What is the Long-Term Impact of Eliminating Employee Ownership and Control?
The July 1, 2009 Employee Ownership Update is online and discusses the following:
- Special Employee Voting Rights End at SAIC
- SEC Approves Path for Monetizing Employee Options
- Things Not to Do in an ESOP
- NCEO Update
The Update discusses how Science Applications International Corporation (SAIC) has changed their corporate structure, effectively eliminating the employee control of the company, and how the corporate structure and ownership culture has evolved since the IPO:
Science Applications International Corporation (SAIC), once the second-largest majority employee-owned company in the U.S., has changed its stock structure to eliminate the 10-to-1 voting rights that preferred shares held by employees were given when the company went public three years ago. Shareholders (including employees) voted on the change in June. SAIC's board concluded that the arrangement (similar to one at Google) was putting off potential investors. SAIC stock has been basically flat since its IPO, after consistently rising by about 15% per year over its 30-plus years as a private employee-owned company. The culture at SAIC has changed substantially since the IPO. Once structured around a series of semi-autonomous (and sometimes competing) teams, the company has now moved to a more traditional corporate model. SAIC is one of a number of majority employee-owned companies to go public, most of whom share a similar history. At the start, leaders pledge to maintain the company's employee ownership culture along with substantial actual ownership. Over time, both the culture and the ownership share tend to dwindle.
Dr. J. Robert Beyster, the founder of SAIC, discussed the change in SAIC's Employee-Ownership Continues to Shift; Blasi Speaks. In his blog post he shared the four key advantages of providing employee ownership and control:
In my book, The SAIC Solution, I pointed out four key advantages that we enjoyed over our competition because of the kind of employee ownership we practiced at SAIC. These key advantages included:
- Employee ownership allows a focus on long-term goals.
- Employee ownership helps attract and retain a superior workforce for decentralized growth.
- Employee ownership facilitates the alignment of key corporate constituencies.
- Employee ownership at SAIC promotes corporate flexibility and adaptability to maintain customer focus.
Employee ownership is important because it is fair for all employees to share with other investors and top management in the value that all of the workers created as a total team. Research now provides strong evidence that the combination of broad-based incentives like employee ownership with teamwork, performance management, and highly trained employees contributes to corporate performance and innovation. This evidence shows that employee ownership is also very good for non-employee shareholders and investors.
I have heard the theory that minority voting control and ownership by employees will unleash SAIC's stock price. I hope the stock price does well but I want to make clear that there is nothing magical about employees owning little of a company. I believe that broad-based employee ownership at all levels was a critical factor in making SAIC so successful in the first place. I hope that the four advantages cited above don't completely evaporate as the company's employee-ownership culture continues to shift to one that is focused on public ownership and Wall Street. I will watch with great interest.
Corey Rosen provides some additional insight on the likelihood of the company sustaining its ownership culture:
Employee owned companies that go public almost invariably see not just the voting power of employees but the ownership culture fade as well. And just as invariably, when they go public, they pledge to retain that culture. A lot of the things that employee ownership companies do to maintain that culture are problematic when public. For instance, open-book management principles can run into insider trading problems. Policies that focus on the long-term value of engaged, participative employees, such as resorting to layoffs only as a last resort or spending considerable resources on training, can cut into short-term profits, displeasing investors whose focus rarely extends beyond the next quarter. High employee involvement in decisions at various corporate levels, as well as their own work, is seen in some quarters as bad management. More egalitarian pay structures are disfavored; investors typically what most incentives to focus just on a few key people (the people who "really matter"). Wall Street likes the conventional; companies like SAIC prospered by being very unconventional.
That's not to say the task is impossible. Many high-tech companies kept their culture (Google, most notably), but investors seem more ready embrace these practices in software companies because it is somehow seen as inherent to the work they do to be more participative. A few other companies, such as Procter & Gamble, have been largely successful in retaining their culture as well. But it is a tough, and usually, losing battle.
For additional information, SAIC vote could end control by employees - Preferred shares would be converted into common stock is a June 19, 2009 pre-vote article that discussed SAIC's ownership culture history and the significance of the vote. Preferred becomes common at SAIC - Shareholders vote for stock conversion is a June 20, 2009 article that discussed the results of the vote.
The Update also discusses the June 17, 2009 ruling by the Securities and Exchange Commission (SEC) that allows employees with vested stock options to use them as collateral in Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval to a Proposed Rule Change, as Modified by Amendment No. 1, Relating to Margin Requirements (Release No. 34-60127; File No. SR-ISE-2007-121):
On December 24, 2007, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the "Act"),1 and Rule 19b-4 thereunder,2 the International Securities Exchange, LLC (the "Exchange" or "ISE") filed with the Securities and Exchange Commission (the "Commission") a proposed rule change to modify its margin requirements to facilitate, under certain circumstances, the ability of account holders to use vested and currently exercisable compensatory employee stock options ("Vested Employee Options") issued by publicly traded companies as collateral for writing call options that have the same underlying security as the Vested Employee Options. On April 29, 2009, ISE filed Amendment No. 1. The proposed rule change was published for comment in the Federal Register on May 13, 2009.3 The Commission received no comments on the proposed rule change.
I recommend that you check out the redesigned and reorganized NCEO website.