OWNERSHIP CULTURE AND STRATEGIC

ADAPTABILITY
Peter B. Thompson
University of Illinois at Chicago • Chicago, II
Mark Shanley
University of Illinois at Chicago • Chicago, II
Abagail Me Williams
University of Illinois at Chicago • Chicago, II

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 perfor-
mance? 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 con-
ventionally-owned companies? And why do some ESOP companies perform better
than others?
Employee ownership, also called "shared capitalism" (SC), or "earned cap-
italism" (EC), a term that includes employee stock ownership plans (ESOPs) stock

146 Journal of Business Strategies

purchase plans, profit- and gainsharing plans, and broad-based stock options (Kmse,
Freeman, and Blasi (2010), is a management practice that has been utilized by firms
for decades.'
Partly a tool of corporate finance, and partly a tool of human resource man-
agement, 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 re-
tirement 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 fi-
nance. For instance, the law permits the employee stock ownership tmst (ESOT) to
borrow money for the purpose of purchasing shares. As such it is a mechanism for
raising capital or restmeturing the balance sheet. And, they can be used to alter the
govemance stmcture of a company. However, as a tool of human resource manage-
ment 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 activi-
ties "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 em-
ployee 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 mecha-
nisms 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.
This gap in the research is due to scholars approaching the topic from differ-
ent disciplines and from studying the ownership phenomenon from a single level of

'For a typology of employee ownership, see Toscano, 1983; Ben-Ner and Jones, 1995.
^For details of the financial, tax, and other technical characteristics of an ESOP, Smiiey, Giibert, Binns, Ludwig, and
Rosen (2007) present an excellent discussion.

Volume 30, Number 2 147

analysis. Because an empirical demonstration of (a) multi-level linkage(s) would
be a monumental undertaking, requiring the simultaneous collection of data from
two levels of analysis—individual-level and firm-level—and from a large sample
of firms, it is not surprising that this knowledge gap persists. To our knowledge, this
multi-level feat has been attempted only rarely (Klein, 1987; Kruse, Freeman, and
Blasi, 2010; Rosen, and Quarrey, 1987; Rosen, Klein, and Young, 1986). Practical
obstacles such as collecting individual-level data from a large number of firms have
to date limited researchers' progress in describing the complete causal chain linking
these programs with corporate performance. As a consequence of the practical dif-
ficulties of uncovering causal mechanisms, the nature of those links remains a mat-
ter of speculation. The employee ownerships-individual outcomes^firm outcomes
linkage is a complex phenomenon that is not fully understood and not every study
has shown a positive relationship (Kruse, Freeman, and Blasi, 2010).

BACKGROUND-EMPLOYEE OWNERSHIP RESEARCH
Employee ownership, whether realized in ESOPs or other forms, has been
studied from multiple perspectives.^ It has been treated extensively by political sci-
entists (e.g., Al-Saigh, and Buera, 1990; Alperovitz, 1997; Bradley, 1986; Dugger,
1987; Gibson-Graham, 2003; Gunn, 2000; Howe, 1986; Miller, 2003; Mygind and
Rock, 1993; Steinherr, 1978); philosophers (e.g.. Mill, 1871, 1998; Miller, 2003)
sociologists (e.g., Whyte, and Blasi, 1982, 1984) ; economists (e.g., Ben-Ner, 1988,
Blinder, 1990; DoucouHagos, 1990, 1995; Fama, and Jensen, 1983; Kruse and Blasi,
1997; Kruse, Freeman, and Blasi, 2010; Vanek, 1976) legal scholars (e.g., Ellerman,
1984; Hansmann, 1990), and management scholars (e.g.. Conte, and Svejnar, 1990;
Klein, 1987; Pierce, and Rogers, 2003) Pierce, Kostova, and Dirks, 2001; Pierce,
Rubenfeld, and Morgan, 1991; Rousseau, and Shperling, 2003).^
In addition, a vigorous practitioner literature extols the virtues of employee
ownership (e.g., Brohawn, 1997; Gates, 1998; Quarrey, Blasi, and Rosen, 1986;
Rosen, and Carberry, 2003; Rosen, and Rodgers, 2007, 2011; Rosen and Young,
1991; Rosen, Klein, and Young, 1986; Rosen, Case, and Staubus, 2005; Young, Ros-
en, and Carberry, 1995). The central question motivating the bulk of this work is the
relationship between employee ownership and firm performance.

The authors wish to thank the following for their heipfui suggestions: Ginny Vanderslioe, Corey Rosen. Anne-Laure
Winkler, and Jack Veaie. Thanks also to our anonymous reviewers for their insightful comments.
^There are several excellent reviews of the employee ownership / shared capitalism literature, including for example,
Blasi, Conte and Kruse, 1992; Bonin, Jones and Putterman, 1993; Carberry, 2011; Freeman, 2007; Kruse and Blasi,
1997; and the introduction to the monograph by Kruse, Freeman, and Biasi, 2010).

Nock and Toscano. and Perry. 1982 Buchko. 1981. Hochner. 1982 Kruse. Klein. 1989 Buchko. 1980 Rhodes and Steers. 1985 Hammer and Stern. and Perry. and Perry. 1981 Russell. and Young. 1980. Stern and & Gurdon. 1979 Long. 1980 Hammer. 1982 Tucker. 1980 Oliver. ESOP Satisfaction Goldstein. 1982 Long 1978a. 1978b. 1981 Russell. 1978 Employee Ownership Hammer. Nock and Toscano. 1984 Long. 1988 Rosen. 1982 Keef 1994 Long 1978a. Hochner. 1979 Sockell. 1986 Perceived and Desired Influence Under Goldstein. 1984 Rhodes and Steers. 1979 Long. 1979 Organizational Commitment / Identification Hammer. Hochner. 1982 Rhodes and Sfeers. 1984 Long 1978a. 1979 Would Take the Same Job Again Russell. 1992. 1989 French and Rosenstein. Sfern and & Gurdon. 1984 Russell. 1982 Kruse. and Perry. 1993 Klein and Hall. Stern and Gurdon. 1990 Motivation. 1993 French and Rosensfein.148 Journal of Business Strategies Table 1 Employee Ownership Outcomes Individual Level Outcome Authors Satisfaction Greenberg. 1978 Kruse. 1984 Oliver. Hochner. 1979. 1978b. and Perry. 1984 Tucker. 1981 Russell. 1978b. Hochner. 1980 .

1986. 1995 Bloom. and increased . on av- erage. 1992. Blasi. However. Volume 30. 1993 Kruse.'' Firm-level outcomes associated with employee owner- ship include reduced turnover. raising the question—"Can ESOPs be a source of sustainable competitive advantage?" Studies at the firm level of analysis document an employee ownership^)- performance link. and Blasi. Freeman. and Jampani. 1992 Kumbhakr and Dunbar. Tardiness. 1995 U. S. ESOP research has also demonstrated that the linkage between ESOP firms and superior outcomes is espe- cially strong when employee ownership is combined with participatory manage- ment (Kruse. while individual-level studies tend to focus on the employee ownership^positive attitudes link. Injuries Buchko. 1986 Tobin's Q. Landau. tardiness and injuries. Kruse. remains obscure. 1993 Return on Assets. S. Empirical studies have overwhelmingly shown a link between ESOPs and positive firm performance. 1995 Conte. Absenteeism. Value Added Bell and Kruse. although how it affects firm performance remains an open question. namely the mechanisms whereby employee stock ownership enhances organizational outcomes. absenteeism. Quarrey. Gov't Accounting Office. 1992. Klein. 1993 Profitability Mitchell. (The divide between the individual-level and the firm-level streams is evident in Table 1. 1992 Saies. and Lawler. Blasi. 1986). Gov't Accounting Office. the nature of that relationship. Number 2 149 Table 1 (cont. 1990 U. better than non-ESOP firms. 1984 Rooney. Rosen. 1988. 1993 Hammer.) Employee Ownership Outcomes Firm Level Turnover. Market Return Bell and Kruse. 2010. 1995 Kruse. and Rosen. and Sales per Employee Bell and Kruse. and Stern 1981 Kruse. The assertion that employee ownership is associated with superior performance has been settled. 1985 Dunbar and Kumbhakar. 1986 EMPIRICAL EVIDENCE Firms sponsoring employee stock ownership plans tend to perform.) Moreover. 1996 Park and Song. Lewin. and Young.

value added and profitability.html). satisfaction with ESOP. motivation. and increased desired influence.150 Journal of Business Strategies sales. Nonetheless. On the other hand. But—and this is an important qualification—even when taken together. com/2007/04/employee-ownership-through-esopsa-bad-bargain-becker.) "For example.. As a consequence. Tobin's Q. retum on assets. sales per employee. market retum. as they do not measure differences in inner processes that cause differences in performance. but do not measure the performance of those firms. it is necessary to conduct research at two levels of analysis. (2) Altematively. (See Table 1 for citations. When the empirical research is considered as a whole it is reasonable to con- clude that shared capital programs enhance or in some way facilitate individual-level outcomes that translate into positive organization-level outcomes.g. 4/08/07 . the two streams of research can do no more than hint at a causal connection. firms with some other form of competitive advantage wish to protect that advantage by linking employment with ownership.) Individual level outcomes include satis- faction. increased perceived influence. Gary Becker and Richard Posner criticize the performance of ESOPs as stemming from their tax advantages to sponsoring firms rather from their effects on workers and suggest that the rationale for such advantages is questionable given available evidence (Becker-Posner Blog. Or. . a particular management philosophy leads to both performance and employee ownership. individual-level studies report differences between employees in employee-owned firms and employees in conventionally-owned firms. That is. that there is some third variable driving both performance and the creation of an ESOP. Long. Or.becker-posner-biog. our knowledge of the employee ownership phenomenon is incomplete and important questions remain unanswered: (1) For instance. in no study has the complete employee ownership^^individual differences—^organizational outcomes causal chain been ob- served or measured. This is because firm-level studies treat the firm as a black box. (Set- ting up an ESOP is time-consuming and costly. It is essential that in order to show how interior processes lead to organizational outcomes. it is possible that the observed ownership-^^outcome rela- tionship is spurious.www. the linkage could be endogenous whereby better perform- ing companies have the financial and human resources to implement an ESOP. This point cannot be over-emphasized. 1978b). Candidates for this variable include the possibility that better-skilled managers are disposed to share retums with workers. it is necessary to simultaneously observe and measure both intemal processes and organizational outcomes across a sufficiently large set of firms. organizational commitment. (Some studies compare employee owners in a single firm with non-owners in the same firm (e.

sells to the employees. company • restructure wages and benefits • tax savings • institute pay-at-risk or variable pay • defer compensation to increase cash • trade stock for wages flow • replace defined benefit plans • repurchase shares to increase leverage • replace profit sharing plans. Table 2 Reasons for Creating an ESOP • provide an alternative to the fiscal re. Similar outcomes might devolve to a firm whose retiring owner. • increase the value and possibilities of sidiary charitable contributions • defend against takeover or maximize • convert ownership of a proprietorship or internal control partnership • carry out hostile or friendly takeovers by • refinance existing debt employees • finance acquisition of another company • give workers stock at no cost to the (Blasi. For example. Volume 30. (1991) Alternatively. motivation. There are a large number of reasons why firms institute ESOPs (See Table II). . rather than cash out to an outsider. • cash out large shareholders without losing control • fake a public company private restructure right-hand side of balance sheet Source: Blasi. each with its own intended and unintended consequences. Number 2 151 (3) Another possibility is some serendipitous outcome resulting from an ac- tion taken for completely different reasons. (1988). which could lead to the unexpected outcome of in- creased employee loyalty. rate income bution plan • trade stock for wage or benefit conces- • raise capital for the firm more cheaply sions • repurchase stock • develop a flexible compensation system • buy out minority or majority shareholders • purchase life insurance for key execu- • or sell whole companies to employees tives or workers • sell a company threatened with shut. • resolve estate and estate-tax problems down to its employees • use as a strategy in collective bargaining • or divest an unwanted division or sub. Chapiinsky and Niehaus (1990). and Scholes and Woifson (1990) argue that the performance of ESOPs is not predicated on tax benefits. • finance a leveraged buyout of a public sponsibilities of a defined-benefit plan corporation • provide an alternative to the fiscal • deduct employee dividends from corpo- responsibilities of another defined-contri. Blasi & Kruse. and performance. a few ESOPs have been created as a takeover defense. 1988).

Our main theme is that employee ownership programs in general and ESOPs in particular have the potential to be of strategic importance to firms in that they can render a company's existing culture more adaptable and capable of chan- neling employee motivation. 3. which is why some ESOP firms do not perform well and eventually drop out of the ESOP population. FINDINGS SO FAR To summarize the foregoing discussion of the studies listed in Table 1.152 Journal of Business Strategies EXPLAINING ESOP PERFORMANCE Surprisingly. than conventionally- owned companies 2. Here we propose a theoretical framework to guide empirical study of our two questions: "Why do employee-owned companies perform better. creativity. ESOP firms are continuously created and terminated . the greater the portion of an employee's wealth that is invested in com- pany stock the greater the employee's commitment and satisfaction At the firm level of analysis we know that: 1. not all ESOP companies are high performers 3. account for ownership phenomena at two levels of analysis and the interaction(s) between those levels. ESOP companies perform better. and be empirically testable. and buy-in to support overall firm results. at the individual level of analysis we know that: 1. Our novel contribution is the application of strategy theory to an unexamined phenomenon combined with an explanation of the performance results of employee- owned firms. The surprise is even more puzzling because instituting an ESOP is a major administrative undertaking. than conventionally-owned companies?" And "Why do some ESOP companies perform better than other ESOP companies?" Answering these questions requires a frame- work that meets three criteria: it must be consistent with empirical observations. employees who participate in ESOPs report greater motivation than non-participants. on average. effort. employees who participate in an ESOP tend to be more satisfied than non-participants 2. none of the reasons listed in Table 2 have addressed the role that employee ownership might play in a finn's competitive strategy. Realizing competitive potential is not easy. ESOP companies that practice participatory management tend to per- form better 4. on average.

mediator. How many more minutes of labor will the engaged workers contribute? Assuming they would work an additional 30 minutes. While it is true that there are (often substantial) financial rewards associated with ESOPs. the more important rewards are intrinsic. while failing to explain the perfor- mance of ESOP companies. the effects of an ESOP have been observed at both the firm level as well as the individual level so it is more likely the case that individual eftbrt is directed not only toward each employee's individual goal. Rosen and Rogers (2011) debunk the individual-level motivation explanation for firm performance with a numerical example: Assume that labor accounts for 30% of a firm's costs. Rather. we have listed motivation theories that could explain why the component increases motivation. The list suggests that there appears to be ample theoretical support for increased motivation among employee owners. or primary cause? Why are ESOPs continuously created and why do they disappear? Motivation—individual level effects. Table 3 lists six practices recommend by Rosen and Rogers (2011) for build- ing an ownership culture. and the other half are "incorrigibles. what effect would a 'powerful' incentive sys- tem have on costs? Only about one percent! . do individual-level satisfaction and mo- tivation account for enhanced firm-level performance? What role does the size of an employee's stake in the firm play in firm performance? What accounts for the variance in firm performance across ESOP companies? What is the effect of partici- patory management—is it a moderator. And. it is true that employees may be motivated by incentives—but to do what? In- dividual motivation alone is not enough to explain the effect of employee ownership on firm performance. firm-level goal. Next to them. having an emotional. Suppose further that about half the workers are fully engaged. psychological invest- ment in the success of an ESOP has the potential to motivate an employee beyond her individual task(s) provided that individual motivationfi-oman ESOP is linked to firm goals on account of the efforts of and messages from management. increasing efficiency. We address this point below. Number 2 153 These findings raise intriguing questions." indisposed to work hard no matter what. One possible explanation for the su- perior performance of ESOPs is that employee ownership is an incentive that moti- vates workers to work harder. but also toward a single. Put another way. Criticisms of the assertion that employee ownership leads to productivity often rest on the observation that em- ployee ownership is a reward system. Volume 30. For instance. and a group reward system at that.

" Table 3 Prescriptions for Creating an Ownership Culture Components of an Ownership Culture Possible Theoretical Explanation • Level of ownership that is financially • Expectancy Theory (Valence) significant to employees • Two Factory Theory (Hygiene Factors) • Understanding of the terms and condi. Again.. 1985). Kozlowski. 2011 . • Expectancy Theory (Instrumentality) tions of the ownership plan • Goal Setting Theory • Skills training to increase effectiveness • Self Efficacy Theory • Path-Goal Theory • Sharing financial and performance infor.154 Journal of Business Strategies 0.30 Percentage of operating costs owing to labor = 1. attitude and behav- ior) engender firm-level results. and Klein. Autonomy) • Two Factory Theory (Motivating Factors) Source: Rosen and Rodgers. Rousseau. decisions concerning the work they do. • Voice portunities to have meaningful input into • Job Characteristics Model (Feedback.5 hours to a full 8 hours X . • Instrumentality (Expectancy Theory) mation with employees • Short-term financial incentives like prof. what are the processes by which these six components drive organizational outcomes? We must look for a mechanism by which individual activity (perception.067 Extra time worked i.5 Percentage of engaged workers X . the effect of an ownership culture is to stimulate em- ployee owners to "work smarter. The question now is: If a general increase in individuals' aggregate motiva- tion is unlikely to have a meaningful effect on firm performance. • Reinforcement Theory it-sharing and bonuses (in addition to the long-term benefits of stock ownership) • Employees have structured. regular op. 2000.0% Cost savings Even more generous assumptions yield similarly unimpressive results. from 7. Rosen and Rodgers (2011) offer an answer: Rather than working harder. what role does individual-level motivation play in firm performance? In other words. 2006.e. This example underscores the faulty logic of aggregating individual outcomes in order to explain a group outcome (Danserau and Cho.

Drivers who lease their cabs do not take such good care of the company's vehicle. You probably know how much you paid for your car. Likewise.). we believe along with others (Freeman. . Sockell. If it is owned by the driver. Participants in an ESOP enjoy all three. a house. an employee stock ownership trust (ESOT) owns the employees' shares. the trustee(s) may vote those shares themselves or pass voting rights through to the employees. The explanation most often given for the observed own- ership^performance linkage is that these ESOPs create an ownership culture that contributes to superior performance. a prized work of art. ESOP companies practice open book management (Case. have a special relationship with their work. and Blasi. for example. 2008). While this general conclusion is defensible. Yet. if you rent an apartment. control over the object. employees can exert some degree of control. like independent taxi drivers. and pleasant. but not all. As owners. Number 2 155 Ownership culture. The concept of an ownership culture may be best introduced with a thought experiment. Ownership consists of three property rights: knowledge pertaining to the object owned. 1995. 1997. is in dynamic equilibrium as existing ESOPs are terminated and new ones created (NCEO. how likely is it that you know the amount of real estate taxes? Consider another example: many travelers have had the experience of boarding a taxi at a strange airport and noticing its condition. 2007.' And finally. Meantime. and the right to residuals (Rousseau and Shperling. This is especially tme when voting rights are passed through to employees. and when it is due for service. The census of ESOPs. Volume 30. it is likely to be clean. Kruse and Blasi. 1985) by sharing financial and operating infor- mation as a part of their "communication and participation" (C&P) programs (See below. The reader might want to contemplate something he or she owns—a car. Property rights. This would be hard to predictfi-omsimple adoption rates and par- ticipation levels and suggests that other forces are needed to explain the linkage between employee ownership and firm performance. the mileage you have put on it. Kruse. well maintained. the amount of real estate taxes. you probably know the balance owed on your home mortgage. Employee owners. and which repairs are needed. In ESOP companies practicing participatory management. 'Technically. they are entitled to increases (or decreases!) in the stock price. 2003). Free- man. some. 2010) that it is overly simplistic to argue that the simple adoption of employee ownership programs or continuing stable levels of employee participation in those programs improve firm performance. the census changes continuously asfirmsterminate ESOPs and new ones are created. and to dividends. Depending upon how the employee ownership Plan Document is written.

Instead. an ESOP must be combined with participation in order to produce superior firm results. but company stock on top of salaries. Owner- ship culture is valuable.. But when extrinsic and intrinsic rewards are combined. group identity. they can foster an "ownership culture. In addition to extrinsic.. and norms in support of the firm's (changing) strategy. beliefs. Technically. bonuses. we first present the mechanism by which an ESOP has the potential to lead to competitive advantage (See Figure 1). management can create a more effective and efficient firm. as noted above. Accord- ingly.. Neither alone is enough to create an ownership culture.members' experiences. Intrinsic rewards do not pay the bills. Two psychological states that are particularly important for the development of an ownership culture are shared risk and commitment to group goals (discussed below). competitive advan- tage is derived from the effective management of heterogeneous resources that are valuable (to the consumer)." (Koziowski and Klein. collective aspect of the unit as a whole. cooperation. wages and sometimes even profit sharing do pay the bills..In this way shared unit properties emerge as a consensual.. Individual level Participation and communication programs encourage par- ticipation. As the empirical research suggests.156 Journal of Business Strategies Effective ownership culture and competitive advantage. rewards.. it must be managed deliberately to enhance existing culture— to nudge as it were firm-specific values. The achievement of an uncertain goal to which all members of a group are committed is intrinsically satisfying. so that with the correct organizational support such as effective strategic planning and excellent evaluation and control. 2000: 30) .and to converge among group members. Firm level An ESOP by itself does not confer competitive advantage..to originate in individual." which may—if management is skilled enough— ""Shared unit properties are presumed. and then examine ESOPs within the VRIO framework. and other psychological states that are intrin- sically satisfying. an ESOP's enhancing potential lies in combining it with "participation and communication pro- grams" or their equivalent. This has a cross-level effect of providing extrinsic rewards at the individual level. an ESOP is a defined contribution benefit plan that provides employees with shares that they can cash in upon retirement. albeit deferred. relatively rare and hard to imitate. According to this theory. inimitable (not readily imitated) and which the organization is ready and able to exploit. rare (not abundantly traded in markets).. Ownership cul- ture can be a resource that leads to competitive advantage according to the VRIO theory developed by Bamey (1991).. Emergence. nowhere more evident than a sports team that has just won a challenging championship game.

In order to be successfiil the content of a culture must be open to adaptation (Kotter. 1992). By its definition. The two together succeed because financial ownership makes the work of participation worthwhile to the employee. Any culture has the potential to be a source of competitive advantage in that certain core values and beliefs about how a company ought to conduct its business may be transformed into value-creating decisions and actions. An ownership culture has more value-creating potential than other cultures because it satisfies a higher order need. personal autonomy. The firm's culture must make sense out of past experiences with the firm. Number 2 157 enable the company to make strategic changes more rapidly than the competition. mutual monitoring and similar norms—however intrinsically satisfying they may be—require extra effort. and even organiza- tional commitment (Buchko. and the economic impact of the firm's culture will be one of increased rather than reduced implementation costs. "All too often. major organizational change occurs only when an organization is in serious trouble and is faced with complete failure. the content of the culture should support the details of the firm's strategy and not be antagonistic to them. Besides focusing participant attention on firm goals. that is. Further. 1993. Klein and Hall. Information sharing. (V) Value creation. so must be reinforced with monetary rewards to have an effect on culture. 1987. firm culture has an inertial and conservative bias to it. but rather a combination of financial ownership and psychological engagement applied to competitive threats and opportunities. Ownership alone is not sufficient to shape culture. cooperation. then the culture will be inertial and resistant to change. If the potential for growth and adaptation are not there. Klein. 1994: xxxv). the desire to help the firm prosper. With respect to ESOPs competitive advantage is not one thing. Chiu. An ESOP enables management to shape or change culture more effectively and more rapidly than would otherwise be possible in the absence of such a program. The financial rewards that such pro- grams offer to participants are complemented by the more intrinsic rewards that come from achieving performance goals within an ownership culture—rewards that include increased levels of job satisfaction. Each firm's culture is unique and there is no one best culture. while also permitting the possibility of growth and adaptation. culture is a heterogeneous resource in the Barney (1991) framework. therefore. And participation without owner- ship is nothing less than manipulation. and Heskett. Finally. Volume 30. 1988). since it represents the cumulative sense mak- ing activities of individuals regarding a firm's history." (Lawler. 2003. It amplifies management's influence and its ability to engage workers more deeply. an ESOP has the capability to intensify the effect of culture on the willingness and ability of workers to ex- .

As noted above. more precisely. Proposition l(a): Changes in emptoyee perceptions. at any one time. 1959). 1990). employees are more likely to be willing to change the way they do things to support new strategies in order to protect their emotional and finan- cial investments—which they have paid for with their labor—as any entrepreneur or sole proprietor would do. Bonin. 1993). Bonin. Young. Conte.1991) sense. These changes in culture and improvements in flexibility make the ESOP valuable in the VRIO (Bamey. 1992). 1993. 2012). 1976). In an ESOP those interests are linked or. atti- tudes. 1987). Hansmann. Value-creators include (1) increased efficiency in information sharing and processing and decision-making (Ben-Ner. Freundlich. and Svejnar. (R) Rarity of effective ownership culture.1988. This may not on first blush seem rare. 1990. This leads to our first two propositions regarding the value of ESOPs in supporting strategic change and flexibility. 1990. and Carberry. is its adaptability (Kotter and Heskett. Conte and Svejnar. 1987). An ESOP can accelerate cultural change when management is able to use it to demon- strate to the workforce that "the way we do things here" affects their interests for better or for worse as well as those of the company. 1988. 1964). and Putterman. Rodgers. though. and Kerr. they are the same (Jensen and Meckling. Proposition l(b): The time requirement for strategic change in an ESOP company is shorter than in comparabte non- ESOPfirms. and (3) increased cooperation among workers (FitzRoy and Kraft. 1994. . and whether that difference will show up in their wallets (Lawler. S. More important than the strength" of a culture. with employee stock owner- ship plans. However.000 ESOP concerns in the U. Vroom.158 Journal of Business Strategies ecute stt-ategy. Because an ESOP aligns the (financial) interests of the firm with its employees. 1995. Rosen. there are about 10. and Putterman. In this lies the potential value of an ownership culture. but it does represent a very small ^ h e strength of culture may be measured by scores on the Organizational Culture Inventory (Cooke and Lafferty. Jones. (2) increased self-monitoring while decreasing the need for supervision (Ben-Ner. employees' willingness to alter their behavior is conditioned upon wheth- er they perceive that their effort will make a difference. ESOP firms have the potential to deploy and redeploy those human resources quickly in order to adapt to changing conditions (Penrose. and behaviors occur more rapidty in ESOPfirmssupport- ing an ownership cutture than in comparabte non-ESOP firms. Jones. Accordingly. This is affected by the ability of an ESOP to facilitate cultural change more rapidly than the non-ESOP competition. or the Ownership Culture Survey (Mackin.

Therefore. along a lengthy continuum. the fit between culture and strategy can vary between good and bad. This is because.. including how it is managed. Unlike a patent or a comer loca- tion. we would expect no direct ownership^>-performance effect. Alternatively. as Barney (1991) pointed out. Because ownership culture is heterogeneous. beliefs. the failure to cre- ate a strategy-supportive "ownership culture" increases the like- lihood of the failure of an ESOP. we would expect superior firm performance. ir- respective of the actions of managers. a hetero- geneous resource. it is a question of degree and of fit. 1987) including one specifically tailored for employee-owned companies available from the National Center for Employee Ownership (Mackin. a "particular mix" of resources is required to implement a strategy. Freundlich. the enhancement of human capital. What is rarer is an effective ownership culture that depends on both the genesis and the management of the ESOP. 2012). one could make the case that instituting an ESOP in order to foster an ownership culture is relatively rare. except that because of the difficulty in creating an owner- ship culture. so that the investigator can test his/her hypotheses by degree of deviation from the norm. to account for differences in ESOP perfor- mance. Accordingly. Most firms already have a culture (strong or weak). which is itself. Volume 30. but many. Reason for creating ESOP. Many are established to realize tax benefits. as primary concerns. Number 2 159 percentage of the firm population in the U. Rather.. etc. in companies whose management aspires to use an ESOP as a complement or enhancement to its H R policies and practices. thereby reducing the number of firms for whom such an investment is affordable. rarity is a matter of degree—some things are scarcer than others. or for similar non-human capital (i. These measures are normative. not all ESOPs are likely to succeed. One could also argue that fostering an owner- ship culture requires a significant investment of firm resources. companies in which building a strategy-supportive culture is not the primary purpose of the ESOP. non-cultural) purposes (See Table 2). we expect differences in owner- ship culture. Further. So it is not a question of . Not all ESOPs are instituted with employee par- ticipation. since the people in the firm will have some degree of shared values. Proposition 2: Excluding ESOPs that were created solely for corporate finance or governance purposes. Cooke and Laf- ferty.S. Note that several measures of culture are on the market (e. Rarity lies in the quality of execution. It is not a question of having one or not. protect against a take- over. and Kerr.e. and norms of behavior. There is no one best ownership culture. Rodgers. Strength of culture.g. cash out a retiring owner.

Difficulty. The first issue that managers must consider is whether the culture is supportive or not supportive of the firm's strategy because "culture constrains strategy" (Schein. employee ownership programs focus employee attention around core values and activities and link individuals and groups to the goals of the firm and to firm performance. An ownership culture is difficult to cultivate.g. Participation and communication programs. as exemplified by the prescriptions in Table 3. a participation and communication program (see below). In addition to providing general information about ESOPs. Case. 1994). commercial bankers. or an ownership culture for their clients. Train- . Without a strong culture. and compensa- tion firms. There must be sharing of knowledge. even taken for granted. but also offer instmction to teach employees to read and understand financial information so that employees fully ap- preciate the benefits (and risks) of owning the company's stock. 1995). there are experienced and dedicated organization development consul- tants and other practitioners who stand ready to institute an ESOP. investment bankers. In addition. which may also account for the extent to which it is rare. In addition to the host of ESOP advisors. These firms not only share financial information with employees. some participation and communication programs are intensely firm-specific. Management can influence cul- ture in support of firm strategies by fostering supportive institutions (such as ESOPs) and their related practices (Scott. 1999: 48-49). So. attomeys.. they provide an objective focus for individuals in the firm that strengthens the link between culture and strategy. Once established these programs persist and grow and in doing so become routine for employees. beliefs. 1995.160 Journal of Business Strategies creating a new culture but of shaping a firm's existing culture. The intent of these programs is to shape perceptions and attitudes by increasing employee awareness and understanding of the ESOP of which they are the benefi- ciary. This is the process of insti- tutionalization (Aldrich. ESOPs are to a certain degree off-the-shelf. As ESOPs become institutions. many firms practice "open book management" (e. Stack. To sustain an ownership culture. and values so that the 'culture' is not just nominal and a mere conceptual artifact of aggregating a set of individu- als . shared capitalism programs like ESOPs are merely incentive programs that appeal to lower-order needs andaré likely to lack strategic impact. many (but not all) ESOP companies invest considerable time and effort in their "participation and communication" programs. 1985). but not impossible. Their purpose is to create a clear "line of sight" between effort and reward (Lawler. By establishing clear and objective sets of mies and procedures that link firm goals and operations with employee incentives and compensation. 2008).

there must be appropriate organizational support. The coach must work with what s/he has. and effective communication. ownership culture must also be difficult to imitate. Notwithstanding that employees may be attentive to their responsibilities and perform them diligently. some ESOP sponsors choose to grant employees the right to vote their shares. thus giving them a role in govemance. The dif- ficulty of imitating an ownership culture comes from creating the incentives and personal satisfaction that come with ownership. (I) Imperfect imitability of ownership eulture. building awareness of and enthusiasm for the ESOP. Proposition 3: The greater the investment by an ESOP company in its "participation and communication"programs or the equivalent the stronger the ownership culture. Rosen and Rogers (2011) do not envision that there is one perfect culture. Number 2 161 ing often includes topics such as effective teamwork. When an entrepreneur creates a firm. skill training. decision-making. the term "participation and communication" has roughiy the same meaning as corporate culture. Therefore. The failure to understand personal motivation and the laek of resources to create this link is what prevents firms from imitating an ownership culture to create parity with an effective ESOP. For example: sharing information. The hard part is to create an adaptive culture from an existing culture. Although participation and communication programs are as varied as the companies that sustain them. All of the requirements for an effective ownership stmcture make them in- deed rare in the sense of the VRIO framework. it is still a big step from conscientious self-interest to commitment to organization performance. "Among managers of ESOP firms and practitioners iike organization consultants who serve them. it must be managed effectively. he or she necessarily is obliged to create its culture from scratch (Schein. Finally. (O) Organization of ownership culture. No organizational stmcture short of ownership has been shown to create the same advantages as ownership on a broad or extended basis. for an ownership culture to be a resource in the Bamey (1991) sense. To be a source of sustainable competitive advantage. Volume 30. This was the waming contained in Berle and Means' (1932) dis- cussion of the separation of ownership and control and it remains a driving force behind entrepreneurship. there are some commonalities. 1985). leadership. we describe how ex- ceptional ESOPS manage for competitive advantage. In addition. em- phasizing common interests. anymore than there is one perfect strategy for winning an NBA championship. not to create culture X de novo. that is. This leads to our next proposition. . problem-solving. and participation in decision making.

and thus have a collective effect. values and norms are widely and deep- ly shared. Pierce. Analogous to shared deprivation (Tucker. and Dirks. In a strong culture. These cooperative behaviors are individually- generated and pervade the enterprise. What sets an ownership culture apart is. 2003." In an ESOP. mutual monitoring and support. and Toscano. where all participants are exposed to the same risk. communication and participation programs educate employees about the risks and rewards—with emphasis on the rewards. and it means that one's job has effects beyond one's area of responsibility. Having observed that the mere creation of an ESOP is insufficient to enhance firm performance. shared risk is the perception—held by members of a group—that all are dependent upon each other to obtain individual outcomes. In the same vein. An ownership culture may be motivational at the level of the individual." In addition to imparting decision-making and communication skills to employees. proposing new ideas. Kostova. 2001) To save space. 2005). and I do not want to let them down. naturally—of employee ownership. such as armed combat. not through aggregation but through synergy. Pierce and Rogers. employee owners embedded in a strong ownership culture value and engage in such value-creating behaviors as sharing information. well. we have argued that the strategic effect of an ESOP is due to the creation of a culture of cooperation and mutual support—i.. but it is not sufficient to explain firm performance. 1989). In extreme settings. . Rubenfeld and Morgan.. ownership. an employee's thinking might go along these lines: "I have skin in the game. but it is more than just my skin that's at stake—be- cause I know that my co-workers also have skin in the game. this means owning an enterprise jointly. Pierce. the rewards of mutual cooperation are highly desirable (survival) and the failure of mutual cooperation is catastrophic (death) (Van Der Dennen. an "ownership culture" characterized by "working smarter. Accordingly. is a factor in the functioning of employee-owned companies (e.e. which I could lose.g. we omit this point and leave it for future discussion. embracing new work methods enthusiastically. In successful ESOP companies it is not unusual for employee owners to '^Several authors have proposed that psychological ownership. effort is directed toward organizational goals in ad- dition to individual goals. In an ownership culture. Nock. and that aggregate individu- al-level motivation has a only slight effect on firm performance. and individual motivation is certainly a necessary condition. an individual level variable. it is possible to create these conditions using conventional rewards and organization development efforts. Shared risk is another individual-level factor contributing to firm outcomes.162 Journal of Business Strategies Multi-Levet Effects." Nonetheless. and so they are not rare or inimitable. and otherwise coop- erating to make the ESOP a success. 1991. Shared risk. making adjustments to work proce- dures quickly.

but that each individual experiences the same risk. In an effective owner- ship culture. 1943). The success of the ESOP itself becomes the over- arching goal because it satisfies these higher order needs. for unskilled or semi- skilled work. esteem. the ESOP has the potential to create a workforce commit- ted to making the company successful—a firm level outcome. workers' efforts are linked to a higher purpose. etc. The rewards of an ESOP are twofold: financial and psychic. This leads to the following propositions. is the fault of supervisors. Rather. Because the financial rewards of an ESOP combined with the psychological benefits of participation and communication so thoroughly engage employees. individual tasks are merely the means to a greater end: the success of the ESOP. can be highly satisfying. existing at the level of the firm. resource allocation." The important difference between a conventional culture and an ownership culture is that in the former a worker need only concern him/herself with his/her own job. Volume 30. we would expect such efforts to affect both individual-level and firm-level outcomes. as predicted by Herzberg's (1968) Two-Factor Theory. to satisfying lower order needs. as it were. and love (Maslow. Choosing tasks and coordinating work in a conventionally-owned firm is the responsibility of management. the game changes. Higher-level effects should not be understood as the sum of all the individual risks added up into a total. often exceeding $ 100. The financial rewards of an ESOP function as hygiene factors. relatedness and growth (Alderfer. That kind of awareness can satisfy higher order needs such as affilia- tion (McClelland. coordinating. The financial rewards of stock owner- ship. But when the activities of a given worker are seen to affect everyone's outcome. Two factors. It is the global awareness that all are in it together that creates the higher-level effect. In this way. one worker's efforts can be perceived as part of a larger whole. plus membership in a group pursuing a common goal. We are not refer- ring to mere mutual monitoring. An employee's individual tasks are demoted. The genius of employee ownership is that it has the potential to satisfy both lower- and higher-order needs. self-actualization. 1972). It is this vision-driven commitment that has the potential to overcome the inertia that hampers strategic adaptability. . while the social and psy- chological rewards function as motivators. Accordingly. One becomes aware of one's membership in a group serving a larger purpose. It is workers' perceptions of the ESOP as a higher purpose that fosters an ownership culture that makes them "think like an owner. failure in scheduling.000. 1985). Number 2 163 enjoy substantial account balances. And so.

Proposition 4(c): The greater the individual-level percep- tion of mutual commitment. the better the firm- level performance." If this procedure is followed. When combined with firm-level "participation and communication" programs an ESOP can create two . and neatly summarize our main theme. ceteris paribus. the better the firm-level per- formance. the average score will be a measure of a firm-level out- come. Proposition 4(b): The greater the individual-level percep- tion of shared risk. In operationalizing these constructs. Figure 1 PartfrtpnUon and O>mint)DÍCHtii>n Advantage 1 i Pcrcei

ed * Group Goal (Organizational) il kli^iuliitlHriilOsyS 1 The relationship of our propositions to each other are depicted graphically in Figure 1.164 Journal of Business Strategies Proposition 4(a): The greater the investment by a company in its "participation and communication"programs or the equiv- alent. "My co-workers have a significant amount of their wealth invested in the company. the greater the individual-level awareness of shared risk and the greater the individual commitment to firm goals. A survey item like "I have a significant amount of my wealth invested in the company" is an individual-level measure. a firm-level measure of others' risk positions might read. An ESOP—a firm-level variable— can provide extrinsic rewards in the form of stock ownership. it is important to distinguish between individual level and organization-level phenomena. In contrast. not an aggregation of individual-level outcomes. ceteris paribus.

EXTENSIONS AND LIMITATIONS Testing the propositions. 2. the difficulty of creating and managing an appropriate culture. and combined with the ESOP's ex- trinsic (i. and that these create the culture that enables a firm to respond quickly to competi- tive opportunities and threats. that this result would not confirm or disconfirm claims about employee perceptions. we offer suggestions for testing the propositions by focusing on the interrelationships among the relevant constructs. attitudes. Volume 30. cause and effect travels along multiple pathways. (2) the individual-level portion of the model. Further.. Up to this point we have argued that an ownership culture can enable a company to achieve competitive advantage by making it more flexible and able to adapt to changing circumstances. with the effect of creating an ownership culture leading to strategicflexibilityand competitive advantage (firm success). A test showing large effect sizes at an acceptable level of alpha error would tend to support the principal claim that to have an ownership culture an ESOP firm must invest in its human capital through communication and participation programs. In addition. Note. Here. difficult to imitate and can be organized to create a competitive advantage. contributes to an ownership culture. Finally. The combination of extrinsic and intrinsic rewards creates an ownership culture. or behaviors. an ownership culture increases a firm's flexibility to adapt to com- petitive opportunities and threats. with ESOPs as well as in other firms. rare. to create superior performance. Multiple levels. This explains why ESOPS have been shown. The processes we've discussed encompass two levels of analysis: indi- vidual and firm. showing the effect of a com- munication and participation program on perceived shared risk and organizational commitment (together called intrinsic rewards). propositions lb. Number 2 165 key perceptions—shared risk and groups goals—at the individual level. The feel- ings of sharing risk with co-workers while pursuing a group goal engenders intrinsic rewards. on average. and 3. showing the connection between the existence of an ESOP that is combined with a communi- cation and participation program.. however. and thereby achieve competitive advantage. The empiricist has a number of choices: Test (1) thefirm-levelportion of the model i. we have outlined how an effective ownership culture within an ESOP can be valuable. explains why some ESOPS outperform others.e. A test showing large effect sizes at an acceptable level of alpha error would tend to indicate that the reason why communication and participation programs are .e.financial)rewards. Taken together.

. Note also that this result would not confirm the effect of culture on strategic flexibility or competitive advantage.166 Journal of Business Strategies effective is that they alert employees to shared risk. the researcher would do well to introduce control variables into the analysis such as tenure. (See discussion below. multiple paths emerge from the box labeled "ESOP" and converge on ownership culture. 2007). Insofar as is practical. and draw conclusions about the fit of the model using stmctural equation techniques. requiring the simultaneous collection of data from two levels of analysis—individual-level and firm-level—and from a large sample of firms. Notwithstanding the lack of sufficient resources. multi-level data collection and analyses are the ideal.e. department. . Nonetheless. It is important to emphasize that empirical demon- stration of a multilevel linkage would be a monumental undertaking. and increase organizational commitment. undaunted researchers continue to explore the ownership-^performance link from a single lev- el of analysis.) A test showing large effect sizes at an acceptable level of alpha error would tend to confirm the strategic flexibility argument and the propositions regarding the intemal mechanisms driving the formation of an ownership culture. it would be well to investigate how cause and effect operate across level boundaries. i. and performance appraisals. In the model in Figure 1. The discussion above is based on the assumption that cause and effect can be detected by comparing the yes-or-no existence of communication pro- grams and the strength or degree of attitudes. If that is not feasible or desired. those variables in between "ESOP" and competitive advantage. level of compensation. then on flexibility and competitive advantage. test them. A test showing large effect sizes at an acceptable level of alpha error would tend to confirm the important role communication and participation programs play in creating an ownership culture. (3) both levels together. As noted above. Pathways. it is possible to estimate path coefficients. another way to study the effects of employee ownership on individuals and firms is to trace pathways among the variables (Edwards and Lambert. in order to fully understand the employee ownership phenomenon. Cultural mea- sures should not be omitted. account bal- ance. When impracticality is invincible. level in organization. a researcher may wish to examine the strength of the mediators. Given a large enough number of observations (See discussion below). (4) the between firm-level portion of the model by comparing ESOP firms with and without communication and participation programs. Altematively. overcoming this chal- lenge has been a rarity. but treated as an individual-level measure. Multi-level research.

and so increases the risk of shirking. The second source is causal ambiguity. and information strategies)? One shortcoming of firm level research has been to make comparisons be- tween companies matched according to size. not just the . Rousseau. an employee who shirks). firm performance. discussions of culture can hardly rise above speculation. This line of investi- gation faces the practical challenges discussed above. 1999) identifies the persistent threat of turnover. Some publishers of measures of culture keep a databank against which ESOP companies may be compared. Forttinately. 2006. however. organizational design. Note. where individual contributions are unobservable. Another important avenue of research would be to examine the ways in which an ESOP is capable of coping with certain dilemmas related to the management of human resources. An interesting avenue of research would be to determine which of them more accurately predicts relative success of ESOP companies.. rent sharing. that when an individual completes a paper-and-pencil questionnaire regarding his/her perception of an organization's culture. Volume 30. as well as three types of information dilemmas: (1) lack of relevant hiring information results in workers who do not fit the job (adverse selection). there are several measures of organizational culture available to organizational development practi- tioners from which scholars may choose. that is. Coff. The fundamental question here is to what extent does an ESOP encompass the coping strategies proposed by Coff (retention. 1985). 2000. As an analytical strategy. Managers want to know what specific values. And scholars are hard pressed to illuminate the connection between culture and firm performance without a reliable and valid measure thereof.e. matching works only when the objects matched are identical in every respect. beliefs. these data may be aggregated because each one is a rating. In the absence of quantitative measures. Number 2 167 Equally important is avoiding aggregating individual-level data in an attempt to describe a firm level phenomenon (Danserau and Cho. and the unique elements of an ownership cul- ture highlighted. Firm level. or (3) ineffective manage- ment decision making (bounded rationality). norms. for example (1997. The place to begin is to document and measure the content of ownership cultures and then compare them with firm outcomes. and behaviors they can count on to improve adaptability and ultimately. (2) moti- vation and moral hazard (i. in the same way that the scores given by Olympic judges of gymnastics or diving are ratings of a single performance and may be combined. Information dilemmas arise fi-om two sources: the first source creating these information dilemmas is social complexity. the difficulty of identifying those factors that contribute to an organization's performance. Kozlowski and Klein. which is a potential shortcoming of team production.

It is the exceptional manager who is willing to depart from tried-and-tme ownership structures. and the multitude of other variables. do individuals in ESOP firms differ from non-ESOP firms on such variables as orga- nizational commitment. existing research has focused on atti- tudes and motivation—interesting. In general. Managerial implications. Accordingly.'^ Individual level. Matching by size does not account for performance differences owing to strategy. At the individual and group levels of analysis. researchers could then develop a measure of individu- al-level risk perceptions and firm-level risk perceptions. So questions like "How does level of motivation affect felt fatigue. if any. locus of control. Suppose Company E pursues a low-cost strategy in an industry with intense competition. 1851. and Campbell (2002) for a discussion of the dangers in using matching in quasi-experimental research. To see why this is so. or self-monitoring? If there are differences. Output might vary proportionately. Example: "My wealth is at risk here." Although the Rosen and Rogers' (2011) example is convincing. To better understand what goes on at the individual level. 1997). the intensity of competition. the other without. 1998). but not enough to lift the lid. it is based on a binary assumption: motivated vs. Mill. one with an ESOP. From people's stories. openness to experience." "This is a risky place to work for all of us. ESOPs are risky and forming an ESOP remains a major strategic decision. and response to that fatigue?" might be appropriate. we would like to know to what extent. It would be worth exploring the relation between worker output and degree of motivation. . organizational identification. Investigators might instead adopt the view that level of motivation is continuous rather than categorical and explore how level of motivation interacts with level of fatigue. 1980). self-efficacy. A good first step would be an ethnographic study across a variety of employee-owned and conventionally-owned firms. Yet the notion that employees respond to the knowledge of a shared fate has been around for a long time (Melville. do they account for differences in firm performance? Shared risk as a management concept is novel. The initial costs of creating an ESOP represent a major invest- '^See Cook and Campbell (1979) and Shadish.168 Journal of Business Strategies matching variable. theory and empirical evidence have barely cracked the lid on the black box concealing the inner workings of an ESOP company. not motivated. Because the causal mechanism is not well under- stood (Coff. it requires further theoretical development and empirical test- ing. Cook. risk preference. 1871. We have not developed it here due to space considerations. imagine two companies. while Company C pursues a differentiation strategy in an industry with moderate competition (Porter. especially the creation of operational measures. 1981.

SUMMARY AND CONCLUSION Our purpose here has been to offer an explanation of why ESOP firms tend to perform. or the problem of allocating resources among internal stakeholders. or to culture. We conclude that employee ownership has the potential to enhance competitive capability and possibly make it sustainable by increasing the flexibility of the workforce in responding to environ- mental threats and opportunities quickly and cheaply. marketing. rely on past experiences of success- ful managers by adopting these and other practices: • Describe and measure existing culture and track changes over time • Engage employees early in the process of planning to adopt an ESOP • Invest in training. budgeting. and behaviors. for instance: How does employee ownership affect the ways a firm manages its workflow. especially open book management. . A promising avenue of research is to explore the effect employee ownership might have on an organization's structure. ongoing maintenance requires continual investments of time and energy. such as an internal wiki Further research. The adventurous manager can. it is logical to expect that its effects per- vade all aspects of an organization's functioning. and finance functions? As we have said. administrative and human resource processes. There are many questions to answer. attitudes. and why some em- ployee-owned firms tend to perform better than others. on average. much is known about employee ownership. Volume 30. but there is much more to be learned. Yet. We have discussed the processes by which an ownership culture can help an ESOP firm respond more quickly to strategic opporttanities and threats. though. Perhaps most importantly. better than conventionally-owned firms. confiict resolution and decision-making • Make the financial rewards meaningfial • Have a plan for employees who do not care to participate • Encourage information-sharing and create a mechanism for doing so. however. Number 2 169 ment for a small company and creation absorbs much management time and energy dealing with setting up the necessary legal. problem solving. is the challenge of managing an entity for which there is not much historical experience on which to draw—manag- ers of ESOPs are still something of pioneers. Third. the effects of employee ownership are not limited to employees' percep- tions. but requires proper manage- ment. human resource management. accounting. as we have attempted to do here. Scholars can help by peering into the black box.

it is nec- essary to combine the two. Privatization in the arab world: Prerequi- sites for success. neither condition is suf- ficient alone. a more convincing explanation points to the process through which increased strategic flexibility occurs in an ownership cul- ture. CA: Sage Publica- tions. efficiency. E. individuals experience satisfaction of lower-order needs (wealth) and higher order needs (growth. Thousand Oaks. but must be combined with participatory management. and the necessity of combining financial rewards with group aspirations accounts for the superior performance of ESOPs over conventionally-owned companies. International Review of Administrative Sciences. and Buera. When the two conditions are present they lead to cooperative behavior. (1972). and that achieving firm success will provide psychic rewards in addition to material rewards. account for ownership phe- nomena at two levels of analysis and the interaction(s) between those levels. A. Strategic flexibility emerges from two conditions: shared risk combined with widespread perception of ESOP success as & group goal. (1999). self-actualization). (3) With sufficient resources to measure individual-level perceptions and attitudes and match them with measures of firm performance. Instead. 56. N. and Growth: Human Needs in Orga- nizational Settings. and strategic flexibility. REFERENCES Al-Saigh. M. M. H. Further. Aldrich. Relatedness. (1990). it is possible to test empirically our claims. esteem. To answer our two questions we stipulated a framework that meets three cri- teria: it must be consistent with empirical observations. that increased motivation of employees is responsible for ESOP performance. P. Organizations Evolving. We have met those criteria: (1) The difficulty of creating an ownership culture accounts for the varied performance of ESOPs companies. 125-135. The common explanation. Existence. (2) Indi- vidual motivation is a necessary but not a sufficient condition for firm performance while shared purpose is also a necessary but insufficient condition. When the common goal is achieved (higher stock price). The two must occur together. This means that an employ- ee perceives that the attainment of her individual goal is dependent upon every one attaining their goals. .170 Journal of Business Strategies Empirical evidence indicates that an ESOP alone is not a sufficient condition for superior performance. and be empirically testable. is not sufficient because aggregate motivation is not a signifi- cant factor at the level of the firm. C. Alderfer. New York: Free Press.

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D. New York: John Wiley & Sons. F. A. W. (1983). Nock. CA: The National Center for Employee Ownership. Prior to his academic career. F. 7. In Collected Essays on Self-Manage- ment. S. now J. 81-89. BIOGRAPHICAL SKETCH OF AUTHORS Peter Thompson is an Assistant Clinical Professor in the College of Business Administration at the University of Illinois at Chicago. Vroom. (1989). K. Work and Occupations. U. (1982). Toward a typology of employee ownership. and Blasi. L. Washington. H. J. Ithaca. He holds degrees from Temple University. J. Whyte. J. Northwestem University. (1984). 16:26-42. General Accounting Office. Young. Rosen. S. Annals of the American Association of Political and Social Science. R. 129-148. J. (1986). NY: Comell University Press. from the University of Pennsylvania and has taught at the University of . 14: 137-163. PoZ/cy 5'c/e«ce5. Tucker. He received his Ph. including The Northem Trust. Vanek. S. J. Work and Motivation. (1978). Employee ownership and percep- tions of work. and Blasi. W. and The University of Illinois at Chicago. and the Capital Markets Group at The First National Bank of Chicago. (1964).. The labor-managed economy: A survey of the economics liter- ature. 473: 128- 140. Govemment Printing Office.. Oakland. D.D. (2005). J. he spent 12 years in the banking industry. R. Van Der Dennen. J. and Toscano. C . V. The Great Game of Business. Peace Review: A Journal of Social Justice. (1994). Whyte. M. Steinherr. (1976). P.581-602. and Carberry. M. G. participation and control: A theoretical model. Human Relations.178 Journal of Business Strategies Stack. Employee stock ownership plans: Ben- efits and costs of ESOP tax incentives for broadening stock ownership. Toscano. Worker ownership. GAO- PEMD-87-8. Employee ownership and the future of unions.. Morgan Chase. 17. Mark Shanley is a Professor of Management and Associate Dean at the Col- lege of Business Administration of the University of Illinois at Chicago. 24. Uncertainty and the investment decision under labor-management and their social efficiency implications. E. J. Annals of Public and Co-operative Economy. New York: Crown Publishing Group. DC: U. (1995/ Theory O: Creating an Own- ership Style of Management.

Volume 30. Her research interests include Corporate Social Responsibility. mergers and acquisitions. He is a member of the Editorial Board for Strategic Management Journal. She has published extensively in leading management joumals over the last 25 years and is co-editor of The Oxford Handbook of Corporate Social Re- sponsibility. strategic alliances. Strategic Management and Strategic Human Resource Management. Northwestem University. and healthcare strat- egy- Abagail McWilliams is Professor of Strategic Management at the University of Illinois-Chicago. 2008. His research interests include strategic groups. She eamed a BS in Business and an MA and PhD in Economics from The Ohio State University. and Purdue University. Number 2 179 Chicago. Methodology. .

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ed * Group Goal (Organizational) il kli^iuliitlHriilOsyS 1 The relationship of our propositions to each other are depicted graphically in Figure 1.164 Journal of Business Strategies Proposition 4(a): The greater the investment by a company in its "participation and communication"programs or the equiv- alent. "My co-workers have a significant amount of their wealth invested in the company. the greater the individual-level awareness of shared risk and the greater the individual commitment to firm goals. A survey item like "I have a significant amount of my wealth invested in the company" is an individual-level measure. a firm-level measure of others' risk positions might read. An ESOP—a firm-level variable— can provide extrinsic rewards in the form of stock ownership. it is important to distinguish between individual level and organization-level phenomena. In contrast. not an aggregation of individual-level outcomes. ceteris paribus.

EXTENSIONS AND LIMITATIONS Testing the propositions. 2. the difficulty of creating and managing an appropriate culture. and combined with the ESOP's ex- trinsic (i. and that these create the culture that enables a firm to respond quickly to competi- tive opportunities and threats. that this result would not confirm or disconfirm claims about employee perceptions. we offer suggestions for testing the propositions by focusing on the interrelationships among the relevant constructs. attitudes. Volume 30. cause and effect travels along multiple pathways. (2) the individual-level portion of the model. Further.. Up to this point we have argued that an ownership culture can enable a company to achieve competitive advantage by making it more flexible and able to adapt to changing circumstances. with the effect of creating an ownership culture leading to strategicflexibilityand competitive advantage (firm success). A test showing large effect sizes at an acceptable level of alpha error would tend to support the principal claim that to have an ownership culture an ESOP firm must invest in its human capital through communication and participation programs. In addition. Note. Here. difficult to imitate and can be organized to create a competitive advantage. contributes to an ownership culture. Finally. The combination of extrinsic and intrinsic rewards creates an ownership culture. or behaviors. an ownership culture increases a firm's flexibility to adapt to com- petitive opportunities and threats. with ESOPs as well as in other firms. rare. to create superior performance. Multiple levels. This explains why ESOPS have been shown. The processes we've discussed encompass two levels of analysis: indi- vidual and firm. showing the effect of a com- munication and participation program on perceived shared risk and organizational commitment (together called intrinsic rewards). propositions lb. Number 2 165 key perceptions—shared risk and groups goals—at the individual level. The feel- ings of sharing risk with co-workers while pursuing a group goal engenders intrinsic rewards. on average. and 3. showing the connection between the existence of an ESOP that is combined with a communi- cation and participation program.. however. and thereby achieve competitive advantage. The empiricist has a number of choices: Test (1) thefirm-levelportion of the model i. we have outlined how an effective ownership culture within an ESOP can be valuable. explains why some ESOPS outperform others.e. A test showing large effect sizes at an acceptable level of alpha error would tend to indicate that the reason why communication and participation programs are .e.financial)rewards. Taken together.

. Note also that this result would not confirm the effect of culture on strategic flexibility or competitive advantage.166 Journal of Business Strategies effective is that they alert employees to shared risk. the researcher would do well to introduce control variables into the analysis such as tenure. (See discussion below. multiple paths emerge from the box labeled "ESOP" and converge on ownership culture. 2007). Insofar as is practical. and draw conclusions about the fit of the model using stmctural equation techniques. requiring the simultaneous collection of data from two levels of analysis—individual-level and firm-level—and from a large sample of firms. Notwithstanding the lack of sufficient resources. multi-level data collection and analyses are the ideal.e. department. . Nonetheless. It is important to emphasize that empirical demon- stration of a multilevel linkage would be a monumental undertaking. and increase organizational commitment. undaunted researchers continue to explore the ownership-^performance link from a single lev- el of analysis.) A test showing large effect sizes at an acceptable level of alpha error would tend to confirm the strategic flexibility argument and the propositions regarding the intemal mechanisms driving the formation of an ownership culture. it would be well to investigate how cause and effect operate across level boundaries. i. and performance appraisals. In the model in Figure 1. The discussion above is based on the assumption that cause and effect can be detected by comparing the yes-or-no existence of communication pro- grams and the strength or degree of attitudes. If that is not feasible or desired. those variables in between "ESOP" and competitive advantage. level of compensation. then on flexibility and competitive advantage. test them. A test showing large effect sizes at an acceptable level of alpha error would tend to confirm the important role communication and participation programs play in creating an ownership culture. (3) both levels together. As noted above. Pathways. it is possible to estimate path coefficients. another way to study the effects of employee ownership on individuals and firms is to trace pathways among the variables (Edwards and Lambert. in order to fully understand the employee ownership phenomenon. Cultural mea- sures should not be omitted. account bal- ance. When impracticality is invincible. level in organization. a researcher may wish to examine the strength of the mediators. Given a large enough number of observations (See discussion below). (4) the between firm-level portion of the model by comparing ESOP firms with and without communication and participation programs. Altematively. overcoming this chal- lenge has been a rarity. but treated as an individual-level measure. Multi-level research.

and so increases the risk of shirking. The second source is causal ambiguity. and information strategies)? One shortcoming of firm level research has been to make comparisons be- tween companies matched according to size. not just the . Rousseau. an employee who shirks). firm performance. discussions of culture can hardly rise above speculation. This line of investi- gation faces the practical challenges discussed above. 1999) identifies the persistent threat of turnover. Some publishers of measures of culture keep a databank against which ESOP companies may be compared. Forttinately. 2006. however. organizational design. Note. where individual contributions are unobservable. Another important avenue of research would be to examine the ways in which an ESOP is capable of coping with certain dilemmas related to the management of human resources. An interesting avenue of research would be to determine which of them more accurately predicts relative success of ESOP companies.. rent sharing. that when an individual completes a paper-and-pencil questionnaire regarding his/her perception of an organization's culture. Volume 30. as well as three types of information dilemmas: (1) lack of relevant hiring information results in workers who do not fit the job (adverse selection). there are several measures of organizational culture available to organizational development practi- tioners from which scholars may choose. that is. Coff. The fundamental question here is to what extent does an ESOP encompass the coping strategies proposed by Coff (retention. 1985). 2000. As an analytical strategy. Managers want to know what specific values. And scholars are hard pressed to illuminate the connection between culture and firm performance without a reliable and valid measure thereof.e. matching works only when the objects matched are identical in every respect. beliefs. these data may be aggregated because each one is a rating. In the absence of quantitative measures. Number 2 167 Equally important is avoiding aggregating individual-level data in an attempt to describe a firm level phenomenon (Danserau and Cho. and the unique elements of an ownership cul- ture highlighted. Firm level. or (3) ineffective manage- ment decision making (bounded rationality). norms. for example (1997. The place to begin is to document and measure the content of ownership cultures and then compare them with firm outcomes. and behaviors they can count on to improve adaptability and ultimately. (2) moti- vation and moral hazard (i. in the same way that the scores given by Olympic judges of gymnastics or diving are ratings of a single performance and may be combined. Information dilemmas arise fi-om two sources: the first source creating these information dilemmas is social complexity. the difficulty of identifying those factors that contribute to an organization's performance. Kozlowski and Klein. which is a potential shortcoming of team production.

It is the exceptional manager who is willing to depart from tried-and-tme ownership structures. and the multitude of other variables. do individuals in ESOP firms differ from non-ESOP firms on such variables as orga- nizational commitment. existing research has focused on atti- tudes and motivation—interesting. In general. Managerial implications. Accordingly.'^ Individual level. Matching by size does not account for performance differences owing to strategy. At the individual and group levels of analysis. researchers could then develop a measure of individu- al-level risk perceptions and firm-level risk perceptions. So questions like "How does level of motivation affect felt fatigue. if any. locus of control. Suppose Company E pursues a low-cost strategy in an industry with intense competition. 1851. and Campbell (2002) for a discussion of the dangers in using matching in quasi-experimental research. To see why this is so. or self-monitoring? If there are differences. Output might vary proportionately. Example: "My wealth is at risk here." Although the Rosen and Rogers' (2011) example is convincing. To better understand what goes on at the individual level. 1997). the intensity of competition. the other without. 1998). but not enough to lift the lid. it is based on a binary assumption: motivated vs. Mill. one with an ESOP. From people's stories. openness to experience." "This is a risky place to work for all of us. ESOPs are risky and forming an ESOP remains a major strategic decision. and response to that fatigue?" might be appropriate. we would like to know to what extent. It would be worth exploring the relation between worker output and degree of motivation. . organizational identification. Investigators might instead adopt the view that level of motivation is continuous rather than categorical and explore how level of motivation interacts with level of fatigue. 1980). self-efficacy. A good first step would be an ethnographic study across a variety of employee-owned and conventionally-owned firms. Yet the notion that employees respond to the knowledge of a shared fate has been around for a long time (Melville. do they account for differences in firm performance? Shared risk as a management concept is novel. The initial costs of creating an ESOP represent a major invest- '^See Cook and Campbell (1979) and Shadish.168 Journal of Business Strategies matching variable. theory and empirical evidence have barely cracked the lid on the black box concealing the inner workings of an ESOP company. not motivated. Because the causal mechanism is not well under- stood (Coff. it requires further theoretical development and empirical test- ing. Cook. risk preference. 1871. We have not developed it here due to space considerations. imagine two companies. while Company C pursues a differentiation strategy in an industry with moderate competition (Porter. especially the creation of operational measures. 1981.

SUMMARY AND CONCLUSION Our purpose here has been to offer an explanation of why ESOP firms tend to perform. or the problem of allocating resources among internal stakeholders. or to culture. We conclude that employee ownership has the potential to enhance competitive capability and possibly make it sustainable by increasing the flexibility of the workforce in responding to environ- mental threats and opportunities quickly and cheaply. marketing. rely on past experiences of success- ful managers by adopting these and other practices: • Describe and measure existing culture and track changes over time • Engage employees early in the process of planning to adopt an ESOP • Invest in training. budgeting. and behaviors. for instance: How does employee ownership affect the ways a firm manages its workflow. especially open book management. . A promising avenue of research is to explore the effect employee ownership might have on an organization's structure. ongoing maintenance requires continual investments of time and energy. such as an internal wiki Further research. The adventurous manager can. it is logical to expect that its effects per- vade all aspects of an organization's functioning. and finance functions? As we have said. administrative and human resource processes. There are many questions to answer. attitudes. and why some em- ployee-owned firms tend to perform better than others. on average. much is known about employee ownership. Volume 30. but there is much more to be learned. Yet. We have discussed the processes by which an ownership culture can help an ESOP firm respond more quickly to strategic opporttanities and threats. though. Perhaps most importantly. better than conventionally-owned firms. confiict resolution and decision-making • Make the financial rewards meaningfial • Have a plan for employees who do not care to participate • Encourage information-sharing and create a mechanism for doing so. however. Number 2 169 ment for a small company and creation absorbs much management time and energy dealing with setting up the necessary legal. problem solving. is the challenge of managing an entity for which there is not much historical experience on which to draw—manag- ers of ESOPs are still something of pioneers. Third. the effects of employee ownership are not limited to employees' percep- tions. but requires proper manage- ment. human resource management. accounting. as we have attempted to do here. Scholars can help by peering into the black box.

it is nec- essary to combine the two. Privatization in the arab world: Prerequi- sites for success. neither condition is suf- ficient alone. a more convincing explanation points to the process through which increased strategic flexibility occurs in an ownership cul- ture. CA: Sage Publica- tions. efficiency. E. individuals experience satisfaction of lower-order needs (wealth) and higher order needs (growth. Thousand Oaks. but must be combined with participatory management. and the necessity of combining financial rewards with group aspirations accounts for the superior performance of ESOPs over conventionally-owned companies. International Review of Administrative Sciences. and Buera. When the two conditions are present they lead to cooperative behavior. (1972). and that achieving firm success will provide psychic rewards in addition to material rewards. account for ownership phe- nomena at two levels of analysis and the interaction(s) between those levels. A. Strategic flexibility emerges from two conditions: shared risk combined with widespread perception of ESOP success as & group goal. (1999). self-actualization). (3) With sufficient resources to measure individual-level perceptions and attitudes and match them with measures of firm performance. Instead. 56. N. and Growth: Human Needs in Orga- nizational Settings. and strategic flexibility. REFERENCES Al-Saigh. M. M. H. Further. Aldrich. Relatedness. (1990). it is possible to test empirically our claims. esteem. To answer our two questions we stipulated a framework that meets three cri- teria: it must be consistent with empirical observations. that increased motivation of employees is responsible for ESOP performance. P. Organizations Evolving. We have met those criteria: (1) The difficulty of creating an ownership culture accounts for the varied performance of ESOPs companies. 125-135. The common explanation. Existence. (2) Indi- vidual motivation is a necessary but not a sufficient condition for firm performance while shared purpose is also a necessary but insufficient condition. When the common goal is achieved (higher stock price). The two must occur together. This means that an employ- ee perceives that the attainment of her individual goal is dependent upon every one attaining their goals. .170 Journal of Business Strategies Empirical evidence indicates that an ESOP alone is not a sufficient condition for superior performance. and be empirically testable. is not sufficient because aggregate motivation is not a signifi- cant factor at the level of the firm. C. Alderfer. New York: Free Press.

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D. New York: John Wiley & Sons. F. A. W. (1983). Nock. CA: The National Center for Employee Ownership. Prior to his academic career. F. 7. In Collected Essays on Self-Manage- ment. S. now J. 81-89. BIOGRAPHICAL SKETCH OF AUTHORS Peter Thompson is an Assistant Clinical Professor in the College of Business Administration at the University of Illinois at Chicago. Vroom. (1989). K. Work and Occupations. U. (1982). Toward a typology of employee ownership. and Blasi. L. Washington. H. J. Ithaca. He holds degrees from Temple University. J. Whyte. J. Northwestem University. (1984). 16:26-42. General Accounting Office. Young. Rosen. S. Annals of the American Association of Political and Social Science. R. 129-148. J. (1986). NY: Comell University Press. from the University of Pennsylvania and has taught at the University of . 14: 137-163. PoZ/cy 5'c/e«ce5. Tucker. He received his Ph. including The Northem Trust. Vanek. S. J. Work and Motivation. (1978). Employee ownership and percep- tions of work. and Blasi. W. and The University of Illinois at Chicago. and the Capital Markets Group at The First National Bank of Chicago. (1964).. The labor-managed economy: A survey of the economics liter- ature. 473: 128- 140. Govemment Printing Office.. Oakland. D.D. (2005). J. he spent 12 years in the banking industry. R. Van Der Dennen. J. and Toscano. C . V. The Great Game of Business. Peace Review: A Journal of Social Justice. (1994). Whyte. M. Steinherr. (1976). P.581-602. and Carberry. M. G. participation and control: A theoretical model. Human Relations.178 Journal of Business Strategies Stack. Employee stock ownership plans: Ben- efits and costs of ESOP tax incentives for broadening stock ownership. Toscano. Worker ownership. GAO- PEMD-87-8. Employee ownership and the future of unions.. Morgan Chase. 17. Mark Shanley is a Professor of Management and Associate Dean at the Col- lege of Business Administration of the University of Illinois at Chicago. 24. Uncertainty and the investment decision under labor-management and their social efficiency implications. E. J. Annals of Public and Co-operative Economy. New York: Crown Publishing Group. DC: U. (1995/ Theory O: Creating an Own- ership Style of Management.

Volume 30. Her research interests include Corporate Social Responsibility. mergers and acquisitions. He is a member of the Editorial Board for Strategic Management Journal. She has published extensively in leading management joumals over the last 25 years and is co-editor of The Oxford Handbook of Corporate Social Re- sponsibility. strategic alliances. Strategic Management and Strategic Human Resource Management. Northwestem University. and healthcare strat- egy- Abagail McWilliams is Professor of Strategic Management at the University of Illinois-Chicago. 2008. His research interests include strategic groups. She eamed a BS in Business and an MA and PhD in Economics from The Ohio State University. and Purdue University. Number 2 179 Chicago. Methodology. .

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