OPINION | Stockpickers looking for small listed companies with an edge would do well to consider those that have a robust employee-ownership scheme in place.
Employee share schemes are an accepted strategy for retaining good employees, recruiting higher quality candidates and providing compensation in a way that is easy on cash flow. Recent research confirms how high levels of employee-ownership are not just good for the employees, but for shareholders generally.
The Employee Ownership Australia (EOA) Index, released in February 2017, shows companies with a strong employee ownership culture command a significant share price premium over their publicly listed peers.
The EOA Index takes the share price of locally listed companies with high levels of employee ownership (EO) and tracks it against the performance of the S&P/ASX 200. To be included in the EOA Index, a company needs a share scheme available to 100 per cent of its employees, with a participation rate of at least 30 per cent. This sets the bar high and is a good indication of a company’s commitment to employee ownership and engagement.
Since June 2011, the share price of the EOA Index companies has risen by rose by a weighted average of 40 per cent; in contrast, the broader ASX 200 Index has risen by just 23 per cent. This means they have delivered nearly twice as great a share price return to their shareholders as the companies in the ASX 200 Index as a whole.
The share-price outperformance has been consistent every quarter of the last five years, regardless of economic shocks such as the slowing of the Chinese economy, the European debt crisis, falling commodity prices and global sharemarket turbulence.
The EOA Index outperforms in more areas
The share price is just one performance measure where employee-owned companies outperform. Research by CAER shows a strong link between companies with a robust employee-ownership culture and high environmental, social and governance (ESG) standards.
Companies in the EOA Index are twice as likely to show clear evidence of equal opportunity systems and they outperform the ASX 200 in 3 out of 5 social sustainability factors, as well as in elements such as job security, health and safety, and training and development practices.
This combination of superior share price and better social and equal opportunity standards should form a compelling case for investors. It should be of particular interest to institutional asset owners, such as superannuation funds, and fund managers that incorporate ESG considerations into their investment decisions.
So how does employee-ownership help increase the value of a company and lift its share price?
Why employee ownership creates an edge
First, employee ownership improves profitability. Study after study confirms that companies that implement broad-based and extensive employee ownership schemes improve their performance as a result, and outperform companies that are similar but have no employee ownership. Employees look for ways to raise their performance when they are involved in the business and share the rewards.
Second, it makes it easier for management to make hard but necessary decisions and to raise productivity. When the employees share a fundamental concern for the performance and success of their company, it’s easier and quicker to implement decisions and to get them to do what needs to be done.
When everyone in the business shares a strong interest in achieving financial success, people focus more on business priorities and work more co-operatively and productively. The culture within these companies is one where people can trust and rely on one another.
Finally, employee ownership has the twin benefits of making a company more attractive to talented candidates and reducing the prospect of its best employees being headhunted by rival firms. This is critical for companies squeezed for cash; employee ownership allows management to offer equity interests to find and hire individuals with the talent and experience the company needs.
While there are many factors an investor needs to consider when evaluating a company, the presence of a broad-based employee-ownership scheme should be one of them. Investors can take comfort in knowing the company they own is run by employees who share the same objectives and are motivated to share the benefits of making the company a success.
Angela Perry is chair of Employee Ownership Australia and New Zealand. She is a qualified English barrister and Australian solicitor with more than 18 years of consulting experience in equity plan design and executive compensation practice. Perry is a member of the Prime Minister’s Community and Business Partnership.