Firm Democracy and Performance

Masaryk University

Faculty of Study: Economics and Administration

Business Management

FIRM DEMOCRACY AND PERFORMANCE

Master’s Thesis

Thesis Supervisor: Author:

Ing. Ondřej ČÁSTEK, Ph.D. Shota DZNELADZE

Brno, 2019

MASARYK UNIVERSITY Faculty of Economics and Administration

MASTER’S THESIS DESCRIPTION

Academic year: 2018/2019

Student: Shota Dzneladze

Field of Study: Business Management (Eng.)

Title of the thesis/dissertation: Firm democracy and performance

Title of the thesis in English: Firm democracy and performance

Thesis objective, procedure and methods used: Goal: The thesis aims to research the adoption of Firm Democracy by a chosen company Description: Author will compare traditional and modern organization structures, which use so-called firm democracy. The author will choose aspects, in which these two differentiate (e.g., motivation, decision-making, leadership, formalization), will analyze, how can be the firm democracy defined, and will examine the effect of specific aspects of firm democracy on firm performance in a chosen company.

Extent of graphics-related work: According to thesis supervisor’s instructions

Extent of thesis without supplements: 60 – 80 pages

Literature: BERNSTEIN, Ethan, John BUNCH and Niko CANNER. Beyond the holacracy hype. Harvard Business Review, Boston: Harvard Business School Press, 2016, roč. 94, 7/8, s. 38-49. ISSN 0017-8012. CARNEY, Brian M and Isaac GETZ. Freedom, Inc.: How Corporate Liberation Unleashes Employee Potential and Business Performance. , Argo-Navis, 2016. SAGIE, Abraham and Meni KOSLOWSKY. Participation and empowerment in organizations: Modeling, effectiveness, and applicati- ons. , Sage Publications, 1999. PAUSCH, Markus. Workplace democracy: From a democratic ideal to a managerial tool and back. The Innovation Journal, 2014, roč. 19, č. 1, s. 1-26. FOLEY, Janice R and Michael POLANYI. Workplace democracy: Why bother?. Economic and Industrial Democracy, 2006, roč. 27, č. 1, s. 173-191.

Thesis supervisor: Ing. Ondřej Částek, Ph.D.

Thesis supervisor’s department: Department of Corporate Economy

Page 1 of 2 Thesis assignment date: 2018/04/05

The deadline for the submission of Master’s thesis and uploading it into IS can be found in the academic year calendar.

In Brno, date: 2019/05/13

Page 2 of 2 Author’s Name: Shota Dzneladze

Thesis Title: Firm Democracy and performance

Department: Department of Corporate Economy

Thesis Supervisor Ing. Ondřej Částek, Ph.D.

Year: 2019

ABSTRACT Although the subject of the approach to firm management has been the focus of debates over the decades, no consensus has been reached on the most appropriate management approach. One of the management approaches that has been increasingly implemented by firms is the democratic management approach. The objective of this thesis was to determine the relationship between firm democracy and firm performance of a software firm in the Czech Republic. The study data was collected using questionnaires. The study first evaluated the principles of firm justice that were in use in the organisation. The policies included meaning and vision, dialogue and listening fair play and honour, transparency, responsibility, involvement, co-decision, integrity, decentralisation, and reflection and assessment. The study then investigated the effect of these principles which were used to indicate firm democracy on the performance of the firm. The thesis established that the firm implemented the principles of firm democracy in it’s the day- to-day operations. However, the dimensions implemented had variations to those stipulated in the theories. The study established that the use of a firm democracy management approach had a positive and statistically significant effect on firm performance.

Keywords:

Firm Democracy, Performance, Holocracy, Workers Cooperatives, Sociocracy, Performance,

Management

Author’s Declaration

„I certify that I have written the Master’s Thesis FIRM DEMOCRACY AND PERFORMANCE by myself under the supervision of Ing. Ondřej Částek, Ph.D. and I have listed all the literary and other specialist sources in accordance with legal regulations, Masaryk University internal regulations, and the internal procedural deeds of Masaryk University and the Faculty of Economics and Administration.“

Brno,

Author’s signature

Acknowledgement I extended my sincerest thanks and gratitude to my thesis supervisor Ing. Ondřej Částek, Ph.D. I would like to thank him for agreeing to read numerous drafts of my study and offering suggestions on how to make it better. I would like to offer thanks to my classmates for their support and suggestions. I would also like to thank my family for their support and encouragement.

Table of Contents

INTRODUCTION ...... 10 1 LITERATURE REVIEW ...... 12 1.1 Firm Democracy ...... 12 1.1.1 Characteristics of Firm Democracy ...... 13 1.2 Theoretical Review ...... 14 1.2.1 Theory of Democratic Firm ...... 14 1.3 Models of Firm Democracy ...... 15 1.3.1 Sociocracy ...... 15 1.3.2 Workers Cooperatives ...... 16 1.3.3 Holacratic Management ...... 18 1.3.4 Employee Stock Ownership Plans ...... 20 1.4 Challenges of Work Place Democracy ...... 21 1.5 Company Performance ...... 23 1.6 Empirical Literature Review ...... 25 1.7 Summary ...... 26 2 RESEARCH METHODOLOGY ...... 27 2.1 Conceptual Framework and Research Questions Formulation ...... 27 2.1.1. General Framework ...... 27 2.1.2 Conceptual Framework and Hypotheses Formulation ...... 28 2.2 Definition of Study Variables ...... 30 2.3 Research Design and Method ...... 31 2.4 Sampling ...... 32 2.4.1 Profile of Firm Studied ...... 32 2.5 Data Collection Instrument ...... 32 2.5.1 Validity of Questionnaire ...... 33 2.6 Data Collection Procedure ...... 33 3 DATA PRESENTATION AND ANALYSIS ...... 34 3.1 Response Rate ...... 34 3.2 Respondents Characteristics ...... 34 3.2.1 Respondents’ Gender ...... 34

3.2.2 Respondents’ Level of Education ...... 35 3.2.3 Respondents Length of Service...... 36 3.2.4 Respondents Age ...... 36 3.3 Management Responses ...... 37 3.3.1 Reason for Use of Firm Democracy ...... 37 3.3.2 Elements of Firm Democracy Applied in the Firm...... 38 3.3.3 Implementation of Firm Democracy ...... 39 3.3.4 Advantages of Using Firm Democracy ...... 40 3.3.5 Disadvantages of Using Firm Democracy ...... 41 3.4 Responses to Questionnaires ...... 42 3.4.1 Principle of Meaning and Vision ...... 42 3.4.2 Dialogue and Listening ...... 43 3.4.3 Fair Play and Honor ...... 43 3.4.4 Transparency ...... 44 3.4.5 Responsibility ...... 45 3.4.6 Involvement ...... 46 3.4.7 Co-Decision ...... 47 3.4.8 Integrity ...... 48 3.4.9 Decentralization ...... 48 3.4.10 Reflection and Assessment ...... 49 3.5 Firm Democracy and Firm Performance ...... 50 3.6 Firm Democracy and Firm Performance ...... 51 3.7 Implications of the Study ...... 54 4 DISCUSSION ...... 55 4.1 Discussion of Responses ...... 55 4.1.1 Meaning and Vision ...... 55 4.1.2 Dialogue and Listening ...... 55 4.1.3 Fair Play and Honor ...... 55 4.1.4 Transparency ...... 56 4.1.5 Responsibility ...... 56 4.1.6 Involvement ...... 57

4.1.7 Co-decision ...... 57 4.1.8 Integrity ...... 57 4.1.9 Decentralization ...... 58 4.1.10 Reflection and Assessment ...... 58 4.1.11 Firm Performance and Firm Democracy ...... 58 4.2 Limitations of the Study ...... 59 4.3 Recommendations for Future Studies ...... 60 CONCLUSIONS ...... 61 REFERENCES LIST ...... 63 LIST OF TABLES ...... 68 LIST OF FIGURES ...... 69 LIST OF ABBREVIATIONS ...... 70 LIST OF APPENDICES ...... 71

INTRODUCTION Numerous studies have been undertaken to evaluate and determine the most effective and appropriate management model for organizations. However, the numerous studies have found different management structures to be suitable for different firms with some results contradicting other studies. Nonetheless, there is a consensus amongst academicians that the issue of management structure is still an important area of research as this structure ultimately affects the performance and sustainability of the firm. In the 20th century, most corporate managers and academics maintained that bureaucratic structures were the mechanism to attaining high productivity and the most suitable approach for management of firms in the fast-changing world (Vopalecký & Durda, 2017). However, various academics maintained that the bureaucratic model has negative effects on the organization. These included tensions between management and employees, illegal strikes, and violent clashes (Carney & Getz, 2013). They belayed the need to change the management philosophy and culture of the firm (Slinták, 2015). According to Handy (2015), modern organizations need to move in different directions in order to stay viable in the modern business environment. It is against this background that various new models of management were proposed. Senge (2006) came up with the concept of the learning organisation which presented an alternative way of looking at the organisation. In the framework, Senge (2006) identified management based on personal mastery, mental models, shared visions, team learning, and system thinking. Laloux (2014) indicated that the values, operations, and structures of the organisation need to be reviewed in the teal concept. Robertson (2015) developed a circular organization where the hierarchy tree is done away with. According to Vopalecký and Durda (2017), these are all forms of firm democracy. The aim of this study is to analyze the application of the management principles of firm democracy and the effect on the performance of the firm being studied. There is literature on firm democracy; however, most of the studies give a description of the implementation (Fenton, 2006; Proenca, 2010; Verdorfer & Weber, 2016; Vopalecký & Durda, 2017). The contribution of democratic management on performance has been explored in Greece and the United States (Robertson ,2015). In the Czech Republic, most of the studies have focused on freedom at the workplace and freedom-based companies (Carney & Getz, 2013).

The first part of this study presents the theoretical background. The main definition of firm democracy and characteristics are given; theory of firm democracy is examined; models of firm democracy including sociocracy, workers cooperatives, and holacratic management are examined; challenges of firm democracy are explained; company performance is analyzed, and empirical literature is undertaken. The second part of the thesis provides the research methodology. The research design, target population, conceptual framework, and research questions are developed. An operational definition of terms used in the study is given. The procedure for data collection and analysis are described. The third part of the thesis presents the study findings and discussion of the findings. The aim of the thesis was to determine the relationship between firm democracy and firm performance. The study evaluated the relationship by collecting the view of employees working at a firm that uses the firm democracy management approach. The study found that the firm applied some of the principles of firm democracy while others were not fully implemented. The study also established that the model of firm democracy has a positive effect on firm performance. The fourth part of the thesis provides the conclusion and limitations of the study and provides recommendations for future studies.

1 LITERATURE REVIEW

1.1 Firm Democracy

The idea of firm democracy has been around for numerous decades, but the question of corporate democratic governance took prominence in the 1980s in the United States. Prior to that period, governance was a little-discussed term and was limited to academic and political sciences in the conducted of government. In the 1980s corporations in the United States were faced by competitive pressures and the relaxation on legal constraints on the institutional investors. This resulted in a string of hostile takeovers and leveraged buyouts. This resulted in the largest fifty acquisitions of companies in the United States in constant dollar terms. These acquisitions resulted in an increase in the debt to asset ratio (Jong & Witteloostuijn, 2007). It is in this climate that the debate of the type and role of corporate governance found resonance. The debate took two streams with one focusing on ownership and the other on control on the company. This debate was further reignited following the 2008 global financial crisis, political theorists have begun to advocate for the concept of the democratic firm (Landemore & Ferreras, 2016). Democracy refers to the system whereby the organisation or society participates in the process of management and governance (Harrison & Freeman, 2004). The word democracy has its origins in the Greek work demokratio which means to assemble from the people and kratein to rule (Jong & Witteloostuijn, 2007). Democracy in the workplace manifests differently than it does in the political, governmental democracy. Few firms can be viewed as democracies in the political sense. This is because in firms there are different groups of stakeholders who have different rights to participate in the decision and receive benefits. In the 20th century, many academics thought that the bureaucratic, top-to-bottom management system was adequate for achievement of the highest level of productivity and possibly the best solution to the fast-moving world (Vopalecký & Durda, 2017). However, over time the model has proved to be incompatible with the modern business environment (Carney & Getz, 2013). Over the last few decades geopolitics, technology, and lifestyles have changed significantly necessitating management to change (Hamel & Breen, 2008). In literature, the term firm democracy has been indicated using terms such as democratic enterprise (Gratton, 2004), post-bureaucratic organization (Maravelias, 2007), organisational democracy (Yazdani, 2010), democracy at work (Fenton, 2006; Fenton, 2012; Ducasse, 2016), F- 12

Form companies (Getz, 2009), organisation without al leader (Brafman & Beckstrom, 2006), or labor-cooperative company (Ducasse, 2016). Democratic management was formulated and implemented in by the central government of China as a way of fulfilling the ideology that the workers are owners of the state (Zhu & Chen, 2005).

1.1.1 Characteristics of Firm Democracy

Fenton (2012), Peterson (2012) and Hamel (2013) indicate that the company structure of democratic firms is based on freedom. Hamel and Breen (2008) refer to this as a flat structure. Hajzler (2017) identifies the meaning and vision of the firm as a key principle of a democratic firm. These determine the manner in which the employees participate in the process of steering the organisation to meet its objectives. Typically, the objectives of the firm are to maximize firm value and/or profits. Slinaták (2016) asserts that these are not sufficient motives for employees in the modern organisation. The modern employee seeks purpose and value. Fenton (2012) indicates that democratic firms are characterized by dialogue and listening. The discussions in the firm provide a new degree of meaning, allow for connections, and collation of ideas. This ensures that employees are willing to share their opinions. In this framework, the subordinates and superiors all get a chance to state their opinions. Further, Hajzler (2017) indicates that fair play and honour are also important to democratic management. Fenton (2012) indicates that newcomers do not have the same rights as employees who have been at the firm for a longer period; rather, each employee is given a fair chance. A corollary of democratic management is transparency or openness. This implies that everyone in the organization has access to information that they need for them to come up with independent decisions. Key information includes the firm’s financial results and business strategy (Hajzler, 2017). The senior management must be willing to share information. According to Petersen (2012) for employees to do their job properly, they need to have access to adequate and appropriate information. To ensure that they have this information, the company has to be transparent (Hamel, 2013). Wilson (2011) indicates that responsibility is critical for democratic management. A clear allocation of duties and responsibilities identifies who is responsible for what, and to whom both within and outside the organisation. Responsibility implies that the individual employee can be relied upon and there is no need for control. Wilson (2011) stipulates that the proper implementation of self-management practices lead to a significant reduction in the need for 13 monitoring and controlling of individuals. Ducasse (2016) indicates that for individual employees to be responsible for the firm they need to be co-owners through stock ownership or through bonus payments. Schaufeli et al. (2002) stipulated that involvement is critical for democratic management. Involvement entails initiate, participation, proactively, engagement and interest. According to Yazdani (2010), participation and employee involvement are important to ensure that the firm attains in objectives. The co-decision was also identified by Petersen (2012) and Hajzler (2017) of the democratic firm. They assert that the decision-making process should be formulated in a manner that allows all employees to have a say. Fenton (2012) indicates that reflection and assessment are the characteristics of a democratic firm. This requires that there is a culture of learning and constantly needing to improve. This is achieved through reflection and evaluation (Hamel, 2013).

1.2 Theoretical Review

1.2.1 Theory of Democratic Firm

This theory is also referred to as Elleman’s theory of the democratic firm (Wasserbauer, 2015). This theory is premised on two concepts. Firstly, the structure of the property is determined by the notion that people have natural and inalienable rights to the fruits of their labour. Secondly, the governance structure is established on the notion that people have a natural and inalienable right to democratic self-determination (Ellerman,1997). Ellerman (1989) maintains that the workers have claim and rights to the negative and positive fruits of their labour. However, this right is alienated by employment contracts. When the employee signs the employment contract, they lose their legal rights to the negative and positive fruits of their labour with these rights being transferred to the employer (Ellerman, 1992). Ellerman(1997) argues that although the employees do not just become tools or rented items because they sign employment contracts. The employment contract also alienates the right of the worker to democratic self- determination at work. However, Ellerman (1997), intimates that like responsibility, the decision- making capability needed to perform job functions is inalienable. Putting it that deciding to do as one is told, is only another way of deciding what to do. The decision making capability cannot be

14 alienated or transferred but can be delegated. The two principles then raise the question of firm democracy. Ellerman (1989) maintains that for the application of democratic theory there must be direct control rights over the firm must be given to persons who are governed by the organisation so that they are self-governing. Additionally, democratic rights should be assigned as personal rights, not as property rights. Thus the democratic firm is the peoples’ organization, not the property based organisation. In traditional models, companies rent labour. In democratic theory employment by the firm is synonymous with membership in the firm (Ellerman, 1997). In the traditional corporate model, the shareholders own property rights which entail the right to residual claims which include the right to vote and to be members of the board of directors; the rights to residual net income which includes net assets. The introduction of firm democracy entails restructuring the company. In the new dispensation, the democratic principles of self-governance and property rights are correlated to voting rights and net income rights which Ellerman (1997) refers to as membership rights. In the democratic firm voting rights and residual claimant, rights are assigned to the workers.

1.3 Models of Firm Democracy 1.3.1 Sociocracy

This theory was put forward by Gerard Endenbug in 1970. The theory proposes a circular feedback process. In the model, the hierarchy of circles represents the various divisions, units, or departments in the organisation. There are links between the individual circles that provide feedback to the organisation (Endenbug, 1998). At the cornerstone of the theory are four principles which include: (i) Consent Governs Policy Making: Decision making is done with the consent of everyone. Objections to the decisions made must be based on concrete reasons with the objector being required to work towards ensuring the productivity of the firm. All policies are made with consent, while day-to-day operational decisions are made using the traditional methods. (ii) Organizing in Circles: The hierarchy consists of semi-autonomous circles. However, the circles do not serve as centres of power. Every circle has a duty to execute, control, and measure the tasks it undertakes. The individuals in the circle are 15

responsible for their own development and that of the circle. This is achieved through integral education where the individual circle is responsible for determining the knowledge and skills needed to remain competitive. (iii) Double-Linking: The members of the individual circles act as links to other circles and to the next higher circle. The leader of the individual circle acts as a member of the next higher circle and represents their circle in the decision-making circle. The highest circle is similar to the board of directors’ with members including external experts that link the organization to its industry and the external environment. (iv) Election by Consent: The individuals in the circle are chosen to perform duties and responsibilities by way of open consent. The individual members of the circle nominate themselves or are nominated by others. Individual members can object to the selection or appointment of people to certain roles. According to Simon (2018), Holocracy and Sociocracy have a lot in common. The key similarity between the two approaches is that they allow for units, departments, and divisions within the organizations to self organize.

1.3.2 Workers Cooperatives

In the extant literature, one of the main examples of firm democracy is workers cooperative one of the most famous examples of workers cooperative movements. Mondragon was founded in 1943 by the Catholic priest Arizmediarrieta when he founded a polytechnic school in Mondragón, Spain. The polytechnic was democratically administered and was structured around the cooperative ethos (Navarro, 2014). Over the last few decades, the cooperative has grown to become one of the largest conglomerates in the world. Mondragon Corporation had in 2018 total revenue of € 11, 936 billion, investments of € 451 million, and operation in 266 centres. The corporation consists of 98 corporations and has 143 subsidiary companies (Mondragon Cooperative, 2019). The performance of the cooperative is credited to its business philosophy which includes cooperation, participation, social responsibility, and innovation. The main goal of the business is to be competitive in the global market by using democratic methods in its business organisation (Mondragon Cooperative, 2019). The management model used by Mondragon is presented in Figure 1.1

Figure 1.1: Management Model Used by Mondragon

Source: Vliet (2012)

The management structure is circular which connotes that is constantly rotating. This indicates the interrelationship between the layers of the cooperative. The three circles represent the ten core principles of cooperatives. The centre circle consists of education and sovereignty of labour. These principles require that the income realized by the cooperative is distributed amongst the members. On average the cooperative distributes approximately 30%-70% of the net profits as dividends annually to members. The net losses are also shared out amongst members (Mondragon, 2019). The second circle represents the principles of payment, solidarity, open and voluntary membership, participatory management, democratic organisation, and instrumental and subordinate nature of capital (Vliet, 2012). Initially, the principle of payment solidarity meant that the difference in wages received by the highest execute was capped at three times what the lowest member received. However, as the complexity of the business has increased, the payment of top executive is equivalent to market rates less 30% for solidarity (Wolff, 2014). The instrumental and subordinate nature of capital is linked to the sovereignty of labour with the implication that the other factor of production namely, capital, is subordinate. The role of capital is to allow for business operations. Capital earns interest but does not have the right to make decisions. Capital is not entitled to ownership (Wasserbauer, 2015). The third circle is the social transformation, universal nature, and inter-cooperative principles.

1.3.3 Holacratic Management

Over the last few years, there has been an increase in the number of studies which explored the different types of management models, frameworks, structures and practices across the globe focusing on various companies and business entities. Noteworthy is the fact that many studies have moved their attention from the traditional management models, practices and approaches to focus on the flexible features of the company such as employee management, mental models, avenues of communications between top management and lower cadres of staff amongst others (Velinov & Denisov, 2017). Numerous studies have evaluated the effect of contemporary management models such as McKinsey 7s model, value-based management model, and sociocracy amongst others. However, little attention has been paid to flat management systems such as holacracy and the resultant effect on firm performance. Flat organisational structure refers to an organisational management model with few levels or even just one level of management (Rishipal, 2012). In this model the command structure is short, but the span of control tends to be relatively wide. One manager typically has many employees reporting to them. The term holarchy was first put forward by Koestler (1967) in a book titled ‘The Ghost in the Machine.’ According to Koestler (1967), a holarchy is made up of holons which are autonomous and self-reliant units which depend on the greater whole of which they form a part. The system of holacracy was first implemented at Ternary software by the company’s founder Brian Robertson in 2007. Holacracy is a decentralized management system in which governance and decision making are distributed throughout a holarchy of self-managing teams rather than being vested in the traditional hierarchical structure (Robertson, 2015). According to Robertson (2015), the key elements of Holacracy include (i) Roles instead of job descriptions: In this framework, an individual can hold multiple roles at any one time. The role is not equivalent to a job description. This model separates the role of the people who perform jobs associated with that role. The role is defined by name, purpose, optional domains to control, and accountabilities which are continuous tasks that need to be performed. The role of an employee is defined within each circle or team through a collective governance process. The role is dynamic and frequently changes to meet the needs of the organisation.

(ii) Circle structure: Roles within the organization are the structures in a system of self- organizing circles. These circles do not have the ability to self-direct. Each circle is given a purpose and is accountable to the broader circle. The circles follow a hierarchical structure. Members of the circle are allowed to self-organize in the best way they can in order to meet their objectives. The circles are allowed to hold governance meetings, give members roles to do, and assume responsibility for carrying out the roles assigned. The circles are linked through a lead link and a representative link who participate in a meeting of the individual circle and the broader circle in order to ensure harmonization of activities in line with the firms’ mission and overall strategy. (iii)Governance Process: Every circle has a clearly stipulated governance mechanism which is frequently updated with regard to its roles and policies. The decision-making process is integrative. There is no consensus or consent during decision-making but rather the process incorporates relevant input from all units, and ensures that all amendments and objections to the proposed changes are addressed in regard to the roles, rather than to individual’s preferences or egos. (iv) Operational Process: Teams and units are formed in alignment to the operational requirements. The process requires that the units work efficiently and effectively in order to fulfil the organizations’ objectives. Unlike traditional management units which require the authority to act or to innovate, in the holacratic model individuals are given blanket authority to perform actions that fulfil the roles assigned to them. The holacratic approach is biased towards actions and innovation. The holacratic process requires that the individual circles have tactical meetings on a weekly basis. In these meetings, relevant reports are reviewed, and updates on project status are given. The meetings tend to be open forums where individual members of the circle can bring up relevant issues (Holocracyone, 2018). This process incorporates triage whereby the focus of the meeting is on clearly defined next steps needed to be undertaken by individuals who stipulated an agenda for the meeting. The aim of this is to ensure that the meetings are productive and not just unproductive discussions. Figure 1.1 provides a depiction of a holacratic governance system.

Figure 1.2: Governance Structure in Holacratic Organization

Source: Gouveia (2016)

1.3.4 Employee Stock Ownership Plans

In the mid-19th Century, firms operating in the United States and economists began to debate the issue that an employee would work for a company for several decades, attain retirement age and have no income after they retired. The leaders of the firms which included firms like Procter and Gamble, Railway Express Agency, Sears and Roebuck amongst others decided to put aside their firms’ shares to give to the employees when they attained retirement (Freeman & Knoll, 2008). In 1956 the first ESOP was created by Louis Kelso when he enabled the employees of a newspaper to acquire the paper from the company founders (Rosen, Case, & Staubus, 2005). From the 1970s to the 1980s legislation was passed in the United States that saw the expansion of ESOPs. The ESOPs are schemes that allow a company’s employees to acquire an ownership interest in the firm. The ESOPs provide the workers with stock ownership often at an upfront price. The shares form part of the remuneration to the employees for work performed. The shares are held by the employee or in a trust until the worker leaves or retirees from the firm. Research by Rosen et al., (2005) and Rosen (2010) shows that the most common reason for the formation of ESOP is to allow for the acquisition of shares from owners of the firms which are tightly held. In such firms, there is typically no succession plan in place. The departure of the founding owner 20 often spells the end of such a firm which negatively impacts the employees (Staubus, 2011). These schemes allow for the transition and succession planning; the founders and the existing shareholders can distribute their shares to the employees over a given period of time. In some firms, the majority of shareholders are the employees. Such firms can be considered as worker cooperatives, but unlike cooperatives, the distribution of capital and control are not equal (The Menke Group, 2019). Voting rights are typically determined by the number of years the employee has been at the firm with longer-serving employees having more voting rights than recently hired employees. Further, unlike cooperatives in ESOP managed firms the management has greater autonomy and flexibility than those in worker cooperatives.

1.4 Challenges of Work Place Democracy Measuring Individual Contribution: The models of workplace democracy rely heavily on the concept of teamwork. All individuals work in groups and in teams. This makes it difficult to identify the contribution of the individual worker to the firm’s output (Carr & Mellizo, 2014). Additionally, the model requires that the workers be willing to undertake tasks and duties that may not reflect their own contribution to the firm. These include providing mentorships, helping others with their work, and providing feedback and information to the firms. Concept and Definition: Carr and Mellizo (2013) indicate that there is a challenge in the concept and definition of workplace democracy. Workplace democracy is defined as a management model where the individuals that have a stake in the performance have a stake in decision making (Ben-Ner, 2013; Ben-Ner & Ellman, 2013). Carr and Mellizo (2013) aver that the definition of firm democracy is straight forward, but there are significant variations in the interpretations of the meaning of shareholders and participation in decision making. These differences have consequences in the form, application, and outcomes. Wu, Bacon, and Hoque (2014) define stakeholders as all the individuals who are affected in one way or another by the performance of the firm. They include shareholders, managers, creditors, workers, customers, the government and society. Wu et al. (2014) indicate that the definition of the stakeholders varies and their inclusion in the organisation also varies. For example, in the United States, the corporate structure identifies shareholders as the main stakeholders of the firm. In these firms, there is democracy in decision making whereby one share equals one vote. In workers cooperative the main stakeholders are the members, decision making is distributed on the basis on of one member, one vote (Ben-Ner, 2013).In Employee Stock

Ownership Plan (ESOP) the main stakeholders are the workers who own shares in the firm. In partnerships such as law and accounting firms, the main stakeholders are sub-set employees – the partners- own the firm. The myriad ownership and decision-making structures that can be identified as democratic firms make it difficult to have a clear definition of the term. Incentives: A central feature of firm democracy is the focus on teamwork. According to Ben- Ner (2013) and Ben-Ner and Ellman (2013), this creates the challenge of determining the reward to pay each team member as it is difficult for the individual effort to be computed. The firm can either pay a flat wage or pay teams rather than individuals. However, paying a flat rate would result in workers implementing a free-rider strategy. In addition to the incentives problem, there is also the challenge of distribution of the surplus. In ESOPs and cooperatives, the surpluses are distributed equally to the members. If the surplus is given equally, then, the workers who are more productive will be underpaid while the less productive workers will be overpaid. The high- productive workers are thus forced to leave the firm while the low productive workers continue self-selecting in the firm. The pay structure and surplus depends on the income generated by the firm. External shocks that the firm has no control over affect the income. External shocks create volatility in ESOPs and other profit sharing mechanisms which reduces the motivation of the worker to stay at the organisation. Type of Worker: The concept of firm democracy is based on the assumption that the individual worker subordinates their interest for that of the firm. Behavioural economists Wood, Stephen, de Menezes (2011) and Daphne (2011) aver that it is unreasonable to assume that the individual worker subordinates their interests relative to the firms. Daphne (2011) identified three categories of workers: self-interested, conditional cooperators, and altruistic. The self-interested employee only focuses on their payoff. The altruistic worker takes into consideration his/her payoff, the payoff to the team, and the firm payoff. The conditional cooperators are in the middle their decisions are based on the actions of others; if others are selfish they will also adopt the selfish stance, and if the others are altruistic then they will also be altruistic. Capital Investment and Firm Survival: Dow (2003) highlighted that capital investment decisions and the limitations of credit constraints affect the democratic firm. Carr and Mellizo (2013) indicated that the maintenance and depreciation, the role of quasi-rents arising from specialized high fixed cost inputs and credit constraints present challenges for firm democracy. Alchian and Demsetz (1972) in their seminal work discovered that depreciation of the firm assets is greater when the owner is not present. They further established the depreciation rate of the 22 asset is more accelerated when the owner of the asset is a group because of 1/N (N is the number of owners). Alchian and Demsetz (1972) maintained that each of the owners receives an only 1/N portion of the benefits arising from limiting the depreciation of the tangible assets. This may then result in the free-rider behaviour limiting the willingness of some to manage depreciation. A challenge also arises from the financing of expensive fixed cost capital investment and who receives the residual items. These challenges have an impact on the survival of democratic firms and the probability of the formation of these firms (Carr & Mellizo, 2014). Daphne (2011) highlights the moral hazard of debt financing in democratic firms. The workers can leave the firm that is not performing well or declare the firm to be bankrupt. There is no individual or entity to take full responsibility for the repayment of money borrowed. The models of democratic firms are thus unlikely to get financing. Creditors prefer financing investor-owners who have a greater incentive to ensure that the firm survives and are responsible for ensuring that outstanding credit is paid. Credit constraints make the decline of democratic firms highly likely.

1.5 Company Performance Despite the relevance of firm performance, various researchers and firms measure performance using different constructs and indicators (Richard et al., 2009; Selvam, 2016). According to Selvan et al., firm performance can be indicated by (i) Profitability performance which is measured by constructs such as Return on Assets, Return on Equity, Return on Investment, Net Income, Earnings before Tax Interest (EBIT), Economic Value Added (EVA), and Net Revenue. (ii) Market value performance includes the volatility of prices, the ratio of market value to equity, and Tobin’s Q. (iii)Growth performance can be indicated by the growth of market share, the growth of assets, net revenue growth, net income growth, and an increase in the number of employees. (iv) Employee satisfaction is indicated by the level of turnover, the budget for training and development of employees, wage rate, reward schemes, career perspective, organisational culture, and employee satisfaction. (v) Customer satisfaction includes the variety of products and services, number of complaints, number of repurchases, new customers, customer retention rate, customer satisfaction, and new products and services.

(vi) Environmental performance is indicated by the amount of energy consumed, the use of recycled materials, the rate of recycling, the reuse of residual products, the number of lawsuits from environmentalists, and level of energy efficiency. (vii) Environmental audits performance is indicated by the firm’s environmental policy, environmental audit reports and environmental reviews. (viii) Corporate performance is indicated by the size of the board, the independence of the board, ownership concentration, outside directors, and inside ownership. (ix) Social performance is indicated by the number of minorities employed, social and cultural projects undertaken. The number of lawsuits brought against the firm by employees can also be used to indicate social performance. Fenton (2002) developed a business health matrix to show the performance of the firm. Table 1.1 presents Fenton’s business health matrix.

Table 1.1: Fenton's Business Health Matrix

Financial Products & Services

Management Processes Culture and Design

Source: Fenton(2002)

Fenton (2002) asserts that the business health matrix is a measure of firm performance. Most firms focus on one or two areas typically financial and its management process. However, corporate culture and the quality of goods and services are important measures of performance. The balanced scorecard developed by Kaplan and Norton (1992) has also been used to indicate the performance of the firm. The scorecard measures performance using four perspectives: financial, stakeholders/customer, internal process, and organisational capacity. Table 1.2 illustrates the balanced scorecard.

Table 1.2: The Balanced Scorecard

Performance Indicator Objective Measures Increase Revenue, Increase Profitability, and Profits, Costs, and Income Financial Decrease Operating Costs from Target Markets Improve clarity of offering, improve market Market Share, Customer Customer perception, and improve customer satisfaction Satisfaction Improve offering selection, improve New Products and Services, Internal information services, improve supplies Brand Recognition, Processes reliability, and improve cost control Efficiency Employee training, Organisational Improve knowledge and skills, improve Technological Integration, Capacity technology, and improve supply chain Supply Management Source: Kaplan and Norton (1992)

1.6 Empirical Literature Review In their influential paper Gompers, Ishii, and Metrick (2003) developed a summary index of corporate governance which provided for the provisions of the Institutional Investors Research Center (IIRC). They used the term democracies and dictatorships. They defined democracies as companies that were friendly to the shareholders, while dictatorships were defined as companies that were friendly to the management. They established that democracies had higher performance and earned abnormal profits than dictatorships. Bebchuk, Cohen, and Ferrel (2004) incorporated the Fama and French (1993) three-factor model and the momentum factor of Carhart (1997). They modified the model developed by Gompers et al. (2003). They found that there was a negative and significant relationship between dictatorial governance and firm performance indicated by market value. Toudas and Karathanasis (2007) classified firms as democracies, semi-democracies, and dictatorships when evaluating the effect of governance structures on firm performance in Greece. The study found that firms with democracies had higher Tobin Qs than semi-democracies and dictatorships. They established that there are significant negative abnormal returns in all types of governance structures. Wang (2013) investigated democratic management in petrochemical companies in China using 988 matching surveys of workers and their supervisors. The study found that the employees’ felt that democratic management improved job performance. However, for some departments, democratic management resulted in reduced performance. Wang (2013) associated the difference in findings to the different perceptions held be workers on democratic

25 management. Agirre, Pedro, & Freundlich (2014) reviewed the management model implemented by Mondragon Corporation which had consisted of combining democratic principles, solidarity, and competitiveness. The study found that the model was the main driver of the firm’s competitiveness which subsequently positively and significantly affected firm performance. Puni, Ofei, and Okoe (2014) in their examination of the effect of different leadership styles on firm performance established that autocratic, democratic, and laissez-faire leadership styles did not significantly predict the financial performance of two commercial banks in Ghana. The democratic leadership style was found to significantly impact variations in financial performance. Velinov and Denisov (2017) explored contemporary approaches to management with a focus on holacracy and its effect on firm performance. The study sampled fifty global companies with the study focusing on the period 2014-2016. The data was collected from annual reports and other secondary based sources. The study found that holacracy affects firm performance positively. Typically, empirical studies focus on the performance of firms. However, there are worker cooperatives that have characteristics of democracy. Pencavel (2013) asserts that workers’ cooperative illustrate the evidence for firm democracy versus traditional firm management.

1.7 Summary The literature review section provides information necessary for the formulation of the research hypotheses of the study. Firstly, it provides an analysis of the main constructs of firm democracy and performance. The characteristics of firm democracy and models were discussed. The methods used to measure performance were also presented. Previous studies examining the relationship between firm democracy and performance were analyzed with regard to the theory. The analysis established that the effects can be positive, negative, or insignificant. At the time of the review, the study only found one study focusing on firm democracy in the Czech Republic. The study of Vopalecý and Durda (2017) only focused on the principles of firm democracy being applied by five firms in the Czech Republic. This indicates that there is a knowledge gap in the relationship between firm democracy and performance.

2 RESEARCH METHODOLOGY The aim of this study is to establish the relationship between firm democracy and the financial performance of firms. This section of the study presents the research methodology that will be used to determine the relationship between firm democracy and firm performance.

2.1 Conceptual Framework and Research Questions Formulation In order to fulfil the objective of this study, a general framework was developed to illustrate the relationship between firm democracy and performance.

2.1.1. General Framework

The general framework was developed after taking into consideration the theoretical and empirical evidence presented in the literature review section. The main assumption made when developing the general framework is that firm democracy affects firm performance. This assumption is made based on the on the work of Ellerman (1997), Ellerman (1989), Ferrel (2004), Hamel and Breen (2008), Viggian (2011), Fenton (2012), Petersen (2012), Carney and Getz (2013), and Aguire, Pedro, and Freundrick (2014).

Figure 2.1: General Framework

Firm Performance Firm Democracy

Source: Author (2019)

2.1.2 Conceptual Framework and Hypotheses Formulation

The general framework provides a broad illustration of the relationship between firm democracy and performance. The conceptual framework is developed from the principles of democracy identified by Hamel and Breen (2008), Fenton (2012), Petersen (2012), Hamel (2013), Viggian (2011) and Camey & Getz (2012). Table 2.1 summarizes some of the principles of firm democracy.

Table 2.1: Principles of Firm Democracy

Hamel & Breen (2008); Hamel Carney & Getz Viggian (2011) Fenton (2012) (2013) Petersen (2012) (2013) Learning Responsibility, Duties of the leader, Cooperation and Meaning and organisation, Choice, Cooperation, Unity, Vision, Self Decentralization, Decentralization, Cooperation, Involvement Management, Fairness and Vision and Meaning, Decentralization, Decentralization, Dignity, Vision Community, Vision and Low Hierarchy, and Purpose, Transparency and Meaning, High- Listening and Openness, Peer Community, Performance Dialogue, Review, Adaptability Transparency and Teams, Trust, Accountability, and Flexibility, Merit- Openness, Peer Shared Collective and Based, Reward- Review, Productivity, Individual Based on Adaptability and Participation, Decision Performance, Self Flexibility, Merit- Making, Determination, Based, Reward- Involvement, Based on Performance, Self- Determination, Involvement Source: Hamel and Breen (2008); Viggian (2011); Fenton (2012); Petersen (2012); Carney and Getz (2013)

The conceptual framework is also developed using the balanced scorecard of Kaplan and Norton (1992). Figure 2.2 presents the conceptual framework of the study

Figure 2.2: Conceptual Framework Firm Democracy Performance

Meaning and Vision

Dialogue and Listening

Fair Play and Honor

Transparency Financial

Responsibility Customer

Involvement Affects Internal Process

Co-decision

Organisational Capacity Integrity

Decentralization

Reflection and

Assessment

Source: Author (2019)

The conceptual framework provides an illustration of the one-directional relationship between firm democracy and firm performance. The conceptual framework allows for the formulation of the following research questions:

(i) What is the relationship between meaning and vision and firm performance? (ii) What is the relationship between dialogue and listening and firm performance? (iii) What is the relationship between fair play and honour and firm performance? (iv) What is the relationship between transparency and firm performance? (v) What is the relationship between responsibility and firm performance? (vi) What is the relationship between involvement and firm performance? (vii) What is the relationship between co-decision and firm performance? (viii) What is the relationship between integrity and firm performance? (ix) What is the relationship between decentralization and firm performance? (x) What is the relationship between reflection and assessment and firm performance?

2.2 Definition of Study Variables Table 2.2 shows a summary of the principles of firm democracy and their definitions

Table 2.2: Definition of Principles of Democracy

Principles of Firm Democracy Definition

The meaning indicates the reason for the firm’s existence. Vision provides Meaning and Vision the direction to the firm

Dialogue and This involves two-way communications. In the firm communication is Listening directly between the management and the employees

Fair play and This indicates the extent to which there are equity and reasonableness in honour the manner in which the employees are treated and decisions made

This indicates the degree of openness about the actions, strategies, finances Transparency and objectives of the firm.

Both the employees and the firm are responsible for each other, their Responsibility suppliers, their customers, and the community

The employees are invited to contribute ideas and information either as Involvement individuals or in teams.

Decisions are made by teams or by the organization. More than one unit Co-decision makes decisions

Integrity The firm and employee decide to behave ethically

This is when power and decision making are shifted from the core and shared with employees. Power and decision making is distributed Decentralization throughout the organisation

Reflection and The thorough and considered evaluation of actions in the previous periods. Assessment The aim is to improve future performance. Source: Fenton (2002)

2.3 Research Design and Method The research design is the framework used by the researcher to collect, measure, and analyze the study data (Cooper & Schindler, 2013). The research design is basically, the plan that structures the study that is formulated to ensure that the objectives of the study are achieved. According to Saunders and Tosey (2013), there are two main approaches to research, the deductive approach and the inductive approach. The deductive approach is based on testing 31 hypothesis while the inductive approach uses research questions to determine the scope of the study (Gabriel, 2013). The study will adopt the deductive research approach. A review of empirical literature indicated that this type of study is best conducted by the use of survey research design. The survey research design is used where the researcher hopes to establish the status quo (Boslaugh, 2008). The aim of using the survey is to investigate and describe the phenomenon under study. According to Kothari (2009), the survey research design is suitable for most studies as it is efficient and economical.

2.4 Sampling The target population is the total number of objects, items, and subjects that the researcher is interested in. It is the population over which the findings of the study will be generalized (Vonk, 2017). The target population of this study is the firms implementing firm democracy in the Czech Republic. Vopalecý and Durda (2017) identified five firms that practice firm democracy in the Czech Republic; they include Raynet, Court of Moravia, Bidding Tools, Na stejné Lodi, and Impact Hub. The study will sample only one company.

2.4.1 Profile of Firm Studied

The firm was founded in 2004 by a group of students (Vopalecký & Durda, 2017). Currently, the firm has 49 employees and a turnover of approximately 25 million CZK. The firm produces, distributes, and provides services in enterprise application software (EAS), information technology (IT) maintenance services, IT auditing and consulting, internet services, auditing services, and software maintenance (Kompass, 2019).

2.5 Data Collection Instrument Atikiya (2015) indicates that there are several tools that can be used to gather data for the study which include focus group discussions, observation of the study phenomenon, questionnaires, and interviews. The choice of the tool to be used is determined by the type of study. Since the study sought to establish the effect of firm democracy on firm performance, a research instrument which could establish the perception is thus needed. The questionnaire is seen to be the most appropriate tool. The questionnaire is considered as the most appropriate tool for determining self- sufficiency of existing relations, items, objects, or events and self-reported beliefs and behaviour 32

(Atikiya, 2015). Saunders, Lewis, and Thornhill (2015) describe the questionnaire as a tool that allows the researcher to get data that gives descriptive of the study phenomenon and is adaptable for inferential statistical analysis.

2.5.1 Validity of the Questionnaire

Validity indicates what the research instrument measures, and how well it measures it (Mohajan, 2017). Validity evaluates the level to which the research instrument measures what it is supposed to measure (Robson, 2011). The researcher tests for validity in order to ensure transparency and to reduce the chances that the researcher introduces their biases in quantitative research (Singh, 2014). This is significant given that it covers the whole concept and determines if the results obtained to meet the stipulated requirements needed in research (Pallant, 2011). In quantitative research, validity is critical given that the outcome of the study depends on the trustworthiness, utility and dependability of the research instrument (Zohrabi, 2013). To test for validity, the study will conduct a pilot study. This will be done by administering the research instrument to a portion of the study sample (Orodho, 2009). According to Creswell (2014), the appropriate size for the sample for the pilot study is 10% of the study sample. The pilot study will thus include 5 of the study sample. The pilot study will help the researcher identify loopholes in the questionnaire, ambiguity, and other challenges. The information will then be used to refine the questionnaire which will be used for the study. In order to reduce bias, the 5 employees who participate in the study will be excluded from the main study.

2.6 Data Collection Procedure The study collected primary data using questionnaires and semi-structured interviews. The study surveyed all the employees of the company. The study interviewed the senior managers and distributed the questionnaires to the rest of the employees.

3 DATA PRESENTATION AND ANALYSIS

In this section of the thesis, the primary data collected from the management and employees of the firm studied is presented and analyzed so as to determine the relationship between firm democracy and firm performance.

3.1 Response Rate Atikiya (2015) defines the response rate as the percentage of the actual respondents who participated in the study versus the actual number targeted. The study aimed to sample all the employees of the target company. The researcher was able to sample all the employees. The researcher distributed 44 questionnaires to the firm and all the 44 questionnaires were returned having been filled. Additionally, the study sought to interview the five managers at the firm. The study was able to interview all the managers. According to Kothari (2004), the response rate is important for research as it indicates the extent to which the data represents the opinions of the study sample and enables the researcher to make generalizations. The response rate for this study was 100%. This response rate is considered to be a good representation of the respondents and provided information need for analysis and for drawing conclusions.

3.2 Respondents Characteristics The study sought to establish some characteristic of the study respondents including their level of education, their age, their gender, and the number of years at the organisation.

3.2.1 Respondents’ Gender The individual respondents in the study were either male or female. Figure 3.1 shows the distribution of males to females in the organisation.

Figure 3.1: Respondents' Gender

27%

Male Female

73%

Source: Study Data (2019)

The results summarized in Table 3.1 shows that 36 (73%) of the respondents in the study were male while 13 (27%) were female. The findings suggest that the firm has a higher preference for male than for female employees.

3.2.2 Respondents’ Level of Education

The study sought to determine the level of education. The results are presented in Table 3.1. Table 3.1: Respondents Level of Education

Level of Education Frequency Percent

Bachelors 30 61%

Masters 19 39%

Total 49 100% Source: Study Data (2019)

The findings indicate that 61% (30) of the respondents had attained bachelor’s level of education while 39% (19) had undertaken masters’ studies. These findings indicate that the educational competencies of the employees are high. This implies they have the qualifications to conduct their job functions.

3.2.3 Respondents Length of Service

The study sought to determine the number of years that the respondents had worked at the company. The findings are summarized in Table 3.2

Table 3.2: Respondents Length of Service at the Firm

Length of Service Frequency Percent Less than 1 year 16 33% 1-5 years 24 49% 6-10 years 4 8% 11-16 years 5 10% Total 49 100% Source: Study Data (2019)

The findings summarized in Table 3.2 show that 16 of the employees had worked at the company for less than 1 year while 24 respondents had been at the firm for between 1-5years. Only 4 of the respondents had worked at the firm for 6-10 years while only 5 had been with the firm between 11-16 years. The findings indicate that the average length of service at the firm is between 1-5 years before the employees move on. The findings indicate that the firm cannot retain its employees. This could lead to high costs and low performance. The firm has to incur expenses to train new employees.

3.2.4 Respondents Age

The ages of the respondents are presented in Figure 3.1

Figure 3.2: Respondents Ages

16%

18-30 years 10% 31-40 years 41-50 years 74%

Source: Study Data (2019)

The findings illustrated in Figure 3.1 show that 74% of the respondents were between the ages of 18-30 years while 16% were between the ages of 31-40 years and 10% were between the ages of 41-50 years. These findings imply that the firm has a very young workforce.

3.3 Management Responses

The researcher sought to establish from the management of the firm the reasons for the use of firm democracy as a management approach, the elements of firm democracy applied in the firm, the process of implementation, the advantages of using democratic management style and the disadvantages.

3.3.1 Reason for Use of Firm Democracy

The managers indicated that the technology sector was very dynamic, with only a few firms being able to keep up with the changes and make profits. The respondents pointed to the fact that many organizations in their industry had gone into what they referred to as organisational death because they did not evolve to meet the needs of the ever-changing business environment. The respondents further intimated that some of the management styles being used by other firms in other industries were developed during the industrial revolution which required the managers to forecast future output and performance targets, plan on how to achieve those targets, and control processes in the firm to ensure that the firm achieved its objectives. However,

37 the managers felt that that mode of management was outdated. In today’s business environment managers strive to create systems and structures that will function in an ideal manner.

3.3.2 Elements of Firm Democracy Applied in the Firm

The study inquired from the managers the elements of firm management implemented in the firm. The managers indicated that the elements of firm democracy were clearly spelt out in their management handbooks. The managers listed the following principles (i) Purpose and Vision of the firm were clearly specified, and each employee was made aware of them. (ii) The managers indicated that there was dialogue and listening in the firm. All employees had an equal voice, and the firm had an open door policy. (iii)The managers indicated that there were participation and collaboration with each employee required to contribute ideas and participate in all activities of the firm. (iv) The managers also indicated that the principle of equality was applied across the firm. The managers indicated that there was impartiality in the treatment of every individual who worked at the firms. Additionally, all the rights of the employees were enforced. (v) The managers indicated that there was empowerment. Each employee was empowered to make decisions. However, empowerment did not imply free will to do what an individual wanted. (vi) The managers indicated that the employees were accountable to the firm and the firm was also accountable to the employees. The managers indicated that they allowed the employees to demand answers for actions taken. (vii) The managers indicated that the employees were encouraged to think outside the box and to be inventive. The managers indicated that this was perhaps the most important aspect of firm democracy. The new ideas were what pushed the company forward and create a competitive edge in their industry. The managers indicated that progression in the firm entailed the development of skills and receiving pay raises. (viii) The managers indicated that there were continuous evaluation and feedback. The managers indicated that this process was good if they allowed the firm and the employees to learn.

The researcher noticed that the managers did not include the element of ownership and sharing of financial rewards and probed the issue. The managers indicated that firm democracy means different things to different organizations. They insisted that a democratic work environment did not necessarily translate to ownership. The managers indicated that financial rewards, perquisites, salaries, and bonuses were determined by firm performance and distributed to the individuals who contributed the most. They indicated that pay had to be based on contribution in order to avoid the problem of free-riders and to stimulate performance.

3.3.3 Implementation of Firm Democracy

The managers indicated that the firm had a horizontal structure with few levels. The managers indicated that there were no middle managers and that they directly interacted with every staff member. The number of employees directly supervised by each manager was large, but the number of managers in the chain of command was small. The managers indicated that in their firm a manager had more duties and responsibilities than those in the vertical structure because there are more employees immediately below who look to the manager for direction and guidance. The respondents indicated that the strong form of the firm structure was self-managing teams that determined the work they wanted to do without the need to supervision. The teams determined when and if they wanted to meet. Each team normally has a manager assigned to it, but it is the team that determines the overall tasks and goals and manages the method by which they will achieve their goals. However, the decisions made by the team had to be communicated to the managers who could disapprove and give new directions. The managers further indicated that they did not let the individual employees deal alone with the clients as they had to ensure quality. The managers indicated that team leadership role was rotated. The structure of the organization is depicted in Figure 3.3.

Figure 3.3: Firm Structure

CEO

Managers

Team Team Team Team

Source: Author

3.3.4 Advantages of Using Firm Democracy

The managers indicated that the greatest effect of firm democracy was the increase in innovation and in the levels of efficiency. The managers indicated that the democratic model enhanced innovation, agility, transparency, and accountability within the firm. The approach allowed the individual employees and the teams to take the initiative. The model also reduced the administrative duties of the management. The managers indicated that firm democracy gave voice to all the people in the organisation. This enhanced their commitment to the firm. The managers indicated that increased commitment meant that the employees were more willing to go over and above their required responsibilities to ensure that the firm’s goals were achieved. According to the respondents, commitment meant that the employees had a purpose. Some of the managers indicated that they felt that when the employees were involved in decision making, it enhanced their morale to work on the projects. They indicated that the projects were implemented much easier when all the employees agreed. The managers also indicated that the democratic model helped the employees feel more responsible for the firm’s outcomes. The sense of responsibility reduced the incidences of behaviours that are detrimental to the organisation. The managers also indicated one of the advantages of the democratic model was that it allowed for learning. This was particularly beneficial to new hires that could get experience in software development, financial management, customer service management, and leadership training. This they felt made the employees more appreciative of the firm and made them more valuable workers.

The managers indicated that fewer levels of management did not do away with the use of mandatory work procedures that were in place to ensure quality was achieved. Given the nature of the firm’s work, each team elected a team leader was had overall responsibility for ensuring that tasks were achieved.

3.3.5 Disadvantages of Using Firm Democracy

The respondents indicated that the process of inclusion in the decision-making process meant that decision making was very slow and cumbersome. They indicated that sometimes it took weeks to make decisions as consensus had to be established. In a dynamic environment such as the technology sector, delays in decision making often resulted in missing the deals or lagging behind competitors. Most of the managers felt that including all employees, especially the junior officers, in decision making was not productive. They indicated that these officers often do not see the bigger picture. They felt that younger recruits should be left out of decision making as they did not fully appreciate what it takes to attract and retain customers and to build a brand. Further, the managers explained that the employees make decisions that often advantage them at the expense of the firm. The management also felt that the manner in which financial rewards and bonuses were distributed in the firm using the democratic approach was de-motivating. They indicated that rewards were given equally to teams that performed well without consideration for individual contributions. They felt that their years of experience, skills, and knowledge contributed significantly to the success of the firm as such the bonuses paid should be based on contribution. However, an individual contribution was not possible to determine in the democratic model as work was done in teams. The respondents indicated that the decisions were taken by teams and individuals which resulted in the other teams and individuals in the firm not knowing what was going on in the firm. They indicated this type of decision making resulted in duplications and confusion.

3.4 Responses to Questionnaires

Before determining the relationship between firm democracy and firm performance the study sought to establish the principles of firm democracy that were in use in the company studied. Using a five-point Likert scale, the study solicited the respondents’ level of agreement to various statements relating to the individual principals. The results of this inquiry are presented in this section

3.4.1 Principle of Meaning and Vision

The study sought to determine the relevance of the mission and vision of the company.

Table 3.3: Meaning and Vision

SD D N A SA Mission and Vision (%) (%) (%) (%) (%)

The mission and vision of the company are relevant 11.4 9.1 27.3 25 27.3

The mission of the company gives direction 11.4 11.4 9.1 25 43.1 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The findings summarized in Table 3.3 show that 11.4% and 9.1% of respondents felt that the mission and vision of the firm were not relevant. 27.3% of the respondents were neutral. Of the respondents, 25% and 27.3% agreed and strongly agreed that the mission of the firm was relevant. These findings suggest that for a majority of employees (52.3%) the mission of the firm is relevant while for the rest (47.7%) the mission and vision of the firm did not serve any purpose. A majority of the respondents 68.1% indicated that the mission and vision of the firm gave direction while 9.1% were neutral, and 22.8% disagreed and strongly disagreed that the mission and vision gave the firm directions. The responses were given to the first and the second question indicate that the firm’s mission and vision are well understood by a majority of employees. However, a significant proportion of the employees does not understand and therefore, do not fully appreciate the vision and mission of the firm.

3.4.2 Dialogue and Listening

The study sought to determine the connections and sharing of ideas within the company studied. The findings are presented in Table 3.4.

Table 3.4: Dialogue and Listening

SD D N A SA Dialogue and Listening (%) (%) (%) (%) (%) The company creates opportunities for dialogue between the employees and management 0 0 0 0 100 All views are actively listened to. All views are evaluated based on their merit 0 0 25 18.2 56.80 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The study established that the company has open communication channels that allow for dialogue. This was deduced from the respondents’ unanimous agreement that the company creates opportunities for dialogue between employees and management. The study established that the majority of respondents (56.8%) indicated that all their views are actively listened to and evaluated based on their merits.

3.4.3 Fair Play and Honor

The findings summarized in Table 3.5 show the elements of fair play and honour in use in the organisation.

Table 3.5: Fair Play and Honor

SD D N A SA

Fair Play and Honor (%) (%) (%) (%) (%) The company is not divided into management and junior officers. All officers are treated equally 0 54.5 29.5 16 0 Financial and non-financial rewards are distributed equally and fairly 40.9 13.6 25 11.4 9.1 Progression within the company is based on performance 0 0 18.1 11.4 70.5 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The majority of respondents 54.5% disagreed that the firm was not divided into management and junior officers while 29.5% were neutral, and 16% strongly agreed. The findings suggest that there is a hierarchy in the firm. Only 9.1% and 11.4% of respondents strongly agreed and agreed that financial and non- financial rewards were distributed fairly within the organisation. A majority of respondents (54.5%) felt that the financial and non-financial rewards were not distributed fairly while 25% of respondents were neutral. These findings suggest that the firm distributed financial and non- financial rewards unevenly. Of the respondents 18.1% were neutral, 11.4% agreed, while 70.5% strongly agreed that progression in the firm was based on performance. The findings imply that in the firm the performance of the individual was important.

3.4.4 Transparency

The findings presented in Table 3.6 show the level of transparency in the company reviewed in this thesis.

Table 3.6: Transparency

SD SA Transparency (%) D (%) N (%) A (%) (%) All employees have access to information about the firm's strategy 0 0 0 0 100 All employees have access to information needed for independent decision making 0 0 0 0 100 The financial results of the company are accessible to all employees 0 0 0 0 100 All employees have access to information about the company and know how to handle the information 13.6 47.8 31.8 6.8 0 The activities of the firm are transparent to the customers 10.4 12.4 52.2 13.6 11.4 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019) 44

The responses given by the respondents indicate that the employees are aware of the firm strategy; they have sufficient information needed for decision making and have access to the financial condition of the firm. However, the majority of respondents indicated that they did not know how to handle the information they had access to. The findings summarized in Table 3.6 indicate that the activities of the firm are not transparent to the customers.

3.4.5 Responsibility

Table 3.7 shows the dimension of responsibility that is in use in the company

Table 3.7: Responsibility

SD D N A SA Responsibility (%) (%) (%) (%) (%)

Each employee is required to be personally responsible for their actions and activities to the firm 0 0 0 10.2 89.8

There is a clear framework of who is responsible for what activity 0 0 0 0 100

The company operates on ethical principles 14 16 20 12 38 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The respondents indicated that each employee is personally responsible for their actions and activities to the firm; this is deduced from the fact that 10.2% and 89.8% agreed and strongly agreed with the statement. The responses summarized in Table 3.7 indicate that there is a clear framework of who is responsible for what activity. A majority of respondents 38% indicated that the firm operated on ethical principles, 12% agreed, 20% were neutral, 16% disagreed and 14% strongly disagreed with the statement. These findings suggest that ethical principles are not emphasized in the organisation.

3.4.6 Involvement

The study sought to determine the level of involvement of the employees in the firms’ activities. The findings are presented in Table 3.8

Table 3.8: Involvement

SD D N A SA Involvement (%) (%) (%) (%) (%)

There is a sense of belonging in the company 22.7 20.5 14.9 16.9 25

The company focuses on the individual identity with the emphasis being on unity 13.6 11.4 47.7 11.4 15.9

Employees are willing to work beyond the scope of their duties 9.1 0 13.6 27.3 50 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The results indicate that 41.9% of respondents had a sense of belonging in the company, 14.9% were neutral, and 43.2% indicate that they do not have a sense of belonging. The study established that the firm has a high turnover. This implies that the employees do not feel that they belong and thus leave the firm. The findings summarized in Table 3.8 show that the majority (47.7%) of respondents were neutral to the question that the firm focuses on the individual identity with the emphasis being on unity. In response to this question 13.6% strongly disagreed, 11.4% disagreed, 11.4% agreed, and 15.9% strongly agreed. The respondents who disagreed were 25% while those who agreed were 27.3 which was almost balanced. Thus the researcher could not determine if the firm focused on the individual identity with an emphasis on unity. The findings suggest that a majority of respondents 77.3% were willing to work beyond the scope of their duties while 9.1 were strongly against the idea of working beyond the scope of their duties while 13.6% were neutral.

3.4.7 Co-Decision

The study investigated the co-decision process in the firm. The findings are summarized in Table 3.9. Table 3.9: Co-Decision

SD D N A SA Co-decisions (%) (%) (%) (%) (%) All the employees can reach a consensus of what to do 18.4 38.8 10.2 12.2 20.4 Everyone in the company can agree on where and when to work 0 0 0 6.1 93.9 People can agree to work with different individuals 0 2 18.4 24.5 55.1 Everyone can agree on how they will work 0 0 0 69.4 30.6 The employees have a say on how much work they will do 0 0 0 73.5 26.5 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The findings indicated in Table 3.9 suggest that the employees cannot find consensus on what to do given that 18.4% strongly disagreed, 38.8% disagreed, and 10.2% neutral while only 12.2% and 20.4% agreed and strongly agreed. The findings indicate that 6.1% and 93.9% agree and strongly agree that everyone in the company can agree on where and when to work. One of the key pillars of the democratic firm is the ability of the employees to determine how and when to work. A majority of respondents indicated that they are willing to work with different individual as indicated by 55.1% and 24.5% of respondents strongly agree and agreeing while 24.5 indicated that they were neutral suggesting that they would not mind working alone or with others. Only 2% indicated that they were not willing to work with different individuals. The findings also suggest that the employees determine the amount of work they will do as implied 73.5% and 26.5% agreeing and strongly agreeing with the assertion.

3.4.8 Integrity

The study asked the respondents about integrity in the company. The findings are summarized in Table 3.10.

Table 3.10: Integrity

SD D N A SA Integrity (%) (%) (%) (%) (%)

The company does what is in accordance with what it states it will do 0 0 52.3 20.5 27.3

There is mutual confidence between the management and the employees 9.1 29.5 15.9 27.3 18.2 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The findings indicate that 52.3% were neutral to the question that the company does what is in accordance with what it states to do. While 20.5% and 27.3% agreed and strongly that the company does what it says it will do. The findings summarized in Table 3.10 suggest that the mutual confidence between the management and the employees is not certain. This is implied by the fact that 38.6% of respondents were in disagreement, 45.4% were in agreement while 15.9% were neutral.

3.4.9 Decentralization

The study sought to determine the level of decentralization in the organisation. The findings are presented in Table 3.11

Table 3.11: Decentralization

SD D N A SA Decentralization (%) (%) (%) (%) (%) Work is divided amongst teams, and individual team members decide what they will do together and what they will do on their own 0 0 0 20.5 79.5 Knowledge and powers are spread out across the firm rather than being concentrated 30.2 34.1 22.7 10.7 2.3 Communication is done directly not through management or supervisors 0 0 0 0 100 If the current management is not available the company will continue to operate 0 0 100 0 0 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The responses given indicated that the work in the organisation was divided amongst teams and the individual team members decided what they will do together and what they will do individually. The responses given in Table 3.11 indicate that knowledge and power are not spread out across the firm rather they are concentrated in a few individuals as suggested by a majority of respondents (64.3%) who disagreed with the statement, while 22.7% were neutral, 10.7% agreed, and 2.3% strongly agreed. The respondents indicated that communication was done directly not through management and supervisors. All the respondents were neutral to the question of what would happen to the company if the current management were not available. These findings suggest that there is no succession planning in the firm. These findings imply that perhaps the survival of the firm is tied to individuals rather than to the institutions/departments.

3.4.10 Reflection and Assessment

The level of reflection and assessment in the firm are presented in Table 3.12.

Table 3.12: Reflections and Assessments

SD D N A SA Reflection and Assessment (%) (%) (%) (%) (%)

There is plenty of feedback 0 0 0 38.6 61.4

The feedback is constructive 9.1 11.4 18.2 31.8 29.5

There is an understanding of the need for and the importance of feedback 0 0 28.6 40.8 30.6

There is a tool such as questionnaires, moderated meetings, scorecards etc. that can be used to elicit feedback 0 0 0 28.6 71.4 SD= Strongly Disagree, D=Disagree, N=Neutral, A= Agree, SA= Strongly Agree Source: Study Data (2019)

The findings indicate that the respondents received plenty of feedback as suggested by the fact that 38.6% and 61.4% of respondents agreed and strongly agreed with the statement. Of the respondents 9.1%, 11.4%, 18.2%, 31.8%, and 29.5% strongly disagreed, disagreed, were neutral, agreed, and strongly agreed that the feedback they received was constructive. The respondents indicated that there was an understanding of the need for and the importance of feedback as deduced from the responses whereby 40.8% agreed while 30.6% strongly agreed. The study determined that the firm uses questionnaires, moderated meetings, and scorecards to solicit feedback from the employees.

3.5 Firm Democracy and Firm Performance The study sought to determine the extent to which firm performance had grown over the period during which the individual employees had worked at the firm. The findings are summarized in Table 3.13.

Table 3.13: Firm Performance

1 2 3 4 5 Performance (%) (%) (%) (%) (%)

To what extent has firm performance grown over the period you have worked at the firm 0 0 20.4 34.7 44.9 1= Very Little Extent; 2= Little Extent; 3=No Extent; 4= To Some Extent; 5= A Great Extent Source: Study Data (2019)

The majority (44.9%) of respondents indicated that the firm performance had improved by a very great extent over the period they had worked at the firm while 34.7% indicated that performance had grown by a great extent and 20.4% were neutral. It can thus be deduced that the firm’s performance had registered growth.

3.6 Firm Democracy and Firm Performance The objective of the study was to determine the relationship between firm democracy and firm performance. The thesis hypothesized that:

H1: There is a statistically significant relationship between meaning and vision and firm performance.

H2: There is a statistically significant relationship between dialogue and listening and firm performance.

H3: There is a statistically significant relationship between fair play and honour and firm performance.

H4: There is a statistically significant relationship between transparency and firm performance.

H5: There is a statistically significant relationship between responsibility and firm performance.

H6: There is a statistically significant relationship between involvement and firm performance.

H7: There is a statistically significant relationship between co-decision and firm performance.

H8: There is a statistically significant relationship between integrity and firm performance.

H9: There is a statistically significant relationship between decentralization and firm performance.

H10: There is a statistically significant relationship between reflection and assessment and firm performance. In order to determine the relationship between firm democracy and firm performance, the aggregate mean score of performance was regressed against aggregate mean scores of the principles of firm democracy. The results of the analysis are summarized in this section.

Table 3.14: Model Summary

Adjusted R Std. Error of Model R R Square Square the Estimate 1 .930a .864 .823 .326 a. Predictors: (Constant), Reflection and Assessment , Transparency , Dialogue and Listening , Responsibility , Integrity, Meaning and Vision, Fair play and honour, Co- decision, Decentralization, Involvement Source: Study Data (2019)

The correlation coefficient (R) is 0.930 which implies that there was a strong correlation between the firm performance and the principles of firm democracy. The R square indicates how close the data was fitted to the regression line. The higher the R square, the better the model fit. The computed R square was 0.864 which implies that 86.4% of the variation in firm performance is occasioned by the principles of firm democracy.

Table 3.15: ANOVA Sum of Mean Model Squares df Square F Sig. 1 Regression 22.369 10 2.237 20.990 .000b

Residual 3.517 33 .107 Total 25.886 43 a. Dependent Variable: To what extent has firm performance grown over the period you have been working at the firm b. Predictors: (Constant), Reflection and Assessment, Transparency, Dialogue and Listening, Responsibility, Integrity, Meaning and Vision, Fair play and honour, Co-decision, Decentralization, Involvement Source: Study Data (2019)

Table 3.15 summarizes the results of the Analysis of Variance (ANOVA) test. The test indicates the significance of the model. The p-value is 0.000 which is less than the critical value of 0.05. This implies that the principles of firm democracy are good predictors of firm performance.

Table 3.16: Coefficients

Unstandardized Standardized Coefficients Coefficients

Model B Std. Error Beta t Sig. 1 (Constant) 5.883 3.226 1.823 .007

Meaning and Vision .241 .120 .264 2.003 .043

Dialogue and .171 .308 .090 .554 .042 Listening

Fair play and honor .077 .066 .128 1.160 .025

Transparency .720 .174 .378 4.127 .000

Responsibility .001 .144 .000 .006 .020

Involvement .032 .106 .051 .300 .008

Co-decision .098 .108 .105 .900 .037

Integrity .196 .117 .199 1.667 .010 Decentralization .152 .254 .094 .600 .016

Reflection and .528 .154 .518 3.420 .002 Assessment

a. Dependent Variable: To what extent has firm performance grown over the period you have been working at the firm Source: Study Data (2019)

The findings presented in Table 3.16 indicate that firm democracy indicated by the meaning and vision, dialogue and listening, fair play and honour, transparency, responsibility involvement, co-decision, integrity, decentralization, and reflection and assessment have a positive and statistically significant effect on firm performance.

3.7 Implications of the Study The findings of the study have numerous implications for academics, business owners, managers and policymakers. This thesis provides empirical evidence that the management approach used in the organisation has an effect on the performance of the firm. The stakeholders of the firm have an effect on the performance of the firm. The interests of the employees should not be ignored when determining the approach for management of the firm. Business owners should bear in mind that the employees of the firm bring ideas, knowledge and skills which provide the organisation with a competitive advantage. Considering the benefits of allowing for participatory management against the losses of participatory management, the business owners should be willing to sacrifice absolute control of the firm and share decision making with the stakeholders. From the manager’s perspective, the findings of the study provide the theoretical and empirical background for understanding the behaviours’ and decision-making perspective of the employees. Being equipped with this information will help them improve their leadership style on the one hand, and realize the potential benefits of inclusive decision making on the other hand.

4 DISCUSSION

4.1 Discussion of Responses 4.1.1 Meaning and Vision

The meaning and vision of the firm are important as they provide direction to the organization. According to Slinták (2016), the earnings and market value of the firm are not sufficient justification for the purpose of the firm. Hajzler (2017) indicates that the meaning and vision are the pillars of firm democracy and indicate whether the employees are going to go along with the firm. It indicates to the employee if it is appropriate to continue working at the firm. The managers indicated that the meaning and vision of the firm were part of their principles and gave the firm direction. The findings suggest that employees understand the meaning and vision of the firm. However, the study established that the average time an employee stayed with this firm was 1-5 years which is relatively short. In this firm, the employees understand the meaning and vision of the firm but do not see a future in the firm.

4.1.2 Dialogue and Listening

Fenton (2012) indicates that dialogue and listening provide connections and distribution of ideas. The findings indicate that the employees are willing to share their ideas and perspective and that their ideas are received by the management. The managers also indicated that the firm had an open door policy and the employees were encouraged to share ideas and opinions.

4.1.3 Fair Play and Honor

These findings suggest that fair play and honour are not present in the firm. In the interviews, the managers indicated that the firm gave financial and non-financial rewards based on individual performance. This was confirmed by the employees who indicated that the financial and non-financial rewards were not distributed evenly throughout the firm. Petryni (2016) argues that corporations can have democratic systems. However, the process of decision-making is not democratic. This is because the firm is made up of various stakeholders. Each stakeholder has a different role to play. The shareholders and their nominee the Chief Executive Officer (CEO) have a responsibility to make profits efficiently. The employees are there to carry out the 55 instructions of the CEO. The inconsistency in firm democracy comes out here. In fully democratic firms, all the stakeholders have an equal voice. The managers and the employees indicated that progression within the firm was based on contribution and performance. The responses were inconsistent with the concept of firm democracy in which the organization was a flat structure. The career path expectation of each employee is promotion up the firm hierarchy. Given that there is no hierarchy, it was expected that the employees remain at the same level. Carr and Mellizo (2014) established that firm democracy significantly focuses on the incentives in the context of team production. They established that team production creates challenges because the individual output is not verifiable, indicating that the firm either gives a flat wage or pays the team based on their level of output. The firm cannot pay the individual. However, paying a flat-wage creates the free-rider behaviour of workers. Financial participation solves the problem by basing the pay and reward on the output per individual. The findings suggest that the company uses the financial participation approach suggested by Carr and Mellizo to reward performance.

4.1.4 Transparency

Hamel (2013) indicates that a key requirement for this principle is that the employees are willing to do the right thing and do a good job, but they need to find out what is the proper way. This can only be achieved through access to large amounts of information. The findings suggest that although the employees have access to large amounts of information but access to information is not beneficial as they do not know how to handle the data.

4.1.5 Responsibility

The managers and the employees confirmed that each individual is responsible and accountable to the firm for their actions. The managers indicated that employees work in teams in which each team member is assigned duties and responsibilities. The findings show that the firm adheres to the principles of responsibility as espoused by Wilson (2011) and Hajzler (2017) whereby responsibility provides an environment in which all employees are clear what their duties and roles are and to whom they are responsible to. The findings suggest that ethics and principles are not relevant to the firm.

4.1.6 Involvement

The findings suggest that the firm is not too concern with creating an environment of involvement and creating unity in the organisation. Yazdani (2010) indicates that the main elements of the democratic firm are unity and the identity of the employee. The principle of involvement requires the participation of the employee and the drive to bring in new impulses. The conditions set by Yazdani for a democratic firm to have involvement are violated by the firm. Denhardt and Denhardt (2003) established that democratic leadership results in high employee output, increased job satisfaction, cooperation, and commitment. The controls and formal rules and procedures that bring about low employee contribution, and increase turnover are done away with. Bass (1990) maintains that the democratic leadership enhances commitment and the willingness of the employees to give their best at work. The findings of the study suggest that this is not applicable to the firm.

4.1.7 Co-decision

Petersen (2012) and Hajzler (2017) indicate that the concept of co-decision requires that the process of decision making allow each individual in the firm to decide what to do, when, where and with whom to do and how much work to do. The principle as described is fully operational in this firm. The findings indicate that the co-decision procedure of the company allows the employees to make decisions without much consultation from the management. However, this approach to decision making meant that some members of the organisation did not know what other teams were doing leading to duplications.

4.1.8 Integrity

The principle of integrity encompasses ethical and moral principles and trust (Fenton, 2012; Petersen, 2012; Hajzler, 2017). The integrity of the organisation depends on the action of the individual and the firm. The findings suggest that in this company integrity is not present. Additionally, the findings suggest that there was not so much customer focus. The firm was focused on efficiency, agility, and innovation but not on their customers. The voice of the managers and employees was present, but the voice of the customers was missing.

4.1.9 Decentralization

Viggian (2011) indicates that decentralization entails the reduction of the hierarchy in the firm. The power in the firm is distributed and shared; decision making is not a top-down process but done in smaller units across the firm. The findings indicate that power and knowledge are still concentrated in the hands of the management. This means that it should make the managers exit the firm might not continue operations. The findings suggest that some elements of reduction of the hierarchy are present given that the employees can determine how they will work and there is direct communication. From the interviews, the researcher was able to deduce that there was a hierarchy in the firm, albeit discrete, which was made up of the managers who had served at the firm for a long time.

4.1.10 Reflection and Assessment

Fenton (2012) and Hamel (2013) maintain there should be continuous learning within the organisation. The management should provide reflections and evaluations as a way of determining whether the learning process is effective. Fenton (2012) and Hamel (2013) stress that the feedback should be in both directions. The findings of the study suggest that the importance of feedback is well understood, but the constructiveness of the feedback presents a challenge. The expectations of the flat management structure require that the progression is in the form of learning and building of skills. In this firm, the progression seems to be by way of financial rewards.

4.1.11 Firm Performance and Firm Democracy

The debate over the relationship between the management style and firm performance has been contested. One school of thought maintains the management style and the disposition of the leaders affect the decision-making process. This school of thought maintains that laissez-faire management styles allow for firms to find solutions to the challenges and adapt to the dynamic business environment that the firm faces (Bass, 1991; Waldman & Yammarino, 1999). The other school of thought argues that the firm’s resource endowment affects performance; therefore, the management approach has no effect of performance (Hanna & Freeman, 1989; Meindl, 1990).

The findings suggest that the management approach on its own affects performance, confirming the suppositions of the first school of thought. Fenton (2012) hypothesized that democratic companies are leaders in their respective industry. This hypothesis was based on the postulation that democratic models and designs were the factors that contribute to making the company success than the less democratically organized competitors. The firm sampled in this study is the leader in its industry. Industry data shows that the firm has an annual sales growth of 42% per annum and operates in 118 countries across the globe. Its nearest rival operates only in Europe and the United States with revenues of 70% of what the firm sampled earned. The findings suggest that the hypothesis put forward by Fenton (2012) is confirmed by the responses given by the respondents. Carr and Mellizo (2014) identified four elements of democratic firms that affected the financial performance of the firms. They include employee support and participation in the process of decision making, job security, group cohesiveness and individual rights. The empirical findings of this study show that some of the elements are presents in the firm that was studied. However, the contribution of each of the four elements is not clear. In this study, it was established that there was limited participation of the employees in the financial gains of the firm and high turnover. However, the decision-making process was inclusive. This raised the question of the significance of financial participation and job security principles of democratic firms on firm performance.

4.2 Limitations of the Study Despite the question of firm management being discussed in various academic works, very few studies were found to comprehensively discuss the question of firm democracy and its effect on firm performance. This was a limitation for the study as it meant that there was very little literature to compare and contrast the findings of this thesis. Secondly, the findings of the study are based on the responses given by the respondents. The validity of the findings is determined by how truthful the respondents were. The researcher had no concrete method to determine if the answers given were truthful or reflect the true conditions in the firm. A third limitation of the study is that the focus was on qualitative data. The use of empirical data could have increased the validity of the findings. The fourth limitation of the study was the focus only on one firm in the Czech Republic; this gives limited insight into the issue of firm democracy and firm performance.

4.3 Recommendations for Future Studies The study recommends that future studies should be expanded to include all the firms in the Czech Republic that use the democratic management approach. The expanded study sample would result in a greater pull of data which would prove more insightful. Additionally, this would allow for comparisons. Additionally, the scope of the study should also be expanded to include firms in Europe and across the globe. This would enrich the field of knowledge. The study used qualitative data which makes it difficult to make causal inferences about the effect of workplace democracy on firm performance. Additionally, the use of qualitative data has the challenges of bias of the respondents. Future studies should be conducted with qualitative data. This will allow for the testing of hypothesis and determining the significance of the effect of firm democracy on firm performance.

CONCLUSIONS

The concept and notion of democratic organizations were first put forward in western nations. This concept is beginning to take root in the rest of the world. It is therefore not surprising that developing nations like the Czech Republic should be considered as natural settings for the extension of firm democracy. The study assumed that the firm democracy model is the methodology that enables innovation, creates meaning and values, and produces knowledge which in turn allow the firm to have a competitive advantage. In the model, the success of the firm is due to individual and team effort. The study sought to determine the relationship between firm democracies and firm performance. In the literature review chapter, the central idea of firm democracy and the theory that supports the concept of firm democracy are highlighted. The various types of firm democracy such as sociocracy, holocracy, workers cooperatives and ESOPs are discussed. The concept of financial performance is also discussed. The empirical literature is also provided in the literature review section. This review highlights the studies that have previously been done so as to identify the knowledge gaps. The data for the study was collected using a questionnaire and by way of interviews. The questionnaire was divided into two sections. The theories of workplace democracy indicate that the firm is managed and governed by all the employees and stakeholders in the firm. The actions and activities of individuals affect performance. The study established that the principles of democratic management are relatively simple and straight forward, but there are significant differences in their interpretations and implementations within organizations. The study concludes that the form of firm democracy is determined at the firm level. Many advocates of firm democracy champion greater alignment of the producer and product flow so that the benefits arising from the products flow to the producers. However, various theorists have argued against such flows in the democratic firm as this would give rise to the free-rider problems (Weitzmann & Kruse, 1990; Kruse, 2002; Ben-Ner & Ellman, 2013). In the United States, group incentive schemes such as share ownership and profit sharing have been found to have a positive effect on firm performance. In the Czech Republic, there are a limited number of studies on the subject matter; thus there is limited information to allow for comparison. The findings of this thesis suggest that in the Czech Republic, the democratic firm

61 does not include profit sharing. However, financial performance was found to be positively impacted by the principles of democracy despite the lack of financial participation. It is premised that firm democracy results in the wellbeing of the employees improving and reduces the turnover rate (Fenton, 2012). Pencavel and Craig (1994) and Pencavel (2002) established that in firms with traditional management models the level of turnover is very high while employment in cooperatives was stable although the wages were more volatile and lower than in the other firms. The study established that the turnover rate can be high despite the firm practising workplace democracy. The study concludes that the subjective wellbeing of the employee is more relevant than the management styles.

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LIST OF TABLES Table 1.1: Fenton's Business Health Matrix ...... 24 Table 1.2: The Balanced Scorecard ...... 25 Table 2.1: Principles of Firm Democracy ...... 28 Table 2.2: Definition of Principles of Democracy ...... 31 Table 3.1: Respondents Level of Education ...... 35 Table 3.2: Respondents Length of Service at the Firm ...... 36 Table 3.3: Meaning and Vision ...... 42 Table 3.4: Dialogue and Listening ...... 43 Table 3.5: Fair Play and Honor...... 43 Table 3.6: Transparency ...... 44 Table 3.7: Responsibility ...... 45 Table 3.8: Involvement ...... 46 Table 3.9: Co-Decision ...... 47 Table 3.10: Integrity ...... 48 Table 3.11: Decentralization ...... 49 Table 3.12: Reflections and Assessments ...... 50 Table 3.13: Firm Performance ...... 51 Table 3.14: Model Summary ...... 52 Table 3.15: ANOVA ...... 52 Table 3.16: Coefficients ...... 53

LIST OF FIGURES Figure 1.1: Management Model Used by Mondragon ...... 17 Figure 1.2: Governance Structure in Holacratic Organization ...... 20 Figure 2.1: General Framework ...... 27 Figure 2.2: Conceptual Framework ...... 29 Figure 3.1: Respondents' Gender ...... 35 Figure 3.2: Respondents Ages ...... 37 Figure 3.3: Firm Structure ...... 40

LIST OF ABBREVIATIONS

A Agree

CEO Chief Executive Officer

D Disagree

EBIT Earnings before Interest and Tax

ESOP Employee Stock Ownership Plan

EVA Economic Value Added

IIRC Institutional Investors Research Center

N Neutral

SA Strongly Agree

SD Strongly Disagree

LIST OF APPENDICES

Appendix 1: Interview Guide Appendix 2: Questionnaire

Appendix 1: Interview Guide

An interview guide was developed for the collection of data from the management of the firm. The following questions were presented to the management. 1. What is your gender? 2. What is your age? 3. What is your academic background? 4. How many years have you worked at this company? 5. What elements of firm democracy are implemented in the firm? 6. How is firm democracy implemented in the firm? 7. What are the positive and negative effects of firm democracy? 8. How does firm democracy affect firm performance? 9. The performance of the firm is indicated by

Performance Indicator Objective Measures Increase Revenue, Increase Profitability, Profits, Costs, and Income Financial and Decrease Operating Costs from Target Markets Improve clarity of offering, improve market perception, and improve customer Market Share, Customer Customer satisfaction Satisfaction Improve offering selection, improve New Products and Internal information services, improve supplies Services, Brand Processes reliability, and improve cost control Recognition, Efficiency Employee training, Organisational Improve knowledge and skills, improve Technological Integration, Capacity technology, and improve supply chain Supply Management

10. To what extent has firm performance grown over the period you have been working at the firm 1= Very Little Extent; 2= Little Extent; 3= No Extent; 4= To Some Extent; 5= A Great Extent;

11. Please indicate to what extent you think firm democracy affects firm performance. The

rank is as follows 1= Very Little Extent; 2= Little Extent; 3= No Extent; 4= To Some

Extent; 5= A Great Extent;

Performance 1 2 3 4 5 6 Meaning and Vision Dialogue and Listening Fair play and honour Transparency Responsibility Involvement Co-decision Integrity Decentralization Reflection and Assessment

Appendix 2: Questionnaire

Part 1: Background Information

1. What is your gender [ ] Male [ ] Female

2. What is your age

[ ] 18-30 years [ ] 31-40 years

[ ] 41-50 years [ ] 51 and above

3. What is your academic background?

Elementary [ ] High School [ ]

Diploma [ ] Bachelors [ ]

Masters [ ] Doctorate [ ]

4. How many years of have you worked at this company

Less than 1 year [ ] 1-5 years [ ]

6-10 years [ ] 11-16 years [ ]

Part 2: Principles of Firm Democracy Used By the Company

Kindly rank the following characteristics of firm democracy that are applied in your organisation. The rank is as follows 1= Strongly Disagree; 2= Disagree; 3= Neutral; 4=Agree; 5= Strongly Agree

No. Principle Issue 1 2 3 4 5

1 Meaning and The mission of the company is relevant Vision 2 The mission of the company gives direction

The company creates opportunities for dialogue 3 Dialogue and between the employees and management Listening All views are actively listened to. All views are 4 evaluated based on their merit

The company is not divided into management and 5 junior officers. All employees are treated equally Fair play and Honor Financial and non-financial rewards are 6 distributed equally and fairly Progression within the company is based on 7 performance All employees have access to information about 8 the firm's strategy

All employees have access to information needed 9 for independent decision making

Transparency The financial results of the company are 10 accessible to all employees All employees have access to information about the company and know how to handle the 11 information The activities of the firm are transparent to the 12 customers Each employee is required to be personally responsible for their actions and activities to the 13 firm Responsibility There is a clear framework of who is responsible 14 for what

15 The company operates on ethical principles

16 There is a sense of belonging in the company

Involvement The company focuses on the individual identify 17 with the emphasis being on unity Employees are willing to work beyond the scope 18 of their duties All the employees can reach a consensus of what Co-decision 19 to do

Everyone in the company can agree on where and 20 when to work People can agree to work with different 21 individuals

22 Everyone can agree on how they will work The employees have a say on how much work 23 they will do

The company does what is in accordance with 24 what it states it will do Integrity

There is mutual confidence between the 25 management and the employees

Work is divided amongst teams, and individual team members decide what they will do together 26 and what they will do on their own

Knowledge and powers are spread out across the 27 Decentralization firm rather than being concentrated

Communication is done directly not through 28 management or supervisors

If the current management is not available, the 29 company will continue to operate

30 There is plenty of feedback

31 The feedback is constructive

Reflection and assessment There is an understanding of the need and the 32 importance of feedback There is a tool such as questionnaires, moderated meetings, scorecards etc. that can be used to elicit 33 feedback

Source: Fenton (2012)

Part 3: Performance of the Firm

The performance of the firm is indicated by

To what extent has firm performance grown over the period you have been working at the firm 1= Very Little Extent; 2= Little Extent; 3= No Extent; 4= To Some Extent; 5= A Great Extent;

Please indicate to what extent you think firm democracy affects firm performance. The rank is as follows 1= Very Little Extent; 2= Little Extent; 3= No Extent; 4= To Some Extent; 5= A Great Extent;

Performance 1 2 3 4 5 6 Meaning and Vision Dialogue and Listening Fair play and honour Transparency Responsibility Involvement Co-decision Integrity Decentralization Reflection and Assessment