Is It Time to Reinvent Ownership?
Americans have largely taken for granted that businesses should be owned by their investors or founders. Some believe it is the best ownership system possible; others simply accept it as an inevitable consequence of capitalism.
While there are many debates about how to distribute the benefits of ownership and capitalism, there has been little discussion of whether the system of ownership needs reinventing.
The new book I have written with John Case, Ownership: Reinventing Companies, Capitalism, and Who Owns What, published by Berrett-Kohler (itself an employee-owned company), argues that it is time to rethink ownership. While capitalism has been an enormously successful economic system, too few people are owners. There are a variety of ways to spread ownership that maintain the best of capitalism, but we believe employee ownership is the most promising. Research shows companies that share ownership perform better and their employees are far more economically secure. History shows that employee ownership is one of the few ideas for creating a more equitable economy that both parties support— in fact, it has virtually no opposition. Employee ownership works, politically and economically.
Publicly Traded Companies
So what does ownership look like now? About 55% of the private sector workforce works for companies whose stock is traded on a stock exchange. These are mostly large companies, most often with 1,000 or more employees. These companies are owned by stockholders, and anyone can buy shares in these companies. This form of ownership offers a lot of advantages. Companies can sell stock to get capital for new investment. People can buy and sell shares in companies when they like, building diverse investment portfolios. Government regulations require some degree of transparency about business operations.
But there are downsides too. “Ownership” in these companies does not mean what we normally think of as ownership. It is more like betting at the horse track, except that here the bets are on companies. While it is true that a lot of people own stock in these companies, most of the shares are held by institutions—pension funds and mutual funds mostly. These owners are rarely in it for the long term. They buy and sell based on quarterly earnings or even shorter-term factors. Algorithms—computer programs that make decisions to buy and sell—trade more stocks than any other category of owner, and these programs usually hold stock for less than one second, relying on some formula to try to time purchases and sales. So CEOs of these companies (whose average job tenure is now less than five years) have to base their decisions not on what works for the long term but works for next quarter—or sooner.
The ownership of these companies is highly concentrated, with just 10% of the population owning 89% of the value. But that looks good compared to private equity.
About 10% of the private sector workforce works for private equity firms. These are companies that attract investment from pension funds and very wealthy individuals. They buy companies, most often companies in the range of 500 to 2,000 employees, but some much larger, with the goal of increasing their profits as quickly as possible and selling them in three to seven years, often to another private equity buyer. Sometimes, this works out well for everyone. Underperforming companies get new management skills and maybe new capital, and prosper as a result. But in many other cases, employees are laid off and other costs cut in order to increase profits for the next sale. Overall, research indicates that private equity buyouts reduce employment. In either case, the main beneficiaries of these deals are the already very rich. As we wrote about in the last issue, some private equity firms have taken steps to share ownership, but they represent only a very small fraction of transactions so far.
Family-owned firms—a term that is broadly applied to almost any closely held company—are the last major leg in conventional ownership. These companies can focus on the long term. Of course, the economic well-being of their workers varies a lot, but unlike publicly traded companies or private equity, at least they have a reason to care about the next generation. Because there are so many of them (millions of mostly small companies), they spread wealth more than the other major forms of ownership.
But just about every family firm eventually has to be sold, and increasingly that means a sale to private equity or to a larger company—or maybe to a real estate developer that wants the place, not the company.
Employee Ownership as an Alternative
Imagine there were a fourth sector of companies owned significantly or entirely by the people who work for them. Wealth would be shared much more widely, helping to reduce the gnawing economic insecurity facing so many American families. Companies could focus on what works for the long term, even if that means forgoing sort-term profits. People would see the economy as more fair, thus increasing social trust.
Of course, there is this fourth sector—you are part of it. It is smaller than the other three, and it gets a lot less attention, but there are encouraging signs of growth. And when we look at data on how these four sectors perform, the employee ownership sector does by far the best in terms of how both companies and employees—and we suspect communities—do. You can be proud to be part of this leading edge.