The Fourth of July was a day of celebration in the UK this year. It was the first annual Employee Ownership Day, designed to raise awareness of employee owned business. Celebrations were more reserved than the Fourth of July celebrations in the US – the most indulgent thing I could find was a commemorative cushion cover made in a John Lewis factory in Lancashire. But employee ownership is definitely something to be celebrated, even if we don’t go in for the carnivals and fireworks.
Employee Ownership Day is part of a wider government strategy to promote employee ownership. Other initiatives include the publication of guidance on how employees can obtain shares in their company and tax breaks for employee owned companies.
The proposed tax breaks, which were opened for consultation last week, will come in two forms. First, income tax and national insurance will not apply to annual staff bonuses of employee owned companies. Second, there will be capital gains tax relief where a controlling stake in a business is sold to employees through a collective structure such as a trust. Both these measures were passed as Liberal Democrat party policy at the Autumn Conference 2012 in passing the policy paper ‘Mutualisation, Employee Ownership and Workplace Democracy’.
The financial underpinning for this policy is £50 million set aside in the Budget. This follows on from an independent review by Graeme Nuttall, published in July 2012 as well as encouragement of employee ownership by other organisations.
CentreForum has been at the heart of this agenda, publishing two papers in early 2012 – one on employee ownership ) and the other on employee empowerment more generally – in which we recommended the introduction of a capital gains tax relief similar to the one now seen in the Budget and the consultation paper.
JS Mill suggested in 1848 that employee ownership would lead to “the relations of masters and work-people [being] gradually superseded by partnership”. This holds true as a liberal principle today just as it did in the nineteenth century. Indeed, research evidence now supports Mill’s view that employee ownership leads to more harmonious workplace relations. Job satisfaction tends to be greater, absenteeism tends to be reduced and workers’ pay tends to be better.
But there are other reasons to back employee ownership. There is mounting evidence that is has positive effects on the economic success of companies. A recent study by Cass Business School found that employee owned companies tend to plan for long term sustainable growth, rather than short term returns, and there is a wealth of evidence that they fare better in times of economic downturn. Numerous studies have reported positive results in terms of company performance and productivity, and employee owned companies tend to have a smaller differential between the high and low paid.
All of these effects are displayed most strongly when companies are completely employee owned and when employee ownership goes together with more participative management. But effects are still seen with partially owned companies. This is illustrated by the performance of the employee share ownership index which the London Stock Exchange has recently launched.
Employee ownership is not without its drawbacks. The flipside to the resilience of employee owned companies in times of recession is that there is some evidence that they grew less quickly when the economy was booming in the early 2000s. And they are not appropriate for all companies – capital-intensive businesses such as oil and gas companies do not suit the model. But they are particularly effective where the success of a business relies on good customer relations – like retail companies – or where employees work remotely so the shared sense of purpose brought on by employee ownership compensates for the relative lack of supervision.
With a more fulfilled workforce, more sustainable economic development and greater innovation, we have every reason to want to promote employee ownership. The guidance that BIS intends to publish will dispel the fears some workers have about the difficulty of setting up employee ownership, and the proposed tax relief will hopefully provide the extra incentive needed to get more businesses on board. ‘Responsible capitalism’ is an idea that is easy to support but difficult to realise; employee ownership will provide at least part of the answer.
The Social Liberal Forum will be hosting a conference ‘Ownership and Democracy: where does power lie?’ on 13 July 2013. Click here for further details.
* Anna Muncey is a research assistant at CentreForum, the liberal think tank.