Employee-Owned Companies in Eastern Europe, After Ten Years of Privatization*
by Iraj Hashi

Ten years after the beginning of the momentous changes in Central and Eastern Europe, the economic and political landscape has dramatically altered. The old Soviet-style planned economies (with varying degrees of planning) have been transformed into market-driven capitalist systems (of varying degrees of development). An important aspect of the transition to capitalism has been the large-scale privatization of state-owned enterprises. Despite ten years of debate and actual experience, there is no consensus about the best method of privatization, or about the success or failure of ownership transformation in these countries.

Diverse Methods of Privatization

Firms may be privatized in a variety of ways. They may be sold through IPOs (shares offered for sale on the open market), direct sales (sale to selected buyers through negotiation), auctions (sale to the highest bidder), and sale to employees and managers (at reduced prices). They may also be transferred to citizens (or a subset of citizens) free of charge through an equal-access voucher system. Here the state distributes vouchers (or entitlements) among the population, who can exchange these vouchers for shares of companies in the privatization scheme. Thus the notion of mass voucher, or coupon, privatization.

Employees have ended up as owners (with varying proportion of stocks) of a large number of companies in many countries. With the exception of countries within the former Yugoslavia, the leading politicians of Central and East European countries had no particular interest in employee ownership. But political considerations, the desire for speed, and the fact that the general population had little financial resources, resulted in the choice of particular methods of privatization. Mass privatization (free distribution of shares to the citizens), and sale to employees (at lower than market prices and payment by installment) are examples.

In Russia, the largest and most important former socialist country, some 6,000 enterprises were transfered in a short space of less than two years following the 1992 privatization law. Three-quarters of these enterprises opted for the method that allocated 51% of shares to employees at greatly reduced prices. The remaining 49% were offered to outsiders (individuals, investment funds or other companies) using vouchers or cash.

In Poland, the largest Central European socialist country, several methods of privatization were employed. But the largest number of companies, near 1,500, were leased or sold (on preferential terms) to employees and managers. This compares with about 200 companies sold on the stock market and some 512 companies transferred in a mass privatization scheme. The behavior and performance of management employee buy-outs (MEBOs) are of particular interest to students of worker ownership and worker control, because these companies have to compete with other privately owned and investor dominated companies.

The countries emerging from the break-up of former Yugoslavia have a special place in the study of privatization. In all of these countries, the system of workers self-management had been well established since the early 1950s. There was a general understanding that “enterprises belonged to their employees,” going back to Tito’s famous slogan of “factories to the workers.” In fact, enterprises did not belong to workers. They belonged to the “society,” which left them “in trust” with employees. Enterprises were not “state-owned” as in other Central and East European countries but “socially owned.”

The transition to capitalism resulted, almost over- night, in the dismantling of the self-management system. In nearly all of these countries the governments decided that adopting a market economy was their top priority, and that privatizing their socially owned enterprises was essential to that policy. The secondary question was how to convert social ownership to private ownership. Interestingly, politicians believed that there was a lack of clarity of ownership in former Yugoslavia. In the successor republics, politicians decided that privatization would help clarify this. [Editors note: for an interesting view on this question, see Horvat’s contribution in the previous issue (#49) of GEO. Horvat maintains that ownership was not unclear at all. Thus the transformation of ownership rights to individuals or institutions outside the enterprise was tantamount to expropriation, hence illegal.]

The exact mechanism of conversion varied in different republics. In Croatia, all socially owned property was simply “nationalized” first, so that it could be subsequently privatized without having to give employees a say in the decision. In this way, the issue of ownership was allegedly clarified. A large number of these firms were put in a mass privatization program and distributed amongst the displaced refugees, war veterans, and other groups who had suffered as a result of the invasion and war. In Slovenia and Macedonia, the most and the least developed republics of former Yugoslavia respectively, socially owned enterprises were converted into joint stock companies, with the majority of shares going to current and former employees who obtained the most influential management positions. State-owned funds (such as development funds or pension funds) took another large bloc of shares, and the remainder was sold to sold on the open market.

How Privatized Firms Have Performed

We can now go on to discuss the behavior of privatized firms and their management in the post-privatization period. We need, first, to formulate several criteria against which progress can be measured. The most commonly used criteria are:

1. Corporate governance

Is the firm run in in the interests of its stakeholders (owners, employees, creditors, customers, etc.)? Some privatization methods lead to dispersion of share ownership and a consequent quasi-independence for the managers, who may exploit this for their self-interest without monitoring by shareholders. Underdeveloped legal frameworks and weak law enforcement in transition economies aggravate this condition. Inadequately regulated corporate governance will not be able to produce improvement in firm’s efficiency and productivity. Moreover, potential investors would be unwilling to part with money, lacking sufficient guarantees against misuse of their funds. Capital for investment and technological improvement is badly needed after years of under-investment.

2. Restructuring

Given the history of enterprises in former socialist countries, almost all of them need fundamental restructuring in order to function in a competitive market. This includes changes in input mix, output basket, technology, management, and all other aspects of conducting business. Downsizing is often needed because of overstaffing, which was common in socialist countries. Restructuring may require closing down parts of a company or the entire firm. Some privatization methods facilitate restructuring while others hinder it. Restructuring also requires additional new capital.

3. Evolution of ownership through secondary share markets

The initial privatization schemes were implemented under extreme historical conditions (the rapid disintegration of soviet-type socialism). But there existed the possibility of secondary markets in shares through which the ownership would evolve toward a more satisfactory form. Again, some methods of privatization lend themselves to further evolution, while others create an inflexible ownership structure with little possibility of change.

Using these three criteria, employee ownership was not often regarded as the most effective method of privatization. Employees were frequently expected to be less willing to undertake serious restructuring. Banks would be less willing to lend money to employee owned companies because of their perceived higher risk of default. Employees were expected to be reluctant to sell their shares to outsiders because of the fear of reduction in employment.

But what has actually happened in these countries? What has actually been the record of employee owned companies in the post-privatization period?


In Poland there are about 1,200 worker-owned companies. The outcome of MEBOs (management employee buy-outs) in Poland is generally regarded as satisfactory, despite a number of difficulties they have faced. About 10% of these firms were unable to survive the emerging market economy and have gone out of business. Given the poor financial state of state-owned enterprises in the early 1990s, this is regarded as a reasonable level of failure. Employees, or at least a section of them, are closely involved in the management of the firms. Depending on the ownership stake of workers and managers, some monitoring is done by the employees (as interested parties). Thus outright theft and misuse of power may be forestalled. The restructuring process has been slow in these firms, although many report a reduction in their work force. Banks have been unwilling to offer them loans. This has further slowed their restructuring efforts.

There has been a very slow process of sale by employees to outsiders, especially in the unsuccessful firms, where the employees have decided to cut their losses and sell. The need for new capital has led many firms to accept outside investors (by injecting additional capital and diluting the insider’s holdings, or by selling some of the existing shares to them). In exceptional instances, companies have been successfully floated on the stock exchange, with employees selling their shares and pocketing significant capital gains. In most cases, there has been a gradual sale of shares by mainly non-managerial employees to outsiders.


Studies of Russian privatized firms show that restructuring has been slow. Insider-domination combined with a weak legal framework often led to the expropriation of minority shareholders. Therefore there was no rush by outsiders (especially foreign investors) to buy these companies’ shares. Furthermore, insider ownership has not been as short-lived and transitory as the proponents of Russian privatization expected. It was not enough to have tradable shares and a stock market. Tradability is a necessary but not sufficient condition for a buoyant secondary market in shares. Managers have been hostile to outsiders and have colluded with workers to keep the outsiders out of their companies even when they do recognise the benefits of bringing in outsider investors.


Slovenian firms, unlike their Polish counterparts, had a history of self-management. They came out of the privatization process as joint stock companies largely owned by their employees, managers and former employees. A number of state-owned funds were also given shares in these companies. The remainder was obtained by Privatization Investment Funds. Vouchers had been distributed to the population free of charge, and citizens gave their vouchers to investment funds, becoming their shareholders. The funds, in turn, exchanged these vouchers for shares of privatized companies.

Although companies were joint stock companies, and their shares could be traded on the stock market or privately, the self-management background was expected to result in the entrenchment of the initial managers and a lack of flexibility in the ownership structure. There is little evidence on the evolution of ownership of over 1,500 companies in the privatization program. However, a research project by Simonetti and others surveyed 183 enterprises in Slovenia with a view to identifying any change in the structure of ownership. It is clear from this research that employees and former employees have retained their shares almost in full over a 5-6 year period. Government and state owned funds have reduced their holding significantly while privatization funds have reduced their holdings marginally. Only the management, domestic investors and financial institutions have increased their stake in the privatized companies. Interestingly, foreign investors have not made an in-road into the ownership of Slovenian firms. This may be for two reasons. First, Slovenians are said to be unwilling to sell their shares to foreign investors despite much pronouncement to the contrary. Second, which is more likely, foreign investors may be unwilling to invest in enterprises dominated by their employees and managers.

The fairly static picture of ownership change reflected in this data highlights the inflexibility associated with Slovenian privatization. The managers, employees, and funds believe that if they hold on long enough, particularly until EU accession, they will reap the benefits of privatization.

The Slovenian economy has been one of the few successful transition economies of Eastern Europe. It has enjoyed a successful recovery from a serious recession and is progressing towards EU membership. But the extent to which this progress is the result of its particular privatization policy is unknown.


Privatization in Macedonia was very similar to that in Slovenia. The majority of companies were turned into employee-owned companies with a number of state-owned funds receiving a proportion of shares in these companies too. The progress of privatized firms has been rather poor. Restructuring has been slow, foreign investment insignificant, and bank lending to these enterprises at very low levels. There is no empirical evidence on the precise evolution of ownership in Macedonia. A study of the performance of over 600 privatized and about-to-be privatised firms, however, indicates that they have not improved their performance, because of dominant insider ownership, lack of restructuring, and the absence of effective corporate governance mechanisms. The poor performance of enterprises, however, may be partly due to the unstable and poorly performing economy in Macedonia during most of the 1990s.

Concluding Remarks

After a decade of transition to a market system, the ownership of former state-owned or socially-owned enterprises remain in flux. In many countries, employees (often together with managers) have emerged as the dominant group within many enterprises. In some of the former Yugoslav republics (notably Slovenia and Macedonia), the tradition of workers’ self-management resulted in employees retaining a large proportion of shares in their enterprises.

Worker ownership is, of course, different from worker control. Employees are shareholders in many privatized firms but this is not because of an ideology favoring employee ownership or control. They have retained their shares to ensure their continued employment, and also a future windfall, when the price of their shares eventually goes up. This is far from the notion of workers’ self-management, and from what was believed to be the dominant ideology in the former Yugoslavia. In Poland, where MEBOs have worked alongside privatized and new private enterprise, they have responded to the very competitive environment and the majority of them have survived. In Slovenia and Macedonia, however, the largest group of firms (insider dominated and privatized enterprises) have been competing with other insider-dominated firms. They have not faced the threat of competition fully and their survival rate has not been studied yet.

* Editors’ note: Iraj Hashi is Professor at Staffordshire University, Stoke on Trent, U.K. A number of cuts have been made to the paper Prof. Hashi submitted. For the text, complete with tables, and a list of references, contact him at i.hashi.ac.uk.

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