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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About the Authors
Joseph Lampel is Professor in Strategy and Innovation at Cass Business School. His current research explores (a) impact of ownership structure on strategic decision-making and performance in employee-owned business (b) how organizations boost creativity under constraints, and (c) how organizations learn through rare events. He is the author with Henry Mintzberg and Bruce Ahlstrand of the one of the best selling strategy books: “Strategy Safari“, Free Press, and has published in top journals such as Strategic Management Journal, Organization Science, Journal of Management, Journal of Management Studies and Sloan Management Review.

Ajay Bhalla is Professor of Global Innovation Management at Cass Business School. He has specific research interest in (a) How Ownership & Governance Structure influences strategic decision making, with specific focus on Employee Owned and Family Businesses, and (b) What makes firms innovate better and what are the implications of pursuing innovation across boundaries for firm configuration. He has published in journals such as Academy of Management Perspectives, Journal of Operations Management, and Journal of World Business.

Pushkar P. Jha is a lecturer in strategy at the Newcastle University Business School. He has contributed to leading journals like Academy of Management Perspectives and International Journal of Project Management. He has also published in practitioner-oriented books like the Project Management Handbook of Knowledge and the Evolution of Business Knowledge. He has a keen interest in the areas of project-based learning, innovation and employee ownership models. The interest stems from his work on design and monitoring studies on cooperatives and enterprise development in some major funding initiatives of the World Bank and the UNFPA.

References
1.Kruse, D., R .Freeman and J. Blasi (2010) Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing and Broad Based Stock Options, Chicago and Cambridge, MA: University of Chicago Press and National Bureau of Economic Research.
2.Gilbert, Ronald J, Dickson, Buxton, C, Bryan, Golden, J, and Paige, Ryan, A (2009). “Navigating through Tough Times with the Aid of Employee Ownership: How ESOPs and/or MSOPs Can Become Viable Economic Allies”. Journal of Financial Service Professionals. 63 (4): 57-66.
3.Kramer, Brent (2010). “Employee ownership and participation effects on outcomes in firms majority employee-owned through employee stock ownership plans in the US”. Economic & Industrial Democracy. 31 (4): 449-476.
4.Bartram, P. (2012). “What about the workers”. Financial Management, 26-30.
5.Lampel, Joseph, Ajay Bhalla and Pushkar Jha (2010)“Model Growth: Do Employee-Owned Businesses deliver sustainable performance?” www.employeeownership.co.uk/download/MTE3
6.Sauser, William (2009) “Sustaining Employee Owned Companies: Seven Recommendations”. Journal of Business Ethics, 84 (2): pp. 151-164.
7. Blasi, Jospeh. R., and Kruse, Douglas L. (2010). “Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-Based Stock Options”. Journal of Employee Ownership Law & Finance. 22 (3): 43-79.
8.Oyer, Paul and Scott Schaefer. 2005. “Why Do Some Firms Give Stock Options to All Employees? An Empirical Examination of Alternative Theories”. Journal of Financial Economics 76(1): 99-103.
9.Bayo-Moriones, Alberto and Martin Larraza-Kintana (2009). “Profit-sharing plans and affective commitment: Does the context matter?”. Human Resource Management, 48 (2), p207-226.

 

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