Trends in employee ownership in Eastern Europe

Abstract

Employee-owned companies are those where the broad group of employees owns the majority of shares. They have been widespread in the early transition process in Eastern Europe. This raises the question of why this type of ownership was so frequently used in some of the countries involved, and why there was a subsequent rapid transfer to manager ownership or outside ownership. This article gives a theoretical overview of the factors driving and hampering employee ownership, and develops hypotheses about how the transition process provided specific conditions for the development of these firms. The predictions are tested using the new members of the EU in Eastern Europe and the candidate country of Croatia as cases. There is no coherent panel data, but by categorizing specific trends in each country and then combining the different trend variables it is possible to identify the most important factors influencing employee ownership.

The article concludes that privatization was the main determinant for the initial spread of employee ownership. However, other factors undermined the sustainability of employee-owned firms. No institutions created a framework for employee ownership. The long and deep production crisis meant severe challenges for most companies and created a strong capital constraint for restructuring. The steeply falling and low level of wages and the paternalistic management in most countries meant that employees soon sold their shares. The evidence does not point to lower efficiency in employee-owned firms, but in most countries the institutions, the level of income and the goals of the workers were not conducive to this type of ownership. Earlier experience with workers' self-management is probably a main reason why employee ownership is more stable in Croatia and Slovenia and such experience may also have influenced the developments in Poland and Hungary. Elements of collective ownership with structures for employee stock ownership plans (ESOPs) and rules for entry and exit of employee owners have stabilized employee ownership in some countries.

Keywords:

• Eastern Europe
• employee ownership
• privatization
• transition

Notes

1. A strict definition would require that at least 50% of the employees own at least 50% of the firm (Kruse and Blasi 1997). However, very few datasets use such a precise definition. Therefore, a less restrictive definition is used here. In the present study, firms with substantial employee ownership are included, while partnerships where a small group of key employees own the firm are excluded, as are and firms where employees own only a small proportion of the shares. This is also the reason why the results of the PEPPER IV Report, based on the Cranet (2006) survey, which mainly deals with minority employee holdings, are not referred to.

2. According to North (1990): “Institutions are the humanly devised constraints that structure human interaction. They are made up of formal constraints (e.g. rules, laws, constitutions), informal constraints (e.g., norms of behaviour, conventions, self-imposed codes of conduct), and their enforcement characteristics” (p. 3).

3. In Eastern Europe, we also find ESOP-type organizations used for employee takeover, but contrary to the USA, these takeovers are connected to privatization and often with contributions from employees. Still, the collective element through the ownership by an employee-controlled fund means that it can be categorized under the ESOP label.