[from the Financial Times] A question of ownership Employees who have no equity may still feel that, psychologically, a business is theirs Published: August 2 2001 18:41GMT | Last Updated: August 2 2001 18:53GMT
For two months I have been working intermittently with an owner-managed business. It has sales of £20m ($29m) and employs 145 people.
By any criterion it is a classy business, and a profitable one, too.
My client dominates the company, by virtue of his position and his personality. He asked me to advise him on how he might reduce this dominance. As he put it: "I am 65 years old. I want to avoid the 'Margaret Thatcher' problem of succession."
He suggested I talk to some of his employees. He needed them to be more independent, to envisage a time when he might retire. "I want them to take ownership of their decisions," were his exact words. I suspect he has been on a training course.
I have told him that these discussions could be useful. However, his accountant has told him they would be a mistake. The accountant believes the only way to redistribute power is to redistribute equity. That is, the employees must become shareholders.
This is not very helpful for my client. He owns 100 per cent of the equity. It is his business and he intends to keep it that way. He has spent every waking minute on it for 25 years.
Furthermore, his employees appear to like it that way. He is the boss and once they have been recruited, employees stay - some for 20 years. They do not feel excluded. My client's retirement is something they would prefer not to consider.
There is a reason for this exceptional performance. Although the employees may not legally own the business, psychologically they certainly do. Employees with no legal right to ownership can still behave as though the company is theirs. They own space, the business, an idea, a product, a system. It is theirs. The accountant does not understand this.
There is little research to help decide between the legal and the psychological views of ownership. The work that has been done focuses on joint ventures and the problems of divided ownership.
One hundred years ago legal and psychological ownership were fused through owner-managers. And it is still true of most small businesses. However, during the past century, directors of large and publicly listed companies worked hard to divorce legal ownership from management. They have been struggling with the consequences for psychological ownership ever since.
Enthusiasts argued that this separation would create more effective companies. So professional managers, not shareholders, replaced owners as chief executives. They were doers. Their objectivity would not be compromised. Rationality became an obsession and emotion had to be suppressed. Psychological issues were taboo.
So effective was this drive that legal ownership became widely diffused. Whereas it is a unifying force for my client's company, it is increasingly divisive in most companies. Corporate financiers and institutional shareholders acquired the stock. Hidden behind institutional facades, these faceless investors cared little for their impact on psychological ownership.
The financiers muddied the relationship between owners and employees. Imagine a listed company. One investment bank may own 15 per cent, another 25 per cent, the original founding family 7 per cent and the ABC pension fund 20 per cent. The remaining 33 per cent is hidden in nominee companies or in the investment portfolios of that ubiquitous band of "little old ladies", who pop up whenever one of their investments is acquired.
Tell me this is progress. Tell me this diffusion has added something to the relationships between the people who work in this company. What it has done is raise questions about added value and for whom?
More specifically, it has had two negative effects. First, it reinforces the accountant's conviction that ownership is about law. Second, it has forced managers to look for alternative ways to explain to their staff that a bunch of people, whom none of the employees has ever met, owns "their" business. That they are, in fact, little more than tenants.
Look at any company wrestling with these issues - often there is a mad scramble to throw stock at each and every employee as part of some belated attempt to reconcile ownership with management.
You will also find a frenetic interest in defining psychological forms of ownership. How can employees who have no equity really feel the business is theirs?
The search for an answer has been long and tortuous. What began as 'communication' in the 1960s shifted to 'worker participation' and 'industrial democracy' in the 1970s. By the 1980s it became 'enrichment' and 'organisational development' and, by the 1990s, 'empowerment'.
With the new millennium it changed its packaging again and was relaunched as 'commitment' or its slightly softer twin, 'involvement'. Its latest format is 'psychological ownership'.
My client has refused to dilute either form of ownership. His accountant is right, he will have a big succession problem. But his stance is at least sincere.
John W. Hunt is professor of organisational behaviour at London Business School and a consultant to private and public sector clients. This column appears fortnightly.