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An acceptable face of capitalism: arguments for and against employee ownership
This topic explores the arguments for and against
employee ownership at both theoretical and practical
levels.
Democratic Enterprise
Learning Goals
• distinguish the economic, social, and political
reasoning behind employee ownership;
• critically assess the theoretical and practical
arguments for and against employee ownership.
Key Arguments
• The case for employee ownership must be argued on economic,
social, and political bases.
• The form of employee ownership in question must be taken into
account when analysing the arguments in favour and against
employee ownership.
• The level of risk borne by workers in an organisation is a key
component in most arguments.
• The majority of benefits associated with employee ownership are
only realisable through an ownership structure that combines
meaningful financial participation with participation in
management, decision-making, and governance.
Introduction
‘...the ultimate conclusion on the labour-managed firm is
clear. Whatever its contribution to industrial democracy,
it is not an inherently efficient economic organisation.’
Eirek Furobotn
‘On the face of it, shareholder value is the dumbest idea
in the world.’
Jack Welch
Why employee ownership?
If you are a business owner, what reasons have you
to transfer ownership of the company to
employees?
If you are an employee, why would it be better for
you to be an owner as well?
Are there benefits to society if there were more
employee-owned firms?
The case for employee ownership
The case must be made on four grounds:
• Rights
• Economic
• Social
• Political
Rights
There are two main arguments:
Workers should appropriate the fruits of their labour (or at
least participate in them to a larger degree) (Dow, 2003).
Employee ownership is superior simply because of its
positive impact on democracy and justice (Dahl, 1985).
Agree/Disagree?
Economic (1)
Efficiency – companies that are owned by people
with highly homogenous interests have reduced
agency costs (monitoring) (Hansmann, 1996).
Productivity – Employees who are owners and/or
participate in governance are more productive
(Lampel et al, 2010; Jones, 1987; Doucouliagos,
1995; Blasi et al, 2003).
Economic (2)
Alignment of employee interests with the firm
– employee ownership can help reduce agency
costs for a firm as it aligns employee interests
with those of the company.
Reduced supervision costs – Employee
ownership increases the level of responsibility of
employees for the firm’s performance; put social
pressure on each other to perform (Blair et al,
2000).
Economic (3)
Employment levels – ‘An alternative argument in favour of
employee ownership comes out of the idea that participatory
firms, for cultural and economic reasons, will have less tendency
to lay off workers during economic downturns.’ (Blair et al, 2000).
Corroborated by Lampel et al:
‘EOBs create jobs faster. EOBs experienced greater employment
growth than their non-employee-owned counterparts in the period
of economic growth from 2005 to 2008 (an average increase in
employment of nearly 7.5% per annum in EOBs compared with
less than 3.9% in non-EOBs).’
Economic (4)
Stability – employee ownership can lower the probability of
being taken over by hostile firms (Blair et al, 2000; Lampel
et al, 2010).
Innovation – The empirical evidence points in favour of
employee-owned companies being more likely to be
innovative than not; due to more innovation and creative
friendly HR policies (APPGEO, 2008).
Financial performance of UK employee-owned firms
The UK Employee Ownership Index, developed by legal advisors Field
Fisher Waterhouse, is an index of the share prices of UK public
companies quoted on the London Stock Exchange and AIM which
have ten per cent or more of their issued share capital held by or
on behalf of employees other than main board directors. The
performance of the index is calculated quarterly. Started in 1995,
the index has outperformed the FTSE All-Share (London Stock
Exchange) index over three, five and ten years. In 2010, for
example, employee-owned companies' share prices were up 16.3
per cent, performing better than the FTSE All Share companies'
share prices which went up by 11.3 per cent over the year.
Source: http://www.ffw.com/practices/employment-pensions-
incentives/equity-incentives/uk-employee-ownership-index.aspx.
Social
More equitable societies – employee ownership can
contribute to reducing wealth inequalities by redistributing
income; improved productivity; democratic control of surplus
(Wilkinson and Pickett, 2009). Can also play an important role
in local economic development.
Benefits to individual employees – employee ownership can
lead to beneficial behaviour and attitude changes as it is
satisfying on three different levels: extrinsic, intrinsic, and
instrumental (Klein, 1987).
Political
Dahl argues:
• Democratising enterprises will produce more
politically conscious and active citizens, resulting in
numerous ‘positive externalities’.
• In democratic nations, if the democratic process is
deemed necessary at a state level, then it should
be the de facto governance system for enterprises.
The importance of participation
In order to achieve the majority of benefits outlined
to this point, a meaningful financial stake in
ownership must be combined with a
participation in governance and management
(Pierce and Furo, 1990; Oakeshott, 2000;
Rousseau and Shperling, 2003; Davies, 2009;
Pérotin and Robinson, 2002).
The case against employee ownership (1)
Most arguments against employee ownership derive
from the theories of economists who have applied
models normally used for the study of investor-owned
businesses. Some of these arguments are not specific
to employee-owned companies, while others raise
important issues of which employee-owners should be
aware.
The case against employee ownership (2)
Horizon problem – employee-owners are liable to under-
invest in the company if the return on investment period
is too long; they would rather extract the value for
themselves in the present in case they are not around to
benefit from the investment decision.
True?
Could the same also be said for investor-owned
companies?
The case against employee ownership (3)
Shirking – worker-owners have an incentive to shirk
(not perform) because their effort only has a
proportional effect on the work completed (‘someone
else will do the work’) (Alchian and Demsetz, 1972).
Control – employee-owners will struggle to reach
decisions effectively as they will have different
interests (Hansmann, 1996). A threat to effective
governance in employee-owned firms.
The case against employee ownership (4)
Inefficiency – employee-owned firms will not be as
efficient (economically) as investor-owned firms. This
argument is only (sometimes) true in terms of
providing a return on capital employed. Too general a
statement (firms of all kinds can be inefficient – more
of a management issue).
The case against employee ownership (5)
Raising finance – always an issue for employee-owned
firms: how to raise capital while protecting the
purpose and ownership structure of the business?
There are issues funding the employee takeover (Blair
et al, 2000); investors trusting employee-owners with
capital (Jensen and Meckling, 1979); lack of
specialised advice and capital for these kinds of
businesses.
The case against employee ownership (6)
Common property – collectively owned assets benefit
new employee-owners, despite not having contributed
to the purchase/development of these assets; ‘free-
rider’ problem.
Portfolio problem – worker-owners bear a lot of risk in
the company as they cannot diversify their investment
(they can only work for a few companies); investors
can diversify risk by investing in numerous companies.
Summary (1)
• Employee-owned enterprises represent a sound model of
ownership on social and political grounds.
• Employee-owned companies are at least as efficient economically
as investor-owned businesses.
• The major economic benefits of employee ownership can only be
realised by combining financial participation in ownership with
participatory management practices and a say in the governance
of the organisation.
Summary (2)
• Risk is a major aspect of the arguments for and against employee
ownership. Arguments for employee ownership centre on the risk
to employees of supplying labour to the organisation. Arguments
against focus on the unsuitability of employees to bear risk due to
capital constraints and an adverse attitude to risk.
• Many of the theoretical arguments for and against employee
ownership are only applicable to certain forms of employee
ownership, and cannot be used as a ‘broad brush’ treatment of the
topic.
Resources and Support
The Carey Center for Democratic Capitalism
http://www.democratic-
capitalism.com/.
The MIT Community Innovators Lab
http://colabradio.mit.edu/.
The Capital Ownership Group
http://cog.kent.edu/.
References and Reading (1)
Alchian, A. A. and H. Demsetz. ‘Production, Information Costs, and Economic
Organization’ American Economic Review 62 (1972): 777–95.
Blair, M., D. Kruse, and J. Blasi. ‘Is Employee Ownership an Unstable Form? Or
a Stabilizing Force?’ in T. Kochan, and M. Blair (eds). The New Relationship:
Human Capital in the American Corporation. Washington: The Brookings
Institution, 2000.
Blasi, J., D. Kruse, and A. Bernstein. In the Company of Owners. New York:
Basic Books, 2003.
Dahl, R., A. A Preface to Economic Democracy. Berkeley: University of
California Press, 1985.
Davies, W. Reinventing the Firm. London: Demos, 2009.
Doucouliagos, C. ‘Worker Participation and Productivity in Labor-Managed and
Participatory Capitalist Firms: A Meta-Analysis’ Industrial and Labor
Relations Review 49 (1995): 58–77.
References and Reading (2)
Dow, G. Governing the Firm: Workers Control in Theory and Practice.
Cambridge: Cambridge University Press, 2003.
Hansmann, H. The Ownership of Enterprise. Cambridge: Harvard University
Press, 1996.
Jensen, M. C. and W. H. Meckling. ‘Rights and Production Functions: An
Application to Labor Managed Firms and Codetermination’ Journal of
Business 52 (1979): 469–506.
Jones, D. C. ‘The Productivity Effects of Worker Directors and Financial
Participation by Employees in the Firm: The Case of British Retail
Cooperatives’ Industrial and Labor Relations Review 41 (1987): 79–92.
Lampel, J., A. Bhalla, and J. Pushkar. Model Growth: Do Employee-Owned
Businesses Deliver Sustainable Performance? London: Employee
Ownership Association, 2010.
Oakeshott, R. The Case for Workers’ Co-ops (2nd edition). Hampshire: Palgrave
Macmillan, 1990.
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