Book Review: In the Company of Owners

By Joseph Blasi, Douglas Kruse, and Aaron Bernstein. Basic Books, 2003.

This important new book makes a persuasive case that ownership needs to be shared more broadly. According to the authors, "CEOs and a thin layer of other executives and mangers in corporate America own a collective total of about 1.2 billion options today," or about 10% of all outstanding corporate shares, worth $80 billion if exercised. Yet the authors conclude that there is no evidence that this embarrassment of riches for these top executives has paid off for shareholders, their companies, or their employees.

Blasi, Kruse, and Bernstein believe there is a better way, what they call "partnership capitalism," a system in which ownership is disbursed broadly and in significant amounts to all employees through options, ESOPs, or other mechanisms. That equity sharing needs to be joined by sharing decision making about how work is performed. This is not just an ideological argument. The authors looked at every significant study of broad ownership models and found that, summing up all the studies of the last two decades, broad ownership boosts productivity 4%, shareholder return 2%, and profits 14% over what would otherwise have been expected. This is despite the much-feared dilution that ownership sharing creates; shareholders, they say, would be wise to share.

The authors are well positioned to write this book. Joseph Blasi is considered the dean of academic researchers in employee ownership in the U.S., having been actively involved in the field since the 1970s. Doug Kruse, his colleague at Rutgers, is considered one of the leading, if not the leading, researcher on incentive compensation systems of all kinds. Aaron Bernstein is a long-time writer for Business Week on labor issues.

High Tech As a Model

The focus of the book is on what the authors define as the High Tech 100, the 100 largest companies that get at least half their income from internet-related business. These companies have shown more resilience than is widely presumed. The list was compiled in 2000; by 2002, eight of the companies were bankrupt. Still, from 1999 to 2002 employment in the High Tech 100 grew 26%. Combined sales grew 78% from 1999 to end of 2001. Moreover, these companies had helped create the most important new element of the economy in decades.

The authors believe that one of the most lasting contributions of the high tech companies will be their business model. Other companies had used partnership capitalism for years, or even decades. Procter & Gamble created the first ownership sharing plan in a major company 1890; Kodak joined them in 1912 and Sears in 1916. In the 1970s, ESOPs gained a foothold, but most of the leading-edge ESOPs would be in closely held companies, not highly visible publicly traded companies. The high tech sector, by contrast, not only included a lot of public companies, but it had captured popular imagination and attention. The authors trace how the early tech pioneers started to spread ownership more widely to attract and retain technical personnel. By the mid-1980s, some companies, most notably Microsoft, were sharing ownership with just about everyone, primarily through options. That went along with a high involvement culture that fit the intellectual capital the companies needed.

The stock options in these companies became legendary, of course. While the top people gathered impressive amounts, so did everyone else. 98 of the High-Tech 100 provide options to most or all employees. At their peak, options beyond the top five people in these companies were worth $175 billion, or about $1 million per employee. The top five people held another $43 billion, or $86 million each. By July 2002, 83% of the options were underwater, a loss of $171 billion overall. But the remaining 17% was still worth $4.4 billion last summer, or about $25,000 per employee below the top five. There still were years left on many options to regain some value, and employees continued to get new options at lower prices. On top of that, the High Tech 100 workers have already taken home $78 billion from the time their companies went public. Of the employee equity in these companies, the top five people owned 14%, while everyone else had 19%. This contrasts sharply with the rest of American business, where top executives own 12% of the equity and everyone else just 2%.

Blasi, Kruse, and Bernstein argue that society, shareholders, and employees would all be better off if the model developed by these high tech companies became more widespread. One of the book's inspirations was Science Applications Incorporated. Its founder, Bob Beyster, makes the authors' point well: "The crazy thing about it was, the more I gave the company away, the more money I made. . . . At one time, I had 20% of the company. Now I have 1.5 percent. I don't know what would have happened if I had kept it all. But I do know that the more I parceled the stock out to people in the company, the more my own stock was worth." Today, SAIC is a $6.7 billion company with 41,000 employees. This book deserves to be a landmark in the effort to spread this enlightened model of ownership and management.