The success factors for employee ownership implementation

The success factors for employee ownership implementation

Shaun Gareth Smit

Research assignment presented in partial fulfilment

of the requirements for the degree of

Master of Business Administration

at Stellenbosch University

Supervisor: Mr. R Fourie

Degree of confidentiality: A March 2015

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Declaration

I, Shaun Gareth Smit, declare that the entire body of work contained in this research assignment is

my own, original work; that I am the sole author thereof (save to the extent explicitly otherwise

stated), that reproduction and publication thereof by Stellenbosch University will not infringe any

third party rights and that I have not previously in its entirety or in part submitted it for obtaining any

qualification.

S G Smit 25 January 2015

Copyright © 2015 Stellenbosch University All rights reserved

Stellenbosch University http://scholar.sun.ac.za

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Acknowledgements

Firstly, my sincere thanks goes to my supervisor, Rudolph Fourie, who has provided a patient

rudder to steer this ship, which at times felt lost at sea. I really appreciate your continued support,

and enjoyed those eureka moments where your guidance just clicked. Secondly, thanks to my

boss and friend, Bruce Hunt, who encouraged and supported me in furtherance of my studies.

Last but not least, heartfelt thanks must go to my family who continued to support me through this

challenging process. To my wife, Justine, your patience and unwavering support are truly

appreciated.


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Abstract

Today’s business world is characterised by technological advance, globalisation, and concentrated

ownership of productive assets. The result is a dysfunctional economy with income being

concentrated with capital owners, and related economic insecurity for a majority of the population.

Employee ownership offers a more balanced economy with more distributed capital ownership.

This is particularly relevant in South Africa, which faces numerous socio-economic challenges.

The South African government has specifically identified employee ownership as a means to

facilitate broad-based economic empowerment of previously disadvantaged persons.

Employee ownership not only offers benefit at societal level, it also offers a vehicle to provide

benefit at personal and organisational levels.

Given the benefits of employee ownership, the objectives of this research are to identify the

success factors of employee ownership implementation, and assess whether such success factors

have been addressed in implementation of employee ownership in South Africa.

The research methodology involved performance of a literature review of success factors of

employee ownership implementation and a qualitative study involving a discussion framework and

semi-structured interviews regarding implementation of employee ownership in South Africa.

Interviewees included management of South African companies that have implemented employee

ownership, trade union representatives involved with employee ownership, employee ownership

scheme fiduciaries, socio-economic development specialists, and employee ownership advisors.

The literature review provided the international context to employee ownership and related success

factors, and the interviews provided a South African analysis thereof.

The research findings identified success factors which relate to education and training of

employees; ensuring the initiative is perceived as being fair; delivering meaningful financial benefit

to employee participants; establishing an ownership-oriented culture in the business; instilling a

commitment to pursuing key business disciplines; implementing sound employee ownership

governance; engaging with unions; and employing specialist advisors. The identified success

factors were used to develop a success factor framework, which was used in guiding discussions

with interviewees, and which was compared to Employee Share Ownership Scheme requirements

as set out in the Codes of Good Practice on Broad-based Black Economic Empowerment.

The findings included that implementation in South Africa has predominantly been compliance

driven, in an attempt to address transformation – specifically ownership by historically

disadvantaged South Africans. Management has typically not been focussed on changing

business culture or operations, and no success factors in this regard have been addressed.

Employee ownership in South Africa has, in general, been considered a failure as few schemes

have delivered meaningful financial benefit to participants.


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The recommendations for businesses implementing employee ownership are regarding awareness

of primary objectives, understanding the potential benefits of employee ownership, understanding

related success factors, and managing employee expectations.

The recommendations for government organisations that wish to promote employee ownership

implementation as well as obtain maximum benefit for employees, businesses, and society as a

whole are regarding understanding the potential benefits of employee ownership, understanding

related success factors, considering past employee ownership successes and/or failures, and

consideration of appropriateness of policies and legislation.

Further employee ownership research includes study of best practice structuring; challenges faced

by businesses; the employee perspective; South African policies and legislation and assessment

against recognised success factors; and study of international tax treatment in order to drive South

African implementation.

Key words

Employee ownership

Employee share ownership plan (ESOP)

Shared capitalism

Ownership culture

Ownership thinking

Broad-based Black Economic Empowerment (BEE or B-BBEE)


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Table of contents

Declaration ii

Acknowledgements iii

Abstract iv

List of tables viii

List of figures ix

List of acronyms and abbreviations x

CHAPTER 1 INTRODUCTION 1

1.1 INTRODUCTION 1

1.2 PROBLEM STATEMENT 1

1.3 RESEARCH OBJECTIVES 2

1.4 RESEARCH METHODOLOGY 2

1.4.1 Overview 2

1.4.2 Population and sample 3

1.4.3 Design of discussion framework 3

1.4.4 Data collection 3

1.4.5 Data analysis 4

1.5 CLARIFICATION OF KEY CONCEPTS 4

1.5.1 Employee ownership 4

1.5.2 Successful employee ownership 4

1.6 IMPORTANCE/BENEFITS OF THE STUDY 4

1.7 CHAPTER OUTLINE 5

1.8 SUMMARY 5

CHAPTER 2 LITERATURE REVIEW 6

2.1 INTRODUCTION 6

2.2 DEFINING EMPLOYEE OWNERSHIP 6

2.3 HISTORY OF EMPLOYEE OWNERSHIP 7

2.4 PREVALENCE OF EMPLOYEE OWNERSHIP 9

2.5 REASONS FOR IMPLEMENTING EMPLOYEE OWNERSHIP 10

2.6 ASSESSING THE IMPACT OF EMPLOYEE OWNERSHIP 13

2.7 DEFINING SUCCESSFUL EMPLOYEE OWNERSHIP 16

2.8 SUCCESS FACTORS OF EMPLOYEE OWNERSHIP 17

2.9 EMPLOYEE OWNERSHIP SUCCESS FACTOR FRAMEWORK 45

2.10 REVIEW OF IDENTIFIED EMPLOYEE OWNERSHIP SUCCESS FACTORS AGAINST BEE CODES REQUIREMENTS FOR EMPLOYEE SHARE OWNERSHIP SCHEMES 45

2.11 SUMMARY 47

CHAPTER 3 FINDINGS 48

3.1 INTRODUCTION 48


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3.2 PROFILE OF INTERVIEWEES 48

3.3 MAIN FINDINGS 49

3.4 SUMMARY 57

CHAPTER 4 SUMMARY, CONCLUSION AND RECOMMENDATIONS 61

4.1 INTRODUCTION 61

4.2 SUMMARY OF MAIN FINDINGS 61

4.2.1 Overview 61

4.2.2 Education and training of employees 63

4.2.3 Fairness 65

4.2.4 Meaningful ownership stake 65

4.2.5 Ownership-oriented culture 67

4.2.7 Commitment to pursuing business disciplines 69

4.2.8 Well governed fiduciary body with company and worker representation 71

4.2.9 Union involvement and support 72

4.2.10 Alignment of human resources management system 73

4.2.11 Employment of specialist employee ownership advisors 73

4.3 CONCLUSIONS 73

4.4 RECOMMENDATIONS 76

4.6 FURTHER RESEARCH 77

REFERENCES 78

APPENDIX A: PROFILE OF SELECTED INTERVIEWEES 85

APPENDIX B: DISCUSSION FRAMEWORK 86

APPENDIX C: SUMMARISED INTERVIEWS 88


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List of tables

Table 2.1: Growth in number of ESOPs and equivalent schemes, and related participants, in United States of America from 1975 to 2012 8

Table 2.2: Requirements for recognition of an ‘Employee Share Ownership Scheme’ as per the BEE Codes 11

Table 2.3: Contrast of management under successful employee ownership to traditional management across key aspects 19

Table 2.4: Translation of ownership rights into organisational practices 19

Table 2.5: Consensus employee ownership best practice obtained from United Kingdom case studies commissioned by the EOA 24

Table 2.6: Consensus employee ownership best practice obtained from United Kingdom case studies commissioned by the EOA 35

Table 2.7: Review of identified employee ownership success factors against BEE Codes requirements for Employee Share Ownership Scheme recognition 46

Table A.1: Profile of selected interviewees 85

Table C.1: Summary of interview 1 with a specialist employee ownership advisor 88

Table C.2: Summary of interview 2 with a specialist employee ownership advisor 91

Table C.3: Summary of interview 3 with a member of management of a South African company that has implemented employee ownership 93

Table C.4: Summary of interview 4 with a member of management of a South African company that has implemented employee ownership 95

Table C.5: Summary of interview 5 with a trade union representative 98

Table C.6: Summary of interview 6 with a trade union representative 100

Table C.7: Summary of interview 7 with a socio-economic development specialist at the Industrial Development Corporation 103

Table C.8: Summary of interview 8 with a chairperson of a large ESOP 106


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List of figures

Figure 2.1: Employee Ownership Success Factor Framework 45

Figure 3.1: Comparison of success factor identified by interviewees against those as set out in the Employee Ownership Success Factor Framework 59

Figure 3.2: Comparison of success factor identified by interviewees against those as set out in the Employee Ownership Success Factor Framework 60


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List of acronyms and abbreviations

BEE Broad-based Black Economic Empowerment

BEE Codes Codes of Good Practice issued under the Broad-Based Black Economic

Empowerment Act of 2003

CRISA Code for Responsible Investing in South Africa

IDC Industrial Development Corporation

EOA Employee Ownership Association

ESOP employee share ownership plan

NCEO National Center for Employee Ownership


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CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION

In a world of rapid technological advancement, humans become relatively less productive. A

consequent result in a free-market economy is that primary distributions (proportional to productive

inputs) deliver progressively less income to workers and more to capital owners. This differential

productiveness results in concentrated income, which is not fully recycled as consumption of goods

and services, leading to a dysfunctional economy where a majority of the population face economic

insecurity due to the capital concentration and inadequate consumer demand (Kelso & Adler,

1958). Employee ownership offers a solution to this problem by establishing more distributed

capital ownership and a more balanced economy (Kelso & Adler, 1958).

In a manifesto for employee ownership, the Employee Ownership Association (“EOA”) (2009: 2)

asserts that employee ownership can be a government policy instrument that is economically

effective, politically attractive and socially just. Employee ownership, without net cost to the

government, can rebalance the economy through wider distribution of wealth, re-invigorate civic

society, rebuild trust, and provide people with more satisfying and productive work (EOA, 2009: 2).

Various research has shown that employee ownership, when successfully implemented, has a

positive effect on employee motivation and organisational performance. In a South African

context, the Broad-based Black Economic Empowerment Act (Republic of South Africa, 2003a)

discusses the ownership and management of enterprises and productive assets by workers as an

integrated socio-economic strategy included in the definition of ‘Broad-based Black Economic

Empowerment’ (“BEE”). Employee ownership can therefore be implemented as part of a

business’ approach to BEE. Employee ownership therefore potentially offers a vehicle to provide

benefit at personal, organisational and societal level.

The research herein primarily seeks to identify the success factors of employee ownership

implementation. A secondary objective of the research is to assess whether identified employee

ownership success factors have been addressed in ESOP implementation in South Africa. Such

information may be of interest to public organisations seeking to promote employee ownership,

and companies that are intending to implement an employee share ownership plan (“ESOP”).

1.2 PROBLEM STATEMENT

A successfully implemented ESOP offers benefits to individuals, organisations, and ultimately

society as a whole. These benefits are linked and essentially support one another. The ultimate

societal benefit is particularly important when considering the significant wealth inequalities and

poverty that faces South Africa (Republic of South Africa, 2012: 14).


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A lack of knowledge of the success factors of employee ownership implementation will hamper

successful implementation of such schemes, and related personal, organisational and socio-

economic benefits will be foregone. For example, based on a review of the qualification

requirements for an Employee Share Ownership Scheme as set out in Codes of Good Practice

issued under the Broad-Based Black Economic Empowerment Act of 2003 (“BEE Codes”), it

appears that the little policy that there is regarding employee ownership was drafted without

significant research as a basis.

Despite their being a large volume of research on employee ownership internationally, it remains

“on the outskirts of academic theory” (Freeman, 2007: 26), and the value of additional research

was therefore confirmed. Freeman (2007: 26) argues that employee ownership has true merits,

but in order to be more seriously considered by academics, politicians and business in general,

several problems need to be addressed. The first problem identified (Freeman, 2007: 26) is that

the predominant use of written surveys in the historical studies has limitations and yields one-

dimensional results. The second problem (Freeman, 2007: 27) is that gaps in research exist and

further study is necessary. The third problem (Freeman, 2007: 27) is that few authors on

employee ownership publish in peer-reviewed journals, and notably not in top-tier journals.

It follows that the resulting primary research question of this research is ‘what are the success

factors of employee ownership implementation?’.

Once the primary research question is answered, the secondary research question is then ‘to what

extent have employee ownership success factors been addressed in ESOP implementation in

South Africa?’.

1.3 RESEARCH OBJECTIVES

Following on from the research questions, the research objectives are to identify the success

factors of employee ownership implementation, and then to assess whether identified employee

ownership success factors have been addressed in ESOP implementation in South Africa.

1.4 RESEARCH METHODOLOGY

1.4.1 Overview

Following most other research on employee ownership, the research has been performed from the

perspective of business. Accordingly, the concept of ‘successful employee ownership’ has been

defined, for the purposes of this research, in this context.

The research is exploratory in nature, and in order to add to the existing body of knowledge on the

subject matter as possible, involves two methods:

i) a literature review of international literature addressing success factors of employee

ownership implementation; and


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ii) a qualitative study involving a discussion framework and semi-structured interviews with

suitable persons that have been involved in the implementation of employee ownership in

South Africa.

The unit of analysis is success factors for employee ownership.

1.4.2 Population and sample

The study involves judgemental sampling of suitable persons that have been involved in the

implementation of employee ownership in South Africa and that are willing to participate in this

research. Such persons include management of South African companies that have implemented

ESOPs, trade union representatives that have been involved in ESOP implementation and/or have

acted as ESOP fiduciaries, ESOP fiduciaries, socio-economic development specialists at the

Industrial Development Corporation (“IDC”), and employee ownership advisors. The IDC is

included in the research as it is a government-owned institution that has financed and supported

over seventy ESOPs. It therefore provides useful input to, and a different perspective on, the

research. Research is conducted through semi-structured interviews, and open-ended questions

are used to draw as full and rich information as is possible.

In terms of interviews with suitable persons, with regard to interviews with management of South

African companies that have implemented employee ownership, the sampling population excludes

management of any company with an ESOP that has been in existence for less than three years.

With regard to interviews with trade union representatives, the sampling population excludes any

representative that has been involved in implementation of less than five ESOPs. With regard to

ESOP fiduciaries, the sampling population excludes any person that has been a fiduciary for less

than three years. With regard to interviews with employee ownership advisors, the sampling

population excludes any advisor that has advised on implementation of less than five ESOPs.

Appendix A provides a profile of the respective selected interviewees.

1.4.3 Design of discussion framework

Following the literature review a discussion framework was designed through identification of key

themes in the literature, and related key discussion points. The discussion framework is included

as Appendix B.

1.4.4 Data collection

Data collection involved semi-structured interviews with suitable persons over a six month period in

2014. Interviews were based on the discussion framework. Except for one interview that was

performed telephonically due to logistical constraints, all interviews were performed in person.

Interviews were electronically recorded. In some cases, follow up discussions were held via

telephone or email.


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1.4.5 Data analysis

Following performance of the interviews a review of such interviews was performed. This involved

summarising each interview under the identified key themes, and then identifying salient points

under such key themes for inclusion in research findings. Summarised interviews are included as

Appendix C.

1.5 CLARIFICATION OF KEY CONCEPTS

1.5.1 Employee ownership

The definition of employee ownership has been considered in section 2.2 of the literature review.

For the purposes of this research, the term ‘employee ownership’ is used in the context of any

scenario where employees directly or indirectly participate in equity ownership of their employing

company. Such equity participation may be a majority or minority shareholding. The term ‘ESOP’

can, for the purposes of this research, be used interchangeably with ‘employee ownership

scheme’.

1.5.2 Successful employee ownership

The interpretation of ‘successful employee ownership’ has been considered in section 2.7 of the

literature review. From a review of the literature the concept of employee ownership positively

impacting business performance appears to be the generally implied definition of ‘success’

regarding implementation of employee ownership, and this definition has been applied for the

purposes of this research.

1.6 IMPORTANCE/BENEFITS OF THE STUDY

In a survey of companies that have implemented employee ownership, Burns (2006: 9) identified

that significant challenges faced by such companies include sourcing information on making

employee ownership successful, finding expert advisors with suitable employee ownership

experience, and identifying companies against which they can be benchmarked. Although this was

a United Kingdom survey, the researcher is of the opinion that these challenges are not unique to

companies in the United Kingdom.

Identifying the success factors of employee ownership adds to the international body of knowledge,

which can provide relevant public and private organisations with valuable guidance and insight into

employee ownership implementation. This thereby improves the probability of successful

implementation, and of corresponding benefits to individuals, organisations and society as a whole.

These benefits are particularly important when considering the significant wealth inequalities and

poverty that faces South Africa. (Republic of South Africa, 2012: 14). From a South African

company perspective, companies can enable benefits from employee ownership implementation to


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transcend beyond just BEE recognition to improved employee commitment, job satisfaction, and

ultimately, improved organisational performance.

Assessing whether identified success factors have been addressed in ESOP implementation in

South Africa provides an understanding of why employee ownership success has or has not been

successful. Further, it provides an opportunity to reflect and learn from past ESOP

implementation.

1.7 CHAPTER OUTLINE

Chapter 2 provides a literature review.

Chapter 3 provides a discussion of the findings in relation to research performed.

Chapter 4 gives a summary of the findings, a conclusion, as well as limitations of this study. It also

offers some recommendations, and suggestions for future research.

1.8 SUMMARY

Achieving the research objectives enables the building of a useful body of knowledge that can

provide relevant public and private organisations with valuable guidance and insight into employee

ownership implementation. This thereby improves the probability of successful implementation,

and of corresponding benefits to individuals, organisations and society as a whole.


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CHAPTER 2

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter reviews literature on employee ownership, with particular focus on success factors of

employee ownership. To better understand and give context to employee ownership and the

research, thereby enabling richer consideration of success factors, a definition of employee

ownership is considered, the history and prevalence of employee ownership reviewed, reasons for

implementing employee ownership analysed, and research on the impact of employee ownership

reviewed. Thereafter successful employee ownership is defined before performance of a

comprehensive analysis and review of success factors. In this respect, the extensive work of

Rosen provides a good framework for describing success and his work has purposefully been used

to explain and research success, with the work of others building onto this. Following the analysis

and review of success factors, information gathered is collated in an Employee Ownership

Success Factor Framework. Lastly, identified success factors as per this framework are compared

to the BEE Codes’ requirements for recognition of an Employee Share Ownership Scheme.

This literature review assists in answering the research question regarding success factors of

employee ownership by providing a comprehensive foundation of information regarding success

factors of employee ownership. The National Development Plan highlights poverty and wealth

inequalities as key challenges faced by South Africa (Republic of South Africa, 2012: 14). BEE is a

socio-economic policy of the South African government with the purpose of increasing the

participation in the economy of South Africans who were historically disadvantaged under the

Apartheid regime (Republic of South Africa, 2003b: 12). The BEE Codes, which provide a

framework for implementing and measuring BEE, include employee ownership as a mechanism for

achieving broad-based empowerment. Research on employee ownership in South Africa is

scarce, and government policies appear not to have a strong research basis.

The literature review also provides a comprehensive foundation of information onto which

subsequent research can build.

2.2 DEFINING EMPLOYEE OWNERSHIP

According to the Employee Ownership Foundation, employee ownership involves direct or indirect

employee participation in ownership of their employer company (Employee Ownership Foundation,

2010). Blasi, Freeman, and Kruse (2010: 4) state that employee ownership is a form of ‘shared

capitalism’ - compensation practices through which employee remuneration or wealth is dependent

on performance of the relevant employee work group or employing business. The EOA is an

association of companies in the United Kingdom with significant employee ownership, and states


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that employee ownership exists when employees of a business have a meaningful stake in the

business (EOA, 2013: 4). Employee-owned organisations are defined as organisations that are

wholly or partially owned by a broad base of employees, including senior management and lower-

level employees (Matrix Evidence, 2010: 7). Employee-owned organisations are generally

distinguished from co-owned organisations, where employees hold a substantial but minority stake

(Matrix Evidence, 2010: 7).

Employee ownership extends from a business being wholly owned by employees, to employees

owning a majority stake or a significant minority stake in the business, usually through a vehicle

which enables collective voting and decision-making (Blasi, Freeman, & Kruse, 2010: 4). There

are three forms of employee ownership – direct ownership, where employees become individual

owners of shares in their company; indirect ownership, where share are held collectively on behalf

of employees, most often through a trust; or a combination of direct and indirect ownership (EOA,

2013: 4).

2.3 HISTORY OF EMPLOYEE OWNERSHIP

Employee ownership is not a new development. In analysing the history of employee ownership,

the Employee Ownership Foundation (Employee Ownership Foundation, 2010) states that in the

mid nineteenth century, as the United States of America transitioned to an industrial economy,

leaders of certain major national corporations recognised the fact that retiring workers may face

financial difficulties. They decided to set aside company shares to be given to such workers.

Rosen, et al., (2005: 50) explain that from early in the nineteenth century employees in a particular

trade would group together as an organisation – most often in the form of a co-operative. They

further state that worker co-operatives existed in many countries throughout Europe.

John Stuart Mill, a British philosopher, economist and civil servant, described as the “most

influential English-speaking philosopher of the nineteenth century” (Wilson, 2014) was a staunch

promoter of, amongst other things, economic democracy. He argued that to sustain improvement

for humankind, work practices require a shift from employees being voiceless people under control

of a capitalist employer to employees collectively owning the capital and being able to make

decisions in the business (Mill, 1848).

In the United States of America in the early twentieth century there was support for the employee

ownership concept from influential people like Leland Stanford, Charles W. Eliot and John D.

Rockefeller Jr., but there were also many sceptics, and with massive unemployment and

plummeting share prices during the Great Depression, the concept of employee ownership was all

but forgotten (Rosen, et al., 2005: 52).

Louis Kelso, a lawyer, author, and investment banker, is commonly cited as a proponent of

employee ownership and the founder of the modern day ESOP in the United States of America. In

1958 Louis Kelso and Mortimer Adler formally introduced the concept of employee ownership as a


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means to broaden the capital-owning element of the economy, and enabling households to

participate in the creation of wealth (Kelso & Adler, 1958).

This consideration of employee ownership to broaden capital ownership was an element of Kelso’s

focus on what he believed was a flawed classical paradigm of economics – one which ignored the

impact of technological change and the consequent shift in distribution of wealth in a free market

economy. This shift involved increasing wealth being distributed to capital owners and decreasing

wealth to the (increasingly relatively unproductive) labour force, resulting in economic insecurity for

the majority of the population (Kelso Institute, 2000).

It took almost twenty years for the concept of employee ownership to gain traction, and this was

achieved through Kelso convincing Russell Long, a powerful politician, of the attractiveness of the

concept and to support the subsequent insertion of provisions regarding ESOPs into legislation

(Rosen, et al., 2005: 61). Employee ownership then spread, albeit slowly initially, in the United

States of America, with an increase in the prevalence of ESOPs, the establishment of various

employee ownership related organisations, as well as specialisation of consulting and law firms in

employee ownership (Rosen, et al., 2005: 64). Table 2.1 below shows the increase in number of

ESOPs and related employee participants from 1975 to 2012.

Table 2.1: Growth in number of ESOPs and equivalent schemes, and related participants, in

United States of America from 1975 to 2012

YearNumber of

schemesParticipants

1975 1 600 250 000

1980 4 000 3 100 000

1990 8 100 5 000 000

2000 10 500 6 400 000

2005 10 000 11 700 000

2010 11 000 10 600 000

2012 12 000 11 000 000

Source: National Center for Employee Ownership, 2014a.

With regard to employee ownership in South Africa, Swanepoel (2008: 515) states that the concept

of employee ownership is not unfamiliar, however it rarely extends beyond managerial and

executive levels. Swanepoel (2008: 515) further states that in more recent times employee

ownership became more closely associated with BEE. It appears that a plethora of empowerment

transactions were implemented in the few years after the Broad-based Black Economic

Empowerment Act was gazetted in January 2004. Examples of this include:

i) Mondi’s 2004 empowerment transaction whereby 5% of share capital was allocated to an

Employee Share Ownership Plan (Engineering News: 2004);


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ii) an empowerment transaction in 2005 implemented by FirstRand which incorporated a 3.5%

ESOP (ShareNet: 2005);

iii) a 15% Distell empowerment transaction in 2005, with 45% of the benefit accruing to an

Employee Share Ownership Plan (Moneyweb: 2005);

iv) 13% of De Beers being transferred to two employee trusts as part of a 2005 empowerment

transaction (Anglo American: 2005); and

v) AngloGold Ashanti’s 2006 empowerment transaction in which 1.4% of share capital,

equivalent in value to 4.4% of South African operations, was transferred to non-managerial

employees (AngloGold Ashanti: 2006, 138).

Reporting back on a trip to South Africa and meetings with the IDC, National Center for Employee

Ownership (“NCEO”) founder and executive director, Corey Rosen reported that employee

ownership is one of the preferred means to achieving truly broad-based transformation and

empowerment (Rosen, 2012). He further reports that through the IDC the South African

government is seeking ways to provide more incentives for these plans as well as clearer legal

structures (Rosen, 2012).

2.4 PREVALENCE OF EMPLOYEE OWNERSHIP

2.4.3 South Africa

There does not appear to be much research on employee ownership in South Africa and little

evidence exists regarding the number of ESOP that have been implemented. Corey Rosen, the

founder of the NCEO in the United States of America, visited South Africa in 2012 with the purpose

of meeting with government officials regarding employee ownership and speaking at workshops on

the subject. Following the visit, it was reported in the organisation’s blog that there are an

estimated 500 ESOPs in place in South Africa (NCEO, 2012).

2.4.4 Other countries

The NCEO calculates that approximately 36% of the American workforce benefits from

shareholding in their employers through varying forms of ownership (NCEO, 2014b). As can be

seen in table 2.1 above, the NCEO estimates the number of ESOPs and equivalent schemes in the

United States of America as of 2012 being 12 000, with related number of employee beneficiaries

being 11 000 000. The value of assets held in the ESOPs is estimated, as of 2012, at $858 billion

(NCEO, 2014b). In a separate report, the NCEO states that regarding the above estimated

number of ESOPs and equivalent schemes as of 2012, approximately 5% are in publically traded

companies, and 95% in private companies (NCEO, 2014c).

In a report on the impact of employee ownership, Iain Hasdell – the chief executive of the EOA –

states that in the United Kingdom employee ownership is being embraced as the most prominent

alternative to conventional forms of business ownership (EOA, 2012: 2). Approximately 9% of


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FTSE 100 companies have implemented tax-approved Share Investment Plans, which involve

employees acquiring shares in their employer (Brione and Nicholson, 2012: 12). As of 2011, there

were in excess of 800 active Share Investment Plans (HMRC, 2012). Brione and Nicholson (2012:

12) state that, in addition to tax-approved schemes, there are many employee share schemes that

are not tax-approved. The EOA states that businesses that have implemented employee

ownership exist in most sectors of the United Kingdom economy, and that such business are of

varying size, geographic location, and varying stages of business life cycle (EOA, 2013: 3).

The PEPPER IV Report, a European Union funded research report on employee financial

participation in businesses operating in European Union member countries, reports an increasing

prevalence of employee ownership between 1999 and 2005 in all member countries except the

United Kingdom (Lowitzsch et al., 2009: 22).

Limited research exists on the prevalence of employee ownership outside of the United States of

America and the European Union. In an assessment of employee ownership laws outside of

United States of America, Rosen (2013) identifies implementation of employee ownership in

Australia, Canada, China, Kenya, Korea, New Zealand, and Zimbabwe. Rosen, Case and Staubus

(2005: 10) state that in new market economies such as Russia and Poland, employee ownership

has become a common means of privatising state-owned companies. They also state that in China

privatisation via employee ownership has also occurred, and the Chinese government has allowed

employees to acquire shares in state-owned enterprises, often the largest and/or most sensitive

businesses.

2.5 REASONS FOR IMPLEMENTING EMPLOYEE OWNERSHIP

2.5.1 As a means to address BEE

Although employee ownership is not new in South Africa, since the introduction of BEE policy in

South Africa, employee ownership appears to most often be implemented in this context

(Swanepoel, 2008: 515). It was reported in a NCEO blog (NCEO, 2012) that following Corey

Rosen’s visit to South Africa to participate at a workshops on employee ownership, and based on

Mr. Rosen’s meetings with South African government officials, BEE is a key driver of employee

ownership in South Africa.

The BEE Codes provide an implementation framework for BEE policy and legislation (Republic of

South Africa, 2003a: 8), and include ‘Ownership’ as one of the elements under which an

enterprise’s transformation is measured. This relates to ownership by African, Indian or Coloured

persons who are citizens of the Republic of South Africa by birth or decent, or who became citizens

of South Africa by naturalisation before 27 April 1994, or who became citizens of South Africa by

naturalisation on or after 27 April 1994 and who would have been entitled to acquire citizenship by

naturalisation prior to that date (Republic of South Africa, 2007: 11). Employee ownership is

specifically recognised as one of the vehicles to address BEE ownership, and bonus BEE points


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are awarded if this vehicle or other vehicles which enable broad-based ownership are employed

(Republic of South Africa, 2007: 23), thus highlighting the emphasis that the government places on

the need for broad-based empowerment.

The BEE Codes set out certain requirements in order for BEE ownership via an ESOP to be

recognised, which requirements are tabulated in Table 2.2. Revised BEE Codes will be effective

from 30 April 2015, but there is no change to the requirements for recognition of BEE ownership

via an ESOP (Republic of South Africa, 2013: 32). A critical addition in the revised BEE Codes,

relevant to ‘Ownership’ is the requirement for a measured entity to achieve a minimum of 40% of

Net Value points (Republic of South Africa, 2013: 17). Failure to achieve such sub-minimum points

will result in the BEE status level of the measured entity being discounted (Republic of South

Africa, 2013: 17). Net Value essentially measures the achieved net asset value of the BEE

investor, considering value of measured entity and outstanding acquisition debt at the time of

measurement in relation to its investment in the measured entity, against targets which escalate

over time (Republic of South Africa, 2013: 38). This addition in the revised BEE Codes

emphasises the governments focus on actual value transfer to BEE investors. In the case of

ESOPs, this value flow is then to the underlying employee beneficiaries.

Table 2.2: Requirements for recognition of an ‘Employee Share Ownership Scheme’ as per

the BEE Codes

Aspect Requirement

Fiduciaries Scheme beneficiaries must appoint at least 50% of the fiduciaries

The scheme constitution must define the beneficiaries and the proportion of their

claim to receive distributions.

Fiduciaries must have no discretion in determination of definition of beneficiaries or

proportion of their claim to receive distributions.

The fiduciaries must present the financial reports to beneficiaries at an annual

general meeting.

Beneficiaries must be able to participate in managing the scheme at a level similar to

the management role of shareholders in a company.

The scheme constitution or other relevant statutory documents, must be available, on

request, to any beneficiary in an official language in which that person is familiar.

Operation and

governance

A track record of operating as an Employee Share Ownership Scheme, or in the

absence of such track-record demonstrable evidence of full operational capacity -

evidenced by suitably qualified and experienced staff in sufficient number,

experienced professionala advisors, operating premises, and all other necessary

requirements for operating a business.

Winding up

All accumulated economic interest of the scheme is payable to beneficiaries at the

earlier of a date or event specified in the scheme constitution or on the termination or

winding up of the scheme.

Beneficiaries

Provision of information

to, and engagement with

beneficiaries

Source: Republic of South Africa, 2007: 30-31


12

The IDC is a national development finance institution that is an implementing agency of the South

African government’s industrial policies (IDC, 2014a). It has the objectives of balanced and

sustainable economic growth, and economic empowerment of South Africans (IDC, 2014a), and

has established a ‘Transformation and Development Scheme’ with the purpose of financing

marginalised groups in South Africa and making the mainstream economy accessible to such

groups (IDC, 2014b). Part of the scheme is a ‘Development Fund for Workers’, which finances

workers acquiring a “meaningful” stake in the equity of certain projects funded by the IDC and

where the ESOP has at least eighty five percent beneficiaries that are black persons. The IDC has

funded approximately seventy ESOPs (IDC, 2014c).

2.5.2 Other reasons for implementing Employee Ownership

The various reasons for implementing employee ownership that are explored below suggest that

there are significant benefits for employers that implement ESOPs and for their employees. Further

in the literature review the evidence of impact of employee ownership is investigated.

The reasons for implementing employee ownership can be grouped in three broad categories –

commercial; employee; and general socio-economic reasons. From a commercial perspective the

EOA states (2012: 7) that positive consequences of employee ownership include improved

business performance; higher employee engagement and commitment; lower employee turnover;

higher levels of innovation; and improved consumer confidence. The association further states that

employee ownership provides an opportunity for managing business succession (EOA states,

2012: 10). In a publication from the NCEO, Rodrick (2014: location 334) states that the

commercial reasons for implementing an ESOP include achieveing a tax advantageous manner of

providing employee benefit; for business continuity; and as a tool for corporate finance. Rodrick

(2014: location 354) further states that employee ownership enables motivation and rewarding of

employees and the building of a stronger corporate culture which ultimately leads to improved

performance. Rosen and Rodgers (2011: 3) identify that the true business benefits of employee

ownership are not from employees being more productive, but rather the main benefit is

employees generating new ideas. Kim and Ouimet (2014: 1312) state that implementing employee

ownership can thwart hostile takeover bids by ensuring that more shares (and related votes) are in

‘friendly’ hands.

From an employee perpsective, the EOA states (2012: 7) that benefits to employees include

increased wealth; more opportunities for self-determination; improved job security; and increased

general well being. Rodrick (2014: location 354) states that employee ownership can be used to

bolster retirement savings. Blasi, Freeman & Kruse (2010: 4) state that shared capitalism (under

which employee ownership is included) benefits employees through increased wealth; improved

job security; and better perceived relations with employers.


13

From a socio-economic perspective, the EOA states (2012: 7) that employee ownership stimulates

economic growth; provides longer term job creation and job security; and offers more responsible

ownership models creating stronger community empowerment and responsibility.

2.6 ASSESSING THE IMPACT OF EMPLOYEE OWNERSHIP

In a 2002 report to a subcommitee of the United States House of Representatives entitled

‘Research Evidence on Prevalence and Effects of Employee Ownership’, Kruse (2002) gave a

summary of over sixty studies performed over the two decades preceding the report, the ten chief

conclusions of which include the following:

i) The majority of studies found higher organisational commitment and identification in

employee ownership circumstances, while studies were mixed between favourable and

neutral findings on motivation, job satisfaction, and other behavioural measures under

employee ownership circumstances;

ii) In the case of studies finding improved attitudes under employee ownership, this was almost

always because of the status of being an employee-owner, rather than the quantum of the

participants’ effective ownership stake;

iii) Increased employee influence and participation in decision-making is an important

complement to employee ownership that can improve employee attitudes and performance;

iv) The results of studies were mixed regarding whether employee-owners are more likely to

want to have increased participation in decisions;

v) There is no evidence of reduced desire for union representation in companies that have

implemented employee ownership;

vi) On the relationship between firm performance and employee ownership, studies were split

between favourable and neutral findings;

vii) In the year that employee ownership is introduced productivity improves by an average of

4.4%, which is more than double the average annual productivity growth of the United States

economy over the preceding twenty years. The heightened productivity level is maintained in

subsequent years;

viii) Employee ownership is associated with greater employment stability;

ix) Business survival rates are higher under employee ownership circumstances.

x) Participation in employee ownership does not replace existing remuneration, and rather is an

additional benefit for employees;

A 2009 study by Buchele, Kruse, Rodgers and Scharf on the impact of employee ownership on

wealth found that (Buchele, Kruse, Rodgers & Scharf, 2009: 23) employees working in companies

with majority-stake employee ownership were wealthier than those that do not participate as


14

employee owners. Further, the study found (Buchele, et al., 2009: 23) no evidence that gains from

employee ownership were offset by decreases in any other employee benefits, and (Buchele, et

al., 2009: 23) that employee ownership expands capital ownership to those at the middle and

bottom of the wealth distribution.

As previously discussed, shared capitalism involves compensation practices through which

employee remuneration or wealth is dependent on performance of the relevant employee work

group or employing business (Blasi, Freeman, & Kruse, 2010: 4). Bryson and Freeman (2008: 22)

found, in a study of the impact of shared capitalism on the performance of companies in the United

Kingdom, that employee share ownership has the strongest positive association with productivity,

but that maximum impact is achieved when firms combine share ownership with other types of

shared capitalist compensation.

In a 2008 study of the relationship between shared capitalist compensation systems and

employees’ willingness to engage in innovative activity, Harden, Kruse and Blasi (2008:2) found

that and innovation culture is most likely to exist, and employees are most likely to be willing to

innovate when they share in ownership of the employer. They also found (Harden, et al., 2008: 2)

that there is highest probability of predicting an innovation culture when shared capitalist

compensation systems are combined with high performance workplace policies.

Blasi, Freeman, Mackin and Kruse (2008: 18) found that there was positive correlation between

employee ownership and lower employee turnover, greater loyalty, and employees’ will to work

hard – particularly when employee ownership is combined with high performance work policies,

fixed pay at or above market rates, and low levels of supervision. Unexpectedly, they found (Blasi,

et al., 2008: 18) that shared capitalist compensation is positively correlated to absenteeism, and

state that his is possibly the result of free rider behaviour (Blasi, et al., 2008: 10). They further

state that this result largely disappears in circumstances of high supervision and where high

performance policies have been implemented (Blasi, et al., 2008: 18).

Research in the United States of America has found that participative management combined with

ownership is a powerful competitive tool (Rosen, cited by Poulain-Rehm & Lepers, 2012: 336).

This is specifically the case for closely held companies (Rosen, cited by Poulain-Rehm & Lepers,

2012: 336), which have more than fifty percent of shares directly or indirectly owned by five or

fewer individuals (IRS, 2014). In the case of listed companies, the relationship between employee

ownership and corporate performance is ambiguous, with the reason being that most ESOPs in

such companies hold small shareholdings and have minimal integration with corporate culture

(Rosen, cited by Poulain-Rehm & Lepers, 2012: 336).

Sengupta, Whitfield and McNabb performed a study on whether there is any evidence that

employee ownership has an impact on performance via employee commitment and/or turnover –

whether employee ownership is the “golden path or the golden handcuffs” (Sengupta, Whitfield &

McNabb, 2007: 1507). The study provided evidence that both employee commitment and turnover


15

are lower under employee ownership, and the authors argue that the positive association between

employee ownership and workplace productivity and performance is due to lower employee

turnover than businesses that have not implemented employee ownership. (Sengupta, et al., 2007:

1524)

The concern that, under employee ownership, managers can protect themselves from the effects

of poor company performance because they have increased participation in decision-making

prompted a study by Lu, Reising, and Stohs (2007) of the impact of employee ownership on the

turnover of managers. The study found no evidence of entrenchment of managers in companies

that have implemented employee ownership, which the authors believe is a positive outcome as

managerial entrenchment would ultimately negatively impact company performance (Lu, Reising, &

Stohs, 2007: 17).

In one of the first studies of employee ownership impact on corporate performance in China,

Rujing, Xiangdong, Xianming, and Hongquan (2010: 1550) found little difference in the

performance between firms that have implemented employee ownership and those that have not.

Henry, Kavanaugh, Stretcher and Chisolm (2007) compared the performance of a portfolio of

companies with active employee ownerships schemes against the average daily returns of the

Standard & Poor 500 Index as well as a portfolio of size and industry matched peers without

employee ownership in the two years immediately before and two years following the market peak.

The employee ownership portfolio significantly outperformed the Standard & Poor 500 Index both

before and after the market peak, however no significant performance difference existed between

the employee ownership companies and their non-employee ownership peers (Henry, et al., 2007:

43). This suggests that the superior performance of the employee ownership portfolio is due to

some other reason other than the existence of employee ownership (Henry, et al., 2007: 44).

The results of a comprehensive employee survey by Freeman, Kruse and Blasi (2008: 23) indicate

that employees benefitting from employee ownership are more likely to address shirking by a

fellow employee than those employees that do not participate in an ESOP. Results of the survey

show that most employees believe that they are able to observe the efforts of co-workers, and that

if such co-workers were considered to be shirking their responsibility, the majority of employees

would respond to this by confronting the shirking employee rather than reporting his or her

behaviour to a superior (Freeman, et al., 2008: 23).

As discussed when defining the problem statement of this research, in an analysis of thirty years of

research on employee ownership, Freeman (2007: 26) states that despite their being a large

volume of research on employee ownership with findings that appear extremely positive, it remains

“on the outskirts of academic theory”. He argues that employee ownership has true merits, but in

order to be more seriously considered by academics, politicians and business in general, several

problems need to be addressed. The first problem identified (Freeman, 2007: 26) is that the

predominant use of written surveys in the historical studies has limitations and yields one-


16

dimensional results. The second problem (Freeman, 2007: 27) is that gaps in research exist and

further study is necessary. The third problem (Freeman, 2007: 27) is that few authors on

employee ownership publish in peer-reviewed journals, and notably not in top-tier journals.

Freeman (2007: 28) further states that open acknowledgment of the critiques of employee

ownership law and practice is required.

2.7 DEFINING SUCCESSFUL EMPLOYEE OWNERSHIP

‘Success’ is a broadly used term, and is defined in the Cambridge Advanced Learners Dictionary &

Thesaurus as “the achieving of results wanted or hoped for” (Cambridge Dictionaries Online,

2014), and by Oxford Dictionaries (2014) as “the accomplishment of an aim or purpose”.

Rosen (2008: vii) highlights that although the positive impacts to employees’ financial future

through employee ownership does motivate employees, it is not enough to meaningfully improve

corporate performance. An increase in productivity is important, but the real value of an employee

ownership structure comes through employees generating new ideas on how to improve the

business (Rosen, 2008: vii). To get employees to contribute valuable ideas requires a structure of

participation, together with employees having access to and understanding information so as to

assess the impact of ideas and actions on the business (Rosen, 2008: vii). Rosen (2008: vii)

states that this level of employee involvement in the business, paired with the rewards of an

ownership stake, leads to impressive results for the business.

From a review of the literature the concept of employee ownership positively impacting business

performance appears to be the generally implied definition of ‘success’ regarding implementation

of employee ownership, and this definition has been applied for the purposes of this research.

It is however important to consider the primary objective of any specific ESOP. For example in one

case this could be enhanced productivity and company performance, in another as part of a

succession plan enabling a business owner to sell the business, and in another it may be the

recognition of Black ownership for the purposes of BEE. The researcher presumes that beyond

the main objective of, and reason for, implementing employee ownership, all companies would like

to achieve as many ancillary positive outcomes as possible.

In a study of 179 American companies that had implemented ESOPs either pre or post the

existence of employee ownership tax incentives, Gamble (cited by McHugh, et al., 2005: 279)

found that those companies that implemented an ESOP before the tax reforms experienced

greater improvements in performance after implementation than those companies that

implemented an ESOP after the tax reforms. This suggests that motivation for implementing

employee ownership impacts success of the ESOP (in respect of increased company

performance) and highlights the importance of management intention and commitment in this

respect. In a study on the impact of motive for employee implementation on improvements in

corporate performance following employee ownership implementation, Pugh, Jahera, and Oswald


17

(2005: 76) found that the motive for implementation was a significant determinant of whether

performance would increase, and to what extent. Findings from a study by Kim and Ouimet (2014:

1312) concurred.

A literature review of success factors regarding the above-mentioned benefits and positive impacts

follows.

2.8 SUCCESS FACTORS OF EMPLOYEE OWNERSHIP

2.8.1 Cornerstones of success

Pierce, Rubenfeld and Morgan (cited by McHugh, Cutcher-Gershenfeld & Bridge, 2005: 280)

assert the multidimensionality of ‘ownership’, and describe three fundamental attributes as being

the right to equity, the right to information, and the right to influence. The implication of this is that

where one of these attributes is not present, ownership will not truly exist, and success of any

ownership initiative is then at risk.

Hams (2012: %50) states that, statistically, companies in which employees share in ownership and

in which there is a culture of “ownership thinking” outperform their previous pre-employee

ownership performance as well as the performance of their non-employee ownership peers.

However, companies that implement employee ownership but do not do any cultural work

underperform due to lack of understanding of employee ownership on the part of employees, and

related unrealistic expectations (Hams, 2012: %50). Hams (2012: %3) further explains the concept

of ‘ownership thinking’ as being a culture of employees thinking and acting like owners, with the

goal of wealth creation. This culture requires that employees are educated about their company’s

business, that employees understand how they contribute within it, and requires that employees

have fun in doing so (Hams, 2012 %3). Company performance improves when employees are

provided with the training, tools, and information to become more engaged in the business (Hams,

2012 %3). Higher performing companies typically provide employees with better incentive-plans,

benefit opportunities and growth opportunities, with ‘ownership thinking’ then being beneficial to

both employees as well as employers (Hams, 2012 %3).

The benefits of sharing ownership with employees and creating a true culture of ownership results

in 6% to 11% faster growth in revenue, productivity, and employment than companies which do not

have this equity model in place (Rosen & Rodgers, 2011: viii). Research over the last three

decades has shown that unless employee ownership is complemented with an ownership culture,

there will be little to no impact on company performance, and the risks exists that performance is

negatively impacted due to employee expectations which are not met (Rosen & Rodgers, 2011:

viii). A central concept in Rosen, Case and Staubus’ book on employee ownership (2005) is that, if

implemented correctly, employee ownership can increase employee engagement, improve

productivity, and ultimately lead to higher company performance. The most important requirement

to achieve this is employees having what they call an “equity attitude” (Rosen, et al., 2005: 26),


18

where employees’ attitude is that of co-owners of a business rather than just employees, and

therefore acting in the best interests of the business as a whole (which is also in their own interest).

This attitude reverses the traditional conflict and/or mistrust between labour and management

through introducing aligned interests (Rosen, et al., 2005: 31). They state that none of the

companies that they have studied achieved this attitude in exactly the same manner, but that there

were consistently three requisite elements. The first element is an ownership stake significant

enough to make a meaningful difference to the financial future of the employee (Rosen, et al.,

2005: 31). The second element is a shared ownership culture where employees feel and think like

the co-owners that they are (Rosen, et al., 2005: 31). The third necessary element is a common

understanding of key disciplines, together with a shared commitment to pursuing them (Rosen, et

al., 2005: 32). Each of these elements reinforces the other two (Rosen, et al., 2005: 97). There is

no one right way to implement any of these ideas, and none of them are static – rather building an

equity attitude is a dynamic process (Rosen, et al., 2005: 97). The ideas are not complicated, but

a sincere effort by management, the commitment of time and resources, and a willingness to take

some risks is required (Rosen & Rodgers, 2011: vii). One or more of these three elements are

identified as success factors by other researchers and subject matter experts – as explored below.

Rosen and Rodgers (2011: 1) identify six key practices displayed by companies that have

successfully implemented employee ownership. These are set out in table 2.3 below, and fit within

the equity model concept previously discussed.

Kaarsemaker and Poutsma (2006: 679) identify five core practices that align with and support the

concept of ownership. Such core practices include sharing of information with employees, training

employees with regard to business literacy, profit sharing, mediation, and participation in decision-

making. The relationship between these practices is “partially conditional, and partially

multiplicative” (Kaarsemaker and Poutsma, 2006: 679). All of these practices fit within the equity

model concept previously discussed, and are discussed in more detail below. Table 2.4 sets out

the translation of ownership rights into organisational practices.


19

Table 2.3: Contrast of management under successful employee ownership to traditional

management across key aspects

Ownership Management Traditional Management

Ownership stake Employees’ ownership stake is maintained at a level which is financially significant to them.

Concentrated ownership, with a small group or single person owning the company

Ownership understanding

Employees understand the principles of ownership as well as have knowledge of how their respective scheme functions.

Ownership issues are considered to be irrelevant by employees

Entrepreneurship training

Employees undergo training for their specific roles, and also regarding how the business works – they learn to be effective.

Employees only undergo training for their specific roles – they learn to be efficient.

Sharing information

Financial and performance information is shared with employees at the company and work team levels.

Information is guarded by managers.

Short-term incentives

Employees share in the short-term rewards of company success with some companies put the focus on ownership only.

Bonuses are paid to employees at the discretion of managers.

Employee involvement

Employees have regular and structured opportunities to have significant input into decisions regarding their work.

Management are tasked with coming up with ideas and making decisions. Employees may be allowed to make suggestions.

Source: Rosen & Rodgers, 2011: 2.

Table 2.4: Translation of ownership rights into organisational practices

Ownership Rights Corporate Governance Practices Human Resource Management Practices

Use Voting rights

Shareholders meetings

Board membership

Sharing of information

Business literacy training

Mediation

Participation in decision-making

Returns Dividends

Share price

Profit sharing

Sale Decision to sell shares Sharing of information regarding employee ownership

Participation in decision-making about employee ownership

Business literacy training to understand and be capable of above

Source: Kaarsemaker & Poutsma, 2006: 678.


20

2.8.2 A meaningful ownership stake

2.8.2.1 Overview

With regard to ownership stake, Rosen, et al. (2005: 33) state that the traditional assumption of

conflict of management and labour interest does not immediately disappear when employee

ownership is implemented. As mentioned above, one of the key employee ownership success

factors key factors is a meaningful ownership stake. This section analyses this concept, and

considers what may impact ongoing perception of a meaningful ownership stake, including actual

quantum; making regular additions to employees’ stakes; the combination of employee ownership

with other types of shared capitalist pay; and employee education regarding ownership

fundamentals and ESOP workings. Lastly management systems and reward learnings from United

Kingdom case studies on the “people” aspects of employee ownership are reviewed.

2.8.2.2 Size of ownership stake

A key factor impacting meaningfulness of ownership stake is the size of ownership stake, where

the related impact on the employee should meet his personal financial expectations - employees

are more likely to feel like an owner in a business when what they owns is perceived by them as a

significant asset (Rosen, et al.,, 2005: 34). As Rosen, et al., (2005: 105) state, “a proclamation that

we’re all in this together rings hollow if most employees don’t have much wealth at stake, it rings

even hollower if top executives, meanwhile, get enough to finance a small country”. Stack and

Burlingham (2003: %41) put forth that ownership will remain an abstract concept in the minds of

employees until their ownership stake is of sufficient size to make a difference in their standard of

living. Rosen, et al., (2005: 106) cite the findings of research that included that the size of a

company’s ESOP contribution correlated not only with business performance, but also with their

interest in looking for another job, their interest in financial results of their employer, and their

willingness to participate in efforts to improve workplace efficiency.

Research studies regarding employees’ ownership stake and success of employee ownership

corroborate the concept that a meaningful ownership stake is one of the prerequisites for success.

A study by Conte and Tannebaum (cited by McHugh, et al., 2005: 281) suggests that employees’

ownership stake is positively associated with company profitability. Long (cited by McHugh, et al.,

2005: 281) found that employees’ ownership stake was an important variable in explaining

performance and attitudinal differences across companies that had implemented employee

ownership.

In a policy experiment, China introduced ESOPs as a way to incentivise employees of state owned

enterprises (Rujing, et al., 2010: 1542). After a comprehensive examination of performance

measures, Rujing, et al. (2010: 1542) found that there is no difference in performance between

firms that implemented employee ownership and their non-employee ownership counterparts.

Rujing, et al. (2010: 1550) concluded that highly diffused employee equity ownership does not


21

incentivise employees and therefore result in no positive impact on firm performance. What is

important from this study is that it supports two ideas that are explored in this research - firstly that

an equity stake in the business alone is not enough to create an equity attitude amongst

employees, and secondly, that unless the size of the ownership stake is meaningful to employees,

it is unlikely to be a contributor to changed behaviour.

2.8.2.3 Regular additions to ownership stake

Making regular additions to an employee’s ownership stake stimulates more attention to value of

the business, and in the case of meaningful ownership stakes, then create a common and

consistent interest in business value amongst employees (Rosen, et al., 2005: 106), which

resonates with business performance (Rosen, et al., 2005: 108).

2.8.2.4 Combining employee ownership with other types of shared capitalist pay

Rosen, et al (2005:115) highlight that it is not only the capital appreciation of employee ownership

that results in employees perceiving a meaningful ownership stake, it is also dividend distributions

and related cash receipts. They further state that such payments reinforce ownership, as well as

the benefits of employee ownership for both employees and employer (Rosen, et al., 2005: 116).

Bryson and Freeman (2008: 22) found, in a study of the impact of shared capitalism on the

performance of companies in the United Kingdom, that employee share ownership has the

strongest positive association with productivity, but that maximum impact is achieved when firms

combine share ownership with other types of shared capitalist pay. Hams (2012: %14) states that

incentive schemes are a necessary element in shifting employees’ mindsets towards ownership

thinking. Rosen and Rodgers (2011: 1) state that sharing profits is a necessary element of

creating an ownership culture, and that his can be achieved through incentive plans, profit sharing,

and other tools. Kurland (1997: 45) identifies supplementing an ESOP with economic feedback in

the form of profitability based cash bonuses as being necessary to reinforce the building of

“ownership consciousness”. Such bonuses should be based on a monthly, quarterly, and yearly

objective measurement of company, team and individual performance – thus merging each

employee’s self-interest with the success of the company (Kurland, 1997: 45).

With regard to combining other incentive schemes with employee ownership, Ettling (cited by

McHugh, et al., 2005: 281) discovered that employees of companies that have implemented

ESOPs, together with scheme which allow for broader economic participation, show higher levels

of commitment to their employers.

Hams (cited by Rosen & Rodgers, 2011: 40) lists three main reasons for combining short-term

incentive plans with an ESOP. Firstly, this provides more frequent reinforcement of behaviour,

leading to more effective reinforcement (Hams, cited by Rosen & Rodgers, 2011: 40). Secondly, a

short term focus on tactics and objectives can educate employees on the factors that ultimately

drive company value (Hams, cited by Rosen & Rodgers, 2011: 40). Lastly, short-term activities


22

and rewards can enable employees to understand the connection between day-to-day actions and

long-term outcomes and overcome the difficulty experienced by employees in understanding the

long-term benefits of an ESOP (Hams, cited by Rosen & Rodgers, 2011: 40).

A combination of group and individual incentives is required (Rosen & Rodgers, 2011: 37). Only

rewarding high performing individuals typically results in very few employees being rewarded,

which may result in a competitive environment that does not foster the co-ownership culture of all

sharing in risks and rewards (Rosen & Rodgers, 2011: 37). It is also likely to leave the balance of

unrewarded employees feeling unappreciated and de-motivated (Rosen & Rodgers, 2011: 36), and

possibly perceiving unfairness (Rosen & Rodgers, 2011: 38) as few individuals truly perform

without support from others. Rosen and Rodgers (2011: 38) believe that another notable

consequence of only having individual incentives is the Pygmalion effect – proven through

behavioural studies that people tend to live up (or down) to expectations and praise. The lack

thereof will negatively affect ongoing employee, and company, performance. Only rewarding

group performance may result in valuable high-performing individuals feeling unrecognised and

unappreciated (Rosen & Rodgers, 2011: 39).

A practical way of implementing both group and individual reward structures is to have core

incentives based on group performance and then also special incentives for outstanding individual

contributions (Rosen & Rodgers, 2011: 39). To achieve buy-in from employees, employee groups

should provide input into respective standards or reward critieria (Rosen & Rodgers, 2011: 39).

Peer involvement may also bring more meaning and value to the award (Rosen & Rodgers, 2011:

39). Rosen and Rodgers (2011: 39) highlight the need to take the company specific culture into

account when designing incentives.

2.8.2.5 Employee education regarding ownership fundamentals and ESOP workings

Challenges that arise with the implementation of an ESOP include employee uncertainty about the

rights and responsibilities of ownership (Rosen, et al., 2005: 116), as well as mistrust of the

initiative (Rosen, et al., 2005: 117). In addition, circumstances may arise where certain employees

create substantial wealth by being “at the right place at the right time” (Rosen, et al., 2005: 118),

while others may create less wealth via the ESOP and these perceived imbalances can then foster

resentment and discontent (Rosen, et al., 2005: 119).

Employee education regarding ownership is imperative to manage the above challenges and

enable employee understanding of ownership, and this requires learning about the rights and

responsibilities that ownership entails as well as about business (Rosen, et al., 2005: 108). Many

approaches to education can be followed, and examples include in-depth training courses for every

employee; intensive classes for small groups of nominated employees who then share the

knowledge with their peers; and/or use of the company’s intranet where scheme information,

training material, and frequently asked questions can be posted (Rosen, et al., 2005: 109). Much

of the employee education regarding ownership will be in formal, occurring as a combination of on-


23

the-job training and ad-hoc educational experiences (Rosen, et al., 2005: 110). A distinctive

feature of ownership education when compared to traditional company training is its emphasis on

the bigger picture, and on the line of sight between employees’ daily actions and ultimate business

performance (Rosen, et al., 2005: 110). Stack and Burlingham (2003: %58) state that educating

and entrenching the concept that the value of ownership is all about future earnings, growth, cash

flow, and ideas is fundamental to developing an ownership mentality in a company. Employees

need to understand that they can directly affect the value of the business and their own financial

position by “learning how to operate in the present with an eye towards the future” (Stack &

Burlingham, 2003: %58).

In a study of the impact of employee ownership on employee attitudes, Pendleton, Wilson and

Wright (1998: 99) discovered that a “sense of ownership” is an important intervening variable

between actual employee ownership and changes in employee attitudes. Their findings suggested

that, to generate this “sense of ownership” it is important for employees to be provided the

opportunity to be involved in decision-making (Pendleton, et al., 1998: 99). This is discussed in

detail below, but education regarding ownership would be a necessary element in instilling an

ownership mindset.

In addition to providing education regarding ownership principles, it is also important to provide

education regarding the workings of the company-specific ESOP (Rosen & Rodgers, 2011: 2).

This education on how a scheme works can come from external advisors, or internally from

management, but the best communication can come from employees themselves (Rosen &

Rodgers, 2011: 8). Examples of this include having employees interviewed in videos, or having

sections in a booklet that are dedicated to employee comments (Rosen & Rodgers, 2011: 8).

Rosen and Rodgers (2011: 10) emphasise that in circumstances of linguistic and cultural diversity

it is critical to ensure that the message is either delivered in multiple languages or is translated by a

person who understands cultural differences and is fluent in both the language of the source

information and translated end product.

Budd (2008: i) states that the potential for shared capitalism to improve individual, and ultimately

company performance, depends on employees having knowledge of and participating in schemes

that link reward to performance. In a study of the extent of employee ignorance with regard to

company incentive schemes and ESOPs, Budd (2008, 20) found that between eighteen and

twenty-five percent of sampled employees were either not aware of such schemes, or

misunderstood the functioning and related benefits of such schemes.

2.8.2.6 Management systems and reward learnings from case studies on the “people”

aspects of employee ownership

In 2008 the EOA commissioned case studies of twenty-five United Kingdom organisations which

have implemented ESOPs in order to examine the “people” aspects of employee ownership. The

primary purpose of the study was to provide benchmark information across five areas – employee


24

engagement; management systems and reward; governance and employee voice; employee

ownership culture; and ethics and social responsibility (Silcox, 2009: 3). With regard to

management systems and reward, consensus across the studied organisations was that employee

ownership is a useful recruitment tool to distinguish the organisation from competitors (Silcox,

2009: 6). Table 2.5 sets out consensus management systems and reward best practice gleaned

from the case studies. Consensus best practice across employee engagement; governance and

employee voice; and employee ownership culture is reviewed in following sections.

Table 2.5: Consensus employee ownership best practice obtained from United Kingdom

case studies commissioned by the EOA

Area Consensus best practice

Management system and reward

Reward strategies should be kept simple, transparent and equitable

The business must operate a meritocracy whereby high performance is rewarded.

Rewards should, as far as possible, focus on collective reward for collective effort;

Employee ownership should be used in recruitment as a competitive differentiator

Employee gains following a transition to employee ownership should be structured to occur not too long after such transition, to reinforce and/or create buy-in to the concept

Profit-based reward should not be smoothed to shelter employees from the impact of period of poor performance – this is paternalistic and does not foster real ownership

Source: Silcox, 2009: 5-9.

2.8.3 An ownership-oriented culture

2.8.3.1 Overview

A shared ownership-oriented culture, where employees feel and think like the co-owners that they

are, is a key employee ownership success factor (Rosen, et al., 2005: 31). This section analyses

this concept, including pre-requisites for a shared ownership-oriented culture; participative

management; commitment by leadership and management; employing the right people; earning

mentality and sense of entitlement; the importance of ownership-oriented culture in large

organisations; and disadvantages of an ownership-oriented culture. Lastly, learnings from case

studies on the “people” aspect of employee ownership are reviewed.

Rosen, et al., (2005: 128) define corporate culture as “the entire set of beliefs, values, and

expectations that govern how people behave in the workplace”, and they state that an important

aspect that affects culture is the message a company sends to the employees. Conventional

companies are organised with one group of people holding ownership rights to the wealth and

income of a company, and another group of people performing the work required to generate

income and create wealth (Rosen, et al., 2005: 128). The organisational structure significantly

impacts employees attitudes and behaviours towards companies (Rosen, et al., 2005: 128), and

where employee owners share in wealth creation the corporate culture can be significantly different

to that of conventional companies (Rosen, et al., 2005: 129). Employee ownership needs to be


25

accompanied by effective forms of governance and engagement if the employee ownership model

is to be successful and delivering improved profitability, employee productivity and innovation

(EOA, 2013: 15). Hams (2012: %50) identifies that companies that have implemented employee

ownership only experience improved performance (from pre-employee ownership performance)

and better performance than competitors if a culture of thinking and acting like owners exists.

2.8.3.2 Pre-requisites for a shared ownership-oriented culture

In considering lessons learned from ESOP failure, Kurland (1997:44) identifies the need for an

understanding of, and commitment to a basic set of fundamental values and ownership rights by all

parties involved, before the ownership and participatory structure is designed. Perception of fair

principles is critical to an effective employee ownership participation structure, and this can be

achieved by ensuring that certain core ownership rights are considered sacred, inalienable, and

not vulnerable to violation by a majority or small elite group (Kurland, 1997: 44).

Kaarsemaker and Poutsma (2006: 669) state that in order to foster a high performance work

system, companies in which employee ownership is a core human resource management practice

should focus on doing two important things. Firstly, these companies should propagate the idea of

employee being deserving co-owners in the business and management should take employees

seriously as such (Kaarsemaker and Poutsma, 2006: 669). Secondly, the human resource

management system should reflect this workplace philosophy (Kaarsemaker and Poutsma, 2006:

669).

An ownership culture does not automatically arise when employee ownership is implemented, and

four principal messages need to be transmitted by the company to employees (Rosen, et al., 2005:

129).

The first message is that employees must never forget that they are more than just employees,

they are co-owners (Rosen, et al., 2005: 129). This is achieved through the previously mentioned

employee education and communication, through payments from the scheme, but also the

language that the company uses in running the business (Rosen, et al., 2005: 129). Examples

include marketing materials and websites conveying the co-ownership message; usage of “we”

and “us” meaning all owners together instead of “we” denoting management and “you” denoting

the employees (Rosen, et al., 2005: 129); as well as initiatives and awards which celebrate

employee owners (Rosen, et al., 2005: 130). Examples of such awards or initiatives include

‘employee owner of the month’ or receiving awards after a certain period of being an employee

owner (Rosen, et al., 2005: 130).

The second message is that opportunities for growth and development exist at the respective

company (Rosen, et al., 2005: 131). Employee owned companies that create this environment

typically have extremely low employee turnover (Rosen, et al., 2005: 133).


26

The third message is that “we’re all in this together” (Rosen, et al., 2005: 137). This is transmitted

primarily through reinforcement of the importance of teamwork, and shared responsibility to get

work done (Rosen, et al., 2005: 138). Another element of this is having fun, together – offering

companies more than just a job (Rosen, et al., 2005: 141). Examples of this include social events

and award ceremonies (Rosen, et al., 2005: 141).

The acid test of a “we’re all in this together” culture is when a business faces hard times (Rosen, et

al., 2005: 141). Employee owned companies that make a point of ownership and equal

involvement cannot easily retrench staff, and rather should first attempt to keep all employees

informed about the business situation, involve employees in figuring out ways to increase profits,

and take all possible interim measures to cut costs before considering retrenchment (Rosen, et al.,

2005: 142). Greater job security can be provided by maximising ownership-related rewards such

as performance bonuses (Kurland, 1997:45). Labour costs should be set at levels which can

ensure survival of jobs under when the business faces hard conditions, with all employees then

receiving cash bonuses based on agreed gain-sharing formulae during normal and good conditions

(Kurland, 1997:45).

The fourth and final message that Rosen, et al., (2005: 133) identify as being critical to fostering an

ownership culture is that employees will participate in running of the company. This is further

discussed in the following section.

Sauser (2009: 153) hypothesises interrelated recommendations for sustaining companies that are

majority or wholly owned by employees (“employee owned companies”). Most are related to

organisational culture. Sauser (2009: 155) states that these recommendations are based on

sound organisational theory, with evidence of their effectiveness being demonstrated in certain

case studies with anecdotal evidence. Further these recommendations address what Sauser

believes are key challenges facing the longevity of employee owned companies – maintaining

democratic forms of management and not becoming more hierarchical and elitist over time, and

human nature and the abuse of power (Sauser, 2009: 153).

The explicit adoption of a set of common company values is the first recommendation (Sauser,

2009: 155). These values identify the character of the company and act as a guide for conduct of

employees and a basis for commercial success (Sauser, 2009: 155). Sauser (2009: 157) asserts

that companies that are established on a foundation of explicitly stated values, which all employees

act in accordance with, will be more resilient to challenges and more likely to achieve long-term

sustainability.

Sauser (2009: 157) further recommends to ensure that power is not concentrated in an

organisation. Jensen (cited by Sauser, 2009: 157) states that a unitary board including employee-

members is unable to resolve certain conflicts of interest. Whyte and Whyte (cited by Sauser,

2009: 157) explain that in making decisions about the future of their company, employee are

naturally ambivalent and states that “ambivalence is not a good position from which to make


27

decisions”. A governance structure needs to be devised that shares power amongst several

bodies (Sauser, 2009: 157).

The next recommendation is to build on the foundation of values mentioned above and establish

an organisational culture of character, and then actively maintain it (Sauser, 2009: 157).

Schermerhorn (cited by Sauser, 2009: 157) defines culture as “a system of shared beliefs and

values that develops within an organisation and guides the behaviour of its members”. Sauser

(2009: 158) describes a culture of character as being a culture where moral values are ingrained

throughout the organisation – where the organisation does not just comply with ethical and legal

standards, but internalises them.

Governance of the company in a way that manifests servant leadership is recommended (Sauser,

2009: 159). This involves leaders facilitating achievement of a shared vision through developing

and empowering followers (Washington, et al., cited by Sauser, 2009: 159). Servant leadership is

optimal in employee owned companies, as managers importantly need to be able to inspire

employees to work together – thereby creating a spirit of service and responsibility, which further

develops a culture of ownership (Sauser, 2009: 159).

Sauser’s final culture-related recommendation for sustaining employee owned companies is to

inculcate a culture of every employee being a protector of the foundational organisational values

(Sauser, 2009: 161). Every employee must guard the employee owned company’s integrity, which

requires self-monitoring as well as monitoring of co-workers behaviour (Sauser, 2009: 161).

2.8.3.3 Participative management

Rosen, et al. (2005: 133) state that much of the employee ownership research findings included

that business performance is only positively impacted when employee ownership is combined with

a form of participative or high-performance management (Rosen, et al., 2005: 133). Participative

management is implemented when employees have the opportunity, and responsibility, to make

certain decisions usually reserved for management, and get a chance to express their opinions on

other decisions (Rosen, et al., 2005: 134). This does not mean that employees make or give

opinion on all decisions, but rather that where employees are directly involved or affected,

companies should do their best to include employees in decision-making (Rosen, et al., 2005:

135).

In a study by Pendleton, et al. it was found that a “sense of ownership” is an important intervening

variable between actual employee ownership and changes in employee attitudes, and that, to

generate this “sense of ownership”, it is important for employees to be provided the opportunity to

be involved in decision-making (Pendleton, et al., 1998: 99).

Ensuring that the employee owners have a ‘voice’ is crucial in any successful employee ownership

structure, and in this regard, formal representation through the trustees of the employee trust,

where relevant, or via employee forums assists (EOA, 2013: 15). Such representation is in


28

addition to the sharing of information, greater transparency, involvement of employees in the

workplace, and increased levels of trust (EOA, 2013: 15). It is noted that the need for inclusion of

employees in decision-making must be balanced with the need to have effective decision-making,

and that a business managed by committee is rarely successful (EOA, 2013: 15).

Blasi, et al. (2008: 18) concluded that shared capitalist workplace policies, including employee

ownership amongst other things, had positive effects on employee effort, loyalty, and turnover, but

that significantly greater impact was achieved when such shared capitalist policies were combined

with high-performance workplace policies such as training and involvement in decision-making.

A study by Ivancic and Rosen (cited by McHugh, et al., 2005: 281) found that employee

commitment to organisational objectives is improved, and a feeling of ownership is promoted when

employees have voting rights. In a cross-sectional study of a sample of American companies that

have implemented employee ownership, McHugh et al. (2005: 286) found that an employee

influence in operational decisions is positively related to managerial perceptions of company

performance.

A change from traditional management to participative management results in an adjustment to

roles for both employees and management, which can be ambiguous (Rosen & Rodgers, 2011:

74). It is imperative that realistic expectations regarding what participation involves are developed,

and there is typically a learning curve for both employees and management (Rosen & Rodgers,

2011: 74). Management must learn to balance continuing to provide leadership while giving up

some control and authority, while being catalysts for employee input and decision-making (Rosen

& Rodgers, 2011: 74). Employees need to acquire new skills that will enable them to actively

contribute, and both groups need to understand how the other contributes (Rosen & Rodgers,

2011: 74).

To stimulate employee involvement in business, Rosen and Rodgers (2011: 54) state that, with

regard to ‘open-door policies’, managers must set aside time to be available for employees, and

should ensure that suggestions either result in a detailed explanation of why they cannot be

considered further, or if further action is necessary, what will happen next and related timing. They

also state that management may not always know best, and that testing some employee ideas

may be successful, but even if not will send the message to employees that management hears

their contributions.

To avoid losing focus in meetings or not acting on decisions made, meetings must be structured

with agreement of the agenda and related time per item, discussion of relevant issues together

with decisions, and then agreeing on an action plan which includes identifying responsible persons

and timeframes (Rosen & Rodgers, 2011: 55).

A well-functioning employee suggestion system can also stimulate employee involvement, and in

this regard, employees should be encouraged not only to make suggestions regarding the


29

business but also to advise any problems they are facing or any other useful information (Rosen &

Rodgers, 2011: 57). To avoid limited usefulness of communication from employees, a standard

template should be utilised which provokes the necessary though on the part of employees and

avoids vague and useless information (Rosen & Rodgers, 2011: 57). Importantly, a prompt

response from management should be provided to employees making suggestions or advising of

problems (Rosen & Rodgers, 2011: 57).

Research has shown that organising work and related decisions into teams is more successful

than traditional top-down management (Rosen & Rodgers, 2011: 69). In teams, employees

generate more ideas and have access to better information, and there is more commitment to

achieving goals than when instructions are given from a manager (Rosen & Rodgers, 2011: 69).

Sauser (2009: 153) hypothesises interrelated recommendations for sustaining employee owned

companies, and relating to participative management, one of the recommendations is to create and

maintain self-managed work teams in order to foster democracy at the micro level (Sauser, 2009:

160). Such teams operate with participative decision-making, shared tasks and members

multitasking, collective responsibility for achieving results, as well as responsibility for tasks

traditionally performed by supervisors (Schermerhorn, cited by Sauser, 2009: 160). To improve

team functioning and ensure maximum benefit is derived, teams need rules on participation, and

also need to ensure that when decisions are made an action plan which identifies actions,

responsible parties, and timeframe is agreed upon (Rosen & Rodgers, 2011: 71). Detailed

feedback from management is critical to create an environment of employee participation (Rosen &

Rodgers, 2011: 71). Teams and management must always consider is there is a mismatch

between the abilities of the team and the problem at hand (Rosen & Rodgers, 2011: 71).

The major driver of business benefits of employee ownership is not increased productivity, but

rather employees generating new ideas (Rosen & Rodgers, 2011: 3). Robinson and Schroeder

(cited by Rosen & Rodgers, 2011: 60) state that although ‘big’ ideas matter, it is a high number of

‘small’ ideas that generate business success. In addition, ‘big’ ideas are more likely to be

generated under an atmosphere that encourages ‘small’ ideas from employees (Robinson &

Schroeder, cited by Rosen & Rodgers, 2011: 60). Robinson and Schroeder (cited by Rosen &

Rodgers, 2011: 62) stress that asking for ideas to be submitted by employees is not sufficient –

rather management should ask employees to respond to specific problems, and over time,

employees will begin to identify their own problems. Results of the process should be shared with

and discussed by those employees affected (Robinson & Schroeder, cited by Rosen & Rodgers,

2011: 62).

In an investigation of the relationship between shared capitalist workplace policies (such as profit-

sharing, employee ownership, and share options) and a culture for innovation and employees’

willingness and ability to engage in innovative activity, Harden, et al. (2008: 2) discovered that

equity ownership by employees was consistently the most positive variable in predicting an


30

innovation culture and a willingness to engage in innovation activity. Harden, et al. (2008: 2) also

found that high performance workplace policies involving employee participation in decision-

making and sharing of information with employees was also a positive variable in predicting an

innovation culture. The study however showed that equity participation by employees combined

with high performance workplace policies is the strongest predictor of an innovation culture

(Harden, et al., 2008: 32).

From a strategic perspective, there are different levels of involvement of employees including

board representation, involvement in strategy planning sessions, and/or involvement in specific

initiatives such as product development or cost cutting (Rosen & Rodgers, 2011: 31).

Ippensen and Ash (2009: 30) state the importance of ESOP trustees playing an active role in the

election of a company’s board of directors. They highlight that because the board directs top

management who conduct the daily activities of the company, they can have a significant impact

on the performance of the company and its related value, which affects all shareholders (Ippensen

& Ash, 2009: 30). It is important that the persons for whom the trustees wish to vote have the

required qualities to be able actively participate at board level (Ippensen & Ash, 2009: 31). Where

employees themselves give input on their preferred candidates, it should be ensured that the

employees can act without coercion or undue influence (Ippensen & Ash, 2009: 31). It is also

critical that employees can act confidentiality, and that confidence in the voting process exists

(Ippensen & Ash, 2009: 32).

With regard to companies that are majority employee-owned, directors will usually include

employees as representatives of the employee owners (EOA, 2013: 15). While the board of

directors will remain responsible for running the business on a day-to-day basis, formal structures

and processes need to be established so as to hold the board accountable to the employee

owners (EOA, 2013: 15).

For many businesses that are not majority employee-owned, the concept of non-management

employee board members can be daunting (Rosen & Rodgers, 2011: 32). Research data

suggests that as little as 5% of companies that have implemented ESOPs do this (Rosen &

Rodgers, 2011: 77). Some companies create non-voting board seats, with defined rules for being

appointed including application and management approval (Rosen & Rodgers, 2011: 78). An

alternative to non-management board membership is to allow selected employees to sit in on

board meeting as observers who do not have rights to vote or receive confidential board

information (Rosen & Rodgers, 2011: 32). Further review of governance is performed below.

Besides for board representation, Rosen and Rodgers (2011: 34) suggest two other possible

approaches to getting employee input into strategic decisions. The first is holding periodic

company-wide meetings at which discussions focus on critical challenges faced by and

opportunities for the business (Rosen & Rodgers, 2011: 34). Employees may be provided with a

draft strategy plan, and employees break into groups to brainstorm ideas on parts of the plan


31

(Rosen & Rodgers, 2011: 34). In such groups it is important to include people from different areas

of the business so as to explore different perspectives and generate new ideas (Rosen & Rodgers,

2011: 34). The second approach involves more ongoing employee involvement, which may

involve an employee steering committee periodically meeting with management, or business teams

meeting on an ongoing basis to deliberate strategic and other issues within their respective areas

(Rosen & Rodgers, 2011: 34). Although there may be a time cost in pursuing such employee

involvement, the business gains from a few valuable ideas makes such investment worthwhile

(Rosen & Rodgers, 2011: 35).

2.8.3.4 Changing role of the board

Ursprung (2009: 98) states that the role of the board of directors is largely determined by the status

of ownership and leadership in a company. The further the company has progressed from first

generation leadership and the wider the ownership base is, the higher is the probability that the

board will include independent directors, and be strategically involved in company business

(Ursprung, 2009: 98). In a company in which there is substantial employee ownership (or for any

other reason a broad base of owners) and various professional managers leading the company

rather than an owner-founder, an engaged board of directors is required. Characteristics of such a

board (Ursprung, 2009: 99) include:

i) a majority of independent directors who provide advice and support to the chief executive

officer and management team;

ii) a high level of interaction and discussion at board meetings;

iii) definition of roles and responsibilities of board members and boundaries and responsibilities

of the chief executive officer and the board;

iv) existence of several sub-committees; and

v) where necessary, seeking of outside assistance from experts who can add value to the

board’s decision-making.

Ursprung (2009: 100) highlights the importance of the right composition of people that can operate

within a culture of candid communication and rigorous decision-making, and that will focus on

strategic issue that will maximise the long-term value of the company. It is essential that the board

is provided with appropriate information and has a robust process for decision-making as well as

holding management accountable for results (Ursprung, 2009: 100).

Once board members have been appointed, Ursprung (2009: 103) suggests that board members

undergo a comprehensive orientation programme in order to gain a deeper understanding of the

company and consequently maximise their effectiveness.


32

2.8.3.5 Commitment by leadership and management

Hams (2012: %57) states that the onus of ensuring success of implementing an equity attitude or

ownership thinking mentality in a business should not fall with the chief executive officer. The chief

executive officer’s role is to be committed to this implementation, and to communicate this

commitment whenever possible (Hams, 2012: %57). This includes allowing for necessary

resources to be employed to facilitate successful implementation, as well as encouraging finding

workable solutions to any identified obstacles (Hams, 2012: %57).

Business leaders who choose to implement employee ownership must be truly committed to it, and

this means encouraging an ownership culture and supporting employee decision-making (Rosen,

et al., 2005: 176). The concept of leadership in an organisation with an ownership culture needs to

be broadened – leadership should be delegated, and leadership development should happen at all

levels in the organisation (Stack & Burlingham, 2003: %4). This involves improving employees’

business skills and knowledge, giving them job ownership together with responsibility for

execution, encouraging decision-making, and pushing for growth and development (Stack &


Rosen, et al., (2005: 177) believe that middle managers are often the “forgotten men and women

of change initiatives”. They have a significant role to play in successful employee ownership

implementation in the capacity of coaches and leaders (Rosen, et al., 2005: 177). Adapting to this

role can be challenging for middle managers, and top management needs to assist middle

managers to do so, or find other roles for those who cannot (Rosen, et al., 2005: 177). Rodgers

(2011: 115) describes middle managers as playing a pivotal role in any company, and being “the

biggest blind spot in many companies that are trying to get the most from their ESOPs”. Survey

data collected by the NCEO indicates that the highest level of cynicism regarding employee

ownership initiatives comes from middle management (Rodgers, 2011: 116). To reduce or

eliminate employee ownership cynicism on the part of middle managers, top management must

involve them in the design and implementation process and then keep them informed throughout

the process (Rodgers, 2011: 116). Top management must importantly make middle management

comfortable that employee ownership does not pose a threat to their jobs, and in fact that it will

provide opportunity to learn and grow (Rodgers, 2011: 116). Middle management must then be

held accountable for supporting the company’s ownership culture (Rodgers, 2011: 116). In this

respect, team building, coaching, and communication should be elements of middle management’s

performance review (Rodgers, 2011: 116). These elements also ensure that middle managers

understand their roles and have a context in which they can request needed support (Rodgers,

2011: 116). Higgens (1997, 65) states that shifting to an ownership culture requires leaders and

managers who are willing and able to share power with employee owners. This requires risk

taking, and trusting of others to accomplish goals (Higgens, 1997: 65). In the case of an

employee-owned company (majority or wholly owned by employees), managers need to think and


33

act more like teachers than bosses and must become genuine leaders who build a followership

through setting an example of excellence (Kurland, 1997: 46).

2.8.3.6 Earning mentality and sense of entitlement

Linked to an ownership thinking culture is a mentality of earning, which applies purposeful and

disciplined energy in an environment with opportunities to achieve and expectations to do so

(Bardwick, cited by Hams, 2012: %5). Bardwick (cited by Hams, 2012: %5) states that this

mentality of earning recognises a basic fact of human psychology – that people prefer

accountability. Opposite to a mentality of earning is a mentality of entitlement where people

believe that they do not need to earn what they get – they get what they want not because of what

they do but because of who they are (Bardwick, cited by Hams, 2012: %5). Entitlement has a

significantly negative impact on motivation and productivity (Bardwick, cited by Hams, 2012: %5).

Bardwick (cited by Hams, 2012: %5) believes that entitlement is the result of too much generosity

and security, in a business context managers do not sufficiently hold employees accountable for

their low or high performance when rewarding them. Hams (2012: %5) suggests that widespread

entitlement in society and political correctness are drivers of managers holding employees less

accountable for achieving results. Following Bardwick’s and Hams’ concepts and rationale,

employee ownership cannot succeed in an environment where employees have an entitlement

mentality. The action that is needed from business leaders and management to eliminate

entitlement habits, and enable employees to achieve and to improve self-esteem, is instilling a

culture of ownership thinking (Hams, 2012: %6). Moving to an environment with an earning

mentality will create anxiety as employees face something new, and face increased accountability

(Hams, 2012: %54). Management should be prepared for this, which often manifests itself in

blame (Hams, 2012: %54). An effective way of addressing this is implementing what Hams (2012:

%54) calls an “adult contract”, which is essentially an agreement of how employees should treat

one another in an environment of visibility and accountability (Hams, 2012: %54). The suggested

agreement (Hams, 2012: %54) includes agreement that all people are adults and are seeking an

enjoyable work environment with financial opportunities and opportunities to learn and develop. In

this respect adults respect each other generally, but particularly for trying new ideas or owning up

to mistakes. Adults take responsibility and do not hide problems – they address them before they

get worse. Adults do not argue with reality, rather they accept it and deal with it as best as

possible, which can involve difficult decisions. Adults help one another, and strive to protect their

homes, which in a business context is their company. It should be emphasised that embracing

these ideas will take practice, but that the entire organisation is committed to it and employees

should strive to be aware of ‘non-adult’ behaviour, starting with their own behaviour (Hams, 2012:

%54).


34

2.8.3.7 Importance of ownership-oriented culture in large organisations

Findings from a study by Kim and Ouimet (2014: 1313) included that size of the workforce matters

when implementing employee ownership – that when a company has a very large workforce it is

more susceptible to the free-rider problem. In the context of employee ownership, this occurs

when some employees do not exert extra effort or positively change their behaviour but

nevertheless share in the rewards of employee ownership (Kim & Ouimet, 2014: 1274). Kim and

Ouimet (2014: 1274) suggest that the reason for this is that employees may feel that they alone

have little impact of company value. An implication would be that building a pervasive ownership

culture is even more important in large companies, to mitigate the risk of experiencing the free-

rider problem.

2.8.3.8 Disadvantages to creating an ownership culture

Rosen, et al., identify potential disadvantages to creating an ownership culture. Companies that

have implemented employee ownership have less labour-force flexibility, as they cannot staff up

and cutback to the extent that conventional companies can (Rosen, et al., 2005: 142). Further,

involving more people in decision-making results in more time being taken, by more people, to

make decisions, for which there is a cost (Rosen, et al., 2005: 142). They describe an ownership

culture as an investment that requires time and effort to maintain (Rosen, et al., 2005: 143).

2.8.3.9 Learnings from case studies on the “people” aspects of employee ownership

Table 2.6 sets out employee engagement; governance and employee voice; and employee

ownership culture consensus best practice gleaned from the previously mentioned case studies of

twenty-five United Kingdom organisations that have implemented ESOPs (Silcox, 2009: 3).

With regard to employee ownership culture, consensus across the studied organisations was that

there is a strong link between ownership culture and employee engagement (discussed above)

(Silcox, 2009: 8) and also that it takes time to instil an ownership culture (Silcox, 2009: 9).

Consensus across the studied organisations was that corporate social responsibility is an

important aspect of being employee owned, as it reinforces principles of sharing and working for

the benefit of all (Silcox, 2009: 10). In this respect, it is important for leaders to set a good example

and demonstrate that the business is ethically strong It is also important for employees to be able

to suggest and discuss initiatives (Silcox, 2009: 10). As far as possible, corporate social

responsibility initiatives should strategically align with the business (Silcox, 2009: 10).


35

Table 2.6: Consensus employee ownership best practice obtained from United Kingdom

case studies commissioned by the EOA

Area Consensus best practice

Employee engagement

Engagement must be created, reinforced, and sustained

Engagement should not be overdone – running a business is the primary objective

Employees should be engaged in decision-making at the appropriate level

All people in the organisation must be open and approachable

New recruits should be receptive of the concept of engagement, and following recruitment engagement should occur as early as possible

Employees must be empowered to ask questions of senior management as well as to make improvements to their jobs

All leadership levels should continuously engage with their teams on the basis of leaders working for such employee teams as co-owners of the business

Business success must be shared with employees

Organisational values should not be compromised, even in challenging times

Full engagement at all times is an unrealistic expectation

The employment contract should reinforce engagement by setting out how employees can expect to be treated, and what behaviour is expected in return

Diversity of the workforce should be recognised

Governance and employee voice

The value of employees’ voice must continuously be communicated

It must be accepted that giving employees a real voice is challenging and resource-demanding

The company must be open and transparent in sharing information, including bad news

Representation structures must reflect the organisations size and way of working

Senior management must make effort to meet employees and make themselves as approachable as possible

Where employee directors exist, it must be ensured that they are not marginalised, that they are equipped to fulfil their role, that they are given sufficient time off to do so, and that the board is sensitive to employee’s varying levels of understanding

Employee owners should be encouraged to have their say by having annual general meetings

It is vital that middle managers’ buy-in to employee ownership is obtained – employee ownership will be meaningless if they continue to adopt a command and control management approach

Employee ownership culture

Sharing of information regarding employee ownership

Consistent effort must be made to raise awareness of the fundamentals of ownership

Major events like annual general meetings and roadshows should be used to signify employee ownership

Physical manifestations of ownership such as share certificates and dividends should be provided to employees

Management behaviour must be appropriate for an employee ownership environment

The company should celebrate the way it does things in an employee ownership context

Source: Silcox, 2009: 5-9.


36

2.8.4 Shared understanding of, and commitment to key business disciplines

2.8.4.1 Overview

Rosen, et al., (2005: 32) argue that, in addition to employees having a meaningful ownership stake

and an ownership-oriented culture pervading in a business, another necessary success factor is a

common understanding of key disciplines, together with a shared commitment to pursuing them.

Employees are an intrinsic part of what makes a business successful, and they need to understand

their part of the disciplines that enable their business to profit (Rosen, et al., 2005: 155). This

requires that companies incorporate the expectation that employees will think and act like owners

into how the company is operated, and this requires employee education on the fundamental

disciplines that drive the business and then involving employees in everyday performance

management (Rosen, et al., 2005: 146). A corollary requirement to helping employees understand

business and act like owners is to provide regular and ongoing information about the state of the

business (Rosen, et al., 2005: 112). The objective is to provide sufficient capability and information

for employees to make more, and better, decisions in the workplace (Rosen, et al., 2005: 114).

Kaarsemaker and Poutsma (2006: 679) argue that an employee cannot truly share in ownership if

he or she does not have access to information about the business or does not understand

information shared with him or her.

In this section, the concept of developing a shared understanding of, and commitment to, key

business disciplines is analysed, including consideration of financial literacy training; identification

and understanding of critical metrics; target setting and celebration of achievement; reporting of

metrics; and acting on information.

2.8.4.2 Financial literacy training

Employee financial literacy is imperative and, in this regard, education is required (Rosen, et al.,

2005: 158). This can be achieved through training sessions, but is is vital that employees are able

to deepen their knowledge by putting their learnings to work, and engaging in on-the-job training

(Rosen, et al., 2005: 158). Requiring employees to explain results to peers is another way of

engaging in learning – for the presenter and the group (Rosen, et al., 2005: 159). Hams (2012:

%22) states that the main reason for providing business acumen training is that “what your

employees don’t know can hurt the company” – employees often assume that the business is

hugely profitable, and then are less conscious of costs and less driven to perform.

Financial literacy training is particularly important in South Africa, where there are generally low

levels of financial literacy and much of the country’s population is inadequately equipped to make

sound financial decisions (Financial Services Board, 2012: 37). Further, financial literacy training

assists in meeting one of the priorities of the National Development Plan, being education and

skills development (Republic of South Africa, 2012: 17).


37

2.8.4.3 Identification and understanding of critical metrics

Identifying a few critical metrics and then enabling employees to understand them is necessary

(Rosen, et al., 2005: 156). Limiting the number of critical metrics, or key performance indicators, is

necessary to ensure that they are measured properly and that employees are not overwhelmed

and then paralysed (Hams, 2012: %27). A detailed historical financial analysis, employee surveys,

and competitor analysis are useful tools when identifying critical metrics (Hams, 2012: %28). The

employee survey gathers useful employee input, and also increases buy-in to the process through

engagement and participation (Hams, 2012: %28).

Hams (2012: %25) states that key performance indicators should be both operational and financial

metrics that have the biggest impact on company success. Although tracking past financial

performance is valuable, leading indicators are essential (Rosen, et al., 2005: 159). The

operational activity-based measures that drive financial performance are in fact more important

than lagging financial measures (Hams, 2012: %25).

It is important that there is a line of sight between achieving the targets for the selected metrics and

succeeding as a company, and also that the metrics are items which can be controlled or

influenced by employees without negatively impacting quality of goods or services (Rosen, et al.,

2005: 157). The identification of critical metrics should be a process of employee and

management involvement, and it is critical that agreement is reached to ensure buy-in from all

parties (Rosen, et al., 2005: 178). Where business size permits, team-based identification of

critical numbers (and goal setting) should be implemented (Rosen & Rodgers, 2011: 24). Critical

metrics are an effective tool for engaging employees in decision-making, but also motivate

employees and can add an element of fun in the workplace (Rosen & Rodgers, 2011: 23).

Critical metrics may change over time, most often depending on where a business is in its life cycle

(Rosen & Rodgers, 2011: 21). Interim metrics may be used to address specific problems, and

once resolved, other areas are then focussed on (Rosen & Rodger, 2011: 24).

Rosen and Rodgers (2011: 13) emphasise the importance of employee-owners understanding how

key aspects of the company connect to each other, and describe these key aspects as “anchor

concepts”, being simple big-picture issues that determine company success. Anchor concepts

should be measurable, and use of a chain of many anchor concepts should be avoided – with five

or six being the preferred maximum (Rosen & Rodgers, 2011: 13). Typical anchor concepts are

employee performance; department performance; company performance; stock price; and related

value of employees’ employee ownership benefits (Rosen & Rodgers, 2011: 13). For each anchor

concept, the related concepts should be defined and then measurement methods outlined and

explained (Rosen & Rodgers, 2011: 14). Rosen and Rodger (2011: 15) point out the importance of

building trust in the anchor concepts and measurement thereof. They also state that it is important

to show employees the impact of flexing the chosen anchor concepts and the related impact


38

through the anchor concept chain – in other words making the concepts more concrete by relating

them to the business (Rosen & Rodgers, 2011: 15).

2.8.4.4 Target setting and celebration of achievement

Once metrics have been selected, targets should then be set for the selected metrics based on

comprehensive assessment of what can be achieved and why (Rosen, et al., 2005: 178). Again, it

is critical that employees are involved and that there is agreement on targets set (Rosen, et al.,

2005: 178). It is important to include those employees that have the greatest influence on a

respective indicator, rather than those employees who have easiest access to the figures (Hams,

2012: %31). Once targets are agree on, ideas should be gathered on how to achieve them

(Rosen, et al., 2005: 178).

Celebration of achievement of targets, and related reward increases commitment to pursuing such

targets (Rosen, et al., 2005: 178). Annual targets should be broken down into quarterly or monthly

goals, and when a goal is reached, time should be taken to acknowledge and celebrate this

(Rosen, et al., 2005: 178). Depending on a company’s culture and existing remuneration policies,

a mix of financial and non-financial (fun) rewards should be enabled (Rosen & Rodgers, 2011: 24).

Bonuses linked to achievement of targets provide effective incentive to achieve targets (Rosen &

Rodgers, 2011: 22). Such bonuses should be structured such that the cost to the business of the

bonuses does not exceed the incremental profit derived for achievement of the related target


2.8.4.5 Reporting of metrics

Reporting of metrics should happen frequently so business performance can be monitored as it is

happening (Rosen, et al., 2005: 159). Examples of reporting methods include meetings with staff;

monthly management meetings followed by meetings between managers and their direct reports;

webcasts; or posting information on the company intranet (Rosen, et al., 2005: 112).

Through analysing leading and lagging metrics, and forecasting performance, employees are able

to make adjustments that impact performance (Rosen, et al., 2005: 160). They not only take

accountability for performing their individual roles, but also for business results as well (Rosen, et

al., 2005: 160). The use of scoreboards of some sort can greatly assist with monitoring metrics

(Rosen, et al., 2005: 178). Hams (2012: %25) highlights the importance of using scoreboards in

high-involvement fashion to engage with all employees. At leadership level, the scoreboard should

include only the most important key performance indicators that have the greatest impact on

business performance (Hams, 2012: %28). Less important indicators that support those on the

leadership scoreboard may be used at the department or business unit level (Hams, 2012: %36).

Reporting focus should be placed on areas of weakness, however the context of overall operations

should always be considered (Rosen & Rodgers, 2011: 22). Progress towards targets should be


39

prominently reported through workplace communication tools such as charts, email, and reports


Employing ‘open book management’ practices enables the building of an environment of

transparency and accountability (Kurland, 1997: 44). This involves educating employees about the

business, making company financial information available to them, and sharing risks and rewards

of the enterprise (Kurland, 1997: 44). With regard to open book management, Stack and

Burlingham (2003: %78) state that employing such management principles creates trust between

employees and management, and this trust together with business intelligence obtained through

training and education can provide a significant competitive advantage. In particular, this

advantage comes from an increased ability to respond to adversity (Stack & Burlingham, 2003:

%78). Stack and Burlingham (2003: %78) do however highlight that pursuing and ownership

thinking culture via open book management principles is a long and difficult journey, but that the

rewards and greater than the effort. Hams (2012: %25) does not believe that full disclosure of

financial information (other than salaries) via an open book management approach is the best

approach, and provides three reasons. Firstly, full disclosure to employees is not necessary –

rather they only require information that enables them to do the best job that they can (Hams,

2012: %25). Secondly, employee performance is higher when they are focussed on activity-based

leading indicators that drive financial results, than when focussed on detailed, lagging financial

information (Hams, 2012: %25). Lastly, Hams (2012: %25) respects the discomfort and fear that

top management generally has about open book management, and believes that they should

share the amount that they are comfortable with, which typically increases over time.

In a cross-sectional study of a sample of American companies that have implemented employee

ownership, McHugh et al. (2005: 287) found that an employee ownership stake on its own does not

impact company performance, however when combined with a strong employee ownership

education and communication system company performance is positively impacted.

The Code for Responsible Investing in South Africa (“CRISA”) provides guidance on how

institutional investors, as asset owners, and service providers of institutional investors (for example

fund managers and consultants) should integrate environmental, social and governance

considerations into execution of investment analysis and activities, including exercising of rights, in

order to deliver superior risk-adjusted returns to ultimate beneficiaries (Institute of Directors, 2011:

3). This guidance extends to institutional investors, by virtue of their ownership, influencing and

encouraging companies in which they invest to apply sound governance principles including

consideration of social and environmental issues (Institute of Directors, 2011: 4). Included in such

guidance is transparency of policies, policy implementation, and application of CRISA (Institute of

Directors, 2011: 3). Given the tense labour relations and related low levels of trust in South Africa

(Republic of South Africa, 2012: 33), the CRISA principles are relevant in the context of ESOPs as


40

shareholders in businesses, and support sharing of information with employee beneficiaries to

enable better understanding and decision-making by all stakeholders.

2.8.4.6 Acting on information

It is necessary to move beyond reporting of metrics to employees – the effectiveness of sharing

numbers with employees is limited unless employees have opportunity to discuss the numbers,

and find ways to improve them (Stack cited by Rosen & Rodgers, 2011: 22). This can be achieved

be enabling employee team meetings, where teams consist of those employees that affect a

particular aspect directly (Rosen & Rodges, 2011: 22). Where a problem affects various work

areas then team leaders can meet and discuss respective team views and to coordinate ideas and

tasks (Rosen & Rodgers, 2011: 22).

A shared understanding of key business disciplines is as important when a business is facing

tough conditions as it is when improving performance and growing a business, particularly when

job losses are looming as employees tend to then become overly cautious and less productive

(Rosen & Rodgers, 2011: 27). When employees have access to and understand business figures,

they will feel a lot more in control, and will know what to expect (Rosen & Rodgers, 2011: 27). A

useful tool to prepare for possible future difficult conditions is the development of a retrenchment

contingency plan, where employees can provide input (Rosen & Rodgers, 2011: 27). Such plan

should ideally show, step by step, what will happen in a downturn before the company will need to

retrench staff (Rosen & Rodgers, 2011: 27). In this respect it is beneficial to have different stages,

with each stage in the plan with each stage being objectively identifiable based on metrics (Rosen

& Rodgers, 2011: 27). Although employee involvement in developing the contingency plan is ideal,

and involvement in trying to solve identified problems is critical, it is important to ensure employee

understanding that management will ultimately need to make a tough decision regarding

retrenchment if the circumstances require it (Rosen & Rodgers, 2011: 28). It is important to

communicate to employees why this is necessary – that employees will not want to make this

tough decision, and that refusing to make the decision will ultimately lead to job losses and lower

value of the business, which then affects all owners of the business (Rosen & Rodgers, 2011: 28).

2.8.5 Other suggestions to improve probability of successful employee ownership

2.8.5.1 Overview

This section analyses other success factors identified through the literature review that do not

clearly fit under the previous three sections. These include fairness; alignment of the human

resources system; value-adding ESOP fiduciaries; union involvement in employee ownership

implementation; and employment of specialist advisors.

2.8.5.2 Fairness

A study by Kuvaas (2003) found that the perceived fairness of the ESOP was an important

predictor of employees’ organisational commitment, and that extrinsic motivation generated by


41

financial rewards is not the only success factor. Kuvaas (2003) notes that when a positive or

negative outcome is achieved by means that are perceived as being fair, the outcome is viewed

more favourably than when the means to such outcome are perceived as being unfair. This effect

suggest then that employees will be more accepting when their value in and/or related pay out

from employee ownership is falling (Kuvaas, 2003). This again highlights the need to provide

training and education to employees regarding employee ownership. A main conclusion from

Kuvaas’ study is that any scheme involving financial participation in a business should be designed

to maximise perceptions of fairness, and that this can best be achieved by allowing an element of

employee participation or consultation in the design process, and by subsequent monitoring post-

implementation (Kuvaas, 2003).

With regard to mediation as one of the core human resource practices, Kaarsemaker and Poutsma

(2006: 679) suggest that without a fair process existing for conflict resolution, employees will not

feel like co-owners.

2.8.5.3 Alignment of the human resources system

Bowen and Ostroff (cited by Kaarsemaker and Poutsma, 2006: 675) assert that individual

employee mindsets will only become a shared and strong organisational culture when consistent

and aligned messages are being sent from the human resources management system.

Kaarsemaker and Poutsma (2006: 669) believe that employee ownership should be embedded as

part of a strategic human resources framework, and that in a company that has implemented

employee ownership, human resources practices should be aligned to support the concept of

ownership. Delery and Shaw (cited by Kaarsemaker and Poutsma, 2006: 672) asserted that a

central idea of a human resources management system is that practices must be aligned to

support and enhance one another. In such case, the entirety of the human resources system is of

more value than the sum of its parts (Becker, cited by Kaarsemaker and Poutsma, 2006: 672).

Rosen and Rodgers (2011: 5) state that a crucial part of building a successful employee ownership

company is ensuring that the right type of people are hired, and that these people are retained.

Examples of reaching out to potential employees via marketing include using employee ownership

as part of branding and offering incentives to existing employees for referring new hires (Rosen &

Rodgers, 2011: 5). During the assessment of a potential employee and during their probation

period, their ownership aptitude should be evaluated, where such evaluation can include informal

evaluation such as discussions, and formal psychological evaluations (Rosen & Rodgers,2011: 6).

Developing existing employees professionally and personally is a means to ensure that the right

type of people are employed in the business (Rosen & Rodgers, 2011: 6). Ensuring that the right

people are employed in the business may require terminating those who, despite best effort by the

company, will not change their behaviour and are negative (Rosen & Rodgers, 2011: 7). Taking

such harsh action will also set an example ad emphasise the company’s commitment to an

ownership culture (Rosen & Rodgers, 2011: 7). Hams (2012: %61) states that it is important to


42

allow some time to pass before assessing employees’ ability to succeed in the new environment of

visibility and accountability, and if any employees are struggling, they should be offered support in

the form of education and training, and in certain cases different roles should be found for them.

Some people will feel uncomfortable, and will leave the company, while some who cannot perform

effectively will refuse to leave and it is these employees who are most likely to sabotage the

initiative (Hams, 2012: %61). Hams (2012: %61) rationalises that these employees damaging

opportunities for everyone else is unfair, and that management must take action to terminate their

employment.

2.8.5.4 Value-adding ESOP fiduciaries

Mathews (2009: 67) highlights that running an ESOP is a group activity, which can be an effort to

accomplish, as it is a complex and sometimes emotionally charged action. Mathews (2009: 64)

asserts that, in order to adequately fulfil their fiduciary responsibilities, fiduciaries of ESOPs must

request all company information that they, as shareholder representatives, are entitled to as

shareholder representatives. He also states that fiduciaries must undergo business literacy

training in order to be able fulfil their responsibility to act in the best interests of the employees

(Mathews, 2009: 65). Where necessary, fiduciaries should be able to employ the assistance of

relevant professionals (Mathews, 2009: 65). Fiduciaries must ensure that such group is not

dominated by the views of one person, and that such groups must operate in an organised manner

(Mathews, 2009: 67).

Rosen, et al. (2005: 175) state that establishing an employee ownership steering committee is an

effective step towards successful employee ownership implementation. Rosen, et al. (2005) do not

refer to ESOP fiduciaries, and it appears that they equate the role of a steering committee to that of

ESOP fiduciaries. The committee’s role is to broadly support the company’s ESOP, and this can

include, amongst other things, researching the subject and learning from other companies’

initiatives, and surveying employees to gather employees’ views on the state of the business

(Rosen, et al., 2005: 175).

A steering committee consisting of both management and employees carries the strength of

management’s involvement as well as the credibility of employee representation, and is then more

likely to achieve buy-in from both sides (Rosen, et al., 2005: 175). Rosen and Rodgers (2011: 11)

however point out that for initial establishment of the committee having committee members

elected through a democratic process will put effectiveness of the committee at risk because each

elected person typically has their own understanding of the ESOP, and their own view of the

responsibilities and purposes of the committee. They argue that in this case appointment by

company management is best as this enables the building of a committee with a deliberate profile

of skills experience and attitudes (Rosen & Rodgers, 2011: 12). This however carries the risk of

undermining the employee’s sense that the committee truly represents them, but this can be

addressed by ensuring that appointments by management to the committee are based on


43

principles that are clear and broadly communicated, and implicitly facilitates employee

representation (Rosen & Rodgers, 2011: 12). An example of such principles include

representation of employees at large in as many respects as possible, such as age, race, gender,

language, business units or geographic location, years of service, and level of authority (Rosen &

Rodgers, 2011: 12). Another example is the requirement for the committee to be sufficiently skilled

to function effectively as a team (Rosen & Rodgers, 2011: 12). This policy may include that

management will set out a plan and provide resources to develop necessary skills (Rosen &

Rodgers, 2011: 12).

Over time, if the committee is successful, there will most likely be increasing pressure for

democratic selection of committee members, and this will require gradual replacement of the

appointed members (Rosen & Rodgers, 2011: 12). Rosen and Rodgers (2011: 13) suggest one

way of effecting this as being limiting candidates to those who have the requisite skills, after

management or the committee have reviewed the basic committee principles regarding skills and

members, and identified gaps that will be created as people leave. They further state (Rosen &

Rodgers, 2011: 13) that such gap analysis is very useful even when no such limitation is placed on

profiles of candidates, as this can assist the committee to identify where it may need external

assistance.

To avoid ‘re-inventing the wheel’, maintaining experience on the committee over time is essential

(Rosen & Rodgers, 2011: 13). Examples of how this can be achieved are staggering the term of

members, having standing members, or reserving member slots for persons who have served as a

committee member previously (Rosen & Rodgers, 2011: 13). Through any changes to

membership, it is also important to maintain the right combination of skills and representation, as

well as experience (Rosen & Rodgers, 2011: 13).

2.8.5.5 Union involvement in employee ownership implementation

When an ESOP is implemented within a unionised environment Kurland (1997, 45) identifies three

union-related success factors, specifically relevant in a wholly-owned or majority employee owned

company. The first is involving the union as much as possible in the design of the scheme, where

negotiation on key issues such as participatory structures, accountability systems, voting rights,

and vesting schedules (Kurland, 1997: 45). The second is a clear definition of the expanding role

of the union within the new ownership framework, where unions should move beyond protecting

basic working conditions and wage rights to protecting and promoting its members ownership

interests (Kurland, 1997: 45). Kurland (1997: 46) states that to protect the union institutional role

but avoid instilling unchecked power, the union should not have any role in appointing or removing

management, but instead should ensure that union members can exercise their voting power to

participate in such process. The union should not take on a managerial role, and rather should

encourage decentralised decision-making within all operational levels of a company (Kurland,

1997: 46). Further, the union should avoid voting as a bloc and ignoring votes of dissenting


44

employees – instead the union should ensure that each member has a vote (Kurland, 1997: 46).

In this regard, the union should educate its members on the rights and responsibilities of

ownership, and ensure that employees have access to financial information that would normally be

provided to any shareholder (Kurland, 1997: 46). The third union-related success factor identified

by Kurland is the linking of union revenues to its members’ stakes in bonuses, dividends, and

ownership in employers (Kurland, 1997: 46). This would offer potentially higher revenues for

unions as well as align interests of unions and employees towards higher sharing in equity

(Kurland, 1997: 46).

As discussed above, Sauser (2009: 153) hypothesises seven interrelated recommendations for

sustaining companies that are employee owned companies, and relating to trade unions, the

recommendation is to transition the role of trade unions to focus on collaborative strategies which

provide mutual benefit to employees and the company, rather than adversarial strategies (Sauser,

2009: 160). Logue et al. (cited by Sauser, 2009:160) state that there is increased potential for joint

labour-management cooperation under an employee ownership structure, as the unions represent

the employees who are also owners. Jensen (cited by Sauser, 2009:160) suggest that the

changed role of unions retains traditional aspects such as protection of wages, working conditions

and jobs, but also now includes a transformational role to change employees consciousness about

self-management and democracy. Thomas and Logan (cited by Sauser, 2009:160) suggest that

the changed role includes engaging in education of employees and guarding against the system of

self-management being eroded. The transformed role of unions still requires protection of workers

interests, but this not necessarily includes working with management to strengthen the company,

thereby protecting job security and increasing financial benefits for employees (Sauser, 2009: 160).

2.8.5.6 Employment of specialist advisors

Rosen (2011: xi) states that it is most often necessary to employ specialist advisors when

implementing an ESOP. He points out that, in doing so, a company should ensure that the

advisors are suitable qualified and experienced though obtaining references, demonstrating

involvement in employee ownership organisations, and have relevant professional certifications

(Rosen, 2011: xi). Rosen (2011: xi) further states that when deciding to implement an ESOP it is

imperative that members of management themselves get educated on employee ownership so as

to not blindly follow all recommendations from the chosen advisor, who may not fully understand

the needs and culture of the company. In this respect Rosen (2011: xi) also suggests embracing

the learning opportunity and asking as many questions as possible, particularly around alternative

approaches to addressing issues, and about protection of interests.


45

2.9 EMPLOYEE OWNERSHIP SUCCESS FACTOR FRAMEWORK

Based on information gathered through a comprehensive review of literature, a framework which

identifies employee ownership success factors has been established. This framework is set out in

Figure 2.1 below. The framework indicates main success factors, composite success factors

(where relevant), as well as where success factors support or reinforce other success factors.

Figure 2.1: Employee Ownership Success Factor Framework

2.10 REVIEW OF IDENTIFIED EMPLOYEE OWNERSHIP SUCCESS FACTORS AGAINST

BEE CODES REQUIREMENTS FOR EMPLOYEE SHARE OWNERSHIP SCHEMES

As discussed under ‘Reasons for implementing employee ownership’, employee ownership is

specifically recognised as one of the vehicles to address BEE ownership, with certain criteria

needing to be achieved before BEE ownership recognition via an ESOP is allowed. Table 2.7

below considers the recognition criteria as set out in the BEE Codes in light of the Employee

Ownership Success Factor Framework discussed above.

From an analysis of Table 2.7 it is apparent that attempts have been made by the South African

government to ensure that robust ESOPs are implemented, however the requirements set out in

the BEE Codes are lacking in terms of driving successful employee ownership.


46

Table 2.7: Review of identified employee ownership success factors against BEE Codes

requirements for Employee Share Ownership Scheme recognition

Inclusion in B-BBEE Codes requirements for Employee Share

Ownership Scheme recognition

Ownership fundamentals None

ESOP workings

The scheme constitution or other relevant statutory documents must be

available, on request, to any beneficiary in an official language in which

that person is familiar.

Financial literacy and key

business disciplinesNone

The scheme constitution must define the beneficiaries and the proportion

of their claim to receive distributions. Fiduciaries must have no discretion

in either regard.

Meaningful quantum

All accumulated economic interest of the scheme is payable to

beneficiaries at the earlier of a date or event specified in the scheme

constitution or on the termination or winding up of the scheme.

Regular additions None

Short and long term elements None

Explicit adoption and

commitment to valuesNone

Participative managementBeneficiaries must be able to participate in managing the scheme at a

level similar to the management role of shareholders in a company.

Ongoing commitment from

leadership and managementNone

Employment of the right

peopleNone

Celebration of employee

ownersNone

Existence of growth and

development opportunitiesNone

Reinforcement of teamwork None

Identification of critical

metrics, and target settingNone

Reporting on metricsFiduciaries must present the financial reports to beneficiaries at an

annual general meeting.

Acting on information None

Celebration of achievement None

Scheme beneficiaries must appoint at least 50% of the fiduciaries.

A track record of operating as an Employee Share Ownership Scheme,

or in the absence of such track-record demonstrable evidence of full

operational capacity - evidenced by suitably qualified and experienced

staff in sufficient number, experienced professionala advisors, operating

premises, and all other necessary requirements for operating a business.

None

A track record of operating as an Employee Share Ownership Scheme,

or in the absence of such track-record demonstrable evidence of full

operational capacity - evidenced by suitably qualified and experienced

staff in sufficient number, experienced professionala advisors, operating

premises, and all other necessary requirements for operating a business.

Success factors identified in ESOP

Success Factor Framework

Fairness

Meaningful

ownership

stake

Ownership-

oriented

culture

Commitment

to pursuing

business

disciplines

Education

and training

of ESOP

participants

and

fiduciaries

Well governed fiduciary body with

company and worker representation

Alignment of human resources system

Employment of specialist advisors

Source: Republic of South Africa, 2007: 30-31.


47

2.11 SUMMARY

‘Success’ is a broadly used terms and is dependent on the underlying aim or purpose desired to be

achieved. Consistent with employee ownership literature, ‘employee ownership success’ being

positive impact on business performance is applied for the purposes of this research. Although

success is seemingly defined with only a business focus, consideration of the identified success

factors highlights that employee ownership success necessarily requires empowerment of the

participating employees – in terms of financial benefit, education and training, and workplace

participation.

Employee ownership is not a new development, and can be traced back to the nineteenth century.

In more recent times it has its roots in a desire for increased shared capitalism.

As of 2012 it was estimated that there were in excess of 500 active schemes in South Africa.

Employee ownership is more prevalent in developed countries such as the United States of

America, the United Kingdom and certain European countries, but it is becoming more widespread

across the world.

The BEE Codes identify employee ownership as a mechanism for achieving broad-based

empowerment. In the South African context, employee ownership has primarily been implemented

as a means to address BEE. There are however various commercial an socio-economic reasons

to implement employee ownership. Commercial reasons range from improving business

performance and innovation levels to building stronger organisational culture and strengthening

labour relations. Socio-economic reasons include broader distribution of wealth, stimulation of

economic growth, job security, stronger community empowerment, and increased general

wellbeing of employees.

Various international research over three decades generally supports the benefits of employee

ownership, particularly when combined with high performance workplace policies. Gaps in

research have however been identified, together with lack of publishing in peer-reviewed journals,

and limitations and one-dimensional results due to predominant use of written surveys. Research

on employee ownership in South Africa is scarce, and government policies appear not to have a

strong research basis.

The literature review identified consistent inter-related employee success factor themes, and

uncovered various related sub-factors of success. The core themes include education and training

of ESOP participants and fiduciaries; fairness of the scheme; meaningful ownership stake, an

ownership-oriented culture, and shared commitment to key business disciplines.


48

CHAPTER 3

FINDINGS

3.1 INTRODUCTION

Based on the literature review, and specifically the Employee Ownership Success Factor

Framework established following the literature review, a discussion framework was drafted and

used as the basis for semi-structured interviews with judgementally selected interviewees. The

discussion framework is included as Appendix B. The literature review provides the international

context to employee ownership and related success factors, and the interviews provide a South

African analysis thereof.

Before interviews were performed interviewees were issued with a letter providing information on

the intended research, planned research methodology, intended interviewees, and rights of

interviewees. Also included in the letter was a discussion framework.

Except for one interview, all interviews were performed in person, and interviews were recorded.

In some circumstances follow up discussions were held, and these were performed telephonically,

or where necessary, via email.

Following performance of the interviews, the interviews were reviewed and salient points noted.

Thereafter each interview was summarised against the themes set out in the Employee Ownership

Success Factor Framework included in chapter 2, except for the theme of ‘fairness’. These

summarised interviews are included as Appendix C, and form the basis for the findings

documented below.

The literature review identified ‘fairness’ as an employee ownership success factor – perceived

fairness of the ESOP is an important predictor of employees’ organisational commitment, as well

as acceptance of positive or negative scheme outcomes. The perception of fairness is difficult to

assess as it is subjective, and this study did not include this employee ownership success factor as

a topic of the semi-structured interviews.

3.2 PROFILE OF INTERVIEWEES

The study involves judgemental sampling of suitable persons that have been involved in the

implementation of employee ownership in South Africa and that are willing to participate in this

research.

Interviewees included management of South African companies that have implemented ESOPs,

trade union representatives that have been involved in ESOP implementation and/or have acted as

ESOP fiduciaries, ESOP fiduciaries, socio-economic development specialists at the Industrial

Development Corporation (“IDC”), and employee ownership advisors. The IDC is included in the


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research as it is a government-owned institution that has financed and supported over seventy

ESOPs. It therefore provides useful input to, and a different perspective on, the research.

With regard to interviews with management of South African companies that have implemented

employee ownership, the sampling population excludes management of any company with an

ESOP that has been in existence for less than three years. With regard to interviews with trade

union representatives, the sampling population excludes any representative that has been involved

in implementation of less than five ESOPs. With regard to ESOP fiduciaries, the sampling

population excludes any person that has been a fiduciary for less than three years. With regard to

interviews with employee ownership advisors, the sampling population excludes any advisor that

has advised on implementation of less than five ESOPs.

Appendix A provides a profile of the respective selected interviewees.

3.3 MAIN FINDINGS

3.3.1 Education and training of ESOP participants

All interviewees shared a common view of the importance of employee training and education, but

a majority of interviewees believed that this has been lacking. Responses about education and

training on fundamental principles of ownership, workings of the schemes, financial literacy and

specific key business disciplines varied somewhat.

Concerns were raised about commitment of companies to the employee ownership initiatives, and

related training and education. It was suggested that because employee ownership is compliance

driven, there is not enough focus on communicating and engaging with employees. One

interviewee stated that companies would rather minimise training time and related loss of

production time.

It was stated that without training, employees will never achieve an understanding of the employee

ownership initiative, nor a sense of ownership. No positive change in behaviour can then be

expected.

Another interviewee highlighted the importance of informal on-the-job training as well as formal

training and education. The importance of ongoing training was emphasised.

Lastly, an interviewee pointed out that despite training and education initiatives being in place, it is

nevertheless a challenge to gain a deep understanding of what ownership means and how the

ESOP may benefit the employees. This is because understanding the equity market and all the

internal and external factors, which affect value, is difficult.

3.3.1.1 Ownership fundamentals

Further to the above findings about education and training in general, there were mixed responses

from interviewees regarding education and training on the fundamental principles of ownership.


50

Although some interviewees stated that such training has been provided, the majority indicated

that they felt that education and training in this regard is generally lacking.

3.3.1.2 ESOP workings

Further to the above findings about education and training in general, all but one interviewee

indicated that training on ESOP workings has been provided.

It was pointed out that where the schemes are structurally complex, success in providing an

understanding to employees can be limited.

3.3.1.3 Financial literacy and key business disciplines

Interviewees consistently indicated that little education and training was provided regarding

financial literacy training, and little to no education and training was provided regarding key

business disciplines.

It was noted that some businesses educate employees on key business disciplines - outside of the

ESOP environment. In addition, where this has been successful the focus has been on simple

aspects of the business that employees have line of sight to, and can easily understand.

A risk point was noted in that where there is no education around key business disciplines and no

related understanding of business performance, it is much more likely that employees will have

unrealistic expectations of ESOP benefits. Further, without financial literacy and an understanding

of key business disciplines, the only way that employees will gauge ESOP success is absolute

quantum of financial benefit from the scheme.

3.3.2 Meaningful ownership stake

3.3.2.1 Meaningful quantum

All interviewees felt that the defining determinant of ESOP success was meaningful financial

benefit to employee beneficiaries. If this did not happen, then despite any other ESOP success

factors being addressed, employee ownership would be considered a failure. One interviewee

suggested that the reason for this focus is that employee ownership in South Africa is closely tied

to transformation and BEE, with ESOPs being seen as vehicles for distributing wealth.

Except in the cases of interviewees being management of companies that have implemented

employee ownership, all interviewees stated that, bar some very few exceptions, there has been

no meaningful financial benefit provided to ESOP beneficiaries. In the cases of interviewees being

management of companies that have implemented employee ownership, they were commenting

specifically on their respective ESOPs. Comments in respect of the one ESOP was that benefit

had been exceptional relative to returns available elsewhere. Comment in respect of the other

ESOP was that the capital gain had not been realised yet, and that dividend benefits had been

substantial in the early years of the scheme, but subsequently there have been no dividend returns

due to poor company performance.


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It was stated by the interviewee who is a chairperson of a major ESOP that employees have

become disillusioned regarding ESOPs, mostly because they had expectations of wealth creation

that did not materialise.

A common view was that the fundamental driver of poor returns to employees was the manner in

which the ESOPs have been structured. Most schemes have been structured with the ESOP

obtaining debt financing in order to acquire the respective equity stake, and with all or some of the

dividends received in relation to such equity being used to repay such debt. Leveraged

transactions such as these essentially rely on positive ESOP net asset value to be created in order

to deliver value to employee beneficiaries. Such value is then highly dependent on the equity

value of respective businesses and outstanding balance of ESOP debt. Further comments from

some interviewees in this regard were that it then becomes a case of luck in terms of timing of

entering the scheme and related relative movements in company value, and that when schemes

were initially established, management was overly optimistic as to how value for employee would

unfold. In addition, financial modelling at employee level was not sufficiently performed, and

therefore there was a lack of consideration of whether there could or would be meaningful benefit

to employees.

In terms of improving the way ESOPs are structured and related probability of meaningful financial

benefit to employees, it was stated that ESOPs must specifically be structured to provide benefit in

good and bad times, with risk minimised for scheme beneficiaries. This could involve some shares

being granted to the respective ESOP, which will necessarily require existing shareholders to dilute

their value somewhat - empowerment cannot happen otherwise. In addition, some interviewees

felt that the shareholding percentages by ESOPs are too small, and larger shareholdings would

increase probability of better returns to employees.

3.3.2.2 Short and long term elements, and/or combined with other short-term incentives

The consistent response from almost all interviewees was that employee ownership has generally

been neither structured with both short and long-term benefit, nor integrated with other short-term

incentive structures.

Interviewees emphasised the high inequalities and socio-economic challenges facing South Africa

– migrant labour, and most of the population earning low income, supporting multiple households,

having no or low savings, and facing high indebtedness. Long-term creation of a capital asset is

important to address poor levels of savings. However, in the context of the socio-economic

challenges, some form of short-term benefits were identified as being critical. Another advantage

of short-term benefits is the creation of a line of sight between business performance and scheme

outcomes and success, and better buy-in from employees because of tangible benefit. Union

representatives and the socio-economic specialist at the IDC stated that they would in future be

focussing more on ensuring that there is short-term benefit in ESOPs.


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Many interviewees stated that there is no consideration of ESOPs with other incentive or

remuneration structures, and approaching ESOPs in this regard – looking at holistic and aligned

benefit structuring – would be ideal. Companies should focus on implementing appropriate short-

term incentives, and then overlay ESOPs on these, rather than trying to separately create

something similar. Through working in tandem with other incentives, the net result should be

employees that are more focussed and understanding of importance of business performance to

their own scheme benefit.

3.3.3 Ownership-oriented culture

From discussions with the interviewees, the primary driver for implementation of employee

ownership has been compliance with BEE legislation. ESOPs are not integrated into businesses

operations, and are rather established as separate business initiatives. Management has little

interest in changing how the business operates, or creating an ownership-oriented culture. As one

interviewee explained, there are connections between employee ownership and general business

operations, but these are not being made. In respect of a wider context of employee relations, one

of the employee advisor interviewees stated “a change in organisational design and management

is necessary and this kind of quantum shift just has not happened in South Africa. ESOPs must be

looked at within the socio-economic circumstances of our country, not in isolation. Our massive

inequalities across race and gender impact employee relations in a massive way.” Other than this

comment regarding changes in organisational design and management to improve employee

relations, no interviewees identified the creation of an ownership-oriented culture as being a

success factor for employee ownership.

The various elements that work together to facilitate an ownership-oriented culture - discussed

below - must all be considered in the context of employee ownership being primarily addressed

from a compliance standpoint.

The interviewees identified a few exceptions, where employee ownership was implemented

outside of the BEE realm or where management did want to create an ownership-oriented culture

where employees act, and are viewed as co-owners of the business. These exceptions were very

few, and in certain circumstances did not involve the broad employee base, just select members of

management.

3.3.3.1 Adoption of and commitment to values

Bearing in mind the above-mentioned context of employee ownership implementation in South

Africa, the consistent response from interviewees was that businesses have not considered

changing their values to better align with an employee ownership environment. In certain

circumstances values already do somewhat align to such an environment.


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3.3.3.2 Participative management

The only cases of participative management identified by interviewees, where employees or

representatives have become involved in an element of decision-making in the business, were the

case of a management ownership scheme and a few cases of ESOP representation on the

company board of directors. The management ownership scheme involved select members of

management participating in ownership and in decision-making in the business. The cases of

board representation were limited – only certain fiduciaries was allowed to participate as directors,

and in one case such person was restricted from sharing all information with the rest of the scheme

fiduciaries.

Other than these mentioned cases, interviewees felt strongly that there is no inclusion of

employees in workplace decision-making - directly or indirectly. One of the union representatives

stated that management of businesses are reluctant to facilitate employee participation in any way,

and further that, in the context of a compliance exercise, ESOP shareholders are always passive

and do not get involved in management and control of the businesses.

It was stated that a lack of engagement with employees at both strategic and operational level in

the business eliminates any possible related positive impact on business performance.

3.3.3.3 Ongoing commitment from leadership and management

There were three general comments from interviewees with regard to ongoing commitment from

leadership and management. Firstly, and in line with the above comment about compliance driven

ESOP implementation, management are not committed to employee ownership in the sense of

creating an ownership-oriented culture. Secondly, top-level management are typically involved in

the initial establishment and rollout of ESOPs, but thereafter everyone gets back to business as

usual and commitment and involvement wanes. Lastly, there is a gap between top and middle

management, and management involvement, understanding and (limited) buy-in does not extend

to middle management. There is no incentive for all management to make employee ownership

work, although their interest increases in proportion to their levels if participation.

One interviewee highlighted the importance of middle management’s role in employee ownership

implementation, with middle management effectively being the conduit for communication and

employee ownership implementation.

Another interviewee felt that another reason why middle management plays little role in ESOP

implementation is that they have become disempowered from a human resources perspective, with

ever increasing human resource departments taking responsibility for all that is human resource

related.

It was stated by another interviewee that the various transformation legislation has become a

compliance headache for management, and they see it in this light rather than an opportunity to


54

meaningfully address inequalities and create a social compact. As ESOPs are primarily

compliance driven, they are then seen in this light.

3.3.3.4 Celebration of employee owners

The general view of interviewees was that there was little celebration of employee owners, other

than at the inception date of ESOPs in some cases. This is because of the compliance-driven

mentality for ESOP implementation, and because, with schemes generally providing little value to

employee beneficiaries, there has been little to celebrate. It was pointed out by an interviewee that

companies have downplayed the ESOP where there has been little benefit to employees.

One of the employee ownership advisors explained that there should be regular communication

and celebration throughout the life. This aligns to the benefit structuring of the scheme where

short-term benefits reinforce the scheme and create a line of sight between business performance

and scheme outcomes/success.

3.3.3.5 Existence of growth and development opportunities

The consistent response from interviewees was that most businesses do have growth and

development opportunities, but there is no connection to, or correlation with an employee

ownership environment. Again, because ESOPs are mainly implemented in South Africa for

compliance reasons they are not integrated into the business, and rather are treated as a

standalone initiative.

3.3.3.6 Reinforcement of teamwork

Similar to the response noted above regarding growth and development, there is typically

reinforcement of teamwork, but not in the ESOP context, and no connections are being made

between normal operations and employee ownership.

3.3.4 Commitment to pursuing business disciplines

As previously mentioned in the above section on ownership-oriented culture, the interviewees

consistently stated that the primary driver for implementation of employee ownership has been

compliance with BEE legislation. Besides for very few exceptions, ESOPs are not integrated into

business operations, and are rather established as separate business initiatives. Management has

little interest in changing how the business operates, or creating an ownership-oriented culture.

3.3.4.1 Identification of critical metrics and target setting; reporting of metrics; employees

acting on information

Although identification of critical metrics and related target setting; reporting of metrics; and

employees acting on information have been identified in the Employee Ownership Success Factor

Framework as separate aspects that are required in order to promote a commitment to pursuing

business disciplines, because of the responses from interviewees it is more appropriate to address

them altogether.


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Bearing in mind the above-mentioned context of employee ownership implementation in South

Africa, the consistent response from interviewees was that businesses do not identify critical

metrics in the context of the employee ownership environment. They therefore do not set targets,

report on these metrics, nor allow employees to discuss and act of the reported information.

Identifying and tracking metrics does happen at management level, as part of normal operations.

As set out above in the findings about education and training on key business disciplines, this has

been identified as the weakest aspect of education and training. Employees are not engaged

regarding key business disciplines, nor are provided with the knowledge to understand them.

One of the employee ownership advisors stated that businesses need to be able to identify metrics

and then codify that down to the basic language of the supervisor and the employee.

With regard to reporting of business information to employees, the interviewees explained that

there is frequently some manner of reporting of general business performance. A union

representative was of the view that that some businesses are however reluctant to share financial

results with employees.

It was stated that communication is an employee ownership success factor, and that good

communication is especially important when business performance has been poor, and employee

expectations need to be managed.

With regard to the lack of sharing information with employees and subsequently enabling

employees to act on such information, interviewees generally were of the opinion that this was a

problem in businesses, not specifically in the employee ownership context. One explained that in

South Africa, with very high levels of inequality, cultural issues, and gender issues, the level of

dislocation that is happening between the employee and management reduces their capacity to

interrelate. Another interviewee said that companies believe that sharing information with

employees is the same as consultation with employees. He felt that employees do not have a

voice, and do not feel heard, and consequently no positive outcomes of the ESOP can be

produced.

Interviewees stated that businesses should be able to listen to employees and be able to see and

listen to the innovation in the workforce and tap into it and trust it, and manage it in a way that

enhances value to the business as a whole. Management need to create structures or forums for

engagement with employees and then encourage employees to share their thoughts.

3.3.4.2 Celebration of achievement

Following from the above findings that critical metrics are not, in the ESOP context, identified,

tracked and acted on, there is no related celebration of achievement. All interviewees stated that

the only celebration of achievement in the ESOP context was when schemes have been

successful in creating value for employees. As identified in the above findings, this has seldom

happened, and accordingly there has been little celebration of achievement of any kind.


56

3.3.5 Well governed fiduciary body with company and worker representation

In terms of composition of the fiduciary body, the general response from interviewees was that

fiduciaries consist of management representatives, suitably qualified and experienced independent

persons, and employee representatives. In a unionised environment, the employee

representatives are typically union representatives. Many interviewees also stated that the

employee representatives constituted at least 50% of the total number of fiduciaries.

In terms of governance, the majority of interviewees stated that fiduciary bodies had operational

capacity and governed ESOPs well. An interviewee however pointed out that with the conflict

among the unions there has been a lack of consistency of union-representative fiduciaries, thereby

limiting their value-add to the ESOP.

Governance was identified as a success factor, with fiduciaries necessarily being suitably skilled

and experienced. Engagement with employees was noted as being important – managing

expectations, increasing buy-in, and positioning the ESOP. Positioning of employee ownership is

vital - in South Africa this is about transformation, and creation of financial benefits for employee

beneficiaries. Having fiduciaries aligned in this regard is important.

Another success factor identified by many interviewees is training of fiduciaries. This is particularly

important for employee representatives – both union representatives and employees. Where they

do not have the requisite skills or knowledge they cannot best represent their constituents, and

also are more likely to argue and react with resistance. Training should extend beyond just roles

and responsibilities – it should also address putting fiduciaries in a position where they feel

comfortable and confident to take action. This requires training about the business and key

business disciplines. It also requires communication from management about the strategic plan of

the business, and risks to success thereof.

3.3.6 Union involvement and support

Responses from interviewees regarding union involvement and support in employee ownership

implementation were mixed.

An employee ownership advisor explained that in larger companies with unionised environments,

unions are involved in employee ownership implementation. In smaller companies, the ESOP is

almost imposed on staff and unions. Strength of the union is a determining factor of the level of

their inclusion in the process. He further explained that unions are getting more militant and to

exclude them is to doom your scheme to failure. Unions should be engaged in the process as

soon as possible, so they are not presented with a fait accompli.

An employee ownership advisor interviewee and union representative interviewee stated that

unions have historically not been engaged with from the inception of ESOP design, and have

traditionally played a passive role. It was felt that if unions built capacity in respect of ESOP

structuring and advisory they would be engaged with earlier in the ESOP implementation process.


57

On the point of union capacity, or lack thereof, multiple interviewees highlighted this as a problem,

but two explained that it appears that unions are trying to address this issue by skilling up, by

employing experienced ESOP advisors, and by playing a more active role in protecting interests of

employee members.

A substantial proportion of interviewees felt that unions should play a bigger role in lobbying

government with respect to employee ownership policy formulation, and then ensuring that

implementation is within an agreed policy framework.

One interviewee stated that unions play a crucial role in engaging with management, particularly in

challenging situations, in order to avoid possible worst outcomes for employees.

3.3.7 Alignment of human resources system

As previously mentioned in the above sections on ownership-oriented culture and commitment to

pursuing business disciplines, the interviewees consistently stated that the primary driver for

implementation of employee ownership in South Africa is compliance with BEE legislation.

Besides for very few exceptions, ESOPs are not integrated into business operations, and are

rather established as separate business initiatives. Management has little interest in changing how

the business operates, or creating an ownership-oriented culture. Alignment of the human

resources system to an employee ownership environment and culture is no exception. One

interviewee stated that, if anything, human resources departments feel that ESOPs are an added

burden to them. Another interviewee explained that South Africa in general rates very poorly when

it comes to human resources, and that there is too little focus on people management and

relationships.

3.3.8 Employment of specialist advisors

All interviewees responded that specialist employee ownership advisors were employed through

the implementation of ESOPs, and indicated that it is necessary to do so.

The socio-economic development specialist from the IDC questioned whether specialist employee

ownership advisors have sufficient knowledge in order to go beyond financial structuring and

compliance with BEE, and look to advising on and driving transformation of companies to establish

ownership-oriented cultures and employee ownership environments characterised by broad sense

of ownership by employees.

3.4 SUMMARY

3.4.1 Identification of employee ownership success factors

In the South African context, taking the socio-economic challenges facing the country into account,

successful employee ownership is defined as that which delivers meaningful financial benefit to

employee beneficiaries. Where there is no menaningful financial benefit, despite whether other


58

success factors exist, respective ESOPs are seen as having failed. Success factors in this regard

included both quantum and timing of benefit, where both short and long-term benefits were

considered to be required.

Interviewees did not identify the broad aspects of creating an ownership-oriented culture or

building a commitment to or pursuing key business disciplines as being success factors.

With regard to ownership-oriented culture, although it was not identified by interviewees as being a

success factor, one interviewee did highlight that without engagement with employees at a

strategic and operational level in the business, the business eliminates any possible related

positive impact on business performance.

Employee education and training in respect of fundamental principles and concepts of ownership;

ESOP workings; and key business disciplines (together with financial literacy training where

necessary) was noted as being a success factor.

Ongoing communication with employees regarding business performance was considered

important for succesful employee ownership implementation.

ESOP governance was also identified as being a success factor, and in this respect training of

scheme fiuciaries and sharing of business information with them was highlighted.

Where relevant, union involvement through design and implementation of employee ownership

was identified as a success factor.

Lastly, employing specialist employee ownership advisors was considered necessary for

successful employee ownership implementation.

Figure 3.1 below compares success factors identified by interviewees against those set out in the

Employee Ownership Success Factor Framework. As discussed previously, ‘fairness’ was not

included as part of this study.

3.4.2 Assessment of employee ownership implementation in South Africa against

Employee Ownership Success Factor Framework

The interviews with persons having experience with employee ownership implementation in South

Africa yielded findings regarding employee ownership implementation and which success factors,

as set out in the Employee Ownership Success Factor Framework, have been addressed.

Interviewees consistently felt that, besides for very few exceptions, employee ownership had not

been successful – this was in light of the fact that very few ESOPs have delivered meaningful

financial benefit to employees. The findings reflected that not only has the success factor

addressing meaningful financial benefit not been addressed, but very few other success factors set

out in the Employee Ownership Success Factor Framework have been addressed.


59

Figure 3.2 below sets out the Employee Ownership Success Factor Framework, and indicates

whether respective success factors have been addressed in South African employee ownership

implementation. As discussed previously, ‘fairness’ was not included as part of this study.

Green ticks highlight employee ownership success factors included in the Employee Ownership

Success Factor Framework that were identified by interviewees as being success factors.

Figure 3.1: Comparison of success factor identified by interviewees against those as set out

in the Employee Ownership Success Factor Framework


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Green ticks indicate success factors that have been addressed in South African employee

ownership implementation.

Orange ticks indicate success factors that have inconsistently and/or partially been addressed in

South African employee ownership implementation.

Red crosses indicate success factors that have not been addressed in South African employee

ownership implementation.

Figure 3.2: Comparison of success factor identified by interviewees against those as set out

in the Employee Ownership Success Factor Framework


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CHAPTER 4

SUMMARY, CONCLUSION AND RECOMMENDATIONS

4.1 INTRODUCTION

Employee ownership involves employees directly or indirectly participate in equity ownership of

their employing company. Such ownership provides an opportunity to provide a more distributed

capital ownership and a more balanced economy (Kelso & Adler, 1958). This is particularly

relevant in South Africa, which faces significant socio-economic challenges largely because of the

legacy of Apartheid, including high wealth inequalities, low savings, high indebtedness, and much

of the population struggling on a day-to-day basis to survive.

The South African government has identified employee ownership as a means to facilitate broad-

based economic empowerment of historically disadvantaged persons. There appears to be little

research on employee ownership in South Africa, and government policies appear not to have a

strong research basis. Based on interviews with suitably knowledgeable and experienced persons,

there appears to have been limited employee ownership success in South Africa

From a review of the literature the concept of employee ownership positively impacting business

performance appears to be the generally implied definition of ‘success’ regarding implementation

of employee ownership, and this definition has been applied for the purposes of this research.

Successful implementation of employee ownership requires an understanding of the different

facets of employee ownership and what related success factors are. This study has sought to

identify success factors of employee ownership as well as to assess to what extent such factors

have been addressed in the implementation of employee ownership in South Africa.

4.2 SUMMARY OF MAIN FINDINGS

4.2.1 Overview

Ownership is multidimensional, with the three fundamental attributes being the right to equity, the

right to information, and the right to influence (Pierce, Rubenfeld and Morgan, cited by McHugh,

Cutcher-Gershenfeld & Bridge, 2005: 280). The implication of this is that where one of these

attributes is not present, ownership will not truly exist, and success of any ownership initiative is

then at risk.

If implemented correctly, employee ownership can increase employee engagement, improve

productivity, and ultimately lead to higher company performance (Rosen, et al., 2005). Higher

performing companies typically provide employees with better incentive-plans, benefit opportunities

and growth opportunities, with successful employee ownership then being beneficial to both

employees as well as employers (Hams, 2012 %3).


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Statistically, companies that have implemented employee ownership and in which there is a culture

of “ownership thinking” outperform their previous pre-employee ownership performance as well as

the performance of their non-employee ownership peers (Hams, 2012: %50). However,

companies that implement employee ownership but do not do any cultural work underperform due

to lack of understanding of employee ownership on the part of employees, and related unrealistic

expectations (Hams, 2012: %50). Hams (2012: %3) further explains the concept of “ownership

thinking” as being a culture of employees thinking and acting like owners, with the goal of wealth

creation. This culture requires that employees are educated about their company’s business, that

employees understand how they contribute within it, and requires that employees have fun in doing

so (Hams, 2012 %3). Rosen, Case and Staubus (2005; 26) similarly describe a necessary “equity

attitude” - being an attitude of co-ownership, where employees act in the best interest of the

business as a whole (which is in their best interest as co-owners). This attitude reverses the

traditional conflict and/or mistrust between labour and management through introducing aligned

interests (Rosen, et al., 2005: 31).

Research has shown that an “equity attitude” consistently has three requisite elements. The first

element is an ownership stake significant enough to make a meaningful difference to the financial

future of the employee (Rosen, et al., 2005: 31). The second element is a shared ownership

culture where employees feel and think like the co-owners that they are (Rosen, et al., 2005: 31).

The third necessary element is a common understanding of key disciplines, together with a shared

commitment to pursuing them (Rosen, et al., 2005: 32). Each of these elements reinforces the

other two (Rosen, et al., 2005: 97). There is no one right way to implement any of these ideas and

none of them are static – rather building an equity attitude is a dynamic process (Rosen, et al.,

2005: 97).

The findings of the literature review performed corroborates the above-mentioned requisite

elements for the creation of an “equity attitude”. The findings identified various composite success

factors, and additional success factors not directly related to these requisite elements. Section 2.9

of the literature review sets out an Employee Ownership Success Framework that was established

based on identified success factors. The framework indicates main success factors, composite

success factors (where relevant), as well as where success factors support or reinforce other

success factors.

Interviews were performed with judgementally selected suitably qualified and experienced persons

that have been involved in the implementation of employee ownership in South Africa and that are

willing to participate in this research. Interviewees included management of South African

companies that have implemented ESOPs, trade union representatives that have been involved in

ESOP implementation and/or have acted as ESOP fiduciaries, ESOP fiduciaries, socio-economic

development specialists at the IDC, and employee ownership advisors.


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The interviews predominantly supported the findings from the literature review, although

interviewees identified fewer success factors. A key finding of the interview process was that

employee ownership in South Africa has been primarily compliance driven – with the goal of

addressing BEE. The researcher is of the opinion that the reason that interviewees identified fewer

success factor than those identified through the literature review is that the interviewees’ definition

of ‘success’ is not the same as that of international experts and academics, nor for that matter the

same as that applied in this research study – being employee ownership positively impacting

business performance. Broad-based employee ownership is compliance driven in South Africa,

and there is little desire to change the way businesses are run or to fundamentally change the

relationship between employers and employees, therefore any of the success factors that are

related to this do not register with interviewees.

A review of the Employee Share Ownership Scheme recognition criteria (as set out in the BEE

Codes) against the Employee Ownership Success Factor Framework discussed above revealed

that the requirements set out in the BEE Codes are lacking in terms of driving successful employee

ownership. Following this, and because employee ownership is compliance driven in South Africa,

it is the researcher’s opinion that there is unlikely to be any truly successful employee ownership

initiatives in South Africa.

A summary of the success factors identified follows, together with an assessment of whether these

success factors have been addressed in employee ownership implementation in South Africa.

4.2.2 Education and training of employees

4.2.2.1 Findings from literature review

Challenges that arise with the implementation of employee ownership include employee

uncertainty about the rights and responsibilities of ownership (Rosen, et al., 2005: 116), as well as

mistrust of the initiative (Rosen, et al., 2005: 117). Employee education regarding ownership is

imperative to manage the above challenges and enable employee understanding of ownership,

and this requires learning about the rights and responsibilities that ownership entails as well as

about business. The potential for employee ownership to improve individual, and ultimately

company performance, depends on employees having knowledge of and participating in schemes

that link reward to performance (Budd, 2008: i).

A distinctive feature of ownership education when compared to traditional company training is its

emphasis on the bigger picture, and on the line of sight between employees’ daily actions and

ultimate business performance (Rosen, et al., 2005: 110). Stack and Burlingham (2003: %58)

state that educating and entrenching the concept that the value of ownership is all about future

earnings, growth, cash flow, and ideas is fundamental to developing an ownership mentality in a

company. To do this, employees must have knowledge of the fundamental principles of


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ownership, the workings of the respective ESOP, and the key business disciplines that drive value

(Stack & Burlingham, 2003: %58).

Employee financial literacy is imperative and, in this regard, education is required (Rosen, et al.,

2005: 158). This can be achieved through training sessions, but it is vital that employees are able

to deepen their knowledge by putting their learnings to work, and engaging in on-the-job training.

Financial literacy training is particularly important in South Africa, where there are generally low

levels of financial literacy and much of the country’s population is inadequately equipped to make

sound financial decisions (Financial Services Board, 2012: 37). Further, financial literacy training

assists in meeting one of the priorities of the National Development Plan, being education and

skills development (Republic of South Africa, 2012: 17).

4.2.2.2 Findings from interviews

All interviewees shared a common view of the importance of employee training and education, but

a majority of interviewees believed that this has been lacking. It was stated that without training,

employees will never achieve an understanding of the employee ownership initiative, nor a sense

of ownership, and no positive change in behaviour can then be expected. The importance of

informal on-the-job training as well as formal training and education was highlighted. The

importance of ongoing training was emphasised.

Concerns were raised about commitment of companies to the employee ownership initiatives, and

related training and education. It was suggested that because employee ownership is compliance

driven, there is not enough focus on communicating and engaging with employees.

Responses about education and training on fundamental principles of ownership, workings of the

schemes, financial literacy and specific key business disciplines varied somewhat.

There were mixed responses from interviewees regarding education and training on the

fundamental principles of ownership. Although some interviewees stated that such training has

been provided, the majority indicated that they felt that education and training in this regard is

generally lacking.

All but one interviewee indicated that training on ESOP workings has been provided. It was

pointed out that where the schemes are structurally complex, success in providing an

understanding to employees can be limited.

Interviewees consistently indicated that little education and training was provided regarding

financial literacy training, and little to no education and training was provided regarding key

business disciplines. A risk point was noted in that where there is no education around key

business disciplines and no related understanding of business performance, it is much more likely

that employees will have unrealistic expectations of ESOP benefits. Further, without financial


65

literacy and an understanding of key business disciplines, the only way that employees will gauge

ESOP success is absolute quantum of financial benefit from the scheme.

Despite training and education initiatives being in place, it is nevertheless a challenge to gain a

deep understanding of what ownership means and how the ESOP may benefit the employees.

This is because understanding the equity market and all the internal and external factors that affect

value is difficult.

4.2.3 Fairness


The perceived fairness of an ESOP is an important predictor of employees’ organisational

commitment (Kuvaas, 2003). Extrinsic motivation generated by financial rewards is not the only

success factor (Kuvaas, 2003). Kuvaas (2003) notes that when a positive or negative outcome is

achieved by means that are perceived as being fair, the outcome is viewed more favourably than

when the means to such outcome are perceived as being unfair. This effect suggest then that

employees will be more accepting when their value in and/or related pay out from employee

ownership is falling (Kuvaas, 2003). This again highlights the need to provide training and

education to employees regarding employee ownership. A main conclusion from Kuvaas’ study is

that any scheme involving financial participation in a business should be designed to maximise

perceptions of fairness, and that this can best be achieved by allowing an element of employee

participation or consultation in the design process, and by subsequent monitoring post-

implementation (Kuvaas, 2003).


The perception of fairness is difficult to assess as it is subjective, and this study did not include this

employee ownership success factor as a topic of the semi-structured interviews.

4.2.4 Meaningful ownership stake


Employees are more likely to feel like an owner in a business when what they owns is perceived by

them as a significant asset (Rosen, et al.,, 2005: 34). Ownership will remain an abstract concept in

the minds of employees until their ownership stake is of sufficient size to make a difference in their

standard of living (Stack and Burlingham, 2003: %41).

Rosen, et al., (2005: 106) cite the findings of research that included that the size of a company’s

ESOP contribution correlated not only with business performance, but also with their interest in

looking for another job, their interest in financial results of their employer, and their willingness to

participate in efforts to improve workplace efficiency. Long (cited by McHugh, et al., 2005: 281)

found that employees’ ownership stake was an important variable in explaining performance and

attitudinal differences across companies that had implemented employee ownership.


66

It is not only the capital appreciation of employee ownership that results in employees perceiving a

meaningful ownership stake, it is also dividend distributions and related cash receipts (Rosen, et

al, 2005:115). Supplementing an ESOP with economic feedback in the form of profitability based

cash bonuses is necessary to reinforce the building of “ownership consciousness” (Kurland,1997:

45). Bryson and Freeman (2008: 22) found, in a study of the impact of shared capitalism on the

performance of companies in the United Kingdom, that employee share ownership has the

strongest positive association with productivity, but that maximum impact is achieved when firms

combine share ownership with other types of shared capitalist pay.

Combining short-term incentive plans with an ESOP provides more frequent reinforcement of

behaviour, leading to more effective reinforcement (Hams, cited by Rosen & Rodgers, 2011: 40).

A short-term focus on tactics and objectives can educate employees on the factors that ultimately

drive company value (Hams, cited by Rosen & Rodgers, 2011: 40). Short-term activities and

rewards can enable employees to understand the connection between day-to-day actions and

long-term outcomes and overcome the difficulty experienced by employees in understanding the

long-term benefits of an ESOP (Hams, cited by Rosen & Rodgers, 2011: 40).


All interviewees felt that the defining determinant of ESOP success was meaningful financial

benefit to employee beneficiaries. If this did not happen, then despite any other ESOP success

factors being addressed, employee ownership would be considered a failure. One interviewee

suggested that the reason for this focus is that employee ownership in South Africa is closely tied

to transformation and BEE, with ESOPs being seen as vehicles for distributing wealth.

A large majority of interviewees stated that, bar some very few exceptions, there has been no

meaningful financial benefit provided to ESOP beneficiaries. It was suggested that this has led to

employees becoming disillusioned regarding ESOPs, mostly because they had expectations of

wealth creation that did not materialise.

A common view was that the fundamental driver of poor returns to employees was the manner in

which the ESOPs have been structured – most often involving ESOP obtaining debt financing in

order to acquire the respective equity stake.

In terms of improving the way ESOPs are structured and related probability of meaningful financial

benefit to employees, it was stated that ESOPs must specifically be structured to provide benefit in

good and bad times, with risk minimised for scheme beneficiaries.

The consistent response from almost all interviewees was that employee ownership has generally

been neither structured with both short and long-term benefit, nor integrated with other short-term

incentive structures.

Interviewees emphasised the high inequalities and socio-economic challenges facing South Africa,

and mentioned that although long-term creation of a capital asset is important to address poor


67

levels of savings, in the context of the socio-economic challenges, some form of short-term

benefits are critical. Another advantage of short-term benefits is the creation of a line of sight

between business performance and scheme outcomes and success, and better buy-in from

employees because of tangible benefit.

Many interviewees stated that there is no consideration of ESOPs with other incentive or

remuneration structures. Through working in tandem with other incentives, the net result will be

employees that are more focussed and understanding of importance of business performance to

their own scheme benefit. Companies should focus on implementing appropriate short-term

incentives, and then overlay ESOPs on these, rather than trying to separately create something

similar.

4.2.5 Ownership-oriented culture


Companies that have implemented employee ownership only experience improved performance if

an ownership oriented culture of employees thinking and acting like owners exists (Hams, 2012:

%50). Employee ownership needs to be accompanied by effective forms of governance and

engagement if the employee ownership model is to be successful and delivering improved

profitability, employee productivity and innovation (EOA, 2013: 15).

The adoption of and commitment to values which support an employee-ownership environment is

a component of building an ownership-oriented culture. These values identify the character of the

company and act as a guide for conduct of employees and a basis for commercial success

(Sauser, 2009: 155).

A “sense of ownership” is an important intervening variable between actual employee ownership

and changes in employee attitudes, and that, to generate this “sense of ownership”, it is important

for employees to be provided the opportunity to be involved in decision-making (Pendleton, et al.,

1998: 99). Much of the employee ownership research findings included that business performance

is only positively impacted when employee ownership is combined with a form of participative or

high-performance management (Rosen, et al., 2005: 133), when employees have the opportunity,

and responsibility, to make certain decisions usually reserved for management, and get a chance

to express their opinions on other decisions (Rosen, et al., 2005: 134). This does not mean that

employees make or give opinion on all decisions, but rather that where employees are directly

involved or affected, companies should do their best to include employees in decision-making

(Rosen, et al., 2005: 135). The need for inclusion of employees in decision-making must be

balanced with the need to have effective decision-making, and that a business managed by

committee is rarely successful (EOA, 2013: 15).

Blasi, et al. (2008: 18) concluded that shared capitalist workplace policies, including employee

ownership amongst other things, had positive effects on employee effort, loyalty, and turnover, but


68

that significantly greater impact was achieved when such shared capitalist policies were combined

with high-performance workplace policies such as training and involvement in decision-making. In

an investigation of the relationship between shared capitalist workplace policies and a culture for

innovation and employees’ willingness and ability to engage in innovative activity, Harden, et al.

(2008: 32) discovered that equity participation by employees combined with high performance

workplace policies is the strongest predictor of an innovation culture.

To reinforce an ownership-oriented culture, employees must never forget that co-owners (Rosen,

et al., 2005: 129). This is achieved through the previously mentioned employee education and

communication, through payments from the scheme, but also the language that the company uses

in running the business (Rosen, et al., 2005: 129), as well as initiatives and awards which

celebrate employee owners (Rosen, et al., 2005: 130).

It is also important to reinforce the importance of teamwork, and shared responsibility to get work

done (Rosen, et al., 2005: 138).

Business management who choose to implement employee ownership must be truly committed to

it, and this means encouraging an ownership culture and supporting employee decision-making

(Rosen, et al., 2005: 176). The concept of leadership in an organisation with an ownership culture

needs to be broadened – leadership should be delegated, and leadership development should

happen at all levels in the organisation (Stack & Burlingham, 2003: %4). This involves improving

employees’ business skills and knowledge, giving them job ownership together with responsibility

for execution, encouraging decision-making, and pushing for growth and development (Stack &


Middle managers have a significant role to play in successful employee ownership implementation

in the capacity of coaches and leaders (Rosen, et al., 2005: 177). The highest level of cynicism

regarding employee ownership initiatives comes from middle management (Rodgers, 2011: 116).

To reduce cynicism on the part of middle managers, top management must involve them in the

design and implementation process, and make middle management comfortable that employee

ownership does not pose a threat to their jobs (Rodgers, 2011: 116). Middle management must

then be held accountable for supporting the company’s ownership culture (Rodgers, 2011: 116).

Another aspect that affects the presence of an ownership-oriented culture is the existence of

opportunities for growth and development (Rosen, et al., 2005: 131).


Interviewees did not identify the broad aspects of creating an ownership-oriented culture as being

success factors.


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As previously discussed, the interview process revealed that the primary driver for implementation

of employee ownership has been compliance with BEE legislation. ESOPs are not integrated into

businesses operations, and are rather established as separate business initiatives. Management

generally has little interest in changing how the business operates, or creating an ownership-

oriented culture.

With regard to growth and development opportunities, interviewees responded that such

opportunities do exist in most, but there is no connection to, or correlation with an employee

ownership environment.

Similarly, there is typically reinforcement of teamwork, but not in the ESOP context, and no

connections are being made between normal operations and employee ownership.

Other than few exceptions, interviewees felt strongly that there is no inclusion of employees in

workplace decision-making - directly or indirectly. One of the union representatives stated that

management of businesses are reluctant to facilitate employee participation in any way. It was

stated that a lack of engagement with employees at both strategic and operational level in the

business eliminates any possible related positive impact on business performance.

In terms of management commitment to employee ownership, top-level management are typically

involved in the initial establishment and rollout of ESOPs, but thereafter everyone gets back to

business as usual, and commitment and involvement wanes. The importance of middle

management’s role in employee ownership implementation was highlighted, but it was stated that a

gap exists between top and middle management, and management involvement, understanding

and (limited) buy-in does not extend to middle management. In addition, there is no incentive for

all management to make employee ownership work, although their interest increases in proportion

to their levels if participation.

The general view of interviewees was that there was little celebration of employee owners, other

than at the inception date of ESOPs in some cases. This is because of the compliance-driven

mentality for ESOP implementation, and because, with schemes generally providing little value to

employee beneficiaries, there has been little to celebrate.

4.2.7 Commitment to pursuing business disciplines


Employees are an intrinsic part of what makes a business successful, and they need to understand

their part of the disciplines that enable their business to profit (Rosen, et al., 2005: 155). This

requires that companies incorporate the expectation that employees will think and act like owners

into how the company is operated, and this requires employee education on the fundamental

disciplines that drive the business and then involving employees in everyday performance

management (Rosen, et al., 2005: 146). A corollary requirement to helping employees understand

business and act like owners is to provide regular and ongoing information about the state of the


70

business (Rosen, et al., 2005: 112). The objective is to provide sufficient capability and information

for employees to make more, and better, decisions in the workplace (Rosen, et al., 2005: 114).

Identifying a few critical metrics and then enabling employees to understand them is necessary

(Rosen, et al., 2005: 156). Critical metrics should be both operational and financial metrics that

have the biggest impact on company success (Hams, 2012: %25). It is important that there is a

line of sight between achieving the targets for the selected metrics and succeeding as a company,

and also that the metrics are items which can be controlled or influenced by employees (Rosen, et

al., 2005: 157). The identification of critical metrics should be a process of employee and

management involvement, and it is critical that agreement is reached to ensure buy-in from all

parties (Rosen, et al., 2005: 178).

Once metrics have been selected, targets should then be set for the selected metrics based on

comprehensive assessment of what can be achieved and why (Rosen, et al., 2005: 178). Again, it

is critical that employees are involved and that there is agreement on targets set (Rosen, et al.,

2005: 178). Once targets are agreed on, ideas should be gathered on how to achieve them

(Rosen, et al., 2005: 178).

Reporting of metrics should happen frequently so business performance can be monitored as it is

happening (Rosen, et al., 2005: 159). Through analysing leading and lagging metrics, and

forecasting performance, employees are able to make adjustments that impact performance

(Rosen, et al., 2005: 160). They not only take accountability for performing their individual roles,

but also for business results as well (Rosen, et al., 2005: 160).

Celebration of achievement of targets, and related reward increases commitment to pursuing such

targets (Rosen, et al., 2005: 178).

It is necessary to move beyond reporting of metrics to employees – the effectiveness of sharing

numbers with employees is limited unless employees have opportunity to discuss the numbers,

and find ways to improve them (Stack cited by Rosen & Rodgers, 2011: 22).


Interviewees did not identify the broad aspects of commmitment to key business disciplines as

being success factors. It was stated that communication with employees, predominantly regarding

business performance, is a success factor.

As previously mentioned, the interviewees consistently stated that the primary driver for

implementation of employee ownership has been compliance with BEE legislation. Besides for

very few exceptions, ESOPs are not integrated into business operations, and are rather

established as separate business initiatives. Management has little interest in changing how the

business operates. The consistent response from interviewees was that businesses do not identify

critical metrics in the context of the employee ownership environment. They therefore do not set

targets, report on these metrics, nor allow employees to discuss and act of the reported


71

information. Identifying and tracking metrics does happen at management level, as part of normal

operations. As set out above, education and training on key business disciplines has been

identified as the weakest aspect of education and training. Employees are not engaged regarding

key business disciplines, nor are provided with the knowledge to understand them.

With regard to reporting of business information to employees, the interviewees explained that

there is frequently some manner of reporting of general business performance.

With regard to the lack of sharing information with employees and subsequently enabling

employees to act on such information, interviewees generally were of the opinion that this was a

problem in businesses, not specifically in the employee ownership context.

Following from the above findings that critical metrics are not, in the ESOP context, identified,

tracked and acted on, there is no related celebration of achievement. All interviewees stated that

the only celebration of achievement in the ESOP context was when schemes have been

successful in creating value for employees. As identified in the above findings, this has seldom

happened, and accordingly there has been little celebration of achievement of any kind.

4.2.8 Well governed fiduciary body with company and worker representation


A fiduciary body consisting of both management and employee representatives carries the strength

of management’s involvement as well as the credibility of employee representation, and is then

more likely to achieve buy-in from both sides (Rosen, et al., 2005: 175).

Fiduciaries must undergo business literacy training in order to be able fulfil their responsibility to

act in the best interests of the employees (Mathews, 2009: 65). Where necessary, fiduciaries

should be able to employ the assistance of relevant professionals (Mathews, 2009: 65). In order to

adequately fulfil their fiduciary responsibilities, fiduciaries of ESOPs must request all company

information that they are entitled to as shareholder representatives (Mathews, 2009: 64).

Fiduciary bodies must not be dominated by the views of one person, and must operate in an

organised manner (Mathews, 2009: 67). Maintaining experience on the fiduciary body over time is

essential, and through any changes to membership, it is important to maintain the right

combination of skills and representation, as well as experience (Rosen & Rodgers, 2011: 13).


Governance was identified as a success factor, with fiduciaries necessarily being suitably skilled

and experienced. Linked to this is training of fiduciaries, which is particularly important for

employee representatives – both union representatives and employees.

Engagement with employees was noted as being important – managing expectations, increasing

buy-in, and positioning the ESOP. Engagement by management with fiduciaries is also important,

where information on strategic plans and business performance should be shared.


72

In terms of composition of the fiduciary body, the general response from interviewees was that

fiduciaries consist of management representatives, suitably qualified and experienced independent

persons, and employee representatives, which most often constituted at least 50% of the total

number of fiduciaries.

In terms of governance, the majority of interviewees stated that fiduciary bodies had operational

capacity and governed ESOPs well. An interviewee however pointed out that with the conflict

among the unions, there has been a lack of consistency of union-representative fiduciaries,

thereby limiting their value-add to the ESOP.

4.2.9 Union involvement and support


The union should be involved as much as possible in the design of the ESOP (Kurland, 1997: 45).

The expanding role of the union within the new ownership framework should be defined, where

unions should move beyond protecting basic working conditions and wage rights to protecting and

promoting its members ownership interests (Kurland, 1997: 45). The union role should transition to

focus on collaborative strategies that provide mutual benefit to employees and the company, rather

than adversarial strategies (Sauser, 2009: 160).

Linking union revenues to its members’ stakes in bonuses, dividends, and ownership in employers

would offer potentially higher revenues for unions as well as align interests of unions and

employees towards higher sharing in equity (Kurland, 1997: 46).


Unions should be engaged in the employee ownership implementation process as soon as

possible. Historically unions have not always been involved, and where they have, they have

played a passive role.

On the point of union capacity, or lack thereof, multiple interviewees highlighted this as a problem,

but it appears that unions are trying to address this issue by skilling up, by employing experienced

ESOP advisors, and by playing a more active role in protecting interests of employee members.

A substantial proportion of interviewees felt that unions should play a bigger role in lobbying

government with respect to employee ownership policy formulation, and then ensuring that

implementation is within an agreed policy framework.

One interviewee stated that unions play a crucial role in engaging with management, particularly in

challenging situations, in order to avoid possible worst outcomes for employees.


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4.2.10 Alignment of human resources management system


The human resource management system should reflect the workplace philosophy of employees

being taken seriously as deserving co-owners of the business (Kaarsemaker and Poutsma, 2006:

669). Employee ownership should be embedded as part of a strategic human resources

framework - in a company that has implemented employee ownership, human resources practices

should be aligned to support the concept of ownership (Kaarsemaker and Poutsma, 2006: 669).

Individual employee mindsets will only become a shared and strong organisational culture when

consistent and aligned messages are being sent from the human resources management system

(Bowen and Ostroff, cited by Kaarsemaker and Poutsma, 2006: 675).


Alignment of the human resources management system to an employee ownership environment

was not identified as a success factor.

With employee ownership being compliance driven in South Africa, management has little interest

in changing how the business operates, or creating an ownership-oriented culture. Alignment of

the human resources system to an employee ownership environment and culture is no exception.

4.2.11 Employment of specialist employee ownership advisors


It is most often necessary to employ suitably qualified and experienced specialist advisors when

implementing an ESOP (Rosen, 2011: xi).

It is imperative that members of management themselves get educated on employee ownership so

as to not blindly follow all recommendations from the chosen advisor, who may not fully understand

the needs and culture of the company (Rosen, 2011: xi).


All interviewees responded that specialist employee ownership advisors were employed through

the implementation of ESOPs, and indicated that it is necessary to do so.

4.3 CONCLUSIONS

A free market economy in which there is technological advance, globalisation, and concentrated

ownership of productive assets may ultimately sow its own seeds of destruction. This is because

employees only have their labour to sell in direct competition with labour that most often can be

employed cheaper elsewhere in the world, and labour-displacing technology that results in humans

becoming relatively less productive. The result is a dysfunctional economy with income being

concentrated with capital owners, and related economic insecurity for a majority of the population.


74

In addition, because the concentrated income is not recycled in the economy as consumption,

there is inadequate consumer demand. The wealth gap between rich and poor will only then

widen. Employee ownership offers a more balanced economy with more distributed capital

ownership. Connecting employees through ownership to an expanding pool of wealth created by

more and more efficient technology will ensure that such employees and their dependents are able

to participate that wealth.

This is particularly relevant in South Africa, which faces numerous socio-economic challenges

including wealth inequalities, low savings, high indebtedness, and poverty. The South African

government has specifically identified employee ownership as a means to facilitate broad-based

economic empowerment of previously disadvantaged persons.

Employee ownership not only offers benefit at societal level, it also offers a vehicle to provide

benefit at personal and organisational levels. From an employee perspective, benefits include

increased wealth; more opportunities for self-determination; improved job security; and increased

general well-being. Various research has shown that employee ownership, when successfully

implemented, results in increased engagement by employees, improved business performance,

and higher levels of innovation activity – particularly when combined with participative

management activities and high performance workplace policies.

Given the benefits of employee ownership, the objectives of this research are to identify the

success factors of employee ownership implementation, and assess whether such success factor

have been addressed in implementation of employee ownership in South Africa.

Defining successful employee ownership is therefore important. From a review of the literature the

concept of employee ownership positively impacting business performance appears to be the

generally implied definition of ‘success’ regarding implementation of employee ownership, and this

definition has been applied for the purposes of this research. The findings of interviews with

persons who have been involved in employee ownership implementation in South Africa included

that such implementation has predominantly been compliance driven, in an attempt to address

transformation and BEE. It is therefore important to consider the primary objective of any specific

ESOP, and consider achievement of success in this regard. It is presumed that beyond the main

objective of, and reason for, implementing employee ownership, all companies would like to

achieve as many ancillary positive outcomes as possible.

The research findings identified various success factors, where success is contemplated as

achievement of positive impact on business performance. Many of the identified success factors

relate to and reinforce one another, and achievement of success as contemplated cannot occur

unless employees themselves have obtained meaningful financial benefit, have been further

educated, and have had their roles and responsibilities in the business developed and expanded.


75

Educating and training employees in respect of the fundamental principles of ownership, respective

ESOP workings, financial literacy, and key business disciplines is imperative. Findings included

that such education and training was generally lacking in implementation of South African ESOPs.

It is also important to ensure that the employee ownership initiative is perceived as being fair. This

increases the probability that employees will better accept positive and negative outcomes.

Providing a meaningful financial benefit that has both short and long-term elements, either alone or

in combination with other incentive structures is vital for success. In the South African context, this

has been the determining factor of whether an ESOP is considered successful. This makes sense

against the backdrop of the broader historical and current socio-economic challenges, and

government drive for broad-based economic empowerment. Research findings included that

employee ownership is considered not to have been successful, primarily because of the failure to

deliver meaningful financial benefit to employee participants.

Critical to employee ownership success is the creation of an ownership-oriented culture. Key

aspects of this are employee participation in decision-making, and creation of an environment

conducive to employee ownership through adoption of and commitment to supporting values,

ongoing commitment from management, existence of employee growth and development

opportunities, reinforcement of teamwork, and celebration of employee owners in the business.

Supporting the creation of an ownership-oriented culture is alignment of the human resources

management system to an employee ownership environment.

Another success factor is the establishment of a shared commitment to pursuing key business

disciplines, where critical metrics are identified, targets are set, information is shared with

employees, employees act on such information, and there is celebration of achievement.

Because of employee ownership being compliance driven in South Africa, there has been little

focus or interest from management to change the culture or operations of businesses that have

implemented an ESOP. There has neither been creation of an ownership-oriented culture, nor

establishment of commitment to pursuing key business disciplines.

Instilling sound ESOP governance, engaging with and obtaining support from unions through

employee ownership implementation, and consulting with employee ownership specialists were

other success factors identified. Findings regarding whether these success factors have been

addressed in South African employee ownership implementation were that generally fiduciary

bodies had operational capacity and governed ESOPs well, that unions have historically not been

sufficiently involved in ESOP implementation, and that specialist advisors were typically employed.

Employee ownership must be looked at within the socio-economic circumstances of South Africa,

not in isolation. Significant inequalities across race and gender have a massive impact on

employee relations. Significant wealth inequalities create a chasm in the population, and a sense

of injustice. Employee ownership must be seriously considered as a means to redress these


76

inequalities - as one part of a broader social compact in an attempt to improve relations and

provide economic empowerment. This necessarily requires stakeholders to relook at how

employee ownership has historically been addressed in South Africa, and focus on broader set of

success factors.

4.4 RECOMMENDATIONS

The recommendations for businesses implementing employee ownership are regarding awareness

of primary objectives, understanding the potential benefits of employee ownership, understanding

related success factors, and managing employee expectations. When planning to implement

employee ownership, management should investigate and consider what the potential benefits to

the business and employees could be. Management should investigate and consider what

recognised success factors are. In addition, management must be clear on what the primary

objective of employee ownership in the respective organisation is, and understand the specific

related success factors. Regardless of what the primary objective of employee ownership

implementation is, managing employee expectations is crucial. This can be achieved through

ensuring that the ESOP is perceived as being fair, and through education and training of

employees in respect of ownership, ESOP workings, and key business disciplines.

The recommendations for government organisations that wish to promote employee ownership

implementation as well as obtain maximum benefit for employees, businesses, and society as a

whole are regarding understanding the potential benefits of employee ownership, understanding

related success factors, considering past employee ownership successes and/or failures, and

consideration of appropriateness of policies and legislation. A clear understanding of potential

benefits of employee ownership is crucial to ascertain what objectives of employee ownership

should be. Related success factors must then be identified and understood. Learnings from past

South African employee ownership successes and failures should be gathered. Following these

actions, an assessment of policies and legislation around employee ownership against success

factors that drive meetings of such government organisational objectives should be performed in

order to identify and consider necessary changes to such policies and legislation. In particular,

because employee ownership implementation in South Africa has historically been compliance

driven in respect of BEE, the recognition requirements for an Employee Share Ownership Scheme,

as set out in the BEE Codes, should be revised. Such revision should include some degree of

requirement for an ESOP to address the success factors set out in the Employee Ownership

Success Factor Framework, especially those that this study has identified as being lacking in

implementation to date.


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4.6 FURTHER RESEARCH

Performance of this study has identified many areas of possible further research, which include:

Study of the meaning and experience of employee ownership from the perspective of

employee participants of ESOPs;

Study of the challenges faced by companies in employee ownership implementation;

Longitudinal study of an ESOP, investigating the views, expectations and experiences of

both management and employees over time;

Study of best practice ESOP structuring, including alignment with other shared capitalist

structures;

Study of historical ESOPs in South Africa, the respective manner in which they were

structured, and the extent of financial benefit yielded by such ESOPs;

Study of South African policies and legislation regarding employee ownership and

assessment against recognised employee ownership success factors; and

Study of the international tax treatment of employee ownership in an attempt to understand

how tax policies could drive employee ownership implementation in South Africa.

Researchers can also now focus on quantitative employee ownership research in certain areas

that have been identified in this research report, and test hypotheses in a statistically significant

manner.


78

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APPENDIX A:

PROFILE OF SELECTED INTERVIEWEES

Table A.1: Profile of selected interviewees

Interviewee number

Description of interviewee

1 Specialist BEE Ownership advisor, including ESOPs – co-founder of advisory firm which started as a business focussing on ESOPs. Exposure to ESOPs of multiple sizes in multiple industries. Currently advising on restructuring of multiple large ESOPs in mining industry.

2 Specialist employee ownership advisor and strategy/human resources consultant – founder of an ESOP advisory services firm. Has been involved in establishment of numerous major ESOPs over the last decade, and almost every ESOP for listed mining companies.

3 Founder, chief executive officer and majority shareholder in manufacturing business that has implemented broad employee ownership in 2008.

4 Former chief executive officer, current chairman, and majority shareholder in global diversified marketing services company that has implemented broad employee ownership in 2008, and management ownership in 1981.

5 Representative of one of the major established trade unions in South Africa –involved in initial ESOP design, and in certain circumstances serves as a fiduciary of ESOPs.

6 Representative of one of the major established trade unions in South Africa – head of transformation unit, and driver of union ESOP research and policy formulation.

7 Senior socio-economic development specialist at IDC – driver of ESOP research and policy formulation at IDC, and engages with respective companies being funded by IDC through the ESOP design and implementation process.

8 Fiduciary and chairperson of major ESOP for last eight years - sustainability specialist; serves on various boards.


86

APPENDIX B:

DISCUSSION FRAMEWORK

Drivers of employee ownership (approximately 5 minutes)

1. What have been the primary drivers of the decision to implement employee ownership?

Defining successful employee ownership and identifying general success factors of employee

ownership (approximately 5 minutes)

2. How do you define a successful ESOP, and what do you feel are determining factors that

impact employee ownership success? Are there any success factors that are specific to South

Africa?

An ownership culture (approximately 20 minutes)

3. To what extent has there been commitment to the employee ownership initiative from

management? (top management and middle management) To what extent do you believe this

has an impact on successful implementation? Do you believe that where BEE is the primary

driver of implementation this impacts management’s view of and attitude towards the scheme?

4. Have ESOP participants had any participation in workplace decision-making? If so, at what

level? (indirect eg. board representation; direct eg. job team decisions)

5. To what extent has an environment been established which supports employee ownership and

ownership thinking? Are there growth and development opportunities? Is there celebration of

employee owners? Is there reinforcement of teamwork? To what extent has there been

adoption of and commitment to supporting and guiding organisational values that align with an

employee ownership environment?

6. Certain authors have asserted that a sense of entitlement is a major threat to achieving an

environment where employees think and act like owners. What are your views on this? In

your experience and opinion, do you believe that there is a strong sense of entitlement

amongst employees? If so, what do you believe is the reason for this?

7. Does the implementation of employee ownership change employees’ behaviour in the

workplace? If so, in what way? What do you believe could better result in employees thinking

and acting like owners?


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Meaningful employee ownership stake (approximately 10 minutes)

8. Have ESOP participants benefitted in a meaningful financial way? (relative to their own

financial position)

9. Has there been a mix of short and long term benefit, either through the scheme or in

combination with other performance driven incentive structures?

10. To what extent has training on ownership fundamentals and scheme workings been provided?

Understanding of, sharing information about, and acting on key business disciplines (approximately

15 minutes)

11. To what extent has education on financial literacy and key business disciplines been provided

to ensure an understanding of the drivers of business’ performance?

12. To what extent has there been identification of critical metrics and related target setting?

13. To what extent has there been ongoing communication to ESOP participants? Was there

communication of company/business unit/team performance? What is the form (eg. tracking of

critical metrics) and regularity of such communication?

14. In the case of reporting of information to ESOP participants, were they given opportunities to

discuss and act on this information? Was there achievement of success and related

celebration?

Union role in employee ownership (approximately 5 minutes)

15. Were employees and/or unions consulted in the design and initial implementation of the

ESOP(s)? What has the union role been in employee ownership implementation?

16. Do you feel that there is any way to work better with unions through the implementation of

employee ownership, or that the union role perhaps should change?

Other (approximately 5 minutes)

17. What has the composition of ESOP trustees or steering committee been? (eg. employees;

independents; management) What do you believe could be done to make the fiduciary body

and/or committee more successful and their role easier?

18. To what extent has there been alignment of the human resources system, providing consistent

and aligned messages, to support an employee ownership environment?

19. Were specialist employee ownership advisors employed?


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APPENDIX C:

SUMMARISED INTERVIEWS

This appendix summarises the various interviews performed under themes identified in the

Employee Ownership Success Factor Framework set out in section 2.9. Tables C.1 to C.8 have

been used to summarise each interview.

Appendix A includes profiles of the respective interviewees.

Table C.1: Summary of interview 1 with a specialist employee ownership advisor

Success factor theme Output from interview

Education and training of ESOP participants and fiduciaries

Ownership fundamentals Yes, in most cases.

ESOP workings Yes, in most cases, but where schemes are structurally

complex there is not always success in terms of training outcomes.

Financial literacy and key business disciplines

Not much. Where this has been done already, for example in Japanese businesses who are into continuous improvement of performance, there is room for ESOP to effectively piggy-back.

Where businesses have gotten this right they have focussed on simple aspects of the business that employees have line of sight to, and therefore can easily understand. Eg. waste; safety

Meaningful ownership stake

Meaningful quantum

There have been cases of both meaningful financial benefit and no benefit at all. This is because of the way that most ESOPs are structured – they are fundamentally leveraged – so in times of good performance employee can do really well, and vice versa. It almost becomes a case of luck in terms of timing of entering the scheme. The challenge moving forward is to structure an ESOP to provide benefit through good and bad times.

Short and long term elements, and/or combined with other short term incentives

Scheme benefits should be structured with both short and long term benefits - short term benefits reinforce the scheme and create a line of sight between business performance and scheme outcomes/success. Where there is just long term benefit the line of sight is not clear to employees and the element of working to improve business performance is reduced or even lost.

The ideal situation is to get short term incentives right, separate to an ESOP, and then overlay the ESOP on these, rather than trying to create something totally different. Through working in tandem with other incentives, the net end result should be employees that are more focussed and understanding of importance of business performance to their own scheme benefit. Few companies have approached employee ownership in this way.


89


(continued)


Adoption of and commitment to values

No. No businesses have specifically considered the employee ownership context when defining their values, or have specifically aligned their values to an employee ownership environment.

Ownership-oriented culture

Participative management

No. Employee ownership is primarily compliance driven – to obtain BEE credits. There is no change in workplace culture or inclusion of employees in workplace decision-making. Perhaps this is one of the reasons why there has not been employee ownership success in South Africa.

As a shareholder, the ESOP should have board participation.

Ongoing commitment from leadership and management

Limited - often the CEO and CFO are committed to it, through the process of planning, getting approval etcetera, but that process doesn’t really involve a many other leaders and managers. In terms of other top management and middle management, there is little buy-in, and no incentive for them to make employee ownership work. Because ESOPs are generally approached from a compliance standpoint, once they are in place management gets back to normal business. To achieve greater buy-in possibly the success and buy-in of employees should be included as KPIs for managers.

Celebration of employee owners

Other than on the start date, no.

It doesn’t help to celebrate upfront and/or celebrate at the end of of an ESOPs life, there should be regular communication and celebration throughout the life. This aligns to the benefit structuring of the scheme where short term benefits reinforce the scheme and create a line of sight between business performance and scheme outcomes/success.

Existence of growth and development opportunities

Yes, most businesses do have growth and development opportunities but there is no connection to or correlation with an employee ownership environment.

Reinforcement of teamwork

Yes, typically teamwork is important in any business and is reinforced, but there is no connection to or correlation with an employee ownership environment.

Commitment to pursuing business disciplines

Identification of critical metrics, and target setting

No.

Reporting on metrics

Further to comment above about identification of critical metrics and target setting, there is no reporting of metrics. The best that there is, in some cases, reporting of business performance in general. This is usually done periodically, mostly annually.

Employees acting on information

No, employees are not given the opportunity to act on information.

Celebration of achievement

Seldom.


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(continued)


Well governed fiduciary body with company and worker representation

Fiduciary body usually consists mostly of management and employee representatives.

Employees are very often elected based on popularity, and this can result in a person who is not sufficiently skilled or experienced fulfilling this role. This can result in this person being out of his or her comfort zone with reactions then being resistance and argument.

To improve this aspect training of fiduciaries is important – this training must not just be about roles and responsibilities, but more about enabling the fiduciaries to be feel like they are successfully representing the scheme beneficiaries. This requires training about the business itself and key business disciplines. It also requires communication from management about the strategic plan of the business, and risks to success thereof.To further improve this functioning of this body the use of a facilitator may be useful, to constantly guide the fiduciaries towards acting best for the interests of the employee beneficiaries.

Union involvement and support

Mixed – in larger companies with unionised environments, especially mines, unions are involved in employee ownership implementation. In smaller companies the ESOP is almost imposed on staff and unions. Strength of the union is an determining factor of the level of their inclusion in the process.

Our unions are getting more militant and to exclude them is to doom your scheme to failure. The unions are getting more sophisticated about real value driving, and also logical. Ideologically they want as much as possible, but they are understanding the fundamental drivers of debt and funding because they are hiring good advisors.

Engage the unions in the process as soon as possible, so you don’t present a fait accompli.


No – no integrated thinking of how human resources and employee ownership link. If anything human resources sees the ESOP as an additional burden that they have to manage.

Employment of specialist advisors Yes, always.


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Ownership fundamentals Very little has been done in this regard.

ESOP workings Most schemes do educate employees on how the scheme

works.


Very little has been done in this regard.

In general there is a low level of education amongst employees, and this together with lack of sufficient education and training has resulted in unrealistic expectations of ESOPs delivering benefits that may just be possible.


Meaningful quantum

Few schemes have delivered meaningful financial benefit.

Most deals have been structured on the basis of debt structuring, and there was high optimism that this would yield meaningful benefit to employees, but this has not been the case.

ESOP success, particularly in South Africa where financial benefit is desperately needed, is dependent on scheme design. Value needs to be created and risk minimised for scheme beneficiaries, while minimising cost to existing shareholders. You cannot however empower people without giving something up – no financial modelling gets you around that.


No. Employee ownership structuring should be done in congruence and in synergy with remuneration structuring and bonus and profit structuring – this is not happening. Employee ownership should be creating capital assets and savings for employees, and other incentives should deliver short term benefits. For both elements there should be a line of sight between reward to employees and business performance.

With South Africa’s dismal level of savings and high inequalities, assistance with savings and creation of capital assets would be very beneficial.



No. There are often stated values in mission and vision statements, but very few actually run the business in line with a commitment to such values.


No – a change in organisational design and management is necessary and this kind of quantum shift just has not happened in South Africa. ESOPs must be looked at within the socio-economic circumstances of our country, not in isolation. Our massive inequalities across race and gender impact employee relations in a massive way.


ESOPs have most often been implemented from a regulatory compliance perspective to address BEE. There is not real commitment from management. There is also a gap between top and middle management due to poor communication, but also because middle management has been disempowered from a human resources perspective. This is because of the massive regulatory changes and requirements, requiring ballooning human resources departments.


92


(continued)



No, only when schemes have been successful when creating value for employees.



Generally, yes, but not to a greater extent than in any business.


No, we are defaulting back to authoritarian ways of running companies, with greater pressure for delivery, and less time and focus for teaming practices.



No, this has not happened.

Businesses need to be able to identify metrics and then codify that down to the basic language of the supervisor and the employee.

Reporting on metrics No reporting on specific metrics, but general scheme

performance has sometime been reluctantly done.


Following on from above, no. Businesses should be able to listen to employees and be able to see and listen to the innovation in the workforce and tap into it and trust it, and manage it in a way that enhances value to the business as a whole.

In South Africa, very high levels of inequality, cultural issues, gender issues, the level of dislocation that is happening in the inter-space between the employee and management reduces th capacity to interrelate.

If you want to truly see ESOPs you must look at them in the socio-economic context in which we exist.


No, only when schemes have been successful when creating value for employees.


Fiduciaries most often consist of a majority of employees (including union representatives), and then some independents and management. With the conflict among unions and implosion of NUM in the platinum belt the biggest issue is consistency of union-representative fiduciaries, which then limits their value-add.

Sometime independents are there for nefarious reasons – they just want to get paid.

Governance has typically been good. Schemes have been audited, there have been no blow-outs, but a high level of stability , understanding, and foresight has not been achieved, which is required for these bodies to be truly successful.


Most often, but not from the inception of design – rather almost as an afterthought. If the unions were investing time and effort into building capacity in this area and not just being ‘short-termist’ about it, this would improve the scale and scope of interaction. But ESOPs are not union’s core focus – they have many political battles that demand their attention.


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(continued)



No. South Africa rates very poorly when it comes to human resources and people management. There is too little focus on people management, and this aspect is the gold dust that South Africa needs. Neither business nor politicians appear to realise this or want to act to change this.

Employment of specialist advisors Yes, most often.


94

Table C.3: Summary of interview 3 with a member of management of a South African

company that has implemented employee ownership



Ownership fundamentals No explicit training, rather on-the-job learning and via

regularly sharing information with scheme participants.

ESOP workings No training.


No explicit training, rather on-the-job learning and via regularly sharing information with scheme participants.


Meaningful quantum

Yes – for those participants that were included in the 18 months following scheme establishment the business did very well then. The following two years were periods of lacklustre performance, with low benefit. The capital appreciation aspect is yet to be realised.


Yes, the scheme includes dividend participation (linked to annual performance) as well as a long-term capital appreciation element



The stated company values are old and need to be revisited. There has been no consideration of values specifically in the context of an employee ownership environment.

Participative management No.


Yes – this business may be slightly different to others in that the owner is the managing director - he takes a very strong sole leader position and was the driver of the ESOP initiative. No comment can be made on middle managers’ buy-in.


No. The closest to celebration is a minority of employees celebrating when dividends are paid to them.


Yes, the greatest learning/development comes from enabling employees to be exposed to new experiences – creating valuable employees.


Yes, teamwork is essential in the business and its importance is reinforced, although not really in the employee ownership context.



No.

Reporting on metrics No reporting of specific metrics, but there is semi-annual

reporting of business performance at meetings with employees.


No.


No. Business performance is reviewed at semi-annual meetings with employees, but there is no celebration of success in times of success.


Fruitful and constructive forum, with majority (senior) worker representation, but also an independent trustee, and union representation.


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company that has implemented employee ownership (continued)



Other than trustee representation, no – union does not take account of any company specific initiatives and rather focusses at industry level. This has resulted in negative impact to business, and dislike of union, as business rewards employees well.

Alignment of human resources system No. The human resources system does not intentionally

consider employee ownership in any way.

Employment of specialist advisors Yes.


96


company that has implemented employee ownership



Ownership fundamentals Ongoing via annual roadshows as well as circulars.

ESOP workings Ongoing via annual roadshows as well as circulars.


No specific training for ESOP participants, but experience and understanding gained at higher levels of work through on-the-job learning.

No specific training for fiduciaries. Many of the fiduciaries are of a calibre where they will be financially literate.


Meaningful quantum There has been exceptional financial benefit.


Substantial and consistent dividends have been paid.



A philosophy of partnership from the start.

The DNA of our business and the value system of our business is very powerful in terms of what we do and people are measured by the values that we have - people either shape up or ship out.

Organisational value system is a critical aspect of getting employees to think and act like owners.


This is not a forced aspect because of the ESOP. For the management ESOP it is expected. For the general BEE ESOP, no opportunities for participative management have been explicitly introduced, however it is a natural growth and development of those employees that want to get involved and contribute.


Management commitment increases proportionately when they are participating in ownership.


No comment obtained.


There are growth and development opportunities for employees in the business.





This is not specifically done including ESOP participants, rather as part of what the executive team does. Those members of the executive team that participate in ownership then are involved in this.




97


company that has implemented employee ownership (continued)








Yes – mix of well-qualified and experienced independent fiduciaries, and employee-representative fiduciaries.

Trust is well governed – regular meetings, and has operational capacity.

Union involvement and support No consultation with union or employees in implementation.

Alignment of human resources system No comment obtained.



98

Table C.5: Summary of interview 5 with a trade union representative



Ownership fundamentals Only in a few cases.

ESOP workings

Yes, typically upfront at inception of the ESOP only.

Despite education and training on ESOP workings, where the schemes are structurally complex the employees may still battle to understand them.

Although companies do promote training, they can also be cognisant of costs, and so may want to limit the amount of training/communication spend.


Only in a few cases, and just focussed on financial literacy, not key business disciplines.


Meaningful quantum

No. There are few schemes that have delivered real value to employees. For the rest there is either no benefit or minimal amounts that are paid to employees.

Structuring of the ESOP is important – we are sceptical when companies implement ESOPs and promise substantial benefits, especially where the scheme is leveraged.

Schemes should be structured such that there is an element of guaranteed value, for example with some of the shares being free.

Also, the actual quantum of shareholding should be larger, for example 15% - this would drive higher value of benefits.


Most ESOPs are structured purely from a long term perspective, looking at increase in value of business over time.

Short terms benefits and incentives often do exist, but these have not been integrated with ESOPs.



ESOPs in South Africa are primarily driven from a compliance perspective, particularly BEE. There is no specific adoption of or commitment to values in line with an employee ownership environment.


No, the closest I have seen was one case where the ESOP had board representation, but even then there was a limitation on which scheme representative could sit on the board of directors.


No. There is most often limited buy-in from management. In some cases the first and last time we saw management was the day that the scheme documentation was signed.

In South Africa ESOPs are largely implemented for BEE purposes, and once the respective company has the BEE credits management does not show much interest in the ESOP.


Celebrations only typically occur if and when the scheme has made money and meaningful financial benefit has flowed to employees. This is very seldom the case. In fact companies will downplay the ESOP when there is not financial benefit to employees.


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Table C.5: Summary of interview 5 with a trade union representative (continued)



Yes, there are typically growth and development opportunities, but no more than in normal business scenario – nothing more because of employee ownership.



Yes, but not in relation to an employee ownership scenario – not more than usual in the business. In one situation productivity, which largely depends on teamwork, was proposed to be a driver of ESOP benefit, but this was rejected by the unions.



No.


Communication is an ESOP success factor – particularly when business performance has not been good and employee expectations need to be managed.

Following on from the above answer, there was no reporting of metrics. A few schemes do however report on general business and related ESOP performance.


Following on from above, no.


No, not regarding business success – rather ESOP celebrations which only typically occur if and when the scheme has made money and meaningful financial benefit has flowed to employees, which is typically when the business performance has been good.


Yes, generally good interaction between fiduciaries, and good governance.

Fiduciaries typically include union representatives and employees making up a majority, with company representatives and independent trustees being the balance.

Governance is an ESOP success factor – the more skills you can bring in the better. Training is important.


Unions must be included in the implementation process.

Talks on implementation can be lengthy, and a skilled and experienced facilitator can add value through this process.

Unions should always seek best outcomes for employees, and in this respect can lobby government – this has been tried in the past without much success.

Alignment of human resources system No, ESOPs are primarily driven from a compliance

perspective, particularly BEE. They are not integrated into how the business operates.

Employment of specialist advisors Yes, always. In some cases the companies initially tried to

do it themselves, but soon realised that they need specialist assistance.


100

Table C.6: Summary of interview 6 with a trade union representative



Ownership fundamentals

This is lacking. The union tries to assist in this regard. The problem is that companies are not committed to significant training – they are more concerned about taking employees off the production line.

ESOP workings As above (for ownership fundamentals).


No, this rarely happens. We try and emphasize that the employees and union are business partners so it is imperative to understand the business model, risks, and constraints etcetera.

Sometimes companies actually do not want to empower the employees with a keen understanding of the business as the may lead to more questions being asked by employees where performance appears to be good but there is minimal financial benefit via the ESOP.

Beneficiary education and fiduciary education and training is critical. There is a level of deficit of capacity, and education and training can address this. Few companies train employees to enable them to understand the business, with a result being that they do not understand their role in the business and cannot make a positive change.

With a limited level of understanding, the only way employees gauge success is quantum of financial benefit.


Meaningful quantum

ESOP success is defined in terms of the level of benefit to employee beneficiaries.

Only in a few cases has there been meaningful financial benefit. Most schemes have delivered low or no value to employees.

Of importance in ensuring that there is value created fro employees is that the shareholding must firstly be not be small, and secondly the ESOP must be structured such that the scheme has no debt. In this respect either the shares must be granted to the scheme or the company itself must bear the debt.

All employees benefitting from a scheme should benefit equally.


Historically ESOPs with both short term and long term benefit were rare.

Moving forward this is something we are focussing on. Dividends in relation to an ESOP shareholding must be paid out to the employees to ensure that employees get cash benefit in the short term.

Vesting periods, where they exist, must be a maximum of five years.

The ultimate goal is that employees, through their effective shareholdings, build capital assets and create generational wealth. But in South Africa it is too soon for that – because of the high levels of economic inequality and indebtedness, and low wages, employees are just trying to survive on a day to day basis.


101





ESOPs are most often implemented from an empowerment perspective – for compliance. There is no consideration of values that align to an ownership-oriented culture as there is no desire to implement an ownership oriented culture.


ESOP shareholders, in the context of a compliance exercise, are almost always passive shareholders and do not get involved in management and control of the business.

Companies are reluctant to facilitate employee participation in any way.

In only one case was the ESOP allowed board representation, but only an independent fiduciary of the scheme was allowed to be a director, and such person was restricted in terms of what information they were allowed to divulge to the ESOP.

See below comment about management lack of commitment because ESOPs are compliance driven.


Because ESOPs are compliance driven, management are not truly committed to them, in terms of changing how things are done, or creating an employee ownership environment.


Because success is typical;;y measured by whether there has been meaningful financial benefit to employees, and because most schemes have not delivered value, there has been very little celebration of employee owners.


From the perspective of education and training and related growth and development, there is little growth and development opportunities.


Not really. Many companies operate in silos



No.


Further to answer above, no. Companies do however share information on general business performance.

Reporting should at a minimum be done through ESOP beneficiary annual general meetings.


No such opportunity.

Companies believe that sharing information with employees is the same as consultation with employees.

Employees do not have a voice, and do not feel heard. No positive outcomes of the ESOP can be produced in this case.


Further to answers above, no.


102




The majority of ESOPs have at least 50% employee representation on the fiduciary body.

The biggest problem employee fiduciaries have is capacity – in this respect education and training is important.

Some ESOP s are controlled and effectively governed by the founding company. It is better for the ESOP to be independently managed.We aspire to have ESOP fiduciaries constituting a majority of the fiduciary body. In this respect if they are to truly represent the employees’ best interest continuous education is vital.


Unions were previously not really involved in setting up the ESOPs, and played a passive role – waiting for benefits.

But this is changing, and the unions are hiring specialist advisors to advise them, and are getting involved in ESOP structuring and governance, as well as communication and training. Unions also are playing a more active role at annual general meetings. This is sometimes limited by capacity contraints.

Unions have a huge role to play. Firstly, to ensure that employees are included as part and parcel of the employee ownership process, and are guided where necessary. Secondly, to lobby government and positively impact legislation and taxation of ESOPs.

Alignment of human resources system No. ESOPs are implemented from a compliance

perspective, and there is little integration of the ESOP into the operations of the business.

Employment of specialist advisors Yes, in almost all cases.


103

Table C.7: Summary of interview 7 with a socio-economic development specialist at the

Industrial Development Corporation




Training is crucial, particularly for fiduciaries to be able to best represent the employee beneficiaries. They need to have the confidence to fulfil the role too – this goes beyond basic training. Unless there is real employee representation, the employee body remains extremely passive.

Training of employees themselves is also important – to ultimately give them an understanding and sense of ownership in their business, and ultimately change behaviour.

Training should not just be once off, and should include formal and informal training.

There has been limited training – not enough for the employees to really understand what the ESOP can mean to them, and not enough for fiduciaries to confidently represent the employee beneficiaries of the ESOP.

ESOP workings As above.


As above regarding financial literacy. No training in respect of key business disciplines.

It is important to tailor training to the specific level of financial literacy of the employees that you are engaging with.

The employees’ understanding of key business disciplines is essential in order for them to understand business performance, and better manage their related expectations form the ESOP.


Meaningful quantum

Employees have not received meaningful benefit.

Part of the problem is that in design and structuring of the scheme nobody modelled benefits at employee level, and so did not realise what the profile of possible benefit could be.


Because of the socio-economic challenges South Africa faces, it is important to have short term benefits flowing to employees. This also makes the ESOP more real to employees, increasing their buy-in to the scheme.

The IDC strives to ensure that there is short terms benefit in an ESOP through dividends, but also long terms benefit through savings to be used as retirement boosters.



ESOPs in South Africa are compliance driven, with a secondary driver, in some cases, being accessing cheaper funding. There is no desire to change how businesses are run or create an ownership thinking environment, and therefore no related work being done on culture, values etcetera.


104


Industrial Development Corporation (continued)



This has happened in very few cases, and when so, it just involved indirect participation through board participation.

Further to above answer, because employee ownership is compliance driven there is not enough focus on communicating and engaging employees, and getting employees to participate in making business decisions. These decisions are not only at strategic level but at processing level, and ultimately positively impact business performance.



Top management drive the initial implementation most often, but there is limited support from rest of management.

As it is compliance driven, management do not truly believe in the concept of meaningful employee ownership in the sense of co-ownership of the business.

Middle management is very important as they are effectively a conduit for the ESOP.

There is not often a good enough understanding of how the scheme works, nor direction on how to support it


None.


Most businesses do have growth and development opportunities for some staff.


There has been no reinforcement of teamwork in the context of an employee ownership environment, with people working together for the betterment of everyone.



There is no engagement with employees around key business disciplines, and therefore no related identification of critical metrics and target setting.

Reporting on metrics No. Some companies share information on performance.

Some are reluctant to share financial results with employees.


There is insufficient engagement and communication with employees – from management to employees, and listening to employees. Innovation can happen when employees share their thoughts on business processes, but they need the structures or forum and related encouragement to do this.


Very little, but this is largely linked to the very little financial benefits that have actually flowed to employees – nothing to celebrate.


105


Industrial Development Corporation (continued)



The fiduciaries have a significant role in terms of engaging the employee so that they believe in the employee ownership model – more than just passively waiting for financial benefit, but rather believing that they are owners in the business and can influence its success.

The IDC’s preferred fiduciary composition is to have at least 50% of the fiduciaries representing the employees, then at least one IDC representative (representing the funder), and at least one trustee representing management.

Training of fiduciaries is important, but equally important is gaining experience in actually running an ESOP.


Unions are sometimes involved in the establishment of ESOPs.

The problem is that the union representatives most often do not have the skills or experience to adequately add value and support ESOPs. Where there is a lack of understanding they see ESOPs as being in conflict to the union functions.Unions need to define their role in driving employee ownership.

Through unions or directly, employees should be consulted in the design of ESOPs – this provides a mechanism for educating employees and getting their buy-in.Unions should primarily take the role of lobbying government for ESOP policy formulation, and then ensure that ESOP implementation is within a policy framework.


ESOPs in South Africa are compliance driven, with a secondary driver, in some cases, being accessing cheaper funding. There is no desire to change how businesses are run or create an ownership thinking environment, and therefore no related work being done on alignment of human resources systems to an employee ownership environment.



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Table C.8: Summary of interview 8 with a chairperson of a large ESOP




Training in this regard was provided.

Despite training, the equity market and related fluctuations is something that is difficult to understand.

ESOP workings Training on this was regularly provided.


This did not happen in the ESOP sphere for employees, although facilitating understanding of key business disciplines may have happened as part of general operations.

Fiduciary training was continuously provided.


Meaningful quantum

ESOPs are closely tied to the issue of empowerment, and are seen as a vehicle for distributing wealth in the private sector – this has then become the acid test for success of ESOPs as opposed to issues around aligning interests as opposed to issues of reducing conflict, creating greater understanding of the way that companies work and so on.

There have been very few schemes where there has been meaningful financial benefit.

With schemes being structured using substantial debt whether or not any real value will be created almost becomes a lottery.

Employees have become disillusioned regarding ESOPs, mostly because they had expectations of wealth creation which did not materialise.


There is little integration with other incentives. To some extent dividends were paid out, and the scheme was designed to pay out value based on increased share price over a hurdle at the end of the scheme life, but no real value has been created in this respect. No capital asset or savings has been created.



No, there has been no adoption of values that specifically align with an employee ownership environment. ESOPs have not been integrated into the way businesses are run, and are rather established and left to run. Businesses typically have established values in place already, with no change when an ESOP is implemented.


In some smaller companies this has happened, but usually not.

In larger established companies this does not happen, most likely because of the existing hierarchies and history – there is no desire to make the effort to change.


No. This is largely because of the compliance mentality, and the related non-existence of a desire to integrate the ESOP into the business.

The various transformation legislation has become a compliance headache for management, and they see it in this light rather than an opportunity to meaningfully address inequalities and create a social compact.


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Table C.8: Summary of interview 8 with a chairperson of a large ESOP (continued)




One must look at form and substance. There were times were employee ownership was superficially celebrated but in substance it never really was.

The scheme did not end up providing the benefit initially hoped for, so, given the large focus on ESOP success being linked to financial returns, there was also no real reason to celebrate.


Such opportunities do play out, but not in the ESOP space. There are connections between normal operations and ESOPs but they are not being made.


Similar to above answer regarding growth and development, not in the ESOP context, and no connections are being made between normal operations and the ESOP.



Not at all.

Reporting on metrics Further to above, regarding identification of critical metrics,

no.


Further to above, regarding identification of critical metrics and related reporting, no.


Further to above, no.


Fiduciaries included employee representatives, usually through trade unions, as well as representatives of management and suitably qualified and experienced independent trustees.

Most often a majority of trustees are employee representatives.

The scheme was well governed, with the fiduciary body really applying their minds and striving to go beyond their mandate in order to best serve the interest of employees.

Positioning of the scheme is vital, and having fiduciaries aligned in this regard. In South Africa this is about transformation, and creation of financial benefits for employee beneficiaries.


Unions were involved in the initial design and implementation of ESOPs.

They also played a crucial role in engaging with management of the business in challenging situations that the ESOP faced, to head off possible worst outcomes for employees.

Unions are however dependent on advice too.

The unions were represented as fiduciaries.

Alignment of human resources system No, again because ESOPs are driven by empowerment

compliance, with no desired change in business practices or desired creation of an employee ownership environment.

Employment of specialist advisors Yes, always.


The success factors for employee ownership implementation

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