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Post-Privatisation Performance of Employee Buyouts

This paper discusses the performance and outcomes of employee buyouts after privatisation. It explores different forms of buyouts, the extent of buyouts in various economies, expected effects on ownership and involvement, human resource factors, employment, productivity, restructuring, and longevity of buyouts.

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Post-Privatisation Performance of Employee Buyouts

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  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

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