Four decades after the initial popularization of ESOPs, we’re still only beginning to grasp the surprising extent of benefits the ownership format brings to employees, to companies, to selling entrepreneurs and to the economy at large.
That’s newly affirmed by an important publication, in the form of a meta-analysis of more than 100 individual studies, on the impact of employee ownership.
Authored by researchers at the University of Iowa, Villanova University and Indiana University, the new analysis captured data on more than 56,000 companies in the U.S. and abroad. And, when all the caveats and qualifications were in, found that a company with a significant employee ownership could expect to be 4% more profitable than others.
Yes, 4% may seem small, but think about how hard your company works each year to widen margins by a percentage point or two, in the face of rising costs, fierce price competition and some of the most challenging labor markets we’ve seen in a long time.
The study also found that the benefits of employee ownership, in terms of corporate performance, have increased over time, suggesting to the authors that managers and workers are getting better at operating as co-owners. This is borne out by my visits with client companies, where employees acting like owners bring ever-increasing value to the workplace, and managers learn to ask more of – and listen more carefully to ideas from – rank-and-file employees.
Interestingly, the form of employee ownership – an Employee Stock Ownership Plan, or ESOP; widely dispersed stock options; stock grants – didn’t seem to matter much, in the study. Nor did the size of the firm or whether it’s publicly traded or privately-held. Overall, the study’s authors found a broad, statistically significant benefit to company performance.
The new study was published in the latest Human Resource Management Journal and is behind a pay wall, $41.65 to download. It follows up on a 2007 meta-analysis of employee ownership research that found similar though not identical benefits.
The latest analysis was narrowly focused on company performance, in terms of profitability and growth, and didn’t take up questions of retirement savings and other benefits to employee owners. It likewise didn’t address the substantial benefits, tax and otherwise, to company founders who sell to ESOPs. And it only dealt with by implication benefits to the economy at large. Still, the study is very helpful confirmation to my many clients who’ve chosen the ESOP path and to those founder/owner/CEOs mulling exit strategies or other major corporate moves.
Among the most notable elements of the journal article:
–Too briefly the authors discuss how employee ownership enables companies to differentiate themselves. Not, in my experience, by merely saying, “we’re employee-owned,” but by offering customers the benefits of a more engaged workforce. (In the study’s parlance, employee ownership “allows for greater differentiation as employees improve horizontal fit by increasing responsiveness, enhancing the scope and scale of unit-level human capital and eliciting necessary cooperation from other unit-level employees.”) Quite dramatically, I’ve seen this at companies such as Central States Manufacturing, a client, operating in a commodity business but vastly out-performing its competition because employee-owners provide peerless service. Central States, an ESOP since the early 1990s, has seen the benefits increase over time.
–Employee ownership can ameliorate the negative impact on productivity and employee engagement felt in recent decades as organizations flattened their structures, and decision makers became ever more distant from front-line workers. As owners, the authors note, employees are self-monitoring. I’d add that they’re also an unending supply of valuable ideas for company improvement. Those ideas can be too little heard in today’s flattened structure, where middle managers have departed. But ESOP companies, such as Schweitzer Engineering Laboratories, tend to find ways for employees and leaders to hear each other. Schweitzer, too, has seen the benefits increase since its initial 1994 ESOP transaction.
–Do employee-owned companies become risk-averse, as guardians for workers’ retirement savings? The authors don’t find a correlation between risk aversion and employee ownership, but spend considerable time debating the topic, and I’m glad they do. More than a few of my clients, ESOP companies, have worried in recent years about the potential for becoming too cautious. This is one of the most exciting areas I’m working on with clients, looking at structures, compensation systems and other mechanisms to encourage prudent risk taking while appropriately safeguarding the built-up value earned by employee-owners.
ESOPs aren’t for all companies. But they remain an under-appreciated ownership format. And going forward, I expect the benefits to keep piling up and for ESOPs to compare ever more favorably to other options.