Research finds employee owned business model offers greater resilience
Businesses owned by their employees have proved more resilient than other companies in the downturn, according to new research by Cass Business School. The study also reveals that employee owned businesses (EOBs) tend to create new jobs more quickly and typically outperform those companies in which employees do not have an ownership stake.
The research was conducted by Joseph Lampel, Professor of Strategy and Entrepreneurship, and Dr Ajay Bhalla, senior lecturer in Information and Knowledge Management, at Cass Business School, London. The findings were based on a survey of more than 60 senior executives, and financial data from more than 250 firms.
“The advantage for EOBs comes from taking a stakeholder rather than a shareholder view of management. Employees who have a stake in the company they work for are more committed to delivering quality and more flexible in responding to the needs of the business,” said Dr Bhalla.
In Britain businesses wholly or substantially owned by their staff are estimated to turn over £25 billion a year, or about two per cent of the UK GDP. In the Middle East employee owned businesses are less common due to the local ownership regulations. However, some international companies such as leading management, engineering and development consultancy Mott MacDonald have extended their EOB model to the Middle East, where they are experiencing much success.
Paul Looker, from Mott MacDonald comments: “In the Middle East at present many of our publicly owned competitors have been under stress with their stock market positions, so being structured as an employee owned business has been a major benefit for us.”
“The EOB model has aided our growth in this market, as expansion is financed through the company funds with a confirmed policy of growth decision making. The model also provided us with more resilience during the economic downturn. We have been able to support our clients through difficult times, with a view to long term business relationships.”
The research documents how EOBs create jobs faster than traditionally structured businesses, with an average increase in employment of nearly 7.5% per annum from 2005-2008, compared with 3.9% in non-EOBs. This rate escalated during the recession (2008-2009), with 12.9% employment growth in EOBs compared with 2.7% in non-employee-owned businesses.
From the research, it has also been shown that EOBs are more resilient, with more stable performance over business cycles and less sales variability. From 2005 to 2008, non-EOBs experienced higher average sales growth per annum than EOBs (12.1% vs. 10.0%). However, the average sales growth of EOBs during the recession (2008-2009) was 11.08%, significantly surpassing that of non-EOBs at just 0.61%.
According to Professor Lampel, “Resilience - the ability of firms to sustain employment and growth during difficult economic conditions - has been neglected as a crucial aspect of company performance over the past two decades. Instead, business strategy and public policy have been dominated by an unremitting focus on maximising share value. In the current economic conditions, business leaders and policy makers should be looking again at the resilience associated with the employee ownership model - and how it could benefit economies as a whole.”
The new research also reveals some key barriers to the growth of employee-owned companies, including how to retain the advantage of a potentially more committed workforce, as the business grows bigger and more complex.
“Increasing size could put greater distance between frontline employees and senior management. It could also make it more difficult to maintain inclusive decision-making without sacrificing the speed and flexibility that is essential for high performance in today’s dynamic commercial environments. EOBs who can adapt their organisational structures and employee involvement, as the business grows, are more likely to sustain their performance,” says Dr Bhalla.
The report also finds that some EOBs have difficulties obtaining favourable financing from institutions that are more accustomed to dealing with listed companies, and that they also face more regulatory and policy challenges than businesses with other ownership structures.
Despite these challenges, in the wake of the financial crisis the study suggests that the strengths of the employee-ownership model – such as accountable management, a happier workforce, closer alignment of risk and reward and a fairer distribution of profit – could help to build a “fairer form of capitalism” with a greater culture of responsibility and trust.
Cass Business School
Cass Business School is one of City, University of London’s five Schools. It’s among Europe’s leading business schools and in the global elite of business schools that hold the gold standard of ‘triple-crown’ accreditation.