Web Article
April 5, 2012

Creating the Ownership Edge at Your ESOP Company

"Employee ownership eliminates the conflict of interest between managers and employees. Everyone's incentives are aligned, so everyone works together to make the company as successful as possible. In the process, people build communities that satisfy their need to earn a living and their need to excel at their profession."

"Companies use the utopian language of employee ownership to cover up their failure to make needed changes in their management styles and structures. These companies ask employees to work harder in return for a share of the profit, a share that too often proves excessively risky or even worthless."

Both of the above statements are partly true. Our experience and research over the 30 years that employee ownership has shown two distinctive realities: first, overall, employee ownership gives companies a performance advantage—"the ownership edge." Second, there is no ready-to-use process to guarantee that a company will achieve the ownership edge. There are, however, six clusters of practices that appear again and again in successful ownership companies. This article describes these six components of ownership management and illustrates the myriad ways in which companies implement them.

A Tale of Two Companies

W.L. Gore & Associates is best known as the maker of Gore-Tex, but its real distinction is its corporate culture. The 8,000-associate owned company (there are no employees at Gore, they will insist) has experienced steady growth in profits and sales since its inception. Its ESOP (employee stock ownership plan) dates back to the 1970s. The company has garnered more than its share of rewards. For nine straight years, Gore has been one of the 100 Best Companies to Work For in America, usually in the top 10. For three years straight, it has ranked number one in a similar list in Britain, and was number two in Germany in 2006. Fast Company named it the most innovative company in America.

Gore does this with no managers, no job titles, no hierarchy, no reporting rules. Employees work in teams. New projects can get started if an associate can convince enough other associates to join the team. Leadership for the team emerges based on skills, not position. It may appear to be a very loose, amorphous organization but, in fact, it is one where peers create an environment in which everyone is expected to play a constructive role. It is demanding, but also rewarding. It is a culture in which everyone is both encouraged to think and act like the owners they are, but also given the authority, opportunity, and knowledge to do so.

Another well-known company, United Airlines, had a much less happy experience with employee ownership. Employees used an ESOP to buy a majority of the company in 1995. In the first year, United took its new ownership structure seriously. Employees were organized into "Best of Business" teams to look at every aspect of operations. The teams were broadly inclusive and their recommendations taken seriously. In the first year, they came up with tens of millions of dollars in improvements. United's stock outperformed the market and other airlines.

But it was not to last. The ESOP was fatally flawed from the outset. Unlike most plans, it was scheduled to end in five years, so most people saw it as just another short-term fix. The flight attendants were not included in the ESOP, even though they are the face of customer service. After the first year, union leadership decided that the employee involvement programs put them too much in the management camp, while the new CEO and HR director (the initial officers were there only on an interim basis) saw employee involvement as an unproductive sideshow. The teams were disbanded, unions pressed for large wage increases, management went back to command-and-control styles of organization, and everyone ended up angry at everyone else. United went bankrupt a few years later, although many other factors contributed to that as well.

What Employee Ownership Really Looks Like

United and Gore are two extreme companies. Elements of their stories show up in countless other companies, but the typical employee ownership company, for better and for worse, is a different creature. Consider, for instance, Jackson's Hardware in the author's home town, San Rafael, California, just north of San Francisco. Other than the local newspaper, Jackson's doesn't often get press coverage and few people outside of San Rafael have heard of it. It's the kind of small privately held business that makes up most of the U.S. economy and most of the employee ownership world.

Jackson's started an ESOP in 1989 and has been 100% employee owned for over a decade. It looks like an old-fashioned hardware store. Its large pink building opens early in the morning when contractors from around the Bay Area come to shop. Throughout the day, customers come in to its maze of aisles filled with everything from light bulbs to the most specialized tools. You're quickly greeted by an employee owner who'll make sure that an expert can help you get just what you need, taking you from questions to purchase (there are no cashiers). There are lots of experts, however-Jackson's takes out regular newspaper ads filled with pictures of its 70 employee owners highlighting their long years of service.

Jackson's is an open-book company. Weekly and monthly sales figures are posted for everyone to see. Employees know the financials and receive bonuses based on them. There are meeting about ways to improve the bottom line, and their ideas are taken seriously by CEO Bill Loskutoff. Several years ago, Orchard Supply, a chain owned by Sears, moved in a few blocks away, soon to be followed by Home Dept. Another hardware store, Yard Birds (part of a regional chain that was recently bought by Home Depot, but that maintains its identity) was just up the road. But Loskutoff says with each new opening, Jackson's sales went up as customers gained a new appreciation for the expertise and personal care they got from Jackson's owners. Yard Birds, meanwhile, closed its doors in 2006.

The thousands of employee ownership companies have more in common with Jackson's than with either United Airlines or W.L. Gore. Typical employee ownership companies are privately held, modestly sized (100 to 300 employees), and not household names. They are more productive than their peers, generate greater employee and shareholder wealth, and are more likely to survive year after year. They have the ownership edge.

The Essentials of Ownership Culture

Compelling research and decades of experience show that employee ownership is a powerful tool to improve corporate performance but only when paired with what we call an "ownership culture" (details of that research can be found here). Ownership edge companies follow six essential rules:

  1. Provide a financially meaningful ownership stake, enough to be an important part of employee financial security.
  2. Provide ownership education that teaches people how the company makes money and their role in making that happen.
  3. Share performance data about how the company is doing overall and how each work group contributes to that,
  4. Train people in business literacy so they understand the numbers the company shares.
  5. Share profits through bonuses, profit sharing or other tools.
  6. Build employee involvement not just by allowing employees to contribute ideas and information but making that part of their everyday work organization through teams, feedback opportunities, devolution of authority, and other structures.

The table below contrasts ownership management with traditional management.

Ownership Management Traditional Management
1. An ownership stake: Employees receive and maintain a level of ownership that is financially significant to them. Ownership is concentrated, with a single person or a small group owning the company.
2. Ownership understanding: Employees understand what ownership means. Ownership issues are seen as irrelevant to employees.
3. Entrepreneurship training: People are trained to have the skills not just to do their own jobs, but to understand how the business works; they learn to be effective. People are trained to do their jobs; they learn to be efficient.
4. Sharing information: Companies share financial and performance information with employees at the company and work team levels. Managers guard information.
5. Short-term incentives: Everyone shares in the short-term rewards of company success. People may, at their managers' discretion, receive bonuses.
6. Employee involvement: Employees have structured, regular opportunities to have meaningful input into decisions concerning the work they do. Ideas come from managers. Employees are allowed to make suggestions (maybe).

Companies that combine these elements create the ownership edge. In 1987, the National Center for Employee Ownership reported in the September/October Harvard Business Review that companies that have an ownership culture grow eight percent to eleven percent faster than would have been expected if they did not. Subsequent research reconfirmed these findings, which are discussed in more detail later in the book. At employee ownership conferences in the 1980s, the talk was all about finance and, occasionally, communication. By the late 1990s, the word had gotten out that the leading employee ownership companies were those with open-book management and highly participative decision making. Leaders and employee owners at these companies became enthusiastic evangelists for this new way to work. Not only were they making more money, but they were having more fun doing it.

Our publication An Ownership Tale is a story-based guide to creating the ownership edge at your company.