More and more people are talking about employee ownership as a strategy to strengthen the American economy and to create broad-based.
But what exactly does “employee ownership” mean?
The big idea behind employee ownership is to distribute the rights and responsibilities of business ownership more broadly. In practice there are as many ways to do this as there are employee-owned companies, but generally the rights and responsibilities of ownership fall into three categories:
All forms of employee ownership involve sharing wealth with workers. They get skin in the game through some combination of direct distributions and financial instruments that have their value tied to the company’s share price. Examples include an annual profit-sharing check, share or option grants, and the wealth effect from owning company stock.
A key notion across all forms of employee ownership is that the wealth sharing must be “broad-based”. Access to ownership must be open to everyone in the company on a reasonable timeline and the concentration of ownership must be limited. In some cases employees are expected to pay for their ownership stake, but more frequently it is a benefit of employment that does not require a buy-in from the employee-owner.
Operational Decision Making
Many employee-owned companies set up practices that expand employee participation in decision making. These practices may increase the role of employees in setting the company’s overall direction, encourage employees to generate new product and service ideas, or simply offer greater autonomy over day-to-day work.
Often increased involvement in decision making goes hand in hand with education about financial literacy and open book management. The idea is that providing workers with transparent access to information about the business and the knowledge required to use this information can help them better think and act like owners, which ultimately improves the company’s performance.
At some employee-owned companies, workers play a role in nominating, electing, and potentially serving on the board of directors. At companies with majority employee governance, workers effectively control the organization and management is formally accountable to the workforce. For instance, worker cooperatives are governed by workers who elect the board democratically (on a one-person-one-vote basis). Some companies take this even further and have employees vote on major strategic decisions, though today this approach is rare.
Employee Ownership in Practice
In practice there are as many different approaches to employee ownership as there are employee-owned companies. For many employee-owned companies, ownership is purely about wealth-building. But others see the financial aspects of ownership and the day-to-day involvement in decision making as inseparable as the two sides of one coin.
The specific meaning of employee ownership can even evolve within the same company over time. Many companies begin their employee ownership journey as the succession plan for a departing founder. Immediately after the transition, the focus might be on long-term wealth building. But as the culture of ownership develops, we have seen many leadership teams become interested in increasing the financial literacy and opening up the books to help employees become even more engaged with their new role as owners. We’ve even seen varying approaches across branches within the same company!
One of the major questions we faced early on with Certified Employee-Owned was: given the complicated and diverse nature of employee ownership, how can you say that one company is “employee-owned” and another isn’t? But that’s a whole different story.