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ORP24 - Employee share ownership and financial awareness - Some Further Evidence
Peel and Pendlebury 1999
Executive summary
The potential benefits of employee share ownership do, on the face of it, seem fairly obvious. The alignment of employees‘ interests with those of shareholders should lead to enhanced employee loyalty, motivation and commitment resulting in a sustained improvement in company performance. Employee share ownership might also be expected to lead to a better informed workforce who take a close interest in the performance of their employer and who also become more adept at understanding financial and accounting terms and practices. Successive governments certainly appear to have had a firm belief in these benefits, which is evidenced by the generous tax concessions granted to employee sharing schemes over the past 20 years or so. During this period a number of Finance Acts have introduced tax relief for approved employee share ownership schemes and in addition the privatisation programme, which began in the early 1980s, provided many opportunities for employee share ownership, with employees often being permitted to acquire shares on favourable terms.
In reality, the extent to which any of these benefits has been realised is far from clear and from the studies that have been undertaken to date it is difficult to find a conclusive link between employee share ownership and improvements in company performance or employee loyalty, motivation, commitment and financial awareness. The present study concentrates on just one of these potential benefits of employee share ownership – that of financial awareness, and is based on a longitudinal survey of employees in a privatised utility company. The first survey was undertaken in 1989 when the company was still in state ownership. The follow up survey was undertaken in 1995, by which time the company had been privatised for almost five years. The privatisation in 1990 meant that employees could become shareholders but it also meant that the company had begun to experience a significantly more competitive environment. Our assessment of financial awareness was based on responses to a ‘financial quiz’ and to questions on employee attitudes towards their company and on their perceptions of the usefulness and understandibility of financial information about their company.
The results from our 1995 survey reveal that although membership of the company’s SAYE share ownership scheme did result in a higher performance in the ‘finance quiz’, the typical employee, whether or not in the share ownership scheme, could not correctly identify the company’s share price on the preceding day, nor the company’s most recent annual sales and profit figures. This a surprising finding and contradicts the view that employee share ownership will lead to employees identifying more closely with their company’s financial performance.
There was also no evidence that employee share ownership had led to the 1995 sample of employees being more financially aware than employees who took part in the 1989 survey, as gauged by performance in the ‘finance quiz’. The 1995 sample of employees did, however, consult a variety of information sources (both financial and non-financial) about their company to a greater extent than their 1989 counterparts. Even so, there was no evidence of a greater level of understanding of this information.
The overall conclusion that can be drawn from this study is that the opportunity for employee share ownership that privatisation provided has not led to an increase in the financial awareness of employees and has not led to employees taking a closer and better informed interest in the performance of their company. Although this study has concentrated on the impact of employee share ownership on financial awareness, the results must also throw serious doubts on whether the other hoped for benefits of improved loyalty, motivation, and profitability will materialise, and must bring into question the effectiveness of a policy that has cost the government a significant amount of taxation revenue over the years.