Welcome back to a Stakehold ministries on why and how business leaders choose to distribute control. The first post, in brief: ownership is a question of both economics and control, money and power. This post tackles why owners might distribute control beyond the usual suspects of owners and investors. The how is next.
Why distribute control?
Here is one way to think about why owners might decide to share power:
Owner-focused reasons, like making more money or distributing the stress of leadership
Business-focused reasons, e.g. aligning incentives or recruiting/retaining workers, to strengthen business performance
Others-focused reasons, like helping develop workers’ personal agency or autonomy
…as well as a final section on why they might not.
Human motivations are tricky.1 We don’t always know why we’re doing things, and we often have multiple reasons for doing them. That double-barreled ambiguity means the three categories above often overlap.
But they don’t always overlap. An owner might distribute control because it will make the company perform better but then distribute that cash flow to their employees. Or they could choose to sell the company to private equity to maximize their sale price, knowing there’s a good chance it will mean the end of the business they built. Or they might distribute control because they want to engender an “owner’s mindset” in their workers, even if they worry it could lower productivity and performance.2
A quick note before we get in it: some of the claims below are well-studied. Some are derived from arguments about distributing cash flow. Others I’m just riffing on. I try to be clear about which are which and welcome pointers to more reasons or evidence!
1. Owner-focused reasons to distribute control
Start with where your 20th century Economics 101 class ended: people are motivated by self-interest. So if we see owners sharing power, we should first ask what’s in it for them. Some self-interested reasons owners might want to share power:
Cementing their legacy as a transformational leader, a corporate rebel, an against-the-mediocre-grain businessperson.
Preserving what they built and care deeply about, including the people and culture that helped build it.
Distributing the stress of leadership among an expanded group of owners.
Making more money for themselves by improving firm performance through shared control.
2. Business-focused reasons to distribute control
If a business owner wants their business to do well to maximize their own profit, that’s an instrumental reason. But it could also be that seeing their business succeed, regardless of whether they are in control anymore, is a business owner’s end goal. Either way, there are multiple pathways through which distributed control might boost performance.
Boosting worker productivity. Recent employee ownership research suggests that the 3-5% productivity benefits of employee ownership depend less on profit-sharing than on employee-owned companies’ management approaches. This lines up with research from the nineties arguing that productivity gains come primarily from giving workers control rather than cash flow rights.
Building trust, loyalty, and a sense of ownership among stakeholders. Earlier this year Trevor Young-Hyman presented to the Purpose Trust Ownership Network’s academic working group (cc Issie) a paper arguing that firms make commitments to the French equivalents of benefit corporations so that their stakeholders have more confidence in the company’s commitment to its purpose. Optimax Systems, we discovered, solidified relationships with some of its customers once they learned the company could never be sold. That’s about legally locking in a purpose, but the same might be true of sharing control, too. Customers might appreciate that decisions affecting them will be internally legislated, rather than made by the whim of a single CEO. Employees may be more likely to trust their careers to a company where they have some power and feel like owners. The result is what employee ownership advocates call an “ownership culture” or “ownership mindset,” and nerds call collective psychological ownership.
Improving the odds of firm survival. Employee-owned firms are more likely to survive economic downturns, but it isn’t clear to me why, and I suspect it has more to do with loyalty to/identification with the firm than workers thinking “if I stick this out, I’ll get my bag.”
Lowering transaction costs. Henry Hansmann argues that firms choose ownership structures that cumulatively lower two transaction costs: contracting costs and ownership costs. You want to give control to stakeholders that can work together effectively; you want to transact at a distance with stakeholders you can easily contract with. Hansmann predicts (and I think we see) more distributed control in industries like law and architecture, where similarly trained partners know how to operate together and would be expensive to contract with if they were external to the firm.3
Recruiting and retaining employees. Hiring, retaining, and firing workers are a real time suck for most businesses. Employee owners are better off than the rest of us—they get paid more, build more wealth, and stick around longer.
Aligning incentives, vision, and accountability. The most common understanding of a firm is as is a collection of contracts, which results in a cat-and-mouse game between “principals” and their “agents”—think investors v. bosses, bosses v. managers, managers v. workers. Distributed control can interrupt that pattern in multiple ways: (1) it collapses some of those categories; the agents (workers) become principals (owners), too; (2) it means that there are more owners making sure all those other principals (coworkers) don’t shirk; (3) it inspires prosocial behavior: As Colin Birkhead, Noah Gibson and I argue, it also sets the stage for a “pay-it-forward” flywheel within an organization. When we see one coworker stepping up to help another, we’re then more likely to help another one; (4) it can lead to more aligned incentives: if the direction of the company is commonly determined, individuals can make sure they and others benefit from its growth; and (5) it can lead to greater alignment around a common purpose: a commonly determined purpose is more likely to be commonly protected.
Unlocking innovation and better decision-making. Corey Rosen’s excellent book Beyond Engagement argues that a primary pathway to improved performance is employee-owned firms’ tendency to build structures reward workers for frontline innovation. To me, this is connected to the power paradox, which is that when we have more power, we see things less clearly. Owners might want to give away power so that more people in the organization are seeing and thinking strategically. When owners set up more transparent, inclusive decision-making systems, they’ll get more participation, higher-quality deliberation, and better problem-solving.
3. Others-focused reasons to distribute control
Armchair economists tend to dismiss the possibility that people might do things out of actual altruism. If something looks like altruism, what they were really doing was making themselves feel good by being altruistic. But scholars today take seriously insights from psychology and evolutionary biology that humans are wired for both competition and collaboration. Reciprocity and generosity are as human as self-interest and pleasure-seeking. So while stipulating that some of these can be used as instrumental smokescreens, here are some altruistic reasons owners might choose to distribute control:
Rewarding and protecting the builders of the company. Employee owners are safer, more financially secure, and happier with their jobs. An owner that cares about their people might be interested in those as goals in themselves, rather than just a means to higher productivity or lower turnover.
Protecting the company’s mission and reducing externalized harms. By expanding the number of people who can monitor how a company behaves, a company might be more likely to deliver on its mission or purpose. It might also be less likely to behave badly—if a company could otherwise get away with doing something that negatively affects the community (say, dumping toxic waste), there are more jiminy crickets around to call foul.
Extending dignity, freedom, and self-reliance. These are all core democratic principles, that distributed control can help protect. It is harder for an owner to mistreat another owner poorly than it is for a boss to mistreat a direct report, for example. And inside of an organization that treats us as equal citizens, rather than subjects or resources, people may be more likely to fight for their freedom to express a contrary opinion. As citizens/owners, they may be more likely to develop a sense of self-reliance or autonomy, as political theorists argue democracy writ large does.
These are also moral principles: I heard that one business owner in Texas, for example, converted to employee ownership because he realized that all his employees were children of God, and should be treated accordingly. For him, that meant distributing profits to the tune of $30-35k per construction worker in one year, according to a recent filing—but it could also mean treating them as “created equal” in a political sense.
Reasons not to distribute control
I’ve long been puzzled by the reaction I get from business owners when I ask about sharing power. You can see their spidey-sense tingling, their minds wondering what kind of squish they’re talking to. Some of this might be branding; I haven’t used the phrase workplace democracy in this series yet for that reason.
What is puzzling to me is that particular phrase elicits skepticism even with business owners who are already sharing power. Power-sharing—even its scariest element, voting—is present in some degree all over the place: in college clubs, churches (including the Vatican!), and professional firms, codetermined German companies, not to mention university departments and pirate ships.
So why the resistance? Here are some things I’ve heard, some that have been tested and some that have not:
It makes businesses less competitive. Big if true, but the balance of research (see above) suggests that this isn’t the case—and that the opposite might even be true. So why aren’t there more cooperatives and the like? The most compelling answer to me is that despite being effective (enough), these organizations struggle to gain credibility in markets dominated by an ethos of shareholder value maximization. That would help explain two difficulties firms with distributed control tend face:
It introduces capital constraints. It’s tough to raise money from bankers not trained on or familiar with these organizations. It doesn’t matter if they tend to do just as well as hierarchically managed companies, if providers of finance are biased against them or consider getting educated about them too time-consuming.
It sacrifices speed. Deliberation takes time, and distributing control (usually) demands deliberation. But most organizational decisions don’t require speed. Imagine a fire department: yes, during a fire you need someone to lead and others to follow. But 99% of the decisions made about fire departments are made in the firehouse, not on the site; the upsides of deliberation might outweigh the time required for those.4
It devolves into a tyranny of the of the majority. As democracy spread during the Enlightenment, one major source of pushback was the belief that that most people were not capable of self-governance. If given power, they would run roughshod over the propertied, educated elites trained to govern. This argument is resonant with the “degeneration thesis” of workplace democracy scholarship, which is that democratic firms will eventually revert back to centralized power, either via market pressures or internal politicking.
It means rule by the mediocre middle. A softer version of the tyranny-of-the-majority thesis is not that popular rule will be cataclysmic, but it will just be…meh. If you distribute control, he said, decisions will be made by the average worker, meaning probably poorly. Instead, you should give all the power to the most capable.5
It misaligns incentives between current and future owners. This is known as the “horizon problem,” which is that employee owners might be less likely to make long-term investments than to extract today what value they can. This is puzzling to me, though: I don’t see why ten owners would be more subject to the horizon problem than one; in either case, the important variable would seem to be the owners’ estimation of whether they can maximize value by investing long-term v. taking dividends out today.
It incentivizes free riding. When a company is shared and managed collectively, people have an incentive to take more and contribute less. This is a version of the classic “tragedy of the commons” argument. But there’s a funny thing about that tragedy: it’s just not always true. In fact, Elinor Ostrom won a Nobel prize for showing examples of places communities managed common pool resources without privatization or nationalization. Many of the features that enable that (and discourage free riding) are found in more democratic firms. Institutions shape incentives, norms, and behavior.
It could negatively impact their family. Some owners see sharing control with workers as precluding sharing control with their family members, their heirs to the business. Or they might think that sharing control and economic rights happens all at once. In reality, sharing control can take many forms and levels, and it does not necessarily have to be bundled together.
Next: From Why → How
In our next episode in this miniseries, we’ll tackle our second question of how owners can distribute control more broadly. Don’t touch that dial! Between now and then:
What are we missing here? What other motivations for distributing control have you heard business owners voice or seen researchers poke at? What other reasons have you heard for why an owner might not want to share control?
How have you seen control-sharing done well? Or done poorly?
Peter Boumgarden and I tackled this in a recent paper, Restructuring the family firm at succession: Aligning structure, motivations, and beliefs.
It doesn’t! But many owners sure believe it does.
Michael Palmieri pointed out that this could explain why successful worker cooperatives “vote only on major strategic issues - not what color to paint the bathroom.” Big thanks to Michael for this and other comments on the first draft.
For more, see Trevor Young-Hyman’s Democratic Deviations: How Organizations Sustain Decentralization Commitments in the Face of Centralization Pressures.
Before you nod along too hard with this one, recall this was Hitler’s argument against political democracy. Today, political scientists would call what we’re describing here non-democratic meritocracy, with China and Singapore as examples of countries with that operating system.
Great discussion! Here are two more reasons why owners may be reluctant to cede (some degree of) control:
1. There are often tradeoffs between different motives for business decision-making. An example I'm very familiar with is occupational safety and health. It really is the case that safer workplaces may entail more expenses and reduce profits. There's a massive literature on this. If you share control you run the risk that workers will substitute their motives for yours. Incidentally, one interesting factor I encountered working in this area is that, because workers aren't "owned" by the firm, investments in them, including in their safety, have an accounting cost but generate no corresponding asset. Even if an employer, for humanitarian reasons, wants to make jobs safer, the standard metrics militate against it.
2. There exists what economists would call a taste for control among many people. Owners and higher level managers presumably are overrepresented in this group, since they have chosen career paths that promise to satisfy it. The argument is analogous to the documented observation that wealthy people are, on average, less charitable than those with lower incomes.
Great write-up as always, Mark!