Is Employee Ownership (EO) a good model to base a business on?

Is Employee Ownership (EO) a good model to work on?

Throughout this blog I will be discussing the advantages and disadvantages of employee owned businesses including examples of where this model has proved to be effective or ineffective.

Introduction

The debate on Employee Owned Companies is a hot topic, with many companies adopting the model – some finding this successful whilst others are struggling to find the benefits. Literature has described employee ownership as an organizational arrangement in which a significant proportion of the employees hold rights to organizational equity, information, and influence. This model has been used in an attempt to avoid outsourcing to other countries as, according to Halogen Corp, outsourcing accounted for declines in hiring. But can we safely say that this model is a route to success?

Pro EO

The Employee Ownership Association website has a variety of benefits of why this model is beneficial to businesses – but they would be biased and in favour wouldn’t they?! However, some studies can support these businesses and have found positive results. For example, Mccarthy Reeves and Turner found that the model created substantial financial returns and had more influence at strategic level. Further research has supported this and found that employee owned businesses have a more strategic approach and are interested in long term growth. Staff are willing to put in extra time and effort over busy period to be successful – which in turn rewards both the business and the employees with dividends. Large multinational companies (such as John Lewis) have found this to be extremely effective, which has resulted in advocates such as Nick Clegg and other politicians encouraging more businesses to consider this approach to unlock economic growth and improve productivity. In fact, they support it so much they have included several additions in their bill to encourage employee ownership. Examples are:

1.       Chancellor has set aside £75m per annum to support growth of employee ownership in the 2013 budget
2.       New Tax Incentives have been included in the 2014 bill
3.       From October 2014, certain bonuses paid for trusts are now exempt from income tax for up to £3600.

 Furthermore it has been found that employee owned businesses are successful in recruiting skilled staff and retaining them. This model works well for John Lewis as they are recording high profits, as well as employees reaping the rewards from their additional effort.

Anti EO

Alternatively this model doesn’t appear to be as effective for all businesses. In contradiction to the above points, researchers investigated whether employee ownership is counterproductive in 2005 and they found less investment and smaller growth. This could be explained by their analysis that employee owned companies tended to prefer low risk strategies, stable cash flow and job security. Another researcher (Durso) found that not all employee owned companies do equally well and that in some cases companies actually did worse than their competitors. Durso’s findings also indicated there is higher production when employees were given the opportunity to be involved. Therefore these studies suggest that there are other factors to consider when analysing the effectiveness of employee ownership. Further findings have suggested that if the company’s share price does not increase (and the employee feels they have no control over the share price outcome) then it can affect morale. Therefore the employee may not be acting in the code of the company. Finally, this model needs to be monitored closely as it can contribute heavily towards bankruptcy. An example of this is Delta Airlines whereby they had financial difficulty in 2005 but employees agreed to a pay cut in order for Delta to cut costs.

Employee Ownership – A route to success?

To conclude on the above, it appears that John Lewis and other companies have effectively adapted this model and have the results to prove the model is beneficial to their business. However, after taking Durso’s study into consideration I feel that, whilst the model may be beneficial to certain companies, it also needs to take into consideration other variables. For example, John Lewis is a highly recognised and respected retailer so therefore this strong image may also be a contribution towards their sales – not just how hard their employees are working. It appears that the companies who have adopted this model correctly have everything else right including products and marketing – so therefore it would be hard to distinguish whether they owe their success to their marketing mix as a whole, or whether it is solely credit to the employees. Finally there seems to be a contradiction in results in relation to performance for growth and investment. In this case, I can only assume that these studies were compiled over different time periods to be able to come to their conclusions as the overall trend seems to point towards long term growth but more safe investments (thus taking both arguments into account).

References

BBC News - http://www.bbc.co.uk/news/uk-16570840

Dermot McCarthy Eoin Reeves Tom Turner, (2010),"Can employee share ownership improve employee attitudes and behaviour?", Employee Relations, Vol. 32 Iss 4 pp. 382 – 395

Employeeownership - http://employeeownership.co.uk/employee-ownership/the-evidence/

Gianna Durso, (1991),"Employee Stock Ownership Plans: Popularity, Productivity, and Prospects", Management ResearchNews, Vol. 14 Iss 3 pp. 10 – 12

Growth Business - http://www.growthbusiness.co.uk/growing-a-business/business-tools/2472152/employee-ownership-trusts-could-prove-valuable-for-succession-planning.thtml

Halogen CorpJon L. Pierce, Candace A, Furo. (1990). Employee Ownership: Implications for Management. Organizational Dynamics. 18 (Issue 3), 1-3.

Morck R. (2005). Is Employee Ownership Counter Productive?. Management Review. 46 (4), 8-9.