Creating competitive advantage: a stakeholder view of employee ownership

Abstract

The discussion in this paper offers answers to two questions: Why do employee stock ownership plans (ESOPs) tend to perform, on average, better than non-ESOP firms, and why do some ESOPs survive and thrive while others underperform or are terminated? Using Donaldson and Lorsch’s (1983) framework we argue that an ESOP can provide incentives that enable managers to mitigate internal conflict, competition for resources, and transaction costs by reducing its dependence upon the product, capital, and labour markets allowing the firm to be more responsive to the external environment and resulting in superior performance. Reduced resource dependence, and increased cooperation among internal stakeholders are not a given; it is the fact of mutual ownership that makes it so. Some ESOP companies are not successful in achieving the necessary stakeholder – resource balance. For that reason they – and firms that are not employee owned – underperform compared to the average ESOP company.