Employee Ownership and Its Consequences

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Employee Ownership and Its Consequences
An international study of employee ownership research
By Eric Kaarsemaker
Reviewed by David Binns, Beyster Institute Staff

In a “study of studies" commissioned by the Foundation for Enterprise Development (www.fed.org), Eric Kaarsemaker, currently at York University, conducted a review of the past 30 years of research on employee ownership and its impact. Kaarsemaker, whose dissertation at the Nijmegen School of Management (Netherlands) focused on “Employee Ownership and Human Resource Management,” undertook a broad international review of quantitative research that specifically deals with the consequences of employee ownership.

The survey, entitled “Employee Ownership and its Consequences” found that a significant majority of nearly 130 studies of employee ownership around the world found favorable effects related to employee ownership. Only 10 percent of the studies found negative effects.

A key limitation associated with many of the studies of employee ownership to date, however, is that the positive effects of employee ownership depend to a significant degree on the context in which the plan operates, but those specific conditions that contribute to successful employee ownership strategies remain largely unknown. Of the 16 studies that looked at the effects of employee ownership combined with participatory management practices, for example, most found a positive correlation while none found negative effects. Such findings are consistent with established understanding of the importance of combining employee ownership with participation in decision-making in order to positively affect corporate performance, but just which practices are most effective remains unclear.

Kaarsemaker found that this problem was exacerbated by the fact that a number of the employee ownership studies used overly simplistic measures of employee ownership, and many of the studies focused on company-level issues without also assessing the impact of employee ownership on the participants themselves. In many cases the research ignored the conditions under which employee ownership can be assessed in terms of producing favorable effects.

Kaarsemaker suggested that future employee ownership research could be enhanced by focusing on what he calls the “5-fits” model, which looks at employee ownership from different perspectives and better identifies the specific factors that influence how such plans work in actual practice. These five conditions that are likely to influence the effects of employee ownership include:

1. Person Fit, or the alignment between employee ownership and individuals’ personal traits and characteristics. For example, some people care more about money and status than others, and some people are more risk-averse than others.

2. Internal Fit, or the alignment between employee ownership and other organizational practices, in particular people management or human resource management practices. For example, employee participation in decision-making is often thought to be a necessary condition in order for employee ownership to yield favorable results.

3. Strategic Fit, or the alignment between employee ownership and the company strategy. Companies operate in a specific market context, and ideally have a strategy to create and sustain competitive advantage, to stay ahead of competitors and earn above-normal returns. Ultimately, company strategy is executed by the workforce. Employee ownership plays a role in aligning worker interests with the company’s strategic priorities.

4. Organizational Fit, or the alignment between employee ownership and organizational characteristics like industry, size, history, organizational culture, reasons for adopting employee ownership, capital sources, and organizational life cycle. For example, there is a difference in the impact of employee ownership between, on one hand, the case of a retiring owners selling a healthy company to its employees, and on the other hand, the case of an employee buy-out as a last resort for a troubled company. The use of stock as incentive compensation in fast-growth companies represents another entirely different dynamic.

5. Environmental Fit, or the alignment between employee ownership and the broader institutional and cultural context of the firm. Much of the research reviewed in this study, for example, focused on U.S. and U.K. companies which operate in a different context than continental European, Asian or multi-national companies operating in many different cultural contexts.

Corey Rosen of the National Center for Employee Ownership, which has also conducted surveys of employee ownership research, reinforces Kaarsemaker’s assessment of the gaps in the research, in particular the importance of the need to determine the context in which such plans operate. In an article on the NCEO website Rosen notes that “while the studies on corporate performance have left most researchers fairly convinced that employee ownership and employee participation result in improved performance, we do not know a great deal about the texture of these results.” It is still unclear, for example, just what kinds of employee involvement work best, whether changes in organizational dynamics associated with employee ownership are ephemeral or long-lasting, and whether employee ownership improves employee tenure or motivation. “Do [equity sharing] companies have significantly different management cultures than comparable companies, and does that affect performance? Is there a threshold level for benefits from these plans to engage employees?”

“Employee Ownership and its Consequences” suggests that fertile ground for future research could include a focus on what the optimal levels of employee ownership are and which aspects of employee ownership matter most. What individual factors are key to influencing employee behaviors and attitudes as well as overall firm performance? Under what specific conditions does employee ownership thrive or fail, and what are the effects of employee ownership on the larger economy? Can broader ownership of capital improve economic prospects for workers?

The corpus of employee ownership research is not insignificant and the progress made over the past several decades in demonstrating the positive impact of employee ownership is far from negligible. But Kaarsemaker is certainly correct in noting that expanded case studies of employee ownership companies and a more robust database of international comparative employee surveys matched with individual-level and company-level financial data would go a long way towards improving our ability to reinforce the anecdotal evidence of how employee ownership exerts a positive influence in a variety of different contexts.

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