Unlocking the power of ownership

2007

Company owners and managers often wonder why their employees don't feel the same dedication to the job that they do. Who hasn't witnessed the 4:59 pm rush to the parking lot, or the employees who provide the minimum levels of customer service necessary? While there are many possible explanations, in my mind, there is one key reason why employees don't feel or act like owners: it is because they aren't owners.

Soon after I founded Science Applications International Corporation (SAIC), I realized that in order to attract and retain talented employees I would need to offer them real ownership in the business, backed with deeds and not just words. So, while I owned 100 per cent of SAIC's stock on Day One, within a year after I founded the company, my ownership stake was reduced to 10 per cent, with the balance set aside for employees. By the time I retired in 2004, I owned less than two per cent of the company's stock.

SAIC was built on the belief that a company in which employees think and act like owners creates the potential for numerous synergies to enhance corporate performance. The employees benefit by working in an environment that challenges them, values their opinions and ideas, and then rewards them with an ownership stake.

The shareholders, including employees, benefit by enjoying the increased returns that this innovative, efficient organization creates. Ultimately, customers are the real winners, benefiting from the good work of motivated and highly skilled employee owners who help solve critical problems.

A growing body of evidence supports this direct link between employee ownership and performance. For instance, in a review of employee ownership studies for the National Bureau for Economic Research (NBER), Joseph Blasi and Douglas Kruse of Rutgers University reported that on average companies with significant employee ownership had better economic performance although there are some variations between companies.

A series of studies by NBER's Shared Capitalism project by Blasi and Kruse and Richard Freeman of Harvard University help explain these variations. They reported that employee empowerment, good employment relations, and various other work practices help determine whether employee ownership will succeed or not. Employees with the right corporate culture and different types of equity and profit sharing will more responsibly monitor fellow employees.

A U.S. General Accounting Office study of 110 American firms found that participatively managed, employee-owned companies increased their productivity growth rate by an average of 52 per cent per year.

Finally, a study of 45 employee stock ownership plans (ESOP) and 225 non-ESOP companies conducted by the National Center for Employee Ownership (NCEO) revealed that companies that combine employee ownership with a culture of participative management grow 8 per cent to 11 per cent faster than those without such plans in place.

So what exactly is it that causes employee ownership to work its magic on the organizations that choose to adopt it? In my experience, the following attributes of an employee-ownership culture are at the heart of this phenomenon:

Employee ownership allows a focus on long-term goals. Employee ownership helped to insulate SAIC from outside shareholders who had no direct ties to the company. Free of the need to meet short-term performance goals dictated by pressures from outside shareholders, the company could establish growth and profitability goals that best suited its own short- and long-term objectives and the interests of patient stockholders.

Employee ownership helps attract and retain a superior workforce for decentralized growth. SAIC enjoyed greater freedom to use stock ownership to maintain a highly decentralized and entrepreneurial corporate culture and to preserve a focus on individual effort and initiative.

Being employee-owned also gave the company greater latitude in designing stock incentive programs geared to a decentralized company. SAIC's equity compensation plans were very diversified and could reach a greater proportion of its employees than virtually any of its competitors.

Employee ownership facilitates the alignment of key corporate constituencies. At SAIC, the roles and interests of owners, employees, and managers were potentially more mutually supportive and overlapping than in traditional corporations that often experience the divide between executive management and the majority workforce with no ownership stake. As an employee-owned company, management perceived an obligation to be more responsive to employees' needs and concerns.

SAIC's interdependent and self-regulating work environment placed a priority on open communications, employee participation in decision-making, and greater mutual accountability. This helped the company in numerous ways, from controlling salary levels—and costs in general—to getting employee feedback on important corporate issues, to implementing quality improvement efforts that enhanced not only results to the customer and the corporate bottom line but also the return to employee-shareholders.

Employee ownership at SAIC promotes adaptability to maintain customer focus. As a high-tech company in an extremely dynamic and competitive business environment, SAIC had to regularly restructure its operations to respond to changing market needs and opportunities. The company's performance-based ownership incentives encouraged SAIC's employee-owners to maintain a customer-driven focus.

The adaptability of SAIC's employee-ownership system has been a key element in the company's success, and it gave it an advantage over slower-moving competitors.

While employee ownership may have been the foundation on which SAIC's success was built, there is more to the story than that. SAIC's employee-owners treated the business as if it was their own, and they made a point of constantly gauging customer satisfaction. Dissatisfied customers can easily result in lost business, which can result in decreased stock value.

In short, ownership put employees' fingers right on the organization's financial pulse, encouraging them to do the right thing for customers, their colleagues, and the company. The result? An $8 billion business success - one that is poised to continue its growth and success far into the foreseeable future.

About The Author

Robert Beyster
Robert Beyster

Dr. J. Robert Beyster is the founder of Science Applications International Corporation (SAIC) and author of the book The SAIC Solution: How We Built an $8 Billion Employee-Owned Technology Company.