Members of Ohio's Employee-Owned Network report operational and economic performance strikingly better than non-members, according to data from The Real World of ESOPs, soon to be released by Cornell University Press. Comparison of Network members and nonmembers show the members of the Network are the most developed in terms of diffusing information, training their employees and encouraging employee participation on the shop floor and in the board room. And Network companies report the most improvement in company operations and performance since becoming an ESOP.

What accounts for the difference?

Employee involvement, open communication and training to understand business information, along with ownership, beats ownership alone every time.

Ohio's Employee-Owned Network is a multi-company learning community, which began in 1989. To address the unique challenges of ESOPs, member firms co-sponsor one to three days of educational programming every month for their employees. Most programs are devoted to the nuts and bolts of developing participatory employee ownership, ranging from business education to leadership skills. Programs are also a means for companies to share their best practices, and that has been a real motor for encouraging change. It isn't unusual to hear representatives from one company report that they were inspired to initiate change after hearing the experiences of another Network firm.

The concept for the Network developed from a CEO's suggestion that it would be very helpful for Ohio ESOPs to get together on a regular basis to share lessons learned. OEOC organized a follow-up session with representatives from 11 firms who decided to collaborate through joint sponsorship of training sessions and forums for information exchange. The Network firms still set the agenda. The newest thing they are talking about is forming small groups with similar characteristics for mutual mentoring, to focus intensely on specific common problems they identify themselves.

About 75% of the funds to cover Network expenses are obtained through member dues, non-member fees, and program registration fees. The remainder is underwritten by the Ohio Department of Development's Office of Labor-Management Cooperation.

Gaining Perspective
Probably the most important benefit companies reap from the Network is the opportunity to exchange and evaluate information and ideas. Network events are a place to pose questions, gather information, gain a peer perspective on challenging issues, and learn how other companies solve problems. The monthly programs provide opportunities for people to compare their firm's experiences and results with other firms, and to inspire and challenge each other.

"Through the Network we have built helpful company-to-company relationships," says Skip Carter of The Mosser Group. "For example, a few years back we were exploring the costs and benefits of converting to a sub-S, so we talked to companies that were also exploring this decision as well as others that were already sub-S. We asked candid questions and got truthful answers which enabled us to make the best choice for our corporation. We became an S-Corp on 1/1/98. Without the open communication with other ESOP firms, the decision would not have come so easy."

Training at Network Meetings
Network membership offers employee education and training at a fraction of the cost of in-house training, and, by bringing together employees from different companies, adds the networking advantages of attending a conference. The annual program of training is set by the members, working with Network coordinator Karen Thomas of the OEOC. The first forums on ESOP communication and participation were launched in the fall of 1989, along with a series of Board Training sessions for non-managerial directors. Today Network firms jointly co-sponsor education sessions to teach owner education, skills for employee involvement, and basic fiduciary and financial knowledge needed by employee-owners.

The Network's Employee-Owner Retreat attracts people from a variety of ESOP firms. Participants say the annual Retreat helps them understand the ESOP and better understand what an ESOP company is about financially. Various interactive learning exercises get everyone involved in promoting teamwork to learn how to run effective meetings and make decisions.

The long-term impact of Network membership is that members are considerably more likely to use a variety of communication methods, training approaches and participatory techniques to involve most employees in the management and governance of their firms.

Over ninety percent of Network members reported increased employee interest in decision-making after the ESOP was established, compared to less than 50% of non-member firms. Almost three quarters (73%) of Network members reported that they had increased the amount of employee input into production after their ESOP was adopted, compared to about one-third of non-members. Sixty-five percent of Network members reported that they provide financial information to their employees, compared to forty-five percent of companies that were not members. Almost half of the Network members elected non-managerial employees to the Board of Directors, compared to just 6% of nonmembers.

How the Network Makes an Impact
Talking to representatives of Network member companies reveals the process behind the distinctive practices of Network members. "The financial training is excellent; we learned what other folks are doing to share financial information inside their companies," says Sheila Henderson of YSI. "For those like me in a leadership role, we need to learn more about the financial side of the business so we can talk with employee-owners about the financials and put together a financial presentation."

"Through the Network we are able to communicate with and interact with other ESOP companies about how their employees are actively involved and participate as owners. This has helped our employees to understand that they are owners, even though they do not run our company day-to-day," observes Skip Carter.

"I was very surprised to learn how different ESOP companies can be and the amount of involvement employees have in different ESOPs," added Mary Finke, of Power Transmission Technology. "Some ESOPs are completely handled by employees. I enjoy the HR Roundtable and the pre-conference sessions because I come away with new insights on HR issues, the challenges of communication, and ideas for employee involvement."

The Network isn't just for new ESOPs. Mature ESOP firms are finding that they need peers to discuss emerging issues. For example, YSI established its ESOP seventeen years ago, yet Sheila Henderson remarks, "The Network should continue doing what it's doing to bring folks together, like our program at YSI last September…Hearing about the success of others reminds us of our success and spurs us on to share and help other companies. The Network is a conduit for other companies to share."

"In the future the Network will inspire companies to come together as peer groups meeting on a regular basis to share ideas, successes and failures with each other for the benefit of the group, sponsoring fewer programs but in optimum locations to learn from and communicate with other ESOPs," predicts Skip Carter.

Better Operations, Better Returns
How have the Network members performed in comparison to non-Network ESOPs?

On a summary measure of the qualitative impact of the ESOP, which included items that are hard to measure, like job satisfaction, manager-worker communications, working conditions, motivation, employee participation and employee attitudes, almost four-fifths (79%) of Network members reported that there had been a considerable (some or strong) positive impact. This compares to just over half (51%) of the non-members.

On a summary measure of the quantitative impact of the ESOP which included performance that is easier to measure, like absenteeism, on-the-job performance, employee turnover, product quality, productivity, customer service, profitability and production costs, two-thirds of Network members report a considerable impact, compared to under half (46%) of the non-members. Reporting on changes in profitability relative to their industry, forty-six percent of Network members reported that their profit position in the industry was better, compared to just twenty percent of nonmembers.

As can be seen in the figure on this page, Network members outscore nonmembers on every measure. Over three years, 1989-1991, the largest percent of companies reporting large gains in stock value were Network members. Fifty-nine percent reported gains over 10%, and twenty-nine percent reported gains over 57% for the three year period. This compares to forty-seven percent of the non-members with gains over 10% and fifteen percent with gains over 57%.

In annualized account value, the Network members are slightly lower than nonmember firms per participant, because a high proportion of the Network member firms were in distress before their ESOP was formed. Twenty-one percent reported using their ESOP to avoid shutdown or job loss, compared to just one percent of non-members. Seventy-seven percent of Network members were leveraged at the time of the study, compared to fifty-two percent of nonmember firms.

In many ways, Network companies are close to being a cross section of all Ohio ESOPs. They tend to be just a little smaller, a little younger, and a little more often in the manufacturing and wholesaling sectors. There are few publicly traded companies in the Network.

Are companies that join the Network just more interested in change and more ready to improve their management methods than other companies?

If the Network member companies were more interested in organizational development, there was slight evidence for it in their practices before they established their ESOP. The dramatic differences between Network members and non-members developed after the ESOP was created.

How the Network helps
So, how is it that the Network helps?

The answer to this question isn't simple, and it probably isn't the same for every member. "You get out of the Network what you put into it," said Skip Carter, founder of the ESOP at The Mosser Group. "Discussing related problems and issues with folks from other companies at the Network programs has helped The Mosser Group grow immensely.

"Through participation at technical programs, such as the Advanced ESOP Issues workshop, we met the firm we now employ as our legal counsel; discussions with other Network firms helped us choose a third party administrator. Talking with other firms has helped us share more wealth with our employees."

"The annual conferences are particularly helpful, and so is the Company Showcase. Typically it is a member firm's sales and management people who are making presentations and manning the company's booth, but [at the Showcase] it's the manufacturing folks who actually make the products. I have heard some extremely inspiring stories, like the folks at SQP," remarks Sheila Henderson

What are the lessons of research and the stories behind it?

Employee ownership alone is not enough. Companies must mobilize the power of ownership through training, information and participation.

Peer learning and support works. Organizational development is easier when you can see how others do it and share your problems with more experienced peers.

And the role of fiduciaries? "The performance difference between Network members and nonmembers is so striking that it would almost be irresponsible for a fiduciary not to advocate additional training for nonmanagerial employees, more information sharing and broader employee involvement on the shop floor and in the board room. And all of those things are easier to accomplish as a member of a network than on your own," says OEOC Director John Logue.