative. [2]
  • Employee owned firms need fewer levels of management, supervision and control as employees are self-directed and teams can be semi autonomous.
  • Witness the organizational structures of businesses in creative industries or know-how businesses.

3. At the level of the firm

  • EO firms more sustainable and resilient through economic cycles. [3]
  • Sales growth and employment growth are consistently stronger in ESOP firms with well-developed systems for employee involvement and participation. [4]
  • EO firms have higher productivity growth. [5]
  • Public companies with higher levels of broad based employee share ownership beat the market benchmarks in terms of shareholder returns. [6]

 4. At the level of the whole economy/society

  • Employee owned firms pay more taxes and claim less welfare.
  • EO firms create wealth more equitably; a less unequal society with more capital owners is more stable and sustainable and its economy more robust. [7]
  • Pre-distribution policies like EO are less punitive than redistribution policies like wealth taxes.
  • Outside of property, pensions and inheritance, EO is one of the few ways to create new capital for large sections of the population (Louis Kelso).
  • EO could fill the gap left by receding pensions.
  • EO contributes to well-being: happiness, good health, community solidarity and longevity. [8]

[1] London School of Economics survey for Computershare (2014)
[2] “We Think” by Charles Leadbeater (2009)
[3] “Does employee ownership confer long term resilience?” by Cass Business School (2014)
[4] www.nceo.org
[5] “The employee ownership effect: a review of the evidence” by Matrix Evidence (2010)
[6] UK Employee Ownership Index by Capital Strategies
[7] “Reinventing the Firm” by Will Davies (Demos, 2010)
[8] “The Spirit Level” by Richard Wilkinson and Kate Pickett (2009)

 
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