Employee Share Ownership: Safeguarding Investments in Human Capital
| Published date | 01 September 2005 |
| Date | 01 September 2005 |
| Author | Andrew M. Robinson,Hao Zhang |
| DOI | http://doi.org/10.1111/j.1467-8543.2005.00365.x |
British Journal of Industrial Relations
43:3 September 2005 0007– 1080 pp. 469– 488
© Blackwell Publishing Ltd/London School of Economics 2005. Published by Blackwell Publishing Ltd,
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Blackwell Publishing Ltd.Oxford, UKBJIRBritish Journal of Industrial Relations0007-1080Blackwell Publishing Ltd/London School of Economics 2005September 2005433469488Articles
Employee Share OwnershipBritish Journal of Industrial Relations
Both authors are at Leeds University Business School.
Employee Share Ownership:
Safeguarding Investments in
Human Capital
Andrew M. Robinson and Hao Zhang
Abstract
Valuable investments in human capital, it has been argued, may be at risk in
much the same way as shareholder equity capital. In this paper, we develop and
test the hypothesis that employee share ownership (ESO) may be used to
encourage and safeguard investments in human capital. Using the Workplace
Employee Relations Survey 1998, we examine the empirical link between the
likelihood of ESO and the presence of valuable human capital. Adjusted for
possible structural influences, empirical evidence suggests considerable support
for our hypothesis.
1. Introduction
In recent years, employee share ownership (ESO) has attracted the interest of
policy-makers, managers and employees for a variety of reasons. Most advo-
cates have focused on the microeconomic benefits of offering employees an
ownership stake, as this will generate more favourable attitudes towards the
company and motivate employees to perform (Perotin and Robinson 2003).
Others stress a shift towards contingent compensation systems in the context
of the fundamental restructuring of economies and firms in an era of intense
product market competition (Pendleton 2000) and the collapse of the fixed
wage system (Sesil
et al.
2001). Alternatively, in a number of former socialist
countries, ESO has been a key feature of their transition to greater private
ownership. Others have made ideological arguments for ESO. On the one
hand, ESO is seen as a means of strengthening support for the capitalist
system, bypassing unions and reducing wage pressures (Ackers
et al.
1992;
Gates 1998). On the other hand, there is the belief that ESO can enhance
social cohesion and equality by distributing the fruits of economic success
more directly (Kruse 1999).
470
British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2005.
Recent literature has emerged to provide different insights into the spread
of ESO in developed countries. Grounded in the corporate governance
literature of financial economics, Margaret Blair (1995a, 1995b, 1995c, 1999)
argues that highly specialized investments in human capital, if made by
employees, can be at risk in much the same way as shareholder equity capital.
Investments in non-transferable knowledge, skills, relationships and other
forms of human capital are not easily recoverable outside the place of work.
Furthermore, there are opportunity costs to employees because they could
have invested their human capital in more remunerative ways elsewhere. As
such, Blair argues that investments in highly specialized human capital should
be treated in the same way as the investment of equity capital. Once such
investments have been committed to an enterprise, employees as well as
shareholders should have rights to residual income and control, something
that is facilitated through ESO. The other side of the coin is that employers
also need to protect their own specialized investment in human capital in the
form of employee training and development. Again, as a remuneration and
as a governance device, ESO provides a way of doing this. As Blair (1995a:
298) writes, ‘Employee-owned companies are the ultimate examples of gov-
ernance structures that empower employees and protect investments in firm-
specific capital’.
The contemporary significance of these issues resides in a number of
areas. One is the growing importance of human resources as a key to com-
petitive advantage and business success (Guest
et al.
2003), particularly in
advanced economies where wealth creation has become the product of
knowledge rather than of physical resources (Stewart 1997). Indeed, we
observe that in many knowledge led and human capital-intensive firms (e.g.
professional services companies), ownership and control is typically vested
solely in the human capitalists either through ESO or along partnership lines
(Roberts and Van den Steen 2000). Another element is the introduction of
extensive ESO-promoting legislation within the UK (Employee Share
Schemes Bill 2002; Schedule 8 of the Finance Act 2000; Schedule 13 of the
Finance Act 2001) aimed at increasing British productivity by ‘harnessing
the ambition of employees to see the company in which they work succeed’
and to reward such enterprise by ‘helping all employees share in the success
of the company’ (HM Treasury 1998: 2). Implicitly, this recognizes that
share schemes tend to reward future behaviour and are aimed at encourag-
ing long-term commitment and identification with the firm (Perotin and
Robinson 2003).
Yet, whilst it is possible to identify ‘cases which exemplify these develop-
ments and possibilities, in the main these types of argument tend to be
speculative and prescriptive. As yet, they are not firmly based on specific
empirical research (Pendleton 2000: 9). In other words, whilst there is evi-
dence to suggest that the use of equity-based compensation systems is grow-
ing and being strongly promoted in the UK, no definitive empirical studies
have linked employee ownership in firms to investments in valuable human
capital.
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