Employee Ownership - is it needed?

A paper on the role of employee ownership in local economic development by Alan Greig.

Successful employee ownership is built on capital investment that stimulates long-term employment and produces real goods and services that people want and need. Once started, employee ownership can grow as part of any local economy enjoying reasonably steady economic growth. Employee ownership then enables the wealth created by economic growth to be spread in a more equitable manner, while also increasing the level of national savings.

The notion that employees should participate in the ownership of the business employing them is not new. In recent years, the idea of employee share ownership has become firmly established in the mainstream of the economy. The concept of broader share ownership in business enterprises (including those operating globally) is firmly established. The Australian Government has recently set a target to double to proportion of ‘employee owners’ in the Australian economy to 11% of the workforce by 2009 (see the web-site of the Employee Share Ownership Unit in the Department of Employment and Workplace Relations). 

Other factors are converging to make employee ownership the natural development of the future. A better trained and more flexible workforce expects greater job satisfaction and increased involvement in decision-making. Profit sharing schemes are becoming widespread and, supported by legislation from the mid 90s, “Employee Share Ownership Plans” (ESOPs) are growing in popularity. The form which employee ownership is taking is showing many variations depending on the company involved, the business it is in and its location. 

Employee Ownership and Local Economic Development

One of the philosophical underpinnings of employee ownership is that there is a need to create a second source of wealth for people who cannot create enough through their labour alone. Yet employee ownership in this country has been least common at the lower income levels and in small and medium sized enterprises in regional economies. It is widespread however in large public companies, particularly the “Top 100” listed on the ASX. 

With the failure of ‘the market’ to encourage employee ownership in regional economies/local communities, it would seem important therefore that community (or local) economic development programs incorporate broader ownership strategies into their projects. Employee ownership has been a key aspect of such programs overseas but, for the most part, community economic development and employee ownership have passed each other by in Australia.

The reasons for this are partly because of the difficulties inherent in the process and partly because of a lack of information on the subject among community economic professionals - or business advisers generally.

In Europe and North America, where community economic development processes are most advanced, there have been some notable successes that show that obstacles can be overcome, and employee ownership can grow where it had not so far been seen  - with employee owned businesses now providing services that even the poorest communities often lacked.

As for the results employee ownership is achieving in local economic development, research recently undertaken in the US state of Ohio indicates that employee ownership yields long term economic benefits way beyond the usual job retention, job creation and economic stabilisation imperatives. These benefits include:

1. employee owned firms invest in existing facilities at a higher rate than other firms
2. employee owned firms reinvest in their human capital at higher levels than is common in the region
3. employee owned firms have a higher multiplier effect in their communities through higher levels of home ownership, purchases of consumer durables and higher retirement benefits
4. employee owned firms create significant assets for Ohio families.  

With these ‘value adding’ benefits, it is not surprising that employee ownership has entered the mainstream of local economic development activity in North America.

However, the largest and most well known example of employee ownership and community economic development in the world is still the long standing (since 1956) Mondragon Co-operative Consortium in the Basque region of Spain, now the fourth largest business conglomerate in the European Community.

The ‘Market’ for Employee Ownership

There are three avenues in which employee ownership can become a significant contributor to the success of community economic development programs. These are:

1.   Employee buyouts 

Private business owners, trade unions, management teams, public companies, the various levels of Government: all have encouraged or implemented employee buyouts (both large and small) over the past few years right across the globe. Indeed, whenever a business is changing hands – whether this is because of an owner retiring, or a divestment, or privatisation or the realisation of an investment, the option of employee ownership is being taken seriously. It is becoming recognised that, as well as spreading wealth and giving people a voice in their company’s future, employee ownership makes profound commercial sense, entirely appropriate for the competitive market economy. The most successful businesses are those that fully involve their workforce and realise the potential and commitment of their employees at all levels.

Employee buyouts where the majority of employees own the majority (or in some cases 100%) of the company they work in, have not been as common so far in Australia as they have been in North America and Europe. However, from the few examples inAustralia, they are an option where the primary motivation for selling the company is because the business no longer fits within the plans of the owner (particularly where the current owner wishes to retire). Where selling a company to it’s employees is motivated by the desire of owners to remove themselves from the active management of their companies (and recoup their investment), such buyouts have a high degree of success – with virtually all remaining financially viable, and most remaining employee owned.

To be successful, employee buyouts - like all firms - require sound management, adequate financing and a viable market for their products or services. Beyond that, employee-owned firms have two additional requirements: an effective, fair system for handling the mechanics of employee ownership (such a share valuation, procedures for selling or purchasing shares etc.) and a management culture which promotes communication and helps develop employee skills for participating in decision-making. Studies show that employee owned firms with employee participation are significantly more successful than conventional firms without such participation.

2. Employee Ownership and Small Business Succession Planning

In Europe and North America, ESOPS are also being used as a “business succession” strategy in communities which until now have lacked the resources and information to consider employee ownership as a viable alternative. Dozens of such enterprises have converted in “low income” communities in the U.S. and the U.K. in the last decade. As many as 12% of sales of small and medium sized enterprises in the US are now made to their employees through the use of an ESOP. 

Since the article about the large number of retiring business owners finding it difficult to secure their retirement “nest egg” through the sale of the business  appeared in the May, 2004 ACCORD Newsletter  (Share in Baby-boomer Dilemma" ), research since released by CPA Australia in their report "Future Bleak for Small Business Owners Set to Retire" confirms that Australia is facing a major economic development issue in this area.

As CPA Australia points out, the large number of retiring business owners coming onto "the market" in the next few years will face the problem of not being able to realise the true value of their asset. Without informed "succession planning" in the small business sector, the problem may escalate into major "wealth depletion" problems for local economies which will be faced with falling asset values, loss of retirement savings and incomes and inability to retain employment for many employees of smaller, locally owned businesses.

The answer seems to lie in the ability to transfer the ownership of these businesses to their employees over time using an Employee Share Ownership Plan (ESOP). Research in Canada is showing that companies in this position that are sold to their employees succeed 80% of the time versus only 30% to 50% when sold to family and/or third parties. Many opportunities now exist here for co-operative and employee ownership specialists in regional economies/local communities.  

3. Employee Ownership and Social Services 

The most striking combination of ownership and community development overseas however has been in the health, community care and recreation services fields.

Some examples of the most innovative and fastest growing “employee owned” businesses in these fields include the following:

1. The pioneer "all employee" owned Community Psychology and Education Services (CPES) is an example of the many employee owned "social purpose" companies which are contributing to the disability services industry in the US.
   Follow this link to CPES (opens in a new browser window)
2. Co-operative Home Care Associates in New York is spawning imitators across North America. Of course, it was not the first into this field.
   Follow this link to Co-operative Home Care Associates (opens in a new browser window)
3. Virtually all the Home Care services in Italy are delivered by "Women's Co-operatives", and have been for decades.
4. Greenwich Leisure Limited in the UK is one of the fastest growing examples of a "stakeholder owned" company in the UK - 2000 jobs in 10 years!
   Follow this link to Greenwich Leisure Limited (opens in a new browser window)

These businesses were created to provide better paying, more stable jobs in industries that typically provided minimal wages, few benefits and casual, part-time work. The latter business (Greenwich) also resulted from the privatisation of a former local government owned service. It now operates 35 leisure centres for 6 Boroughs in London, with a turnover of 30 million pounds p.a., and with over 2000 employees – substantial success in a few short years. 

Employee Ownership and Community Leadership 

In almost all of the documented overseas cases of community economic development involving employee ownership structures, success has come because of an extraordinary commitment by one or more people willing to contribute organizing and, most importantly, management skills in an environment where most talented management candidates are not eager to take on a company with might have uncertain prospects, a lower pay scale for managers, and a blurring of social and profit making objectives.

Because of the many negative factors usually evident in economically declining communities, it can appear unlikely that employee ownership has a major role to play in community economic development. However, with “conventional economic development” efforts often failing to achieve the desired success in targeted communities (eg: attracting “footloose” capital etc), governments everywhere are starting to see the benefits of funding support agencies to facilitate growth in employee ownership in targeted communities. One such example is the Ohio Employee Ownership Centre, which has had startling success in that US state.

Follow this link to the Ohio Employee Ownership Centre (opens in a new browser window)

In the UK, where it is increasingly difficult to separate social issues from economic issues in disadvantaged communities, the Blair Government has committed millions of pounds through its “Social Enterprise Unit” to the development of social enterprises and local co-operative/employee ownership development agencies. 

While effective self-help is a vital component for urban regeneration and local economic development, strong local leadership and skilled technical assistance and support is also vital to modernise local economies, and improve productivity and competitiveness. Social enterprises – with their focus on achieving social goals through trading activities and financial self sufficiency – are making significant contributions to this economic focus, as are employee owned businesses (which are seen as part of the social enterprise spectrum in the UK by creating and preserving jobs as part of local economic strategy). For more information on “Social Enterprises” in the UK, see the web-site of “Social Enterprise London”.
Follow this link to Social Enterprise London (opens in a new browser window)

The Prospects for Employee Ownership in Australia

Where does this leave us in Australia? While we are clearly many years behind some of these developments, there have been several recent advances in the social enterprise area (see the recent Special Edition Newswire “Social Enterprise – Definitions, Examples, Links and Readings” on the communitybuilders website). These developments forecast that the time is ripe for a significant investment in broad employee ownership in this country.

Up until now, there has been a widespread assumption in Australia that the ups and downs of local economies don’t matter as long as the national economy is prosperous and friendly to private enterprise. But then, local economies are the very building blocks of democracy (and self-governance) where civil society develops and social capital is created. Any destabilisation of local economies undermines these factors, so local economies are becoming the focus of attention again. There are many ‘remedies’ in the local economic development lexicon aimed at stabilising and growing local economies. Employee ownership is one of the newer ones. 

To the extent that the primary need of working people everywhere – and Australians are no different   - is a secure, well-paid job, then employee ownership is no more than one of the many contributors to meeting this need. However, it is in employee ownership’s ability to add value in the areas of employee participation and satisfaction, broader wealth creation, increased savings and workplace innovation that distinguishes employee ownership from the rest.  

The low rate of growth of employee ownership in Australia (as distinct from employee share schemes in the larger public companies) is a puzzle. Perhaps there is a cultural issue that we have to face – is it that employee ownership here is seen as “too different” in meeting the needs of either working people or business entrepreneurs?  Perhaps most employees are reluctant to invest in what they perceive as a “risky” business, even if it is ‘theirs’? And perhaps people with entrepreneurial skills might want to manage their own business rather than participate in an “employee owned” one?

Overcoming these cultural barriers will require appropriate support and promotion systems that need to be the focus of our attention over the next few years. 

The evidence is there that employee ownership is a viable local economic strategy needed by local economies in Australia. To introduce and support it in local economic development activity, a “Call for Partners” has been made to participate in the establishment of an Employee Ownership Development Agency along the lines of those operating in other countries, with the guiding example being the Ohio Employee Ownership Center.

This call has been distributed to various social and business networks. If you think you can make a contribution to these developments, I would be keen to hear from you.

Any comments on these matters would be welcome.

Alan Greig, Social Enterprise Technologies, July 2004.

For further information

Contact	:	Alan Greig, Social Enterprise Technologies (SENTECH)
Email	:	ahgreig@bigpond.com.au