Superior performance demands vested interest: Why employee ownership is the foundation for high performing organisations
Organisations are typically formed as corporations and are investor owned, characterised by a separation of ownership from staff and management. While this structure has some benefits, it creates agency problems as the objectives of the owners (stock/shareholders) differ from that of staff and management. Shareholders seek to maximise their return, which is generally achieved by minimising wage expense relative to outputs and the efficient use of capital. Employees on the other hand, benefit from higher wages and the conservative use of capital.
It is often supposed that agency problems can be addressed by the application of financial rewards: basing employee salaries on role/competency/seniority, performance based rewards such as gain-sharing or profit-sharing arrangements, balanced scorecard systems, or share options. The inherent problem with these schemes is that they do not resolve the agency issue; they merely attempt to establish a series of common short term objectives while often encouraging other dysfunctional behaviours.
Investor Owned Companies vs. Employee Owned Companies
Employee owned business models are often regarded as curiosities, and receive limited attention in business schools and literature; they are nonetheless a significant form of business structure. The 300 largest cooperatives for instance, represent nearly 800 million people in 92 countries with combined revenues of nearly $US1 trillion in 2004 (Chesnick & Liebrand, 2007). Yet investor owned companies are still overwhelmingly the dominant form of structure, despite being characteristically short term focused, profit driven, externalising, lacking in innovation and subject to top down control by managers who often extremely remote from their customers. Employee owned companies by comparison, are innately long term focused, socially committed, innovative and are controlled from the bottom up by staff who are actively engaged with their customers – all the things that investor owned companies strive to be, but often fail to achieve.
The direct correlation between employee satisfaction and performance with employee ownership has been conclusively established. Previous research has found that employees who participate in the ownership of an organisation are more loyal, work harder, are more involved, more productive and are more likely to make suggestions for innovation (Jones, 1987) (Blasi & Kruse, 2010). Studies into Employee Share Ownership Plans (ESOP) found that employee satisfaction with such schemes were directly correlated to influence in decision making, a sense of involvement and financial gains (Klein & Hall, 1988), hence demonstrating a positive correlation with the desire of employees to be involved with the management of the companies they work for.
Clearly then there is a benefit to allowing employees to actively participate in the ownership of a company. It establishes a foundation of mutual benefit and trust, that is not present with investor owned companies.
Creating a High Performance Culture
The creation of a high performance culture is often regarded as being a vital aspect for organisational success (Kaliprasad, 2006). The characteristics necessary in creating a high performance culture within an organisation include a dedicated workforce with a sense of ownership and purpose, organisational fairness and integrity, and who feel their contributions are valued. The focus of the organisation should be on the “big picture” and its members should feel a sense of responsibility toward each other and not simply to management.
Consider the intrinsic effect of employee ownership models. These characteristics are the underlying position for such models. By default, individuals within an employee ownership model must focus on the larger overall objectives of the organisation as this is intrinsically linked to their individual objectives. The underlying sense of ownership and purpose is tangible, rather than an artificially imposed concept. Members are obligated to each other for their shared outputs –they are there to achieve organisational outcomes for their own purposes, not those of someone else. Perceived inequities between organisational levels, both financial and emotional, are also diminished when all parties share in the benefits of the organisations outputs – especially where any such imbalances that do exist are a result of visible achievement.
By comparison, in investor owned businesses, the employee-employer relationship is based purely on the expectation of mutual benefit. There is a default limited degree of trust between parties, who are each inherently motivated to act in their own best interests, often at the expense of the other. Once the supposed mutual benefit begins to favour one at the expense of the other, the relationship breaks down. That is why employee-employer relationships are often heavily regulated - to provide a disincentive to act on imbalances in power and information asymmetries.
Employee Ownership the Learning Organisation
When measuring organisational success over the long term, superior performance demands superior learning (Senge, 1990). However, investor owned companies traditionally seek to withhold information from their employees, denying their natural curiosity and impairing their ability to learn. Consider the words of W. Edwards Deming: “Our prevailing system of management has destroyed our people. People are born with intrinsic motivation, self-esteem, dignity, curiosity to learn, joy in learning.”
A learning organisation requires the ability to communication openly. In a traditional hierarchy with responsibilities to third party shareholders, this is difficult to achieve. Investor owned companies are conservative and value control, the content of communications are usually filtered for the reader, internal criticisms are usually censored, external criticisms result in disciplinary action. Enabling positive criticism provides a path for growth and a forum for organisational members to discuss relevant issues. Failure to provide such a forum only encourages negative criticism; whether in a public or discussed privately amongst likeminded parties. Neglect breeds contempt.
Learning organisations also require a degree of freedom to experiment, take chances and make mistakes. Some companies realise this allowing staff members to devote a portion of their paid time to experiments and developmental projects, with the short term focus in investor owned companies, typically creates demands that such initiatives be eliminated when budgetary pressures are applied. But such short term thinking ultimately comes at the expense of longer term performance.
Consider also this perspective from the employees’ perspective. The nature of the employee-employer relationship is essentially founded on the employee selling their labour and acquired skills and abilities to the employer. Consider where the employee has gained specialised skills in a field of expertise and their motivation to share that information with other members of an organisation.
In a traditional setting where the employee is a mere paid servant to a third party owner, the shrewd employee, in order to maximise their own inherent value, should withhold information so that the employer will always have need of that employees services and will be forced to pay a premium for those services. Where the employee shares equally in the ownership of the business, the imperative to withhold that information is diminished, yet they may benefit from sharing that information to the extent that it furthers the organisations objectives.
Employee Ownership and an Intrinsic Motivator
Employees who fully participate in the rewards of organisational outcomes are directly and fully motivated by their achievements. This is supported by expectations theory (Lawler, 1973) which provides us with a model for linking effort to performance and performance to outcomes. This tells us that an employee working in an organisation will be encouraged to apply more effort when it directly translates to greater performance, which in turn translates into a positive outcome valence – an outcome that the employee desires.
Expectation theory also suggests that where an employee must share the organisational outcomes with a third party, that they will be less motivated to perform ceteris paribus than an individual who gets to fully enjoy the rewards from their effort. Furthermore, employees whose reward is irrelevant to performance, i.e. a salaried staff, will be ambivalent towards their performance beyond that which is sufficient to maintain their employment.
Another perspective is provided by Distributive Justice and Equity Theory. Where an individual perceives inequity and or feels under rewarded, they can engage in behaviour they feel will correct the inequity, such as reducing their performance to match their perception of outcomes, reduced organisational citizenship, engage in petty theft and absenteeism. Simply put, an individual disenfranchised with perceived organisational reward imbalances, would lack motivation to perform to their maximum capability.
Ownership Models and Inequity
Consider that the majority of the world’s population are typically middle class and must work to support themselves. In addition, they must often support the lower classes (through taxation and benefit systems). On top of that, they must work to support the organisations to which they belong but often do not have an ownership interest in.
While it may be favourable for some to claim that employees working for some (especially public) companies have an opportunity to participate in ownership, in reality the majority of share capital is densely and disproportionately attributable the upper classes of society. It is presumed that a feature of capitalist society is equality and unlimited opportunity for all - however this is not necessarily the case. The concept of the “meritocracy myth” (McNamee & Miller, 2004) suggests that while factors such as hard work, talent and education will quid pro quo result in greater individual income and wealth, that factors such as ethnicity, gender, social connections and luck are far more significant in an individual’s long term financial success. Most significantly, being born into an already wealthy household is a critical determinant in individual wealth with wealthy families usually retaining such wealth for generations and completely independent of any effort by the heirs/heiresses themselves.
Not only is this inherently de-motivating, the establishment of a true organisational democracy is impaired as long as imbalances of power and conflicts of interest exist. A peer group cannot form a natural organisation when such imbalances exist within the organisation. The members of the organisation will be forced to defer to the whims of a dominant shareholder. Indeed what motivation would a dominant shareholder have to relinquish control and share their wealth? Where shareholdings are based systems of merit and relative equality, no such impediment would exist.
Employee Ownership and Organisational Direction Setting
Traditionally, businesses are controlled via a conservative hierarchical structure and a top down focus, by managers and board members. Employees and middle management meanwhile are forced to “manage up” making decisions that are defensible to higher levels in the organisational hierarchy. The underlying assumption of such a model is that the top is capable of doing all the thinking within the organisation, while the lower organisational levels carry out the work. In the context of globalisation and multinational businesses, this is simply an unrealistic expectation (Senge, 1990).
The alternative approach to a top down strategy setting process is emergent strategy (Mintzberg & Waters, 1985) or strategic incrementalism (Quinn, 1978). This approach recognises that it is impossible for all strategic decisions to be made by senior management and board members alone in an ivory tower, independent of the remainder of the organisation. Rather, it must be the objective of senior management and the board to establish broad overall organisational objectives and system constraints, fostering an atmosphere supportive to the development of self-organising groups, and providing guidance while delegating authority and decision making powers throughout the organisation (Stacey, 1993).
This type of decentralised organisational structure is well documented with such methodologies as self-directed work teams and organic organisations. However, large organisations are by their very nature conservative, and seek compliance over novelty and risk taking (McNamee & Miller, 2004, p. 148). Consequently, in traditional investor owned companies, short term pressures can create the temptation to return to a traditional top down structure. Under the longer term focus of employee ownership models, short term pressures can be looked through, and ultimate power and responsibility remains vested with the employees.
A well implemented employee ownership model provides a foundation for establishing commonality between employees and the organisation. It is then necessary to grow on that foundation and foster the creation of a supportive environment. As this starts to develop:
- The “us and them” mentality of a line drawn between staff and management will dissipate, as the perceived importance of roles diminishes.
- Employee motivation and loyalty will begin to increase as they release they benefit of such an arrangement.
- Information will begin to flow more freely and honestly throughout the organisation.
- The members of the organisation will begin to influence the direction of the organisation by their collective wisdom.
- The members will experience a common sense of achievement, and will take enjoyment from each other’s success.
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