Employee ownership is great. Employee ownership plus quality jobs is even better.
Private equity giant KKR is taking its much-discussed employee ownership program global; deal teams in the Americas, Europe and Asia-Pacific will adapt the model for local markets, the firm’s Pete Stavros told Buyouts. The news comes on the heels of Blackstone’s announcement that it will include broad-based employee ownership at firms in which it takes a controlling interest. The moves suggest the private equity behemoths see the returns-generating power of making jobs better all the way down the org chart.
The private equity firms aren’t alone in using improved job quality to achieve value creation goals, according to our recent research at WORC, the Workforce & Organizational Research Center (see ImpactAlpha’s coverage, “The next frontier of private equity value creation: Better jobs for frontline workers). Generating superior returns by making lower-level jobs better is nothing new. Future of Work Partners (formerly Two Sigma Impact) and WORC client HCAP Partners have been doing it for years.
Awarding ownership shares alone won’t automatically generate returns for investors or upside for employees – it isn’t a magic wand. To ignite the full benefit and unlock wealth, broad-based ownership must be tied to a quality jobs strategy.
Beyond incentives
Contrary to the narrative many PE firms are accepting, scientific evidence demonstrates that the superior financial results we observe with broad-based ownership don’t come from simply providing a financial incentive.
It makes sense that the PE world would draw the conclusion that the financial incentive of ownership is the sole driver of returns and wealth-building. PE professionals are trained to interpret what they’re observing through the lens of financial mechanisms. In doing so, however, they may be leaving money on the table.
The neoliberal economic theory every MBA student is taught suggests that the relationship between employee ownership and better financial returns is all about utility-maximizing behavior: give people financial incentives to create better business results, and they’ll hop-to.
But a strong and rapidly growing body of research in labor economics indicates that there’s a significant hole in that logic.
While financial incentives do explain a portion of the effect of broad-based employee ownership on financial results, that’s far from the complete story. And, there’s evidence that financial incentives may account for a smaller portion of that relationship than has previously been thought.
Instead, rigorous evidence points to two other key factors that explain why broad-based employee ownership generates better financial results. Those factors are:
- Whether employees’ identities are bound up with their companies, referred to as “organizational identification”
- Whether employees feel a duty to increase their work effort because they’ve been granted an ownership share by their employer, which is called a “social exchange obligation”
The playbook that PE needs – and neglects at its peril – is one that activates these mechanisms.
Ownership behaviors (and how to ignite them)
That begs the questions: how can companies get employees to identify with their organizations? What makes workers feel a duty to work harder?
The answer you often hear is, “Create a culture of ownership.” But that statement is a dead-end unless you can operationalize it and measure progress against financials to maximize returns for investors and wealth-creation for employees.
Culture is notoriously hard to quantify. At WORC, we don’t even try because measuring culture isn’t actionable. If I tell you, “Hey, your culture of ownership is weak,” your question to me will be, “Well, what do I do about that?”
Measures of culture don’t answer that question. Measures of “ownership mindset” don’t answer it either.
Fortunately, there’s a better way: measure ownership behaviors and the extent to which the managerial and operational practices that are known to generate those behaviors are in place.
Ownership behaviors refer to the above-and-beyond actions employees can take – or choose not to take – to improve the company’s fortunes. They’re discretionary efforts and include whether workers speak up when they think there’s a better way to do things or when they have ideas about how to cut costs. It includes whether they seek out information on how the company is doing so they can understand what they can do to improve financial performance.
Measuring ownership behavior is diagnostic: if your people aren’t helping their coworkers do things right when they see a mistake, if they’re not bringing their creativity to solving operational problems, you know exactly where to start to improve “ownership culture.”
The diagnostic we’ve developed, the Ownership Impact Index, measures these behaviors along with the managerial and operational practices that ignite them. The results are highly actionable. And, to help companies assess progress over time and correlate with financial KPIs, we generate two index scores: the first summarizes the prevalence of ownership behaviors, the second summarizes the strength of the practices that ignite them.
Quality jobs
There’s good news. The research is very clear on which managerial and operational practices will generate those above-and-beyond behaviors. Measure how your portfolio companies are doing on these practices and act on the results. That’s how you activate the full power of broad-based ownership with a quality jobs strategy. Do these three things:
- Give employees more control over making decisions that affect their work
- Empower employees with the autonomy to do their jobs in the best way they know how
- Teach frontline supervisors how to be collaborative managers
It’s early days, but the transformation is getting started. Field-leader Apis & Heritage requires a board seat for employees at their portfolio companies to ensure worker voice is part of decision-making at the highest level of the organization. Nonprofit Ownership Works is creating tools for members to help portfolio companies upskill supervisors. Southeast Acquisition Capital focuses on the day-to-day lived experience of employees and how greater autonomy leads to a sense of mastery and purpose for workers.
So, here’s the playbook:
- Award meaningful ownership stakes to employees;
- Transform operational practices to give employees more control over decisions that affect them and more autonomy to do their jobs the best way they know how;
- Upskill frontline supervisors to help them manage their teams collaboratively and shed the command-and-control style that’s so counterproductive to achieving shared goals;
- Activate the above-and-beyond employee behaviors that power better financial results; and
- Enjoy superior returns for investors, wealth-building for employees, and all the community benefits that come from healthier businesses, workers, and families.
Our tagline at WORC is Better Jobs Mean Better Business®. The evidence shows that pairing broad-based ownership strategies with a quality jobs strategy unlocks wealth for all.
Ellen G. Frank-Miller, PhD, is founder and CEO of the Workforce & Organizational Research Center (WORC), a woman-owned social enterprise dedicated to catalyzing a thriving economy where every worker has a job worth having.
