Commentary: Employee ownership could be the future of capitalism–but it doesn’t work unless workers earn it

We tend to forget that employee ownership largely built the American dream through the first hundred years of our country’s history. The “company” was typically a farm, stable, or dry goods store. Participation in the family business was a given, as was employee engagement. The “company” was handed down over generations. And not much changed until the 20^th century made way for mass production.

Mass production meant lower product costs, and subsequently lower cost of services—again, the stuff of the American dream. However, with great growth came a great separation between owner and employee. Customers were delighted. Fortunes were made. But over time, wealth concentrated at the top, while unrest accumulated at the bottom. As employees were pushed out of ownership, engagement petered out. The ownership culture that was once so evident, so American, became the exception.

Many well-intended business owners muse, “We want our employees to think and act like owners, so let’s make them owners.” They hand out stock, enjoy a round of applause, and wonder why nothing changes. It’s akin to a university distributing degrees to students who haven’t begun their studies. Business ownership–like home, car, or pet ownership–is about responsibility.

Corey Rosen notes in his Harvard Business Review piece, “How Well Is Employee Ownership Working?,” “ESOP (Employee Stock Ownership Plan) companies that instituted participation plans grew at a rate three to four times faster than ESOP companies that did not.” Without participation, or taking on of responsibility, there’s no documented increase in performance. With participation, results improve significantly.

Using survey data from the past five years, we’ve found that partnership and participation substantially and consistently improve business performance. In fact, companies in the top quartile of the Economic Engagement index have double the profit growth of their peers, as seen in 10 waves of research of 50-150 companies per wave.

This philosophy is anchored in “economic engagement”, a way of running a business founded on partnering with employees to serve customers profitably, improving both business results and the lives of the employees who drive those results.

An economically engaged company can be identified by the following five practices:

1. Customer engagement is the starting point since customers define value and, thus, the economics of any business.
2. Economic understanding aligns all employees in a common understanding of what defines success for the company.
3. Economic transparency enables all employees to see how the company is doing and learn from successes and failures.
4. Economic compensation gives all employees a shared stake in the results, making them economic partners in the company.
5. Employee participation leads to lower turnover and better relationships between owners/managers and employees.

That might sound obvious, but the practical implication is that these five components of Economic Engagement need to be explicit in an organization’s day-to-day working, otherwise companies risk touting talking points at the expense of partnering with employees.

Robert Griggs’ company, Trinity, is a great example. From an initial modest investment in 1979, Robert saw a rate of return of 22%, almost three times that of the S&P 500 over the same period. Using a combination of open-book management and continuous improvement, the company has involved employees in decision-making for decades. They did not start with employee ownership: They only recently made the natural move to an ESOP, benefitting owners, employees, customers, and their community alike.

Fortune’s recent article goes on to profile Hyperion Materials & Technologies, which “granted all 2,000 of its employees ownership in 2019 alongside a robust internal employee engagement effort.” Profit margins increased by 57%. Ownership is great, but without effective employee involvement, it does not change long-term results.

Once employees understand the economics of the business, they can make autonomous decisions, with the organization becoming more agile, responsive, and profitable. This is what really makes employees feel and act like owners.

Southwest Airlines (SWA) has outperformed the rest of the industry for over 50 years and seems to run on fierce company pride. It’s clear where that pride comes from. As other airlines repeatedly go bankrupt, they continue to turn a profit. When downturns come, competitors lay off employees while Southwest retains its talent. Yet how they arrived at employee ownership behavior is instructive.

In 1990, the pilots agreed to an unprecedented 10-year union contract. In exchange for a five-year pay freeze, they were granted options to acquire up to 1.4 million shares of the company’s stock each year. Employees were not simply given equity–they purchased it. The stock soared.

Earning ownership, and actively participating in the running of the business, are essential to effective ownership for both employees and the company. This is where incremental performance and wealth gains come from. This came naturally at SWA–after all, it was a pilot who invented the fabled Southwest “quick turn.” Their “Plane Smart Business” Economic Engagement initiative with Orlando Pilots generated $2 million in fuel and productivity savings in six months. But this crucial relationship between involvement and ownership isn’t unique to Southwest, nor should it be.

Other examples of strong participation, responsibility, and ownership abound, including Feuerborn Engineering (their cumulative revenue went up 300% and profits up 400% cumulative in seven years, without no layoffs), Boardman Fabrication (after applying economic engagement principles, sales grew by 55% in the first year, and profits were more than the past three years combined across the entire company), and Adams Beasley Remodeling (sales doubled and profits grew even faster).

The benefits of a self-funded, well-working employee ownership program? Well, it just might be the answer to the economy’s current uphill battle. But what makes it work? It turns out it’s been there all along–the employee. Employees who understand, drive, and share in the wealth they create think like owners–and participate in the American dream. 

Christos A. Makridis is a professor, entrepreneur, and adviser. He serves as an adjunct fellow at the Manhattan Institute and holds Ph. D.s in economics and management science & engineering from Stanford University. Bill Fotsch is a business strategist and writer.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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