New Study Shows Employee Ownership Companies More Stable

A new study by Margaret Blair of the Brookings Institution and Douglas Kruse and Joseph Blasi of Rutgers University shows that publicly traded companies that are at least 20% owned by employees are more organizationally stable than non-employee ownership companies. The results undermine the prevailing theoretical economic wisdom that employee ownership is an inherently unstable organizational form.

There is a surprisingly large theoretical literature on employee ownership that argues that it cannot survive for very long. Employee owners, the arguments go, will have an incentive to hire non-owners and will have difficulty gaining access to capital. The productivity effects of employee ownership will be limited by the "free rider problem" (i.e., "if the rest of the group works harder, I don't have to, but I'll still get rewarded"), while it will be impossible to govern employee ownership companies effectively because there are too many competing interests, one of which is to push for wage growth over capital investment.

These theoretical arguments often involve elaborate econometric models, but rarely are informed by actual data. Blair, Kruse, and Blasi attempt to address the issue by looking at a variety of measures of organizational stability. They tracked every publicly traded company they could identify as being at least 20% employee owned in 1983. This sample was matched to a set of non-employee ownership controls. Twenty-seven companies met their employee ownership criteria. Only two of these plans were used to save troubled companies or prevent takeovers.

Between 1983 and 1997, 59.3% of the employee ownership companies continued to do business as independent operations, compared to 51.1% of the matched group. If 1996 had been the cutoff, the percentages would have been 74.1% and 37.8%. None of the employee ownership companies disappeared due to bankruptcy, liquidation, or private buyouts, while 25% of the matched sample vanished for these reasons. A more sophisticated statistical analysis showed that employee ownership is a significant factor in predicting a company's odds of survival.

The authors also looked at productivity and employment growth, but found no statistically significant differences. For return on assets and total shareholder return, however, the employee ownership sample outperformed the matched sample in a statistically significant way. Return on assets for the employee ownership companies was 20.4%, compared to 16.7% in the comparison group, while shareholder return was 20.4%, compared to 17.1% in the matched group.

While the authors caution that these results are based on a small sample, the findings add further evidence to the notion that employee ownership is at least as, and probably more, stable and productive an ownership arrangement than conventional ownership.