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Who's Afraid of Ownership?

Loren Rodgers

July 2002

Advocates of employee ownership accentuate the positive: we believe that ownership motivates employees through the chance to build financial assets, to make their companies more fulfilling places to work, and for all of us to have greater control over our own destinies.

Decades of research show that we're right: employee ownership can improve performance, and the key factor to unlocking its potential is employee participation. We also know that employees share in this improved performance. On average, ESOP participants have substantially more retirement assets than non-ESOP participants, and preliminary research suggests that stock options come on top of, not instead of, competitive salaries.

But in these days of turbulent stock markets, headlines about Enron, and underwater stock options, it's hard to deny that there is another side to employee ownership: it gives people something to lose.

Managers instinctively avoid talking about the risks of ownership. They don't want to stir up trouble. They ask "how can we reduce employees' sense of having an investment at risk?" Our answer: that's the wrong question.

Risk and Ownership

The fact is that employee-owners do bear a degree of risk. Having something to lose is just the "glass half-empty" version of having something to gain. Risk is an unavoidable feature of ownership, and it will be talked about. For company leaders, the only question is whether you want people to learn about the risks of ownership from you or from the rumor mill.

One company president talks about one of his senior managers, who expressed concern about company stock being such a large portion of her retirement portfolio. He told her, "Now you know how owners of companies feel." Like this president, it makes sense to be sure that the link between ownership and risk is clear to everyone.

The Psychology of Risk

How does risk affect people's enthusiasm about ownership? We developed a model of cynicism (see "Ownership Cynics," The Journal of Employee Ownership Law and Finance, fall 1999, pp. 69-78) and applied it to data about risk and reward. Not surprisingly, ownership believers are much more likely than cynics to expect ownership to provide future benefits.

However, data collected from thousands of employee-owners using the Ownership Culture Survey (OCS) shows that believers are also much more likely to accept the risks of ownership: only 2% deny having something at risk, while almost one-fifth of cynics feel risk-free. Paradoxically, a sense of risk seems to be a requirement for building a company of people excited about ownership.

The OCS database highlights another counter-intuitive trend: despite the tight conceptual link between risk and reward, in reality a sense of risk does not necessarily follow from a sense of reward. Some people believe that they stand to gain from ownership without much risk, and others focus on the risks without much consideration for possible rewards.

In other words, for people to have an accurate understanding of risk and reward, both topics must be addressed directly. Just talking about the potential benefits of ownership is not enough.

Communicating About Risk

Education about ownership increases the sense both of reward and of risk. Our database lets us divide employee-owners into those who have a strong understanding of ownership and those with a weak understanding. In a typical employee-ownership company, 59% of the better-informed employees believe that they will receive their "fair share of company successes." By contrast, only 38% of the low-understanding respondents believe they'll share in the benefit.

And the same general tendencies apply to measures of perceived risk: higher levels of understanding lead to higher levels of perceived risk.

When melded with understanding, a sense of risk can be psychologically empowering. When people understand the risks of their business and how the company will react to different threats, they are less likely to feel panic or helplessness when signs of trouble appear.

For example, Reflexite Corporation has a grid that defines four stages of economic distress and explicitly states what the company will do in each of the four stages. This grid reduces uncertainty and also gives employees a sense for what it will take to emerge from crisis.

Currencies of Risk

One strategy is to expand the meaning of risk. When we think about risk in a company, we usually picture the person who put up his or her own cash. But there are many other means through which people invest in their companies. We call these different means "currencies of risk."

One form of investment is the company-specific skills that we all learn: they help us do our jobs at our companies, but they may not transfer anywhere else. Another currency of risk is simply the years that people work in a company when they could be working elsewhere. "Sweat equity" is more than just a phrase. And people who come up with suggestions to improve the company are investing their creativity, intelligence, and initiative.

Talk to people about the different currencies of risk to reinforce that they already have an investment in the company. Their job is to cultivate that investment, and the best way for them to do that is to understand the threats and sources of risk, as well as the opportunities and sources of success.

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