Beyond Dichotomy: The Curvilinear Impact of Employee Ownership on Firm Performance

• DOI: http://doi.org/10.1111/j.1467-8683.2008.00703.x
• Published date: 01 September 2008
• Author: Zied Guedri,Xavier Hollandts
• Date: 01 September 2008

Beyond Dichotomy: The Curvilinear Impact of

Employee Ownership on Firm Performance

Zied Guedri* and Xavier Hollandts

ABSTRACT

Manuscript type: Empirical

Research Question/Issue: This study examines the impact of employee stock ownership and board employee representa-

tion on f‌irm performance.

Research Findings/Results: Results drawn from a longitudinal analysis of a sample of 230 French f‌irms over the period

2000–2005 provide support for an inverted U-shaped relationship between employee ownership and accounting-based

performance measures. However, this relationship is not supported when a market-based performance measure is used. We

also found that the inf‌lection point of the inverted U-shaped relationship between employee ownership and f‌irm perfor-

mance does not depend upon the level of employee representation on the board.

Theoretical Implications: This study addresses the inconsistency of results found so far in the literature examining the

performance implications of employee ownership by proposing a theoretical framework and providing empirical support

for the hypothesis suggesting that the relationship between employee ownership and f‌irm performance is not linear, but

indeed, has an inverted U-shape.

Practical Implications: In a governance context characterized by a spectacular increase in employee ownership fostered by

a pervasive support from both managers and government, our results suggest that performance implications of employee

ownership are positive up to a certain point, after which the marginal effect of employee ownership on f‌irm performance

becomes negative. As a result, our f‌indings suggest that managers and shareholders should be careful when launching and

increasing the level of employee ownership to not go beyond specif‌ic inf‌lection points.

Keywords: Board Composition, Board of Directors Issues, France, Ownership Issues

INTRODUCTION

Employee ownership, def‌ined as ownership of company

stock by employees through broad-based ownership

mechanisms such as Employee Stock Ownership Plan

(ESOP), stock awards, and stock purchase plans, has become

a widespread phenomenon during the last two decades. In

the US, the number of employees owning stocks of f‌irms for

which they work has been estimated at 25 million – approxi-

mately 24 per cent of the total number of private sector

employees (NCEO, 2005). Employee ownership is not only

growing in the US but also worldwide. In Europe, the

number of employee stock owners has been estimated at 17

million, which represents 19 per cent of the total number of

private sector employees (Perotin and Robinson, 2002). In

France, the number of employee stock owners has increased

from 700,000 in 1998 to 3 million in 2005 (FAS, 2006). This

increased popularity has been the result of pervasive

support from both executive managers and governments

(Kruse, 2002). Governments have encouraged employee

ownership for its sustained positive macrolevel effects on

both economic growth and employment (Weitzman, 1985).

Executive managers have encouraged the adoption of

employee ownership for its positive effect on employee

productivity, cooperation, and information sharing (Blasi,

Conte and Kruse, 1996).

While empirical support for the positive impact of

employee ownership on employee behavior such as motiva-

tion (Long, 1978a, 1978b; Pierce, Rubenfeld and Morgan,

1991), satisfaction (Hammer and Stern, 1980; Long, 1980;

French and Rosenstein, 1984; Klein, 1987), and level of

involvement in the task (Frohlich, Godard, Oppenheimer

and Starker, 1998) has been extensive, the linear positive

relationship between employee ownership and f‌irm

*Address for correspondence: E M Lyon,Strategy and Business Policy Department, 23

AvenueGuy de Collongue – BP 174 – 69132 Ecully Cedex. Tel: 00 33 478337005; Fax:00

33 478337925; E-mail: guedri@em-lyon.com

460 CORPORATE GOVERNANCE

Volume 16 Number 5 September 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00703.x