The Employee Ownership Update
September 24, 1998
Unions Reject Employee Ownership Bid at Philippine Airlines; Company ClosesA last-ditch attempt to solve a pilots' strike by offering unions 20% of Philippine Airlines has failed and the airline has shut down operations permanently. The company had been in serious financial difficulty and had a long history of labor problems.
Study Shows Broad Ownership Helps Stabilize IPO CompaniesA 1997 study by Theresa Welbourn at Cornell University has found that companies that do an initial public offering and offer stock ownership to most or all employees are more likely to survive than companies with narrower ownership. Welbourn analyzed the 128 non-financial goods-producing companies that initiated an IPO in 1988 for which complete data were available. She found that by 1993, 40% of the companies were either out of business or absorbed into another entity. The data showed that broad employee ownership through stock options, ESOPs, or other plans was significantly (in the statistical sense of the term; that is the results are not likely to be random) correlated with the likelihood of survival, while companies with executive ownership only were neither more nor less likely to survive. The data do not allow us to say, however, that the employee ownership group were "x%" more likely to survive.
The data also show that there is no relationship between broad employee ownership and stock price, one way or the other, but that there is a large and negative correlation between CEO ownership and stock price and a negative correlation between executive ownership in general and stock price.
Welbourn's data indicate that the median percentage ownership by executives was 15.6%, by executives as a group 38.3%, and by broad-based plans as just .61%.
CNN to Air Story on Broad-Based Options October 7CNN's "Newsstand" will air a story on broad-based options on October 7. The show generally appears immediately after "Larry King Live." NCEO director Corey Rosen was interviewed for the story. Other events, of course, may change the planned airing.
Scott Forge Thrives as ESOP CompanyScot Forge in Spring Grove, IL, is one of the oldest ESOPs, with a plan dating back to 1978. The metal forging company was founded in 1893 and sold to an ESOP when the then-current owner decided to use the plan as a means to provide a market for his shares. The ESOP acquired the shares gradually over a period of 11 years and now owns 100% of the company. Employees have full voting rights and representation on the company's board. Monthly luncheons provide an opportunity to review the company's financial performance. Employees get dividends on their shares and bonuses paid out three times a year. Since the ESOP was established, stock value has gone up 16.7% per year. In 1997, the company had average sales of $317,000 per worker compared to $150,000 for the industry overall.
Stack Says Ownership Is the KeyJack Stack, CEO of Springfield ReManufacturing Corporation (SRC) and author of The Great Game of Business, told an 800-person audience at the fifth annual "Gathering of the Games" conference (a meeting on open-book management) that sharing ownership broadly with employees was the key to making open-book management work, and might be the only way to address growing inequities in wealth worldwide. Stack related his experience with broadened ownership at SRC, one of the country's most successful and widely-imitated industrial models. He said that the most difficult challenge was providing meaningful ownership opportunities for employees coming in after the initial transaction. He noted that the share price in many start-up or buyout situations can go up rapidly, then level off to a more sustainable growth rate. Early employees get a windfall, but more recent employees may wonder what all the fuss is about. Stack suggested helping employees form their own spin-off businesses as one approach to address the problem, but said that one of the challenges for SRC was how to find other ways as well.
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