Employee Participation, Firm Performance and Survival: Volume 8

This volume of Advances in the Economic Analysis of Participatory and Labor Managed Firms marks the second volume in this series to be produced by Elsevier. The previous volume “The Determinants of the Incidence and the Effects of Participatory Organizations” edited by Takao Kato and Jeffrey Pliskin, marked the re-launching of the series. (The series began in 1985. Six volumes appeared during 1985–1995 when the series was published by JAI and was co-edited by Jan Svejnar and Derek C. Jones.)

This volume of Advances in the Economic Analysis of Participatory and Labor Managed Firms consists of nine original papers grouped together under the title of “Employee Participation, Firm Performance and Survival.” The first four papers explore the growing area of empirical studies of participatory and labor-managed firms’ survival. The second group of three papers offers a number of new approaches and insights into the performance effects of participatory firms, while the final group of papers provides a broad-ranging synthesis and assessment of the experience of employee ownership and participation in transition.

Research on employee ownership has focused on questions of productivity, profitability, and employee attitudes and behavior, while there has been little attention to the most basic measure of performance: survival of the company. This study uses data on all U.S. public companies as of 1988, following them through 2001 to examine how employee ownership is related to survival. Estimation using Weibull survival models shows that companies with employee ownership stakes of 5% or more were only 76% as likely as firms without employee ownership to disappear in this period, compared both to all other public companies and to a closely matched sample without employee ownership. While employee ownership is associated with higher productivity, the greater survival rate of these companies is not explained by higher productivity, financial strength, or compensation flexibility. Rather, the higher survival is linked to their greater employment stability, suggesting that employee ownership companies may provide greater employment security as part of an effort to build a more cooperative culture, which can increase employee commitment, training, and willingness to make adjustments when economic difficulties occur. These results indicate that employee ownership may have an important role to play in increasing job and income security, and decreasing levels of unemployment. Given the fundamental importance of these issues for economic well being, further research on the role of employee ownership would be especially valuable.

One of the surprising developments in the privatization processes of post-socialist economies was the high incidence of employee ownership. However, the available evidence suggests that the number of employee-owned firms is declining quite rapidly. This paper approaches the decline by using data on individuals in Estonian employee-owned firms. The key idea is that employee ownership can be sustainable only if it is extended also to new, incoming employees.We analyze the determinants of ownership in employee-owned firms and find out that new employees are excluded from ownership. While this finding is consistent with the literature on “degeneration” of employee-owned firms, it is not consistent with earlier empirical research. We argue that in developed economies, there are many countervailing forces that prevent the decline, but these are not in operation in Estonia. The peculiarity of Estonian findings is explained by different motives of entry of employee ownership vs. advanced market economies. However, the findings from this study may carry over to other transition economies as well.

The paper explores the pattern of early closure risks for worker cooperatives, whether this pattern involves a “liability of newness” or a “liability of adolescence” and whether it applies identically to coops created from scratch, to rescues of failing firms and to conversions from sound conventional businesses to the cooperative form. Non-parametric hazard curves are estimated using data on the 2,740 worker cooperatives created in France in 1977–1993, 1,660 of which exited during the period. Comparisons are drawn with conventional French firms whenever data for the same cohorts are available.

Looking at data for over a hundred years on democratic economic institutions in the U.S., there seems to be a clear pattern of initiatives growing strongly, peaking and then falling off. The broad range of data used in this paper allows an investigation of these long-range patterns. These institutions show a life-cycle pattern and appear to be filling in more niches in the economy. The connections between different democratic economic institutions across sectors have historically been weak, but there is evidence of umbrella organizations playing a more active role as a supporting structure to encourage growth.

What enables some employee ownership firms to overcome the free rider problem and motivate employees to improve performance? This study analyzes the role of human resource policies in the performance of employee ownership companies, using employee survey data from 14 companies and a national sample of employee-owners. Between-firm comparisons of 11 ESOP firms show that an index of human resource policies, nominally controlled by management, is positively related to employee reports of co-worker performance and other good workplace outcomes (including perceptions of fairness, good supervision, and worker input and influence). Within-firm comparisons in three ESOP firms, and exploratory results from a national survey, show that employee-owners who participate in employee involvement committees are more likely to exert peer pressure on shirking co-workers. We conclude that an understanding of how and when employee ownership works successfully requires a three-pronged analysis of: (1) the incentives that ownership gives; (2) the participative mechanisms available to workers to act on those incentives; and (3) the corporate culture that battles against tendencies to free ride.

This paper uses an unbalanced panel of 129 French firms over the period 1981–1991 to test the effects of two participatory schemes – profit sharing and employee share ownership – on voluntary quits. The effects of sharing schemes on productivity are well documented and most studies show positive and significant effects on productivity but their effects on quits have been less studied. This paper is the first French study looking at the effects of profit sharing and employee share ownership on quits. Our empirical investigation shows that employee share ownership reduces voluntary quits significantly whereas pure profit sharing has no significant effect.

This paper analyses the mechanisms through which profit-sharing schemes may induce debt constrained firms to improve technical efficiency over time to guarantee positive profits. This hypothesis is first formalised in a partial equilibrium framework and then is tested on a sample of Italian traditional and cooperative firms. Technical efficiency change indexes are computed by DEA. These are regressed on a measure of finance constraints to analyse their impact on firms’ efficiency growth. The results support the hypothesis that a restriction in the availability of financial resources can affect positively the growth in efficiency in firms with profit-sharing schemes.

We find that: (i) substantial insider ownership persists, though majority ownership by non-managerial employees is eroding fast; (ii) flexible pay systems and state-mandated forms of employee representation are becoming more common; and (iii) while increased employee influence is sometimes apparent, privatization often does not produce fundamental changes in inherited patterns of corporate governance.The evidence of the impact upon enterprise productivity indicates: (i) no persuasive evidence that a single form of private ownership is most efficient or that the key obstacle to enhanced performance is employee participation in economic returns; (ii) some evidence that employee participation enhances business productivity; (iii) limited evidence that employee participation boosts the effect of employee ownership and employee participation in profits; and (iv) a role for ownership dynamics as well as changes in patterns of influence in accounting for the determinants of differences in labor productivity. Thus it appears that widely differing ownership structures may be most appropriate when institutional contexts vary.

The paper examines the overall results achieved in the area of privatization in Serbia, as the largest part of the Serbian-Montenegrin economy. The privatization process in Serbia during the 1990s is described in some detail, including the various pieces of privatization legislation (adopted in 1989–1990, 1991, 1994, 1996, 1997), and the overall results achieved, which have been extremely poor: by late 2000, less than 40% of the country’s Gross Material Product was produced by the private sector. The main problems of corporate governance are also discussed in some detail, having in mind the specific situation in Serbia characterized by the maintenance of the ambiguous system of “social property.” The most recent privatization phase started after the political changes in late 2000, and marked a fundamental change in the approach, away from sales at privileged terms to insiders implemented throughout the 1990s, towards commercial sales to strategic owners, at tenders and auctions. The main achievements and shortcomings of the new strategy are discussed.