On the 16th of April,
on the occasion of his 50th birthday, Quinton van Rooyen gave a
rather remarkable gift to his employees – part ownership of the Namibian
conglomerate Trustco. And while this is not the first of its kind, it does have
several unique features not usually associated with Employee Stock Ownership
Plans. First amongst these is that the cash-value of the gift is a flat amount
– not linked to current salary, performance or any other considerations usually
applied to plans of this nature. Every employee with one year of service, from
the janitorial staff to the highest level executives, receive the same cash
value of shares.
This plan, crucially, does not
replace any existing employee stock compensation plans – indeed, the standard
bonus schemes that award shares remain in place. But it does provide every
employee the same, standard base going forward from which to grow their
ownership in the company. And while the shares granted is a restricted share
(meaning it cannot be transferred or sold for a period of 5 years except on the
death of the shareholder), it is not a different class of share. This means
that these shares have full voting rights at the company’s Annual General
Meeting, and that dividends declared still accrue to the shareholder. All in
all, it seems to be a pretty good deal for employees of Trustco.
But what about Trustco itself? If
you were an existing shareholder, would you have welcomed such a scheme? And
how will this affect its performance going forward? Luckily, existing
shareholders do not need to speculate on this matter – academic studies have
vindicated this approach for years already.
Indeed, already in 1987 a study conducted
by the Toronto Stock Exchange found that public companies which are
employee-owned reflected an increase of 123% in 5-year profit growth, and
managed to maintain 95% higher profit margins than companies without a similar
plan. And in the United Kingdom it was found that UK companies with 10%
employee ownership or higher outperformed the London FTSE All-Share Index by
more than 10% per year over 20 years.
Share Performance of 10% Employee Owned Institutions vs FTSE All-Share
Essentially, the theory behind
companies issuing shares to employees have always been quite simple: If the
share price increases, employees’ wealth increases – incentivizing employees to
focus on making the company more successful and profitable.
But new research from the
Wharton’s Center for Human Resources cast doubt on this traditional view. In
fact, their research showed that workers frequently see the shares not as an
incentive, but as a gift they felt compelled to repay by working harder. The
reciprocity effect they found was actually larger than the incentive effect.
Indeed, they found that when a
company does well and the share price increases and the people therefore make
more money, their performance in the next period goes up as well. Other studies
have also found higher levels of job satisfaction and greater worker loyalty in
companies that are partly employee owned.
Still, there are some steps to
take to ensure success in plans such as these. For employee ownership to work,
there needs to be trust, and full disclosure of financial results. Companies
should ensure that their worker-owners are financially literate and can, for
example, make sense of its financial statements.
It seems the more information you
disclose – the more you teach your staff to understand the main value drivers
that create value for the company, the easier it becomes for them to generate
new inventive ways to provide even more value for your business.
It seems that Mr van Rooyen has
always incorporated these aspects in his business model. And given the growth
of Trustco, it is working quite well. It should serve as an example for more
Namibian business owners to follow his example. After all, economic prosperity
for one cannot be achieved without economic prosperity for all.
