by Henry Engler, Regulatory Intelligence

The wealth gap in the United States has been a growing and elusive problem. Experts argue it is a primary driver behind the country's growing political polarization and hopes for government intervention are slim. Enter the private sector.

New, preliminary research suggests that companies that provide their employees with share ownership as a significant part of their compensation not only put their workers on a path towards greater personal wealth but also reward their shareholders — an outcome that may surprise many.

There is a wealth of academic research that suggests that if you provide employees with greater share ownership you will get greater productivity, less turnover and a stronger commitment to the firms they work for. The logic is straightforward: incentivize your employees to become part owners, and they might begin to act like ones.

Some of the strongest evidence can be found from examining companies that are formed as Employee Stock Ownership Plans (ESOPs), established by Congress in 1974. ESOPs provide companies tax incentives to finance the purchase of shares through loans to an employee benefit trust where employees do not have to pay for shares. For companies that have operated as ESOPs for many years, the benefits are clear.

"The shared values, the shared accountability that we all have to share in the success that we create for our clients but also for each other is the critical element that makes the employee ownership model such an important thing to be a part of," Michael Williams, chief financial officer for Black & Veatch, told a recent Aspen Institute conference.

Black & Veatch, a company that started providing infrastructure services more than 100 years ago became employee-owned in 1999, with operations across numerous countries.

Wall Street takes notice

The multiple benefits of employee ownership have seemed to attract the interest of certain investment companies. Some of the largest U.S. private equity firms are buying into the employee ownership model. KKR, Apollo Capital Management, Ares Management, Silver Lake, and TPG are all implementing programs to empower the employees of their portfolio companies with ownership.

Most recently, Blackstone kicked off a program to grant equity to all 18,000 employees of Copeland, a climate technology firm it recently acquired. At KKR, Pete Stavros, co-head of global private equity, has founded "Ownership Works," a non-profit focused on broadening corporate ownership and enhancing the financial resiliency of the workforce.

While the model used by private equity firms is different from the traditional ESOP structure, the recognition by Wall Street that employee ownership has numerous benefits is seen as an important milestone.

Employee ownership and shareholder value

What has been less discussed and examined is the potential for employee ownership in large, publicly traded U.S. companies to lead not only to greater wealth for employees but also for the firm's shareholders. "Work to Own" is a non-profit focused on creating an index of ownership inequality by a company and using that benchmark to motivate more broad-based ownership.

Bill Mundell, the organization's chairman and founder, told Regulatory Intelligence that he and his team are studying whether they "can demonstrate something disarmingly simple: that higher employee ownership is associated with abnormal stock returns, an objective measure that all public company CEOs are bound to strive for."

As a starting point, they assembled publicly available data and created an estimate of the number of shares held by employees. Their calculation is based on a comprehensive set of integrated employee ownership data for the largest 1,500 publicly traded companies in the United States, representing over 75% of the U.S. stock market.

"Our initial findings are promising," Mundell said. "We found a significantly higher return over three years in high employee ownership companies versus low employee ownership companies for the largest 1,500 public companies. Our abnormal return results thus far are very suggestive that employee ownership contributes to value creation."

Next step in the research process

According to Ethan Rouen, professor at the Harvard Business School, and a lead researcher for Mundell's team, "the next big step is really getting a better understanding of who employees are as shareholders."

Flying in the face of long-established finance and investment principles, the data they found show that once employees are granted company shares, they tend to become long-term investors.

"We're learning that when employees get shares, they don't do what economic theory would predict, which is to sell them quickly, to diversify their risk," Rouen said. "They tend to hold onto these shares for a really long time."

The group is now trying to further refine their results and get a more accurate sense of how many shares are held by employees through share-based compensation.

"Once we do that, we'll be able to go on to rank companies more accurately and create a list of the hundred companies that are doing this best," Rouen said.

This article was published by Thomson Reuters Regulatory Intelligence on September 26, 2024. For more information about Regulatory Intelligence please visit:  

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