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ABSTRACT
Although abundant evidence demonstrates a positive relationship between employee ownership and firm performance, two questions remain unanswered: why does employee ownership fail to enhance the performance of some adopting firms, and what are the mechanisms by which employee ownership enhances performance? We argue that employee ownership has the potential to enable managers to shape organizational culture in support of firm strategy. In supporting firm strategy, employee ownership has the status of strategic choice. Further, to the extent that organizational culture is strategy-appropriate, it leads to competitive advantage by increasing the availability of resources, the serviceability of those resources to the firm, and flexibility in the allocation of resources to address competitive threats and opportunities. When managers of employee-owned firms are unable to create such a culture, the performance of their firms suffers as a result.
INTRODUCTION
Strategic management, often called 'policy' or nowadays simply 'strategy'...includes those subjects which are of primary concern to senior management, or to anyone seeking reasons for the success and failure among organizations.
Rumelt, Schendel, andTeece (1991)
Why do employee-owned companies perform better, on average, than conventionally-owned companies? And why do some ESOP companies perform better than others?
Employee ownership, also called "shared capitalism" (SC), or "earned capitalism" (EC), a term that includes employee stock ownership plans (ESOPs) stock purchase plans, profitand gainsharing plans, and broad-based stock options (Kruse, Freeman, and Blasi (2010), is a management practice that has been utilized by firms for decades.1
Partly a tool of corporate finance, and partly a tool of human resource management, ESOPs have become a small yet significant part of the economic landscape. Congress created the ESOP in the 1974 Employee Retirement Income Security Act (ERISA), which established the legal basis for ESOPs as a defined contribution retirement plan. Laws and regulations pertaining to ESOPs are regularly considered by Congress and reported in the press. During the last two decades, the number of ESOP firms has held steady at around 10,000 firms (NCEO, 2008).
ESOPs have a dual nature. On the one hand, they are a tool of corporate finance. For instance, the law permits the employee stock ownership trust (ESOT) to borrow money for the purpose of purchasing shares. As such it is a mechanism for raising capital or restructuring...