Playing ‘catch up’ with the US

A promising future for employee ownership in Australia?

Alan Greig from The Mercury Centre is a PWF guest writer. The following article will be published in the Australian Employee Ownership Association (AEOA) August News.

If the breadth of employee ownership developments in the US over the past 25 years – as described below – is any indication, then the future looks very promising for employee ownership in Australia (where we could only describe ourselves as being in “the beginning phase”).

Several trends however make similar developments look likely here. These include: more people reaching an age where they will sell their business, the growing need to get employees involved in decisions and the tightening markets for skilled labour. These all suggest that employee ownership will play an even larger role in Australia in future.

Back in 1981 in the US (at the time of the formation of the National Center for Employee Ownership – NCEO), Employee Share ownership Plans (ESOPs) were almost entirely about finance and benefits, not about corporate culture.

Research then undertaken on employee ownership – which was done by the NCEO as one of its first tasks – showed that, by themselves, ESOPs had no real impact on performance. Only when companies combined ownership with open book management and employee involvement in work-level decisions did it really make a difference. At the time, many were convinced that companies would not want to make these often difficult cultural changes. Over time however, the stories about the companies that had these cultures convinced those that didn’t that this was the right way to go.

As a result, employee ownership has become anything but “rare”. In 1981, there were a few million employee owners, mostly in ESOPs. Today, there are about 11 million ESOP participants, but there are also about 8 million non-management employees who get share options or other forms of ownership rights directly, nearly 15 million who buy shares in employee share purchase plans, and 4 million who have more than 50% of their assets in 401(k) plans invested in employer shares. Because, many of these plans overlap, the total number of people who own shares is not simply the sum of each of these, but rather about 25 to 30 million employees, or about 39% of all employees who work for employers with shares. Companies are also putting a lot more into plans than previously, with most ESOP companies now contributing more than 5% of pay.

ESOPs also own much more of the companies that sponsor them. Early on, ESOPs were often used to buy small amounts of shares in public companies and minority stakes in “closely held” private and unlisted companies. While ESOPs did buy a majority in some companies, today that trend has accelerated substantially, with about a third of ESOPs owning a majority. That percentage is increasing and could reach more than 50% of all plans in coming years.

This trend is reflected in the recently released “Employee Ownership 100” in the US. This list shows that Publix Super Markets, with more than 136,000 employees topped the list of the largest majority owned companies in the US. To qualify for this list, companies must have at least majority employee ownership (more than 50% of the employees owning more than 50% of the shares). In 2006, the smallest company of the “Top 100” had 930 employees, compared to 900 in 2005 and 700 in 2004. Total employment for the top 100 companies was 550,182 compared to 505,675 last year and 421,688 in 2004. This is a lot of genuine “employee owners”.

The range of companies represented is also very broad. There were 16 manufacturers, 15 companies doing some kind of engineering, 13 supermarket chains and 10 construction companies. There were also other types of companies represented from restaurant chains like Round Table Pizza and Hot-Dog-on-a-Stick, to an executive protection service (Vance International) to high tech companies such a Science Applications International (SAIC) and W.L Gore and Associates.

The list reflects the continued penetration of majority (mostly 100%) ESOPs into large companies, as well as the expansion of many existing ESOPs, often through acquisitions.

The full “Employee Ownership 100” list can be seen at: http://www.nceo.org/library/eo100.html

(Data sourced from: “Employee Ownership Report”, July/August, 2006, published by the National Centre for Employee Ownership in the US – www.nceo.org ).