Best Candidates for Employee Owned Companies
Having at times been a bit critical of my co-contributor Joe’s enthusiasm for Employee Owned Companies (EOCs) and “economic democracy” in general, it seems only fair that I spend a moment looking at the good sides — and there do definitely seem to be good sides to the employee owned company model.
Being entrepreneurially-minded, employee ownership is certainly not something that I’m in principle opposed to, it’s more that I think it probably works well in certain situations, but is not a panacea.
Where It Doesn’t Work
It seems to me that certain business characteristics will make it particularly hard for EOCs to prosper. This does not mean that employees at such companies should not have company issued stock, but the amount of stock distributed to employees by the company should probably be limited to the traditional 10-20% maximum.
Companies which require large amounts of capital investment (early stage startups which are trying to grow very fast, research-intensive companies) are generally not going to be good candidates. The traditional return for investment is stock — either by the general investing public through a public stock offering, or through specific investors in a privately held company. Such companies often reserve a portion of stock for issue to employees as an incentive (or sell to them at a discount via stock options) and have company performance based compensation, but their need for capital makes it impossible for them to reserve 50%+ of company stock for employees.
Companies which are attempting to achieve very high growth and which are thus at very high risk of failure are also poor candidates for being employee owned. Again, such companies often offer stock or options to their employees, but they need the vast majority of the stock to give to investors. Further, employees at such a company often will prefer higher salaries to investment in the company — since the employees know their jobs are already at risk due to the riskiness of the company, they won’t want to increase their risk by having their earnings tied up in company stock. They would much rather have higher salaries and invest those salaries in a diversified fashion, so that if the company goes down, they can at least still have the money. Stock options are popular at such companies, because the employees can wait to exercise those options till they see if the company is going anywhere.
Those first two are probably pretty uncontroversial, but these latter two suggestions may be more controversial for EOC advocates:
Companies which rely heavily on good creative direction strike me as poor choices for employee ownership and the democratic management style that seems to suggest. Examples that spring to mind are Apple, Google, Amazon, movie studios, investment banks (though these may be best as limited partnerships — owned entirely by a small subset of employees who have achieved “partner” status), advertising agencies, fashion companies, architecture firms, cutting edge design or product development firms, etc. The success of such companies rely heavily on the creativity of the management team, and so they’re naturally going to be strongly top-down organizations. Democracy is much better at inertia than creativity, and thus the top down structure. And relying heavily on the creativity of key management (and coming up with a corporate structure and culture which will channel the creativity of individual contributors) creates risk, which again makes it a bad investment for employees (who would be thus accepting too much risk) and a good one for investors who are investing in multiple companies in order to mitigate risk.
Very large companies (for example, the one I work for has 75,000+ employees) also seem like a poor choice for worker ownership, because although there may be democracy mechanisms in such a company, an individual worker’s vote is not going to count for much with so many employees. And individual worker is also unlikely, in a large and complex company, to understand functions other than his own all that well. As such, his voice neither has much impact nor does him much good – and so he’s probably better off being compensated in the form of salary and investing broadly in a 401k rather than having his earnings tied up in an employee stock fund. Because of the company size, if the company is being badly run, he’ll be able to do little about it and may not even know the difference.
Where It Does Work
I’ll start here with an example of an employee owned company that I buy from roughly every other week, the King Arthur Flour Company. While King Arthur Flour has certainly enjoyed outstanding growth — going from five employees in 1990 when it became an EOC after over a hundred years of family ownership to 160+ employees and $70M in annual revenues now. However, providing high quality flour to a nation-wide market is not the sort of business which could provide the kind of huge and unlimited growth which a publicly owned company would need to seek. And employee ownership provides the sense of employee responsibility and commitment to quality to every single employee which previously only the members of the owning family would have had. This is truly the best approach for a company like King Arthur.
Many other small to mid-size companies could do very well as either fully employee-owned, or equally split between the founders and the workers: companies which require a strong commitment to quality and responsibility from all employees, and which are fairly “flat” (and thus visible to all employees) in product breadth and strategy. Small service companies might do especially well here: maid services, mechanic shops, barber shops, etc. Also retail stores or chains.
There’s also the most advantage to be gained by employees in working for a company such as this that’s employee owned, as small (say: under 500 employees) services or retail companies often have some of the most obvious inequality. For instance, I recall one of the salesman at the small chemical distribution company I worked for back in California (itself a good example of workplace inequality, with a 25-person company having a salary range of 25k to 400k) talking about why he hired someone directly to come clean his McMansion every week rather than a maid service: because he paid her $30/hr to come clean two hours a week, while if he’d hired a maid service they would have charged the same amount while paying their workers $7/hr. The fact that many of those who are willing to clean houses cannot speak very good English or keep clear accounts or file government paperwork gives the person who organizes the business great leverage in terms of salary over those who actually provide the service the business is in business to sell. And yet, so long as the company should achieve a certain fairly modest minimum size (getting there would require the help of someone willing to be other than strictly self interested) an employee owned maid service company could afford to pay a small office staff the going wages for that kind of work while still giving more money to the actual workers than is common.
In a case like that, reducing the inequality between workers and owners/management in a small company would provide a much greater gain for the workers than in a large corporation notorious for low wages such as Wal-Mart. Although people often decry Wal-Mart’s pay practices, the fact is that if you look at the total corporate profits and executive compensation and the number of employees — distributing all the profits among employees and reducing executive compensation would actually only provide a couple hundred dollars per year (an amount people would love to have, but realistically only 20-30 per month) in benefit to each employee. Competition at that level of business is intense enough to keep the profits pretty tight, and so turning the company employee owned and increasing wages to the level people would want to vote themselves (unless it involved laying off a lot of employees and increasing the productivity of the remaining ones) would probably just result in the whole company faltering to the detriment of all.