South African companies can create shared value through employee ownership

By Bruce Hunt & Lyal White

Published in the Daily Maverick: Employee share ownership plans have been underused as a strategy to galvanise economic growth in South Africa. They can be a mechanism to drive inclusive economic growth while broadening the reach and impact of black-based economic empowerment programs.

Employee share ownership plans (ESOPs) have traditionally been seen as compliance and empowerment requirements in South Africa. But recent developments both locally and abroad, especially in low-growth markets, suggest this could be a creative approach to lasting shared value.

ESOPs driving strategic inclusivity can be designed to re-mine areas of growth in economically dormant markets like South Africa. An important starting point is to frame this as an imperative for growth and business model innovation.

Shared value is a strategic concept coined by Harvard Business School scholars Mark Kramer and Michael Porter, more than a decade ago. In essence, it looks at doing business differently.

Beyond the so-called “business of business”, shared value considers the pain points in society and addresses its most pressing developmental needs while building sustainable and profitable businesses.

It is a fundamental part of a competitive strategy and can be distinguished from corporate social investment, corporate social responsibility, and other philanthropic initiatives through its direct relevance to the core business and sustainable strategy of an organisation.

This is driven by a motive or purpose to provide lasting value and social dividends, and not to merely meet shareholder profits or, in this case, compliance requirements.

Read more: The GNU can drive new growth and value through transformative employee ownership

Going beyond compliance

Employee share ownership has been underused as a strategy to galvanise economic growth in South Africa. In moving away from an exclusive focus on compliance, which doesn’t necessarily build the competitiveness needed for long-term sustainability, ESOPs can be a mechanism to drive inclusive economic growth within the South African context, while broadening the reach and impact of black-based economic empowerment programs.

In South Africa, ESOPs have traditionally been built into compliance with transformation legislation. Efforts to build greater economic inclusivity and transformation have been encouraged by President Cyril Ramaphosa and reiterated by the Department of Trade, Industry and Competition (DTIC) insisting that “worker share ownership programs can contribute to addressing income inequality and the deficit of social justice in modern economies.”

The DTIC estimates that roughly 125 Esops have been completed in South Africa, totaling more than 550,000 beneficiaries. This number is significantly understated and excludes private market and multinational ESOPs.

In a country defined by the inequality of opportunity, and not just income inequality, this number must increase in the interest of correcting the skewed nature of wealth and income in South Africa while building competitiveness and new opportunities in a relatively mature economy.

The purpose of business

Creating shared value through ESOPs also speaks to corporate culture and the broader purpose of business. It is increasingly important to broaden the rationale behind such programs towards a mindset of sustainable growth and good business.

The underlying motivation for ESOPs is clear: improving corporate performance, aligning interests between employees and employers, fostering a sense of ownership and engagement, and distributing wealth more equitably.

There is empirical evidence that supports the commercial imperatives of ESOPs. Globally, companies with Esops consistently outperform those without similar programs. According to Forbes.com, “employee owners possess a dedication toward their jobs and are more accountable for their and their fellow workers’ job performance than employees at non-ESOPs. ESOPs also tend to be more active in helping their local communities.”

ESOPs are also strongly aligned with the strategic imperatives around higher environmental, social, and governance (ESG) standards, an area that is now firmly entrenched in the corporate mainstream across Europe and the US and is gaining traction around the world as companies seek capital and opportunities in alternative markets.

While ESOPs in South Africa sit firmly in the “G” of ESG strategies, internationally they are part of the “S” and “E”. With a deeper shared value orientation, the growing social and environmental imperatives will comprise a significant part of ESOPs. This is especially relevant in the plans designed for some of the large mining houses.

Beyond the broad generalisation often associated with ESGs, some of the specific benefits of Esops include:

• Improved performance, competitiveness, and innovation through a greater sense of ownership, accountability, and aligning interests;
• Attracting and retaining the right talent;
• A better distribution of wealth and an overall improvement in well-being; and
• ESOPs contribute directly toward building a culture of cohesion through a more engaged and motivated workforce with a common purpose.

While the implementation of ESOPs may be complex, the structure must be kept simple and easily understood across the board. With such broader schemes, longer-term thinking is required, with constant emphasis on shared growth.

Managing expectations and clear communication are key. This instills a strategic mindset across the organisation, well-imbued with inclusivity, hence the cultural underpinning. ESOPs are a pivotal part of the purpose playbook.

By offering a share in the performance of the company, an ESOP aligns with a shared value model, and the employees have a direct impact on the stakeholders both within and outside of the organisation. This is a constructive approach toward the inextricable link between profits and purpose.

At the national level, ESOPs create the opportunity for economic growth, reduction of inequality, and the alleviation of poverty. While employee share ownership allows employees to have dignity and to share in the profit and prosperity of the company they work for, they contribute directly to a more prosperous and progressively competitive South Africa.

About the Authors

Prof Lyal White at The Gordon Institute of Business (GIBS); Bruce Hunt is managing director of Transcend Capital.

For more information on the ESOP Playbook program running at the Gordon Institute of Business Science (GIBS) please visit The Esop Playbook for South Africa.