Employee-owned businesses perform better
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The topic of management ethics has reared its head once again with the Volkswagen emissions scandal. In truth, it’s a subject that has rarely been far from the headlines since the global financial crisis, as dismal stories of mis-selling and rate fixing have continued to emerge. And the financial sector has been far from unique: in the UK alone, the horse meat scandal, accounting problems at Tesco, and public service failures at the Mid-Staffordshire NHS Trust are still fresh in the mind.
But are management ethics and culture regularly discussed when strategic business decisions are being made? Such scandals are deeply corrosive of public and customer trust and, thanks to 24/7 news and social media, hard-earned reputations can be lost overnight. Ethical failures have the power to destroy the best-laid plans.
CMI’s research with MoralDNA shows that ethics should be higher on the management agenda. The results have been striking. Managers are more likely than other employees to leave their sense of ethics at home, suppressing the ethic of care in favour of obedience to rules. Many risk ‘robotic compliance’ – obeying the letter rather than the spirit of rules, which results in worse decision-making. The outcome can be the gaming and manipulation of rules, often driven by short-term performance targets and incentives.
Employers have to empower employees – including managers – to take responsibility for their decisions. They need to build a shared understanding of the organization’s values, with senior managers leading by example. And they need to reward behaviour that reflects those values.
Our latest report highlights a group of businesses with an impressive track record: employee-owned companies. Worth £30 billion to the UK economy, the employee – owned sector has been a real success story, improving productivity by 4.5% while it has flatlined across the economy as a whole, and growing sales by 11% through the recession, compared to just 0.6% for other forms of businesses.
Our research points to some of the reasons. Only 10% of managers in employee-owned companies report that the dominant leadership style is command-and-control or pacesetting/demanding – compared to 42% across other types of organizations. More than double the number (36% versus 15%) describe their organization as democratic.
Among the many benefits identified, 95% agree that being employee-owned increases people’s commitment to the organization, and 91% agree that it ultimately improves performance. There’s undoubtedly an opportunity to increase the number of employee-owned businesses. Accounting firm Grant Thornton is one of the most high-profile companies moving in this direction, and is taking bold steps to reshape its culture, such as building the company’s purpose into its constitution and limiting executive pay as a ratio of the company average.
There are also lessons for leaders in other sectors, whatever the form of ownership.
Increase employees’ sense of ownership by giving them control over their work. Build more democratic management cultures by encouraging constructive criticism and challenge, helping to avoid groupthink. Reinforce that by increasing the diversity of management teams. Invest in managers’ development so they have the confidence and capacity to do the right thing. And recognize and reward values-based behaviour, not just narrowly defined measures of success.
Patrick Woodman is head of external affairs at the Chartered Management Institute