1. Shared Capitalism and Corporate Strategy: A Resource-Based Examination of ESOPs and Strategic Human Capital Programs Peter B. Thompson, Mark Shanley, and Abagail McWilliams University of Illinois at Chicago Mid-Year Beyster Fellowship Conference Rutgers University New Brunswick, New Jersey February 2011

2. Shared Capitalism and Corporate Strategy: A Resource-Based Examination of ESOPs and Strategic Human Capital Programs Peter B. Thompson Mark Shanley Abagail McWilliams University of Illinois at Chicago The authors are grateful for support provided by the Beyster Institute’s Foundation for Enterprise Development and the School of Industrial Relations at Rutgers University.

3. Outline Shared Capitalism Strategy and Culture The Formation of Culture Changing Culture No One Best Culture Shared Capitalism is a Catalyst Role of Strategy The Growth of Firms (Penrose) Shared Capitalism, Strategy and Growth: Research Propositions Availability of Resources Services Provided by Resources Flexibility of Resources Growth: Firm-Level Outcomes

4. Shared Capitalism Is shared capitalism a strategic variable whose effects are firm-specific? Are the performance effects of shared capitalism intended or unintended consequences? What is the role of ownership culture in the strategy  performance relationship?

5. Shared Capitalism 10,000 ESOPs in U. S. Figure stable for decades 2% to 4% turnover (dynamic equilibrium) suggests the contingent nature of shared capitalism

6. Shared Capitalism We know that employee ownership is correlated with superior performance, especially when combined with employee participation Employee ownership $ Employee Ownership + Participation $$$

7. Research Findings Findings are suggestive of a causal relationship, but not conclusive. Research has not ruled out a s purious relationship. E. g., Management skill may be correlated with an ownership philosophy. Performanc e EO Shared Capitalism

8. Mechanism is Unknown Black Box! Some explanations: Financial incentive Psychological ownership Cooperation, information sharing Mutual monitoring (solves the shirking problem) Performance EO Shared Capitalism

9. Satisfaction Would take the same job again Organizational Commitment and Identification Motivation Satisfaction with ESOP Desired Influence in Decision Making Perceived Influence in Decision Making Some Outcome Variables

10. Shared Capitalism, Strategy and Culture Formation of Culture N Changing Culture “The way we do things here.” “Everyone knows that.”

11. Shared Capitalism, Strategy and Culture No One Best [Ownership] Culture Shared Capitalism is a Catalyst Shapes, but doesn’t radically change culture Engages individuals by channeling their perceptions, attitudes and behavior Engenders cooperation, information sharing, and dispute resolution

12. Shared Capitalism, Strategy and Culture No One Best [Ownership] Culture Culture is firm-specific

13. The Role of Strategy We propose that the link between strategy and firm performance is through corporate culture, enhanced by shared capitalism. ESOP or other form of shared capitalism is an institution that links culture with financial incentives and thus permits managers to influence—not determine—firm culture, leading to overall performance.

14. The Growth of Firms Firm is a collection of resources Shared Capital Attracts and retains superior, hard-to-imitate human resources

15. Penrose Growth Criteria Growth is a function of the services resources provide. Shared Capital Increases quantity and quality of human resource utilization (Working harder, yes—but also working smarter.)

16. Penrose Growth Criteria There will always unused productive resources. Shared Capital Increases quantity and quality of firm-specific human capital through retention and training. Increases flexibility in assigning workers to tasks, equipment, teams.

17. Shared Capitalism, Strategy and Growth: Research Propositions Availability of Resources Services Provided by Resources Flexibility of Resources Sustainability

18. Propositions: Availability of Resources Employees in ESOP companies possess a greater proportion of firm-specific skills than employees in comparable firms. Average tenure of employees in ESOP companies is greater than than that of employees in comparable conventionally- owned firms. ESOP forms supporting an ownership culture attract a greater proportion of team players than comparable conventionally-owned firms.

19. Propositions: Availability of Resources ESOP firms supporting an ownership culture attract a greater proportion of risk seekers than comparable conventionally-owned firms. The rate and extent of information sharing, and the frequency of diagonal and horizontal communications are greater in ESOP companies than in comparable conventionally- owned firms.

20. Propositions: Services Provided by Resources Changes in employee perceptions, attitudes, and behaviors occur more rapidly in ESOP companies than in comparable conventionally- owned firms. Individual and group behaviors combine to produce firm outcomes more rapidly in ESOP companies than in comparable conventionally- owned firms.

21. Propositions: Services Provided by Resources Group cohesion, group performance, and inter-group communications are greater in ESOP companies than in comparable conventionally-owned firms. The use of integrative conflict resolution approaches in firms sponsoring shared capitalism and fostering an ownership culture is greater than in comparable conventionally- owned firms Firms adopting shared capitalism and fostering an ownership culture experience greater mutual monitoring, and less social loafing and shirking than comparable conventionally- owned firms.

22. Propositions: Flexibility of Resources Firms adopting shared capital programs will display greater flexibility in allocating human resources than comparable conventionally- owned firms. Firms adopting shared capital programs and nurturing ownership culture will have greater levels of job sharing, cross training, and job rotation than comparable conventionally- owned firms.

23. Propositions: Flexibility of Resources Employees in firms adopting shared capitalism and fostering an ownership culture will perceive greater effort and productivity on the part of coworkers than in comparable conventionally-owned firms. The adoption of an ESOP by a firm will be associated with greater levels of perceived group performance across relevant groups than in comparable conventionally-owned firms.

24. Propositions: Growth and Firm-Level Outcomes Firms adopting ESOPs will outperform their competitors in market share. Firms adopting ESOPs will outperform their competitors in product quality or product reputation.

25. Propositions: Sustainability In a given industry, early adopters of shared capital programs will experience the largest performance effects, but those effects will diminish as competitors imitate these programs.

26. Conclusion Shared capitalism, when used to shape corporate culture, has the potential to increase strategic flexibility, and thus enhance firm performance.

27. Shared Capitalism is a Catalyst Strategy Direct Causation Performance Shared Capitalis m Organizational Culture