How Loyal Are Your Employees?

Employee stock ownership enjoys great popularity among its advocates. According to a more recent study by Tower Watson, 72% of the 50 largest publicly listed European companies have introduced employee stock ownership plans (ESOP). Even though the numbers vary a lot across European countries the European Federation of Employee Ownership (EFES) reports that in Europe there are about 9.9 million employees holding the equivalent of 232 billion euro in their companies’ shares. Similarly, the US National Center for Employee Ownership (NCEO) reports more than 10,000 employee stock ownership plans covering 10.3 million employees which adds up to 10% of the private sector workforce.

ESOPWhen employee ownership plans are introduced along with participative management techniques, companies with employees who “think and act like owners” are found to outperform companies that shy away from introducing employee ownership. Increases in company performance and viability are attributed to strengthened employee loyalty and commitment to the company and to dampened turnover and absenteeism accompanying employee ownership.

It is not least because of increased loyalty and commitment that shareholder mix campaigns advocate an increase in employee ownership. In fact, employee owners due to their increased loyalty are viewed to use their ownership rights to vote with (current) management. However, while many researchers and practitioners view labor as “naturally allied” with management numerous anecdotal evidence suggests this is not always the case. For example, in 2010 more than half of all UBS employee shareholders declared they will not approve of the board’s actions at the company’s annual general meeting contributing to a “sensational” 58.2% of opposing votes. In this case thus employee shareholders instead of demonstrating loyalty to management seem to have followed the lead of Ethos, the most prominent and most censorious local proxy advisor. Clearly, employee shareholders’ behavior is not obvious and their unequivocal loyalty to management must be questioned.

An inquiry into employee loyalty towards the company must thus take into account 1) the subtle interplay between financial and other incentives and 2) the nature of loyalty and identification that employee ownership induces. Above a certain threshold and relative to employees’ personal wealth, employee owners may decide to sell their shareholdings and realize financial gains which may translate into loyalty to a party other than incumbent management (think unfriendly takeover!). Moreover, the heightened organizational identification that arises from employee ownership may induce risk aversion and defensive behaviors among employees that translate into boycott of decisions and resistance to change. Clearly, employee ownership plans to deploy their  beneficial and desired effects must be carefully thought through, introduced, and communicated in organizations.