Human Resources: State of the Economy Will Compel Business Leaders to Take a Closer Look at Employee Ownership

State of the Economy Will Compel Business Leaders to Take a Closer Look at Employee Ownership

Education is key to driving 21st century organization

By Mary Ann Beyster

America’s system of market capitalism has been shocked to its core by the recent financial collapse. This catastrophe will lead to a reevaluation of how corporations are managed and governed, and who they benefit. Scholars, policy makers, students, and citizens are asking tough questions about how this could happen, how corporations should be governed, who should be accountable, and how the interests of shareholders can be better aligned with those of stakeholders.

With “accountability” commanding people’s attention, many will be compelled to take a closer look at employee ownership. Employee ownership is when a corporation is owned in whole or in part by its employees. Many models of significant employee ownership in both publicly-traded and closely-held companies exist in the United States. For example, many of Fortune Magazine’s 100 Best Companies to Work for in America stress employee stock ownership in their organizations. A number of Forbes Magazine’s 100 largest closely held corporations are in fact majority employee-owned. Moreover, the Silicon Valley model of the innovative corporation commonly used unique combinations of employee stock ownership, profit sharing, and broad-based stock options.

But, the true concept of employee ownership goes well beyond this basic definition. Employee ownership requires fairness and ethical treatment of employees in an organization and a supportive corporate culture which supports empowerment and teamwork. An important element of this fairness is a just wage for employees as the basis for their membership in the organization and access to diversified retirement portfolio. Employee ownership represents an opportunity to realize wealth on top of a salary. A company that pays employees poorly and pushes them to invest their savings in company stock, thus concentrating their retirement assets in company stock, creates too much risk is not working at making employees responsible owners.
What does it mean to have an owner’s view in a company?

Imagine a group of individuals vested in the success of the company. These individuals are motivated to enhance both the short-term and long-term financial performance of the company because they have a vested interest in the long term success of the company. They believe that everyone working together will create value, generate profits, and increase wealth of the employees. That is, if they have a role in shaping the pie, they will have the opportunity to share in the pie, and this combination of participation and incentives will have a direct role in growing the size of the pie.

They take personal responsibility for growing the company, satisfying their customers, seeking opportunities for improvements to meet future needs, and never risk the health of the company through their decisions or actions. Individuals’ rewards are proportionate to their contributions, and rewards are both financial and psychological.

They have a voice in the direction and management of the organization. Issues are not for others to identify and resolve, and opportunities are not for others to shape and pursue. Change occurs because each employee believes he/she is empowered to address issues and opportunities, regardless of his/her level in the organization. “Self-managed teams,” as they are frequently called, become organizational entities for employees to create change. These teams are dominant in the company and are preferred over traditional hierarchies of authority and control.

This is a snapshot of what one would find in companies where employee ownership is a core operating principle. There is a sense of empowerment at all levels of the organization fueled by participation, often outside one’s functional area.
Can ownership create value?

There is a principle called “value-added” that is well established in engineering fields. A product gains value from raw material to finished product as that transformation creates something of value to a customer through useful functionality, improved quality, and performance. Value added to that product or project ultimately must improve the customer’s performance while reducing time and cost. Within a production system, “non-value” activities—those that do not actually directly improve the quality and production of product—are eliminated, to the extent possible given the stage of maturity of that product, technology, or production system. Resulting cost reductions go to bottom-line profits and/or support unit price reductions.

Value engineering requires both individual responsibility and team engagement. The use of quality checks throughout the development of the product or project is one example. Those checks involve individual project team members, their peers, and third-party reviewers to help test assumptions, perform experiments, evaluate results, adjust designs and plans to improve quality, and—if needed—discontinue bad projects. We need a sense of ownership like this at the enterprise level, focused on creating something of value—not just personal wealth or shareholder value.

Research performed by academics and non-profit organizations indicates that company performance is improved in companies with broad-based ownership. That improvement can be demonstrated by many measures: including productivity, sales growth, and innovation.
Professors at the National Bureau for Economic Research, Rutgers University’s School of Management and Labor Relations and Harvard University have conducted extensive research in this area, and a number of other universities, including Carnegie Mellon, Kent State, MIT Sloan, University of Penn, San Diego State University, USD, and the Beyster Institute at the Rady School of Management and others are also contributing to the research in this area.

Employee-owned companies are not immune to the perils of economic slowdowns, but many have demonstrated more resilience (e.g., shedding fewer jobs) than those without employee ownership. This performance difference was confirmed in a recent study by the Ohio Employee Ownership Center (OEOC) at Kent State University, which compared the performance of companies in an Ohio manufacturing network of employee-owned companies with those not in that network.

The economy is currently the number one concern for the U.S. and countries globally. Today, we must regain our footing by re-thinking the fundamentals of our economic system. For the U.S. especially, the power of the individual and a free enterprise system have sparked new ideas for innovation, new business models to make the most of those innovations, and new standards of living derived from those innovations.

Our economic growth has been based on these innovations creating value. Those who create something of value make money and are personally rewarded as a result. As we know, that does not always happen, but with a free enterprise system, we hope it happens more often than not, and that the system is open to all versus a few.
How do you get started?

It would be easier to get started in a greenfield site or new company. In times of economic downturn, executives and middle managers in a more traditionally organized company may have a tendency to tighten the controls instead of using this time to engage employees in identifying issues and opportunities and creating solutions. For some, ownership will be counter-intuitive and challenging.
Empowerment—The top of the organization is a good place to begin. The leadership of the company must decide that ownership will be a core principle rather than a shallow one based on tax advantages or exit strategies for founders, which can be found at some companies. There needs to be a commitment that employee ownership will be an integral part of the overall corporate system. This commitment leads to a style of leadership that is based on empowering employees versus controlling them.

Evaluation—In order for employees to feel like owners, they must be able to act like owners. There isn’t one thing that a company does to create that ability for its employees to act as owners. A company should create a system—including organizational structure, hiring and retention practices, incentive practices, financing, work processes—that it hopes will reinforce the principles of employee ownership. With regular evaluation, a company learns what is working and what is not. Just as a company must evolve continuously to meet the demands and exploit the opportunities of a dynamic business environment, it must also regularly evaluate how it is creating an environment for ownership. Regular evaluation and learning should lead to important adjustments and improvements that best fit current and future needs of the company, its employee, and customers.

Education— Employees, management, and the board need to especially understand the why, what, how, and when for establishing ownership practices and behavior. This education builds buy-in and consensus on how to approach ownership in any particular company and helps set expectations of the necessary leadership.

As we envision what the corporation of the 21st century should look like in order to thrive in a global and dynamic economy, it’s critical for universities and policy makers to have a comprehensive understanding about the new realities inside corporations. Creating or running a company with significant employee ownership is not simple, but has been demonstrated to be a successful model with benefits to all—employees, shareholders, and customers. Business schools play a critical role in helping individuals as well as organizations understand the components of employee ownership, defining the possibilities of implementing ownership-based practices, and most importantly training today’s business leaders and our next generation leaders to strengthen the commitment both of employees and employers to the health and success of the 21st century Corporation.

In October of 2008, the Foundation for Enterprise Development (FED), the Employee Ownership Foundation (EOF), and the Aspen Institute Center for Business Education (Aspen CBE) announced their collaboration to create a Curriculum Library on Employee Ownership (CLEO). CLEO will be housed on CasePlace.org, Aspen CBE’s free online resource for up-to-date case studies, syllabi, and other innovative teaching materials on business, corporate responsibility and sustainability. The site now offers the largest collection of university teaching materials on employee ownership, addressing such areas as broad-based equity compensation, profit sharing, and other forms of shared capitalism. Much of the research cited above can be found on this site.

This collaboration was sparked in 2007 by a mutual interest to better prepare undergraduate, graduate, and executive-level business students to lead and grow privately-held or closely-held companies, including innovative technology-based start-ups. We also recognize that companies privately-held or closely-held ownership that also have significant employee ownership have valuable best practices resulting in innovation, sustained growth, and profitability. In addition, there are publicly-traded companies who have successfully introduced the concept of employee ownership to their employees through equity incentives, profit sharing, or retirement programs. Our vision includes making available high-quality research and teaching materials for use by business professors and their MBA students, doctoral students, and post-doctoral fellows. Universities and business schools provide the forum for much of the dialogue about our current crisis and, fully armed with alternatives, can help initiate the ideas for creating global economic recovery.

Both the FED and EOF fund fellowships at leading universities to address critical gaps in employee-ownership focused research and teaching materials. It is our intent that disseminating existing research and this new work through CLEO and other outreach channels will accelerate the adoption of these materials into universities. We hope that the resulting dialogue can play a constructive role in redesigning the corporation.

CLEO is a work in progress. We welcome organizations nationwide dealing with employee ownership, profit sharing, and related practices to engage in the dialogue, contribute to the library, and expand the adoption of ownership principles

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Biography

Mary Ann Beyster, M.S.
President, The Foundation for Enterprise Development
Mary Ann Beyster is the President of the FED, a non-profit foundation focused on promoting the concept of broad-based, participative employee ownership and entrepreneurism. She is responsible for developing and directing the Foundation’s strategy, programs, and services. She established research fellowships at six leading universities; several publication initiatives; and the largest online curriculum library to help catalyze new education, policy development, and knowledge sharing to advance growth companies and cultivate future generations of entrepreneurs in science and technology communities. The FED also works directly with early-stage and expansion technology companies to help prepare them for growth.
Prior to joining the Foundation, Ms. Beyster worked for 20 years as an executive, manager, and engineer in large research and consulting companies. She has launched new business practice areas and worked with entrepreneurs in a range of fields, including systems engineering, energy, environment, water, life sciences, and homeland defense. She holds a B.S. in Industrial Engineering from California Polytechnic State University at San Luis Obispo and an M.S. in Management from The Sloan School of Management at the Massachusetts Institute of Technology.