Employee Owned Companies Pass the “Recession Test”
Employee stock ownership of companies has been promoted in the US since the country’s founding.
After the Revolutionary War, Treasury Secretary Alexander Hamilton fostered the resurgence of the Codfish industry by providing financial subsidies, but only for ships that had written profit-sharing agreements with their crews.
This program, enacted in Y 1792, lasted until after the Civil War.
Today, the idea remains attractive. New research analyzing the past 2 recessions indicates that even modest ownership of companies by workers might help cushion the blow from economic downturns and boost productivity.
A commission co-Chaired by economists Larry Summers and Ed Balls has embraced the notion, and I have long thought it has merit.
The idea is that, in a severe economic crisis, companies whose employees own stock will fare better than others, and this will mitigate the economy-wide costs that come from job cuts or, worse, company bankruptcies. The great financial crisis provided a testing ground for that proposition, and it seems to have passed.
In their new book, “How Did Employee Ownership Firms Weather the Last Two Recessions?,” economists Fidan Ana Kurtulus and Douglas Kruse link company-level data on employment and financial performance to data on employee ownership for all publicly traded U.S. firms.
The levels of employee ownership in the Kurtulus-Kruse data are modest: Even among the firms that have some, 50% have employee-owned shares at or below 1.5% of the total value of the company. In 95% of the employee-owned companies, employees own less than 12%.
Despite these modest shares, the authors find that in response to each 1% increase in the national unemployment rate, companies with no employee ownership have cut jobs by 3%, while those with an employee stock-ownership plan have cut them by just 1.7%. And for companies in which all workers are included in the plan, the fall in employment has been only 0.7 percent. Firms with employee ownership programs are also somewhat more likely than others to survive recessions.
This is not because the companies have more flexible pay structures and thus are able to avoid layoffs, the authors argue.
They find more evidence in favor of a productivity explanation: Some employee ownership is, on average, associated with higher productivity. Yet, even after controlling for that difference, they found that such companies have lower employment variability and higher survival odds. In addition, during the 2 most recent downturns, companies with employee ownership experienced lower (not higher) short-term productivity than others.
What could explain this?
Kurtulus and Kruse point to company culture. In particular, their evidence suggests that employee-owned firms may tend to value long-term connections with their workers, believing they will pay off over time. So, when recession hits, rather than lay off workers, they use the downturn to retrain them and build up their skills in new areas. During that time, measured productivity falls, but it recovers as the investment in human capital reaps dividends. Kurtulus and Kruse are careful to say that they lack direct proof of this explanation.
The broader point is one that Jason Furman and I emphasized in a Y 2015 White Paper: What happens at the company level has macroeconomic consequences. Employee ownership is only one among many tools to affect company culture and performance, and may not make sense in every situation. But figuring out what helps to raise firm-level productivity, which can vary from company to company, matters for more than that firm alone. For too long, economists have viewed company performance and culture as an area of interest mostly for management consultants, and have tended to downplay the importance of differences among firms.
More and more, we are learning that what goes on inside some firms and not others may have surprisingly large effects on the economy as a whole.
By Peter R. Orszag
Paul Ebeling, Editor
Editor’s Note: Mr. Orszag is a Vice Chairman of Investment Banking at Lazard.