Public Company Study Says Employee Ownership Hurts Performance

In a new study by Olubunmi Faleye, Vikas Mehrotra, and Randall Morck of 225 public companies with broad employee ownership of 5% or more of a company's stock, the authors found that productivity, Tobin's Q (a ratio of the market value of a firm's securities to the replacement costs of its tangible assets), long-term investment, operating risk, and growth were all worse in employee ownership companies than public companies in general. The study looked at 100 ESOPs and 115 companies with other plans; plans had to be in place for at least five years prior to 1995. Data were gathered for 1995 through 2001.

The authors argue that "labor voice" causes the underperformance, as workers would vote their shares to favor policies that underspend on investment, research, and development so as to maximize current wages and short-term stock gains. They do not specify just how participants in these plans could possibly do that, given that they would normally only vote for board members and auditors, often do not vote at all, rarely vote with much unanimity and, in any event, are typically voting for a slate of directors that has no meaningful opposition. There is also a question of whether the employee ownership plans are overrepresented in underperforming industries. The authors do not control for this variable, although we know that the airline, steel, and banking industries were heavily overrepresented among public company employee ownership plans during the study period.

Nonetheless, the findings do lend support to the argument that just setting up an employee ownership plan does not improve performance and can harm it if not coupled with an ownership culture. NCEO research shows just that. We also found that, unlike ESOPs in closely held companies, public companies with employee ownership plans show no increased tendency to increase information sharing or employee involvement.

The study is titled "When Labor Has a Voice in Corporate Governance" and is published as a National Bureau of Economic Research Working Paper (No. 11254).