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The Employee Owned Business Model During Growth and Adversity: How Well Does it Hold Up?

July 17, 2012 • Finance & Economics, Global Business, STRATEGY & MANAGEMENT, Succession Planning

By Joseph Lampel, Ajay Bhalla & Pushkar P. Jha

Criticism of modern corporate capitalism in the wake of the current economic crisis is reawakening interest in alternative ownership and governance models such as employee owned businesses (EOBs). EOBs are well suited for knowledge intensive firms where their combination of ownership and employee participation in decision-making fosters initiative and commitment. However, the relationship between ownership and employee participation that is central to the EOB advantage is potentially undermined by growth and complexity. This article reports on the results of a survey and archival study on UK-based EOBs that examines this issue. Taking advantage of the economic crisis, the study also examines EOB performance under adverse business conditions. Analysis of the archival data shows that EOBs lose their performance advantage over non-EOBs as they grow larger. EOBs, however, performed better over the entire business cycle, including the onset of the current economic crisis, demonstrating resilience and business sustainability relative to non-EOBs.

 

1.Introduction

A stream of corporate scandals followed by a financial crisis has ignited a debate on the potential pitfalls of modern corporate capitalism.1,2 In wake of this debate, increasing attention is being paid to ownership and governance models that represent an alternative to the publicly listed corporation. One model in particular is attracting renewed interest: Employee Owned Businesses (EOBs). EOBs have been part of the economic landscape since the industrial revolution. Until recently, however, they were viewed as an interesting governance model with certain advantages, but also with intrinsic limitations when compared to the growth and dynamism of publicly listed corporations.

One clear limitation to the employee owned business is built into the basic assumption that underpins this model: Employee ownership works best when employees feel a direct link between their efforts and the performance of the company.3,4 Success, however, often leads to growth, and growth can undermine the very advantage that often makes EOBs successful: As firms get larger, EOBs face the challenge of maintaining the link between employee efforts and firm performance that motivates employees to set aside narrow self-interest for the greater good of the firm.

We set out to study this issue in late 2008, just as the current economic crisis was beginning to take hold. Our study which was sponsored by John Lewis Partnership, the largest employee owned business in the UK, with support from the Employee Ownership Association (EOA), originally intended to look at the problems that employee owned businesses confronted as they scaled up their operations.5 However, in light of the economic crisis, we decided to add another dimension to the study which we felt was central to the merits of employee ownership when compared to other ownership and governance models: How resilient are EOBs? How do they fare in adverse economic environments when compared to non-EOBs?

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