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.