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Study Finds Employee Ownership Improves Performance of Newly Privatized Businesses
By Martin Staubus, Beyster Institute Staff
In many parts of the world, a substantial number of business enterprises are owned and operated by national governments. Known as State-Owned Enterprises, or SOEs, these firms are often inefficient and owe their continued existence either to monopoly positions (allowing them to charge high rates) or to government subsidies. Not surprisingly, in recent years many countries have taken steps to privatize at least some of their SOEs. They have been encouraged by proponents of privatization, who have argued that it will lead to the improved business performance of these enterprises. Evidence of actual results, however, has trickled in slowly.
Now comes the results of a new research study on the financial performance of SOEs that sheds important new light on the actual effects of privatization. The study, conducted by professors David Dawley and Jamal Ibrahim Haidar, focused on the Middle East and North Africa (MENA) region – a part of the world in which the Beyster Institute has conducted extensive entrepreneurship training activity and has come to know well.
Their recently published paper reported their findings based on a detailed examination of many of the largest instances of privatization in the MENA region since 1988. The question is whether privatization does in fact improve the profitability of former SOEs. The answer: it depends.
Privatization in and of itself, they concluded, is not a guarantee of efficiency gains. Where privatization opened a former SOE to new competition from others players in their industry and was coupled with new management strategies and personnel practices, business performance improved measurably. Where competition remained absent and operating practices unchanged, business performance, too, remained unchanged.
In addition to exposure to competition, the key factor that distinguished the firms that showed significant performance improvement was the newly invigorated emphasis on customer service levels. While part of the improvement in this area was attributable to investment in updated technology, these companies were also distinguished by their aggressive efforts to improve the level of service provided by their personnel. Said professors Dawley and Haidar, “We attributed profit and sales efficiency improvements to improved policies of hiring employees … as well as post-privatization employee training and development programs.”
The significance of employee motivation in determining business performance results is notable. In fact, reported the authors, the best-performing of the former SOEs had adopted the practice of employee stock ownership. “Stock ownership became an incentive to improve employee efforts and increase productivity.”
The authors’ conclusion? Privatization per se is not a “magic bullet.” Where profits and sales efficiency increased for privatized firms, it was due in large part “to successful training and development programs that were implemented and because employees and managers were urged to gain a more vested interest after gaining options to buy shares in their enterprises.”
[1] Privatization and Financial Performance: Can Value Be Created by Privatizing State Owned Enterprises in the Middle East & North Africa (MENA) Region? (2008) David Dawley and Jamal Ibrahim Haidar, Journal of Business Valuation and Economic Loss Analysis, The Berkeley Electronic Press.
©2008 The Beyster Institute and its authors and their entities. All rights reserved.
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