Ownership Culture and Strategic Adaptability

ABSTRACT Although abundant evidence demonstrates a positive relationship between employee ownership and firm performance, two questions remain unanswered: why does employee ownership fail to enhance the performance of some adopting firms, and what are the mechanisms by which employee ownership enhances performance? We argue that employee ownership has the potential to enable managers to shape organizational culture in support of firm strategy. In supporting firm strategy, employee ownership has the status of strategic choice. Further, to the extent that organizational culture is strategy-appropriate, it leads to competitive advantage by increasing the availability of resources, the serviceability of those resources to the firm, and flexibility in the allocation of resources to address competitive threats and opportunities. When managers of employee-owned firms are unable to create such a culture, the performance of their firms suffers as a result. INTRODUCTION Strategic management, often called 'policy' or nowadays simply 'strategy' ... includes those subjects which are of primary concern to senior management, or to anyone seeking reasons for the success and failure among organizations. Rumelt, Schendel, and Teece (1991) Why do employee-owned companies perform better, on average, than conventionally-owned companies? And why do some ESOP companies perform better than others? Employee ownership, also called "shared capitalism" (SC), or "earned capitalism" (EC), a term that includes employee stock ownership plans (ESOPs) stock purchase plans, profit- and gainsharing plans, and broad-based stock options (Kruse, Freeman, and Blasi (2010), is a management practice that has been utilized by firms for decades. (1) Partly a tool of corporate finance, and partly a tool of human resource management, ESOPs have become a small yet significant part of the economic landscape. Congress created the ESOP in the 1974 Employee Retirement Income Security Act (ERISA), which established the legal basis for ESOPs as a defined contribution retirement plan. Laws and regulations pertaining to ESOPs are regularly considered by Congress and reported in the press. During the last two decades, the number of ESOP firms has held steady at around 10,000 firms (NCEO, 2008). ESOPs have a dual nature. On the one hand, they are a tool of corporate finance. For instance, the law permits the employee stock ownership trust (ESOT) to borrow money for the purpose of purchasing shares. As such it is a mechanism for raising capital or restructuring the balance sheet. And, they can be used to alter the governance structure of a company. However, as a tool of human resource management employee ownership has the potential to have a much greater impact on firm performance than do alterations to the right-hand side of the balance sheet. This is the basis of our discussion. There have been a large number of studies attempting to show that EO activities "work"--that they have results that are beneficial to a firm's overall results. A considerable body of empirical work has demonstrated a positive link between employee ownership and firm financial performance (to be discussed in detail below). Research has also demonstrated some positive effects of EO programs on individual attitudes and behavior (to be discussed in detail below). While both of these lines of research are promising, there is a gap in the theoretical basis of this work that limits its usefulness. Specifically, there is a need for a clearer delineation of the mechanisms by which EO programs work at the individual level in motivating employees and yet are seen as contributing to significant firm level performance outcomes. Explanations tend to point vaguely at factors such as increased motivation, culture, information sharing, even a multi-period prisoner's dilemma, but generally lack detail. To compound the deficiency, no theory of which we are aware addresses the question of exactly how individual-level outcomes produce firm-level outcomes. …