Post-Privatisation Performance of Employee Buyouts

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 gt 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