How Empathic Leadership and Employee Ownership Can Change Work for the Better
Written by Pete Stavros
My Dad was a construction worker who paved roads for a living for 45 years. He was a member of a union and, despite fundamentally enjoying his work, he had a stereotypically negative relationship with his employer. My Dad earned a meager hourly wage and had no opportunity to build wealth or share in the value he helped to create. Management wouldn’t listen to his ideas or take any input from the front-line employees, even though they were closest to the work. And my Dad had no incentive, no reason to care. In fact, as an hourly wage earner, if his productivity was too high his hours could go down and his paycheck would follow.
As an investor, I see many of these issues reflected in the broader economy today. And they’ve only gotten worse. Most workers have no financial wealth. The size of the wealth gap is well understood and frequently discussed. What is less well understood is the root cause of the problem. The critical factor, dividing those who have wealth and those who don’t, is ownership, or more accurately the lack of it. Yes, home ownership is a driver of the wealth gap, but the ownership of stocks is a far greater factor. According to Federal Reserve data on household wealth, the value of stock assets owned by the top 10% sits at around $35 trillion, whereas the bottom 50% have stock assets worth only $400 billion. That is a staggering gulf, and it is continually compounding because stocks tend to increase at +/- 10% over long periods of time.
The problems go well beyond the inability of workers to generate wealth for themselves. Without the right incentives in place, many employers don’t see a reason to listen to their employees. Workers have no voice or input in their daily work. And most employees are unhappy. According to Gallup surveys, 70% of global employees are disengaged on the job. In my experience, the scores get worse the deeper you go into an organisation, so front-line workers are typically the most disaffected.
Finally, consider financial literacy. In America, government statistics indicate that over 60% of the population is financially illiterate. Without any assets to speak of, what motivation exists to engage on topics related to personal finance?
Taken together, this all leads to an economy where few participate in upward mobility, and scores of workers quit their jobs each year in search of a better situation. In the U.S. the so-called “quit rate” peaked at 40% recently. Just think about that for a moment – if 4 in 10 people quit their jobs every year that means the average company is re-hiring its entire workforce every 2.5 years. That’s bad for workers who aren’t staying on the job long enough to build skills and progress their careers, and it’s bad for companies who are spending all their time re-hiring and re-training employees. That type of structural waste in the economy is also bad for aggregate productivity.
While certainly not a cure-all, broad-based employee ownership – where a company grants ownership to all employees – is a grain of hope. Stock ownership gives workers a chance to get ahead financially. It aligns incentives and gives everyone a stake in the outcome. And just as stock is retentive for senior managers, so it is for workers – it gives everyone a reason to stick around. When done well, leadership can leverage this common incentive into an “ownership culture”, where employees are kept informed and where they understand how they can contribute to a stronger workplace. It also creates an incentive for workers to engage on personal financial literacy. With stock ownership as an asset, there is a counterbalance to poor credit scores and debt.
It sounds like such a simple and elegant idea, so why doesn’t every company share ownership with workers? Because it’s hard and it takes years for the benefits to show up. For broad-based employee ownership to be effective, it must be paired with a robust employee engagement program. Information must be shared transparently, and workers need to be given a voice. When employees are made owners of a business, their expectations of the company go up – they should understand the business plan, and they should be kept informed about where the company is headed and how they can help. All of which requires considerable education. You see, ownership is an ethos. It’s about much more than just handing out stock.
I wish I could tell you that we had this all figured out. That every time we share ownership with workers, it acts like magic dust; everyone is immediately happy, the quit rate drops, and the engagement scores skyrocket. Unfortunately, that is not what happens. The initial reaction is one of disbelief or, at a minimum, a lack of understanding. There is often no trust between management and worker so, culturally, we’re usually starting in the basement. Despite our best intentions, sometimes the culture doesn’t change.
Which leads to two questions I often get asked: “Where does this work best? Which type of companies are well-suited to this model?” Certainly, there are some characteristics of a business that make it easier or harder to deploy broad-based ownership. For example, if the “quit rate” is completely out of control (e.g., some retailers have 100% annual turnover of the workforce), it’s difficult to start talking about 5-year business plans and get any engagement. It’s also harder when companies are distributed across many facilities and countries. That makes the logistics more challenging and, typically, companies are less internally “connected” to begin with.
However, I’ve learned that success often has less to do with the specific characteristics of a business and more to do with one thing above all else – leadership. With great leadership you can move mountains. And without it this program is very difficult to make effective.
Which leads to the next question I often get asked: “What type of a leader does best with this model?” Here, I’m very much still learning and can only offer anecdotal evidence and an initial hypothesis. I’ve been blessed to observe dozens of CEOs implement broad-based ownership programs. I’ve been able to see when it’s gone swimmingly and when it’s gone less well. With the caveat that this is anecdotal evidence at this point, here’s what I’ve observed about leaders who have done an exceedingly good job creating an “ownership culture” and making all employees feel included as true colleagues:
1. Empathy: Leaders who genuinely care about improving the lives of employees do well with this model. I put genuinely in italics because you aren’t going to fool front-line workers whether you care about them or not. These empathic CEOs do not come to the ownership program with an eye on how to get more out of their workforce. Rather, they are drawn to and excited about the opportunity to lift up the least well-off among their colleagues. But, ironically, they end up getting more engagement and productivity even though it was never their primary intention.
2. Responsibility: Great corporate leaders look at the problems of society and say “I can’t solve all the world’s problems, but I can make a difference for my employees – and I have a responsibility to do just that”. They aren’t waiting for the government to come and fix the labor market. They are going to take action themselves as it relates to things like the lack of wealth for their workers, low levels of employee engagement, a lack of financial literacy, etc. And they view stock ownership as a key tool to help them accomplish their goals.
3. Belief: To make progress on these dimensions is a daunting task and it takes a leader with tremendous inner confidence to take it all on. You need a leader who says: “If I put my shoulder into this, I know we can do it”. Without that belief and determination, it simply won’t work.
What do these traits look like in action? It’s a CEO who begins her board meetings and all of her operating reviews with discussions about worker safety, employee engagement and worker turnover – with financial results coming later, almost as a consequence of whether her colleagues are thriving. It’s a CEO who is moved to tears when simply recounting the story of when they announced their broad-based ownership program - because he could see the impact – and employees felt included, trusted and respected. It’s a CEO who literally shuts down the entire manufacturing plant any time a worker suffers even a minor injury on the job. It’s a CEO who defines his company’s purpose as “being the light” in the lives of his employees and his customers, and then acting on it every day in ways both big and small. It is these CEOs who create true “ownership cultures” that deliver unbelievably great outcomes not just for workers but for investors too.
Broad-based employee ownership presents an opportunity for that rare “win-win” in business. Workers can be happier and more fulfilled. We’ve seen employee engagement scores increase from the 20th percentile to the 90th and quit rates go down 90%, as they did at Gardner Denver. Workers can also benefit from the tremendous wealth-creation potential afforded by ownership. We’ve witnessed front-line workers at companies like RB Media, Minnesota Rubber & Plastics and CHI Overhead Doors make multiples of their annual salary through ownership. And, as noted, investors can benefit too. It’s still early and we need more data but, so far, these broad-based ownership programs have delivered some of our very best financial returns.
My Dad’s dream was employee ownership at his construction company. He figured it would be the perfect way to get his union and its members aligned with his employer. With everyone “rowing in the same direction”, it would logically be better for everyone, including the customer. Although his dream was never fulfilled at his company, he’s excited to see where this current movement might lead. As he told me recently “Peter, I’m only 85 – we’ve still got time!”
Pete Stavros
Pete Stavros is Co-Head of Global Private Equity at KKR. His role includes oversight across the business in Europe, Asia and the Americas and covers traditional large and mid-cap private equity, impact, core and growth equity. Prior to this role, Stavros served as Co-Head of the firm's Americas Private Equity platform. He is a member of several investment and management committees at KKR and has also served as Co-Chair of the firm’s global Inclusion and Diversity Council.