Post-Privatisation Performance of Employee Buyouts

1. Post-Privatisation Performance of Employee Buyouts Mike Wright Centre for Management Buy-out Research United Kingdom Conference on Privatisation, Emloyment and Employees Istanbul, October 10-11, 2002

2. Buy-outs • Transfer of ownership to a new legal entity where management & employees are significant direct shareholders • Forms: • Narrow (MBO) or broad insiders (MEBO, EBO) • Outsiders (MBI) • Insiders & outsiders (Voucher buy-out; BIMBO)

3. Buy-outs • Purchase - financial institution funding & monitoring • Give-Away - vouchers (plus some cash) • Lease of assets with option to buy • Employee shares: • Direct purchase • ESOP

4. Extent of Buy-outs • Developed Economies • Most common in UK (271) • Germany, France, Austria • Transition Economies (Large Privatisations) • Primary privatisation method in 9/22 countries • Secondary method in 4/22 • widespread for smaller enterprises • Emerging Economies • Zambia & Sub-Saharan Africa

5. Expected Effects • Developed economies • Individual ownership incentive • Close monitoring by financing institutions • Commitment to servicing external finance • Performance-contingent rewards • Importance for non-routine tasks • Employees must ‘feel’ like owners • Minimise opportunism, enable entrepreneurial opportunities

6. Expected Effects • Transition economies • Purchase buy-outs • Similar incentives & control • Weakened by undeveloped financial system • Lack of monitoring skills & hard budgets • Voucher buy-outs • Absence of pressures to service finance • Restructuring depends on motivation to hold shares • Insurance & entrenchment • Assets - sell to realise gain, obtain outside funds and introduce pressure to restructure • Employees sell if need cash & have little influence

7. Longevity & Survival • Objectives of insider, financiers & market exigencies • Need for finance for further growth • Industry restructuring & privatisation • Need to seek strategic partners • Employees: • ESOPs may reduce scope for enterprise to be sold over heads of employees • Employees seek to realise significant gains • In transition management entrenchment may mean reduction in employee ownership

8. Attitudes to Ownership & Involvement • Most privatisation buy-outs are MEBOs dominated by management • Employees: • little participation in decision-making • limited perceptions of ownership

9. Human Resource Factors • Higher levels of employee ownership in both developed & transition economies more likely to be associated with: • greater employee oriented human resource management strategies, such as greater communication, annual appraisals, & higher levels of bonuses • In transition economies, generally no significant association between employee ownership & insider wages

10. Employment • Developed economies: • privatisation buy-outs followed by initial employment reductions then re-employment • employment reduction lower in MEBOs • Transition economies: • employee ownership does not restrict reduction of employment • on balance greater employment falls in MEBOs than in SOEs but less than in OOs

11. Productivity & Restructuring • Impact on productivity depends on institutional context and policy • Employee ownership may be more effective than other forms in some cases • Most studies show positive effect but those finding negative effect more robust techniques (selection bias problem) • MO more positive than EO • Restructuring greater where insiders have purchased shares rather than acquired for free

12. Restructuring • Developed economies depends on context • Increased cost efficiencies, new products & restructuring in UK; flexible decisionmaking in Austria • Transition economies • Employee-dominated firms less management turnover • Mixed findings on product & input restructuring • Insider ownership associated with domestic product strategies that restrict exports; outsider board presence important positive effect • Asset sales and renovations greater in purchase buyouts than give-aways

13. Longevity • Developed economies: • depends on industrial sector dynamics not buyout mode • high level of structural change => short life-cycle of buy-outs • Transition economies: • employee ownership reducing as managers/outsiders purchase employee shares • mixed evidence of reduction importance of employees as dominant shareholders, but dominant managers increasing • changes greatest in voucher buyouts, least in lease buyouts

14. Conclusions • Build institutional arrangements inside MEBOs to increase employee involvement • Access to finance • Greater financial constraints on voucher buyouts and purchase buyouts than OO firms • Mode of sale • More restructuring in purchase than give-away buyouts • Longevity of MEBOs highly dependent on: • Industrial sector • Management influence on share transferability • Influence of objectives of employee ownership