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The Employee Ownership Update

Corey Rosen

May 3, 1996

(Corey Rosen)

First ESOP Privatization Completed

The first privatization of a federal agency to its employees will soon be completed. The newly formed US Investigations Services, Inc., will employ about 700 people currently working for the Office of Personnel Management's background investigation unit. The company has signed a sole-source contract with the agency to continue the background checks and will also seek private contracts. The company will be nearly 100% owned by an ESOP.

New Study Finds Negative Performance Effect for ESOPs in Public Firms

A new study by Mary Ducy and Zahid Igbal of Texas Southern University, and Aigbe Akhigbe of Florida Atlantic University, concludes that ESOPs have a negative effect on corporate performance in public firms, although stockholders tend to view ESOP announcements favorably.

The study measured operating cash flows relative to a company's market assets, sales, and number of employees. The study looked at ESOPs with at least 10% ownership that had been in place since 1990 or earlier. The final sample included 48 firms. Results were evaluated based on the difference between pre-ESOP and post-ESOP performance relative to industry norms.

The researchers found that performance declined in about 60% to 65% of the cases, depending on the measure, with a median decline of about 1% to 2%. Only a few of the measures produced statistically significant results, however (that is, results that clearly were not random). When the sample looked at companies with over 15% ESOP ownership, the pattern was less clear, but still somewhat negative. On the other hand, stock prices rose about 1.6% after the ESOP announcement.

The results are contrary to a recent study by Don Collat at Harvard who found a small, statistically significant performance improvement in public company ESOPs in those firms that were not takeover candidates. The Ducy et al. study also looked at this factor but found it did not change the results.

NCEO Annual Conference Judged "Best Ever"

The NCEO's annual conference from April 17 to 19 was said to be the "best ever" by a number of attendees. The conference featured a new format designed to reduce the number of speakers on panels and increase the ratio of company attendees to consultants. Next year's annual meeting will be in Chicago in April.

Keynote speaker Margaret Blair of the Brookings Institution told the participants that corporations need to find ways to account for and compensate the "firm-specific human capital" that is increasingly the basis for a company's competitive position. Current ownership models are based entirely on financial and physical capital, ignoring the tremendous investment companies have in training and retaining their employees. Blair argued that the owners of this human capital -- the employees -- have traditionally been paid for it in higher wages, with increasing pay for the same job categories going to more senior people. As companies are finding it difficult to pay these wages in competitive markets, they are laying off people, with an emphasis on encouraging departures of the most senior (highest paid people). Ultimately, Blair argues, this undermines the firm and the economy. Instead, she suggested, firms should pay people for their human capital the way they pay other owners, namely in stock.

Blair's recent book, Ownership and Control, has stimulated considerable discussion in economic and government circles, although she said she was more likely to be asked to discuss her ideas than to get feedback that they would be implemented.

Author biography and other columns in this series

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