September 2^nd, 2003

Employee ownership is changing the face of business

Gene Mage

Today’s column is the second in the series, Nine trends that are going to rock your world. Last week we examined how technology is forcing us to reexamine our definition of productivity. Employers and workers are rethinking their expectations about one-another as the value of people has changed from craftsman to laborer to machine-operator to knowledge worker to creative partner.

One of the remarkable outcomes of this trend over the past two decades has been the emergence of the small investor as a force to be reckoned with. Not long ago an investor needed to present his or her needs to a high-priest of finance who would “advise” the supplicant on how to invest. That guidance usually came at a cost in the form of commissions on the recommended products.

Then along came Charles Schwab, founder of Charles Schwab & Co. Schwab’s idea was that the individual investor was more than capable of making investment decisions without the intercession of a broker. The discount brokerage was born, offering small investors an inexpensive way to trade securities on their own. Mutual fund companies began offering “no-load” mutual funds that were marketed directly to investors. Those changes, combined with changes in the tax laws to encourage individual retirement savings, drew millions of households into the ranks of stockholders.

According to the American Council for Capital Formation Center for Policy Research, about 19% of households owned stock in 1983. By the year 2002, that number had risen to 49.5%, representing a breathtaking 84.3 million individual stockholders. The term “investor class” was coined to describe those people who have taken control of their financial future through saving and investing.

They are discovering what businesses have known for years; owners act differently than non-owners. When you own a business, or a piece of a business, you treat it differently. Can you honestly say you treat “Mr. Hertz’s” car with the tender loving care you treat your own hard earned set of wheels? Owners exercise a degree of interest that you just do not find in employees or renters.

To build that sense of responsibility among the workforce, businesses took a variety of actions to encourage employee ownership. The most significant vehicle for encouraging employee ownership is the tax-advantaged employer 401K plan. In 2002, 36.2 million households owned stock through their company 401K plans. Even in a bear market environment, employee equity ownership grew 11.4% from 1999 to 2002.

Meanwhile, stock options as a performance incentive for managers have lost their luster in the wake of the Global Crossing, Enron, and MCI scandals where unprincipled leaders cooked the books in order to bilk shareholders. Ownership is still the best motivator, but companies are shifting the focus of incentive programs towards outright stock grants.

The principle of ownership also applies to society at large. As President Bush recently observed, “The more somebody owns, the more somebody is going to have a stake in the future of the country.” Policy makers from both parties are taking steps to encourage and expand home-ownership, savings, and investment by individuals. These changes include expansion of tax-advantaged savings vehicles, elimination of double taxation of dividends, lower tax rates on capital gains, and elimination of estate taxes. Additionally, in the wake of the various accounting scandals, Congress passed legislation requiring more rigorous external oversight of corporate accounting practices. Taken together, these actions are creating even greater confidence in the financial markets and equity investing.

What does the future hold? As we shift from a nation of employees to a nation of owners, enterprises will be challenged to develop new ways to give people a “piece of the action.” Employees’ financial stakes in their companies is a start. But with more control of their financial futures, employees and investors will be looking for greater management power within their companies as well. The “investor-class” will no-longer meekly trust its future to the largess of a benevolent aristocracy.

Syndicated columnist Gene C. Mage is author of the book Managing for High Performance. For more information on Nine trends that will rock your world visit www.makingitwork.com.