Canadian employee ownership

Global Research Shows ESOPs Outperform During Recession

Recent studies from the United States and the United Kingdom illustrate the strength of companies with employee share ownership plans (ESOPs) compared to non-ESOP companies, especially in times of economic recession.

A recent Forbes article by Mary Josephs points to research showing that during the 2008 financial crisis companies with an ESOP in the U.S., known as S-Corporation ESOPs, performed better when compared to non-S-ESOP firms along a number of dimensions. These included:

• job creation

• revenue growth

• providing for workers’ retirement security

“The S-ESOPs paid their workers higher wages on average than other firms in the same industries, contributed more to their workers’ retirement security, and—crucially in a year of recession—hired workers when the overall U.S. economy was pitched downward and non-S-ESOP employers were cutting jobs,” states the report.

These findings from the U.S. support similar findings from the U.K. In 2012, the Nuttall Review of Employee Ownership found that companies with employee ownership demonstrate increased economic resilience during the global recession.

For example, before the recession employee-owned companies and non-employee owned companies were closer in terms of sales growth, with ESOP companies at 10.04% and non ESOP companies at 12.10%.

However, the big change in sales growth came during the 2008-2009 recession. During this year, employee-owned companies showed sales growth of 11.08%. In that same year, non employee-owned companies had a sales growth of 0.61%.

The researchers concluded that non-employee owned companies tend to swing between excessive risk taking and excessive risk aversion, employee-owned companies maintain a more consistent approach towards risk. They are not prone to taking on too much risk during economic upswings, but surprisingly are more positive about expanding ahead of demand when economic conditions are poor.

In other words, the researchers concluded, employee-owned companies take a long-term view, rather than feeling that they must only move in line with current economic conditions.

This research from the U.S. and U.K. is important as it draws attention to the strengths of the ESOP model. A major attribute of employee-owned companies is that the employees are now co-owners, and as a result, are more likely to engage in finding ways to cut costs or increase sales, making these firms more resilient and capable of weathering a recession.

Secondly, ESOP companies that are privately held are not subject to the whim of the stock market, and can take a long-term approach without worry of having to report short-term earnings and share prices.

Again, this strength is backed by research from the U.S. that shows employee-owners were four times less likely to be laid off during the recent recession.

As Canada continues to weather economic uncertainty, ESOPs offer a powerful tool to ensure companies stay competitive and are around for the long term.

— Camille Jensen