Last year, Pete Stavros, a senior partner at KKR and the founder of Ownership Works, published an article in Fortune championing shared company ownership as the “missing path to the American dream.”
And for good reason–an increasing share of Americans believe the American dream has deteriorated, with only 19 percent reporting confidence that their children’s generation will be better off than their own, according to a recent NBC poll. Pete’s proposal received support not just from the labor advocates but also from the investment community, including major financial institutions.
We, too, find common ground with Stavros, particularly in improving business results and the lives of the employees that drive those results. But we diverge when it comes to the implementation of employee ownership. The difference, as they say, is in the details–arguably, ones that make or break the success of employee ownership.
Recognizing the many benefits of employee ownership, our perspective emphasizes that it does not automatically produce the desired outcomes on its own. To rise to the American dream level, ownership must be earned, not simply given. In other words, ownership must be realized by gains in productivity and value-added; it cannot sustainably be given out in perpetuity.
That raises a chicken-or-the-egg question. Let’s go back to Corey Rosen’s 1987 Harvard Business Review research, which revealed that ESOP (employee stock ownership plan) companies with participation plans grew three to four times faster than those without. The key word here is “participation.” Rosen, an otherwise staunch supporter of employee ownership, did not shy away from revealing this detail. For the ESOP to thrive, employees must be involved in the plan and earn the reward.
That was over three decades ago; has the narrative changed?
Take, for instance, the Harvard Business School Working Knowledge article discussing how KKR’s ownership model dramatically changed worker behavior and company success. It’s a compelling narrative, but it may tempt readers toward an overly utopian view of ESOPs. An employee will not necessarily behave like an owner simply because they are given equity, no more than a pre-med student will behave like a doctor if given a unearned degree. In contrast, ownership is the fruit of stewardship and investment.
Recent conversations with Gil Hantzsch, President of MSA, reminded us that giving employees ownership changes a company’s form more readily than its function. MSA is a thriving ESOP company, yet when they attempted to pool resources and share best practices across their various branches, the ownership model did not automatically encourage collaboration, trust, or shared action. It wasn’t until MSA introduced structured interactions–a series of ‘flocking events’, where subject-matter experts met in person to get to know one another, build trust and share insights–that their best-practices initiative gained traction. Here, the company equity had been in place for years, but was not wholly sufficient to affect behavior.
If it’s clear that a company would do better if its employees began to think and act like owners, and ownership at face-value does not transform employees, then what does?
The genesis of a successful ESOP doesn’t begin with the ESOP itself. It starts with cultivating a culture of ownership among employees, treating them as true partners in the mission to deliver value to customers and ensure sustainable profitability. Many ESOP successes lead back to this fundamental approach; companies such as MSA Engineering, Trinity Products, Springfield Remanufacturing, and Dorian Drake. And there is no shortage of successful companies that never had employee ownership as part of their arsenal; Southwest Airlines had profit sharing long before it had any employee equity program.
When employees can see and understand the economics of the business, they learn how their day-to-day behaviors influence the bottom line. Then can innovate and contribute. When employees are actively in conversation with the customer, they have insight into what drives the business’ value. As confidence builds, employees develop an eye toward long-term strategy. It’s algebra, then calculus. This scaffolding ensures employees are prepared for the responsibility of ownership and can make the most of it.
Our five years of research on this management approach, called Economic Engagement, contains 8 waves of 50-150 companies per wave and is published in Inc. (“A Key Strategy to Double Your Profitable Growth”). It includes fifteen questions aimed at understanding drivers behind employee behavior and company success, one of which is employee ownership. While employee ownership is part of the equation, the existing body of research does not single it out as the ultimate driver of performance or employee well-being. It’s the combination that produces superior results:
- Customer engagement is the starting point since customers define value and thus the economics of any business. Insure that all employees have a window on what customers value on an ongoing basis, since customers change over time.
- Economic understanding aligns all employees in a common understanding of what defines success for the company that evolves from customer engagement and the value they are adding.
- Economic transparency enables all employees to see how the company is doing and learn from successes and failures.
- Economic compensation gives all employees a shared stake in the results, making them economic partners in the company. This ranges from wages, incentive compensation and long-term equity.
- Employee participation leads to lower turnover and better relationships between owners/managers and employees, by encouraging employees to actively participate in the business, often beyond their defined role.
At economically engaged companies, employees are immersed in the operational economics that power profitability–metrics like product shipments, monthly job margin dollars, and the acquisition of new customers. Employees learn to track and forecast these key numbers on a weekly basis. They’re empowered to steer these numbers in a positive direction, while also reaping the rewards of enhanced performance. They’re likely to forge long-lasting and fruitful careers, as well as source quality referrals. The environment elevates the participation of the employee to a level that transcends transactional ownership.
Employee ownership is good, but by itself, it has less impact on employee behavior. It’s hard for employees to feel motivated by a potential benefit of an indeterminant amount, at some point in the distant future. It’s hard enough to get employees to participate in 401K (ndr: conto pensionistico personale sponsorizzato dal datore di lavoro) matching programs. Shared ownership is not a panacea; it’s a tool. So, let’s agree that we should improve business results and the lives of the employees that drive those results–by learning from each other, from employees, and from research.