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Turning workers into shareholders improves corporate performance, or so advocates of employee ownership maintain. Their logic is simple: Workers with a stake in their company's future are more likely to take a long-term view, which translates into higher productivity and other gains. But new research from the National Bureau of Economic Research casts doubt on those claims. In their April 2005 working paper, 'When Labor Has a Voice in Corporate Governance', Olubunmi Faleye, an assistant professor of finance and insurance at Northeastern University, and Vikas Mehrotra and Randall Morck, both members of the finance faculty at the University of Alberta, report that companies with significant levels of employee control systematically underperform - in large part because workers can hold management hostage to their short-term concerns. These findings are of more than academic interest in the United States, given current levels of employee ownership. How do such holdings affect corporate performance? To answer this question, the researchers analyzed a broad range of financial measures for over 2,100 companies from 1995 to 2001. At 226 of these companies (the 'labor voice' companies), employees owned and voted at least 5% of outstanding shares since 1990 or earlier; the remaining 1,888 companies reported labor stakes of less than 5% or none at all. (Excluded from the sample were 22 companies in which employees owned at least 5% but where management voted employees' shares.) The problem, the authors explain, stems from the incentives of employee shareholders. Their interest in the company's future is typically dwarfed by day-to-day concerns, such as ensuring that their jobs remain secure and their wages are paid. Consequently, they tend to favor low-risk strategies that generate stable cash flows over riskier projects that could generate greater profitability and growth. In addition, workers may shy away from productivity-enhancing investments in equipment or innovation with the potential to make their jobs obsolete. So, is employee ownership altogether a bad idea? No, says study co-author Randall Morck. Instead, he argues, these results suggest that 'employee ownership needs to be done in a different way'. The traditional approach - giving workers ordinary shares - has two effects. 'If the workers' financial state is tied to the share price, there's the incentive effect that people have traditionally talked about', he explains. 'But if they have voting control, there's a second effect that distorts corporate decisions to benefit workers at the expense of other shareholders'. The solution, Morck believes, lies in separating the two effects. By giving workers non-voting shares or shares that are held in a trust - or by designing other programs that allow them to participate in share-price gains - companies may be able to reap the benefits of employee ownership without paying the costs.