Recent Research Discusses How and Why Employee-Owned Enterprises are Here to Stay

By Mitchell Miller

Ideas that weather tough storms are worth keeping around. Not only have employee stock ownership plans (ESOPs) weathered several recessions better than their counterparts, recent research finds that companies with employee ownership perform better in economic downturns than companies without employee ownership opportunities.

The Emergence of Conscious Capitalism and ESOPs

The discussion on the role of business in American society has been around since the birth of the U.S. In 1776, Adam Smith wrote in The Wealth of Nations about how the "invisible hand" of the marketplace allocates scarce resources more efficiently and promotes social welfare better than in any other economic system. Ever since, economists and businessmen have attempted to uncover the best methods to promote social welfare while seeking to make profits for shareholders. One relatively recent development is the rise of conscious capitalism, which encompasses the idea that capitalism should be used as a means to promote social, environmental, and economic change.

Employee ownership is a means to distribute capital wealth to employees who would ordinarily not benefit from this form of investment. ESOPs are qualified retirement plans administered by a trustee who owns stock in the company on behalf of the retirement plan. Thus, ESOPs function as both an employee retirement-benefit plan and a technique of corporate finance that encourages employee ownership. Many of the best stories of employee ownership are told by loyal employees who enjoy stable job conditions and retire with substantial retirement accounts. As an additional bonus, employee ownership keeps wealth in the community in which it was generated. ESOPs could be an example of successful conscious capitalism.

The Proof of the Pudding is in the Eating

Conscious capitalism has led to many interesting methods of promoting social welfare, but the debate exists about whether some of these methods are merely fads. Research shows employee ownership is not a fad for at least two reasons: 1) firms with ESOPs weather recessions better than firms without ESOPs; and 2) employee ownership is associated with continuing strong firm performance.

ESOPs Weather Recessions Better

A recent study of all publicly traded U.S. firms shows that firms with larger amounts of broad-based employee ownership are more likely to survive in economic recessions.1This study found that with a one percent increase in unemployment, companies with ESOPs had a decrease in employment by nearly half that found in companies without any employee ownership defined contribution plans.

Special attention has been given to S-Corporation ESOPs (“S ESOP”) in the research community. When a business takes the S-Corporation designation, it enjoys pass-through taxation. The IRS taxes only at the shareholder level, as opposed to taxing at both the corporate and shareholder level. When used in conjunction with an ESOP, the shareholder is the trustee of a qualified retirement plan, and is eligible to defer income tax payments. S ESOPs have become increasingly popular over the past decade for many reasons, but particularly for tax advantages.

S ESOPs have been found to be quite resilient in the face of economic downturns. 2 Swagel and Carroll (2010) assessed how S ESOPs weathered the Great Recession, and confirmed that S ESOPs in 2008 did better than other companies in job creation, revenue growth, retirement contributions, and wages.3

Many researchers have speculated as to why ESOPs outperform other forms of business entities during recessions:

  • Employee ownership could lead employees to develop their human capital through increased participation and motivation to contribute.4
  • Employee owners are less likely to engage in risky investment behavior.5
  • Employee ownership is linked to higher worker productivity, overall firm productivity, and higher employee retention during economic downturns.6
  • It is possible there is a general willingness on the part of employee owners to make adjustments during times of economic distress.7
  • When faced with recessionary pressures, employee ownership firms may retain workers to sustain a workplace culture based on cooperation, information-sharing, and commitment to long-term performance.8

Whatever the reasons may be, it is clear there are many significant and positive outcomes that stem from employee ownership.

ESOPs Are Associated with Strong Firm Performance

Much research has been devoted to the effect of ESOPs on firm performance. A recent meta-analysis of 102 studies representing 56,984 firms from around the world found a small but significant effect of employee ownership on firm performance. 9 It was noted, however, that even small increases in performance can lead to large increases in the value of a firm. Employee ownership has led to sustained improvements in company performance, which has proven to increase over time.

Many theories exist as to why ESOPs are associated with strong firm performance:

  • When goals between employers and employees are misaligned, agency problems may exist at the employee level. Employee ownership aligns employees' and owners' interests, resulting in a more harmonious set of goals.10
  • Employees are reluctant to learn a skillset specific to an employer unless they have residual rights to profits.11 Thus, by providing stock ownership, employee ownership encourages employees to learn employer specific skillsets.
  • Employee ownership provides firm wide incentives to increase firm performance because increases in firm performance is tied to increases in compensation.12
  • An employee ownership culture indirectly supports the benefits of a vertical and horizontal fit in improving involvement, information sharing and training. Employee ownership has been described as the glue that helps increase the effectiveness of overlapping and complementary organizational resources and practices.13

Employee Ownership is Here to Stay

In summary, recent research shows that companies using employee ownership weather recessions better than companies without employee ownership, and employee ownership boosts firm performance. Employee ownership is associated with higher wages, productivity, employee investment into company specific skillsets, company value, and employee retention. These qualities have a high value in today’s economy, especially as the U.S. struggles to decrease the inequality gap between the owners and workers, and as American companies struggle to remain productive.


1 Kurtulus, Fidan Ana and Douglas L. Kurse, How Did Employee Ownership Firms Weather the Last Two Recessions? Employee Ownership, Employment Stability, and Firm Survival: 1999-2011, 2017
2 Brill, Alex "Statement before the House Small Business Committee on S is for Savings: Pro-Growth Benefits of Employee-Owned S Corporations," American Enterprise Institute, April 27, 2016
3 Swagel, Phillip and Robert Carroll, "Performance of S-ESOP Firms in the Recession," March 23, 2010.
4 O'Boyle, Ernest H., Pankaj C. Patel, and Erik Gonzalez-Mulé, "Employee ownership and firm performance: a meta-analysis," Human Resource Management Journal, 2016
5 Bernstein, Jared, "Employee Ownership, ESOPs, Wealth, And Wages," 2016
6 Kurtulus, Fidan Ana and Douglas L. Kurse, How Did Employee Ownership Firms Weather the Last Two Recessions? Employee Ownership, Employment Stability, and Firm Survival: 1999-2011, 2017
7 Bernstein, Jared, "Employee Ownership, ESOPs, Wealth, And Wages," 2016
8 Blasi, Joseph, Douglas Kruse, and Richard Freeman, "Having a Stake: Evidence and Implications for Broadbased Employee Stock Ownership and Profit Sharing," February 1, 2017
9 O'Boyle, Ernest H., Pankaj C. Patel, and Erik Gonzalez-Mulé, "Employee ownership and firm performance: a meta-analysis," Human Resource Management Journal, 2016
10 O'Boyle, Ernest H., Pankaj C. Patel, and Erik Gonzalez-Mulé, "Employee ownership and firm performance: a meta-analysis," Human Resource Management Journal, 2016
11 Wang, H.C., He, J. and Mahoney, J.T. "Firm-specific knowledge resources and competitive advantage: the roles of economic- and relationship-based employee governance mechanisms." Strategic Management Journal, 2009
12 O'Boyle, Ernest H., Pankaj C. Patel, and Erik Gonzalez-Mulé, "Employee ownership and firm performance: a meta-analysis," Human Resource Management Journal, 2016
13 O'Boyle, Ernest H., Pankaj C. Patel, and Erik Gonzalez-Mulé, “Employee ownership and firm performance: a meta-analysis,” Human Resource Management Journal, 2016


Mitchell Miller, consultant, Beyster Institute

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