Employee Ownership

by

Frank Shipper, Joseph Blasi

• LAST REVIEWED: 24 February 2021
• LAST MODIFIED: 24 February 2021
• DOI: 10.1093/obo/9780199846740-0199

Introduction

Narrowly defined, Employee Ownership (EO) is a mechanism for employees to have a financial stake in the enterprise. It can take many forms, including Employee Stock Ownership Plans (ESOPs), worker-owned cooperatives, perpetual trusts, profit sharing, Employee Stock Option Plans, gain sharing, Employee Stock Purchase Plans (ESPPs), grants of restricted stock units (RSUs) and performance-based equity shares, phantom stock, and mutual companies. As this practice has developed, the term has come to mean both financial and psychological engagement in the enterprise. Contrary to the academic ideal of theory leading to practice, theories regarding EO have been derived often from practice. Early studies that looked at only financial engagement produced mixed results relative to organizational performance. More recent studies that have studied simultaneously the impact of financial and psychological engagement have provided strong evidence that collectively there is a significant impact between them and organizational performance. EO with a high psychological engagement has also been referred to as shared capitalism, shared entrepreneurship, and democratic capitalism. Regardless of the terminology when done well, they have produced positive results for the organization, employee-owners, and society. One reviewer of a book on EO compared it to a Swiss Army knife because the authors claimed that it could increase worker productivity and commitment, reduce income and wealth inequality, and improve firm performance, sustainability, and employment stability. EO in practice is not always capable of perfectly achieving its goals, and many of the practitioners talk about it being a journey. Academics working on understanding EO and how, when, and where it works may be able to help practitioners achieve these results and more by suggesting the conditions and contingencies under which it works or does not work to achieve firm-level, employee-level, and society-level outcomes. Before proceeding, one thing that may distinguish this bibliography from some of the others in this collection is the number of practitioner sources. EO predates the formalization of management as an area of academic interest. Even after the establishment of management as an area of academic interest, EO appears to have developed more from the practice of business than from academic theory. When practitioners do acknowledge academic theory as a source of guidance, they tend to blend multiple theories rather than a single overarching theory of EO.

History and Trends

As noted, Employee Ownership (EO) predates the formal study of management. Baptista 2018 reports that the Basque whalers of the 16th century practiced profit sharing based on expertise of the individual. For example, the harpooner in the whaling long-boat received more than a rower. Once the boat was launched from the ship, it operated like an autonomous team. The harpooner and person on the tiller had to share leadership. Blasi, et al. 2018 details how in the 18th century, a form of EO, profit sharing, was practiced in the cod fishing industry of New England. Some of the founders of the United States favored profit and equity sharing because the ideals of some of them were based on broad-based property ownership by a lot of citizens who had a share in the capitalist system. By the late 19th century, the need for employees to work as a team was recognized by Jevons 1883. In addition, profit sharing was used in the United States and western Europe as documented by Gilman 1896. By the early part of the 20th century, a few business leaders were using various forms of EO with a high involvement culture, e.g., see Cox 2010 under Books by Practitioners. This trend continued in the latter half of the 20th century, e.g., see Iverson and Varian 1997, Stack and Burlingham 2013, and Mackey and Sisodia 2013 (all cited under Books by Practitioners. Blasi, et al. 2018 documents another trend related to the growth of EO, largely favorable public policy from the George Washington thru the Ronald Reagan administrations. In August 2018, a bill was signed by President Trump supporting EO, called the Main Street Employee Ownership Act, which was the result of bipartisan cooperation to reform the US Small Business Administration’s approach to the phenomenon. Whether this marks a return to favorable policy is unknown. A final trend is not so much a trend, but a roadblock to the growth of EO. Despite multiple calls for greater financial literacy in education, there is a lack of knowledge about profitability. Beauchamp, et al. 2013 reports that both the public as well as business students overestimate the percentage of profits per sales dollar. Many employee-owned enterprises and companies with different levels of employee shared ownership include financial education as part of their training and practice of open-book management. If more companies did the same, more people would have a basic understanding of how companies operate and be able to estimate profitability realistically.

• Baptista, F. “On the Hunt with the Basque Whalers.” National Geographic 234.2 (2018): 102–107.

  Profit-sharing is not new. For example, the Basque whalers of the 16th century practiced it. Upon returning to port, three groups -- ship’s owners, outfitters, and crew – each received a third of the value of the cargo. Prior to the voyage, the captain and master agreed upon their share with the owners and outfitters. The third allocated to the crew was split among them based on their position of responsibility.

• Beauchamp, C., W. Ford, and D. Tatum. “Evidence on the Growing Profit Disconnect between the Public’s Views of Corporate America.” Business Economics 48.2 (2013): 140–142.

  DOI: 10.1057/be.2013.5

  This study is based on survey results regarding people’s knowledge about profitability. The results found a lack of comprehension of what profits are and how much companies average. A significant portion of the sample were business students. They showed less knowledge regarding profits than others in the sample. In closing, the authors assert that improving people’s knowledge of functioning of business would improve the functioning of the economy.

• Blasi, J., D. Kruse, and R. B. Freeman. “Broad-Based Employee Stock Ownership and Profit Sharing: History, Evidence, and Policy Implications.” Journal of Participation and Employee Ownership 1.1 (2018): 38–60.

  DOI: 10.1108/JPEO-02-2018-0001

  This study traces the history of public policies on employee-ownership and profit sharing from Washington to the Obama administrations. In general, they were favorable until the second Bush and Clinton administrations. In addition, it documents the favorable impact that employee-ownership has had on employees, the work environment, the firm, and the economy. It closes with a call for favorable policies on employee-ownership and profit sharing.

• Blasi, J. R., R. B. Freeman, and D. L. Kruse. The Citizen’s Share: Putting Ownership Back into Democracy. New Haven, CT: Yale University Press, 2013.

  The idea of workers sharing in the financial success in the United States predates its founding. The authors trace this practice starting with the cod industry. This book is a history of US policy on the topic with a summary of current statistics on the prevalence of employee ownership and empirical research to date. Based on a ten-year study of these practices, the authors propose a policy plan for rebuilding the middle class.

• Gilman, N. P. Profit Sharing between Employer and Employee: A Study of the Wages System. Boston: Houghton Mifflin, 1896.

  This book is noteworthy because it discusses and documents profit sharing in France, Switzerland, Germany, Austria-Hungry, Great Britain, other European countries, and the United States in the 1800s. Gilman concludes that profit sharing is an equitable and satisfactory method for remunerating the capitalist, the employer, and the employee. In addition, he concluded that both employers seeking labor at a low cost and employees seeking a high price are shortsighted.

• Jevons, W. S. Methods of Social Reform: And Other Papers. London: Macmillan, 1883.

  In this book, Jevons included multiple essays. In the essay entitled “On Industrial Partnerships,” he warned about employees in one company linking their interests with employees of another company and employers linking their interests with other employers. He argued that interests in the industrial sectors should be vertical and not horizonal. In other words, employers and employees in one company should work together as a team to achieve common goals.