The Effect of Employee Stock Ownership Plans on Corporate Profits. Comment

Abstract

article by D. T. Livingston and James B. Henry in your September, 1980 issue entitled The Effect of Employee Stock Ownership Plans on Corporate Profits has several major flaws: 1) article does not, as it claims, assess ESOPs. ESOPs are a special form of employee ownership that do not require employee stock purchase. first ESOP was established in the mid-i1950s and there were very, very few until Congress passed special legislation encouraging their growth in the mid-1970s. article, however, claims to be studying ESOPs established between 1916 and 1966 in companies with over 1,000 employees. I can assure that no such thing existed. Instead, the authors are looking at employee purchase plans. This is a crucial distinction. Most ESOPs involve most of the company's employees and require no employee contribution. They can, and often do, transfer substansial ownership to employees. In fact, over 250 companies are now majority employee owned. Stock purchase plans, by contrast, only occasionally provide such broad coverage, and their stock distribution tends to be heavily skewed towards upper level employees, for obvious reasons. Moreover, it is a rare plan that provides any significant number of employees with any significant amount of stock. There is no theoretical reason for employees in this situation to be more motivated, or for group productivity norms to emerge. This is not the case in an ESOP that provides substantial ownership to employees. 2) Almost as remarkable as this error is the failure to even mention the two major studies on the impact of employee ownership on profitability. first was done in 1977 by the Institute for Social Research at the University of Michigan the nation's leading social research center. They compared 30 employee ownership companies with a matched group of similar companies (not on a one on one basis, but compared to the general performance of firms in that field). They found that employee ownership companies were 1.5 times as profitable as non-employee ownership companies and that the more the employees owned, the more profitable the company was. Around the same time, researchers at Cornell found that of the approximately 60 buyouts of failing firms by employees that have occurred since 1971, 58 have succeeded, and most have turned the companies around to steady profitability. Several