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Post-Privatisation Performance of Employee Buyouts Mike Wright Centre for Management Buy-out Research United Kingdom 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

Buy-outs • Transfer of ownership to a new legal entity where management & employees 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)

Buy-outs • Purchase - financial institution funding & monitoring • Give-Away - vouchers (plus 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

Extent of Buy-outs • Developed Economies – Most common in UK (271) – Germany, 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

Expected Effects • Developed economies – – – – Individual ownership incentive Close monitoring 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

Expected Effects • Transition economies – Purchase buy-outs • Similar incentives & control • 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

Longevity & Survival • Objectives of insider, financiers & market exigencies – Need for 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

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

Human Resource Factors • Higher levels of employee ownership in both developed & transition 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

Employment • Developed economies: – privatisation buy-outs followed by initial employment reductions then re-employment 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

Productivity & Restructuring • Impact on productivity depends on institutional context and policy • 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

Restructuring • Developed economies depends on context – Increased cost efficiencies, new products & 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

Longevity • Developed economies: – depends on industrial sector dynamics not buyout mode – 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

Conclusions • Build institutional arrangements inside MEBOs to increase employee involvement • Access to 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