Nick Clegg: Employee share ownership helps build a stronger economy and a fairer society

Way back in 1983, when I first entered a Liberal office as a 15 year old, I took away with me a leaflet which talked about industrial democracy and employee share ownership. This is an idea which has been around for a lot longer than that and it’s something Nick Clegg has been keen to get us all talking about again.  I should point out that this is nothing to do with George Osborne’s “shares for rights” idea much scorned by Liberal Democrats and which was heavily defeated in the Lords last week as Tracy Connell wrote on this site.

One of the pioneers of employee share ownership was Robert Oakeshott, a businessman, journalist and friend of Jo Grimond who died in 2011. This Guardian obituary tells you more about his life. Today, Nick Clegg gave the first Robert Oakeshott Memorial Lecture and talked about what he wants to achieve in Government towards greater employee involvement and ownership of their companies.

First of all, he had some interesting comments to make about the essence of liberalism, looking at Robert Oakeshott’s life:

If you look across Robert’s many adventures and causes, you see an attitude – a set of instincts – which, for me, sum up what liberalism is all about. He went to Hungary to help the revolutionaries. He developed schools for children in Botswana. After the fall of the Soviet Union, he travelled through Eastern Europe, urging workers to take a greater stake in their companies before the oligarchs arrived. Robert Oakeshott – like all liberals – was optimistic about people. And he knew that power and opportunity must not be hoarded by the few; they must be spread among the many, and the world will be better for it. Those are noble ideals. And they underpinned one of Robert’s great passions, which I am here to talk about today: employee ownership.

The empowerment of the ordinary worker.

He then set out why employee share ownership was so crucial to developing, wait for it, a stonger economy and a fairer society.

But crucially, employee ownership can drive employee engagement by aligning the incentives of ordinary workers and the business. Robert Oakeshott thought that the key to the success of employee owned firms was the increased staff engagement of workers who own a share in equity. In practical terms, it means lower absenteeism and lower levels of staff turnover.

Rather spend a fortune on quirky ideas, he said, companies should alter the structure of their companies to give workers  a stake. The evidence showed that companies where this happened were significantly more productive.

The Government were working on a number of fronts to encourage greater worker ownership:

  • Capital Gains exemption if a business was sold to employees  to preserve the “traditions, employees and customers” of the firm;
  • An “Employee Share Ownership in a Box” toolkit to help business owners through the legal and financial process;
  • Creating new mutuals in the public service;
  • A new Institute for Mutual and Employee Ownership is being developed.

He also had a request for his audience of business people today. He asked them to get out there and evangelise for the cause of employee share ownership:

I ask those companies who have already embraced employee ownership – to spread the word; tell others of the benefits you are seeing; help those in transition. I ask those who have not yet considered it to open yourselves to the possibility – look, seriously at what greater employee engagement can do for you. I ask the professional bodies – the lawyers and accountants – to understand this model so that you can advise your clients on the benefits.

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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29 Comments

  • Eddie Sammon 27th Mar '13 - 8:53pm

    I strongly disagree with the government getting involved with employee share ownership. Throw sticks at me all you like but my mind is not for changing.

  • Eddie Sammon 27th Mar '13 - 8:53pm

    Not on this topic anyway.

  • Richard Dean 27th Mar '13 - 9:03pm

    Interesting, but I wonder? Employee share ownership was apparently much favoured by Mrs.Thatcher. In what ways is it thought to be fairer? Sure, it might tend to reduce the power of unions, but in what ways might it give strength? http://en.wikipedia.org/wiki/Employee_stock_ownership_plan

    If I earn £200 per week from wages and £1 per week from the share I owned, and if my share of control was valued at a further £1 per week, would it be “fair” on me if I took the £202 instead? Would it be fair on my colleagues? And how so?

    If I am a council employee can I have a “share” in the council? What about voters, and is it moral for me to vote for the size of the dividend, bearing in mind it could affect council tax? If I can’t, and my sister works for a private company with an employee ownership scheme, is it fair on me, since she has access to a scheme and I don’t?

  • Richard Dean 27th Mar '13 - 9:30pm

    Eddie Sammon is being very mysterious this evening! 🙂

    As the owner of a share, I am being asked to take a business risk – after all, the value of shares can go down as well as up. Is this fair on me? Is it fair that my fate is in the hands of my colleagues who are as unskilled as I am at business strategy, rather than in the hands of some hard-nosed capitalist who knows all the tricks? Is it fair on my family?

  • Eddie Sammon 27th Mar '13 - 9:44pm

    I’m not being that mysterious, just trying to save time! 🙂

  • Stephen Donnelly 27th Mar '13 - 10:01pm

    A business owned by those who work in it will make different decision than a business driven entirely for financial profit. That can work in favour of staff, particularly in the short term, by protecting employment and working conditions. The weakness of employee owned businesses is that they often find it difficult to make necessary but hard choices. Nobody knows a business better than those people who work in it, but they may not always be experts on the business environment.

    In the end businesses must serve their customers, or they go out of business, no matter who owns them.

  • Eddie Sammon 27th Mar '13 - 10:49pm

    I think it’s adding complexity to the tax system, the money would have been better spent taking people out of national insurance than creating tax breaks for bonuses on employee owned businesses.

  • Many businesses have some degree of employee ownership. IMHO the stated benefits are overplayed. As an employee, if not only your income but also some of your accumulated wealth is tied into the success of your employer, you can be completely [email protected] when the company runs into trouble which happens to many businesses very rapidly for all manner of reasons well beyond the control of the typical employee. Another signal that a high degree of employee ownership has negative effects is that large companies with a high degree of employee ownership are the exception and not the rule in most sectors.
    I think this is an area where the government should butt out. Small shareholders have very little control or impact on large companies. If the government wants to make a difference they should address governance issues first.

  • Richard Dean 28th Mar '13 - 12:37am

    I wonder if this idea is being floated as a way to solve our investment or lending problems?

    A share is essentially a loan with variable payouts. If banks can’t lend companies money, and if no capitalist is willing to invest, why not get workers to lend companies money? By selling shares to workers, or by getting them to accept shares in lieu of wage increments.

    Over-cynical, or realistic?

  • Thinking back to when I first read Liberal leaflets about industrial democracy and employee ownership makes me nostalgic. It seems so long ago that a policy could be motivated by people having control over their lives, limiting the power of capital or the state, rather than by a post-Thatcherite concern for economic efficiency.

  • Eddie Sammon 28th Mar '13 - 1:06am

    Al, if you want to explain how your employee ownership world would look like then go ahead. Should a business owner, who has invested their personal money into their business, simply give it away to employees? Which employees? The first 10? The first 20? What happens when they leave, do the new employees get shares too? Or do the original shareholders have to give back their shares, in which case they never owned them in the first place?

    People who dream of an employee owned world are in fantasy land – the person who stumps up the cash is the person who owns the business. This is the nature of private property.

  • Richard Dean 28th Mar '13 - 1:24am

    Eddie,
    Doesn’t the investor-entrepreneur effectively sell the business to the employees over a period of time? By getting them to accept shares instead of what they would otherwise get as wages? The investor-entrepreneur gets the money invested back, with a profit, via the extra business profits that the lowered wages generates in the early stages.

  • Eddie Sammon 28th Mar '13 - 7:10am

    I understand the principle that time is money and if a business wants to remunerate employees via shares then great, I just don’t think it should be recognised in the tax system as some great virtuous thing. First of all there is the fairness argument that I have already mentioned and second of all there is the diversification argument that Alistair brought up.

    Diversification is not just “not putting your eggs in one basket” – if two companies have the same expected return and the same level of risk, then the investor can reduce their exposure to risk but keep the same expected return by investing in both companies rather than just a single one. This holds true as long as the two companies aren’t perfectly correlated.

  • Steve Griffiths 28th Mar '13 - 9:51am

    Yesterday, by chance, I was listenning to a recording of a radio interview of the late David Penhaligon talking about this very subject and what made him join the then Liberal Party. He said;

    “I worked in a big factory employing about a thousand people and my socialist friends told me it should be nationalised. I said if it was run by London it wouldn’t make fourpence ….and I took the view that there was nothing wrong with my company making a profit, that giving some of it to David Penhaligon wouldn’t put right. And I don’t see why people laugh when you say that. People who work for enterprises give their skills and give their energies, whatever they are, whether be they PHDs or whether they have the ability to sweep the floor, and yet it is generally considered irrational in this nation that if you suggest that they should have a right to some of the profits of their labour, that is thought to be in some way a revolutionary concept…but it think it is the one we’ve got to move towards and it is what the Liberal party was arguing for all those years ago and still does, and that probably singularly was one of the issues that attracted me to it.”

    It was policies like Employee Shared Ownership that got me and apparently the late lamented David Penhaligon ‘fired up’ in the Liberal cause. Maybe going back to the old policies might do the trick again.

  • Stuart Mitchell 28th Mar '13 - 10:32am

    “People who work for enterprises give their skills and give their energies, whatever they are, whether be they PHDs or whether they have the ability to sweep the floor”

    The people who give their skills and energies sweeping the floor at John Lewis are outsourced, hence they are totally excluded from the benefits of ownership enjoyed by other employees. I’d hate to see that kind of model extended to the economy at large.

  • Steve Griffiths 28th Mar '13 - 11:21am

    Stuart Mitchell

    “The people who give their skills and energies sweeping the floor at John Lewis are outsourced, hence they are totally excluded from the benefits of ownership enjoyed by other employees. I’d hate to see that kind of model extended to the economy at large.”

    And so would I; I don’t like outsourcing anymore than you, but the issue here is Employee Shared Ownership. The floor sweepers could still share in the profits of the outsourcing company that employs them.

  • Eddie Sammon 28th Mar '13 - 11:29am

    I’m all for paying employees a percentage of the businesses profits, but that can be achieved via a bonus scheme and not employee share ownership.

    Employee share ownership can never work because what happens when the cleaners leave? The company’s equity would just be drained away until the employees own none of the business and the business is owned entirely by ex employees.

  • Stuart Mitchell 28th Mar '13 - 2:43pm

    Steve

    You’re right, they could, but such profits are likely to be much smaller than those achieved by John Lewis. The cleaning companies pay a pittance and probably make very low profits – which is precisely why they win the tenders, and why it’s economic for John Lewis to use them.

    Personally, if the aim here is some sort of distribution of company profits, I’d rather see that happen through the tax system, so that everybody is treated equally.

  • The question is why so few companies have taken up the existing tax efficient paths to Employee Share Ownership.

    Perhaps a disincentive is the all-or-nothing aspect of the qualifying criteria? for example a listed company would have difficulty suddenly allocating 10% of their share capital to the employee share scheme, however this could be achieved more gradually.

    Perhaps part of the problem is inertia, if when a company was incorporated 10% of the issued share capital was automatically allocated to ’employees’, we would have more (small high growth) companies in which the employees had a stake.

    I would expect ALL companies owned/controlled by the UK government to be among the first to set up employee share ownership schemes, ie. practise what you preach. Also with 10 of the 16 railway franchises up for grabs before the 2015 election, here is another opportunity to promote employee share ownership by including it as a tender requirement.

  • Jeremy Bennett 28th Mar '13 - 8:06pm

    I’m slightly surprised at the number of negative comments. Having worked in high tech throughout my career, share options for all staff have been the norm. As someone who now runs a software company, I find that rather than the narrow financial advantage of apparently motivating staff, it is “softer” benefits that make a real difference. With all staff having a stake in the business, there is a more collegiate approach, and less differentiation between managerial and non-managerial workers. That in turn leads to more openness and better communication – which is what really makes a modern business successful.

    Like all forms of remuneration share ownership is open to abuse by a bad company. It’ s no excuse for underpaying staff. But used properly it ensures that all staff have the opportunity to benefit from the success of a business they were instrumental in creating. Surely that is a good thing.

  • Eddie Sammon 28th Mar '13 - 8:50pm

    Jeremy, politely, my arguments against yours are as follows:

    1. What percentage of your business do you give away to your employees and what happens if they leave? You can’t just keep carving up your company.
    2. Options provide the exact same problem only on a magnified scale. Options cost much less to grant but can end up costing the shareholders much more than traditional share schemes.

    I know options are popular with many but I believe that popularity is misplaced. I’m much more in favour of remunerating via cash, pensions, bonuses etc.

    The mutual model is different but I don’t really think that counts as “employee ownership”. I’m not a fan of mutuals – I’m in favour of keeping things very simple with charities and companies – I don’t see the need for something inbetween because it blurs the aims of the organisation.

  • Stephen Donnelly 28th Mar '13 - 11:11pm

    Mutuals in the UK are (were) usually owned by their customers. There is an alternative form of ownership called a Company Limited by Guarantee, which is a membership organisation. Neither of these are examples of employee ownership. A Company Limited by Guarantee cannot distribute a profit.

    The benefit of employee ownership is that it gives employees some control over their business, which they do not get through bonuses etc, and the benefit of receiving a share of the profits.

    Co-operatives are a special form of employee ownership, where every staff member has a (usually) equal share. They often fail because they are unable to take difficult decisions to respond to the demands of their customer or respond to challenges by competitors.

    @ Jeremy. I am not negative about employee ownership, in fact I run a group of companies that only allows employees to be shareholders. But we are unusual, and there is probably a reason for that. Employee ownership is not a panacea. I am just trying to insert a little bit of experience into the debate, we have to live in the real world where the most successful form of ownership is likely to be the traditional company limited by shareholding.

  • Michael Parsons 28th Mar '13 - 11:47pm

    Businesses can be owned and run by the ’employees’ as producewe co-opratives (like Scott-Bader or Basque industrial production) but mere employee-shares simply displace people by a votes-for-money scheme; large share blocks usually dominate most companies. Unless either the unions or other employee associations buy up shares they don’t seem likely to have much sway.
    Unreformed worker share ownership without for example provision for multiple votes by worher shares (since workers put their lives at stake here) seem typical of the Orange Book ‘money rules ok’ mentality.

  • Many comments seem to illustrate that employee share ownership rarely has much to do with industrial democracy. Perhaps there could be an alternative that could give employees some genuine involvement in the decisions that have such an impact on their lives. If an employee’s ownership of a few shares just provides finance or lower costs to the dominant owners of an enterprise then it could be a bit of a Con.

  • Jeremy Bennett 29th Mar '13 - 9:05am

    Clearly a subject that generates a lot of interest. Here are my thoughts on the comments raised.

    @Eddie – 1. In my experience, 15-20% kept as an evergreen share in a small high tech company. In a spirit of openness, I should declare that I have yet to set up the scheme for my current business – it’s only recently got to the stage where it has employees to offer share options to.

    @Eddie – 2. You don’t pay tax on grant of share options (at least in the UK), only when the gain is realized, so for any employee they are more attractive. I am not in the least concerned that they cost shareholders a lot. How did the shareholders gain advantage if not by the hard work of those employees?

    @Stephen – I agree Employee ownership is not a panacea. But invariably lack of some form of employee ownership is a sign of serious problems. If shares/options are sharing for the long term, then bonus schemes are about sharing for the short-term. My current company shares a proportion of the profits each year with employees.

    @Michael – Your comments are more about bad practice and a “them” and “us” relationship between management and workers. Any good corporate leadership should be engaging with its staff at all levels. A good CEO will recognize that his or her staff know more about the business than any external investor. Whether or not they own shares, their knowledge is something vital to be shared for the benefit of the business as a whole.

    @Al – partially correct. Ownership through shares or share-options is just one part of a healthy relationship between a business and its staff.

  • Eddie Sammon 29th Mar '13 - 9:21am

    I’m not vehemently against businesses running a share scheme, it is the government spending money on it that I am against.

    I believe the idea of industrial democracy is also socialist nonsense. Businesses are not countries, they need to make a profit to survive and benefit society, which sometimes involves freezing/cutting pay etc. A business is the private property of the shareholders and we have employment law to protect against the worst forms of exploitation.

  • “The idea of industrial democracy is also socialist nonsense.”
    That takes me back. Back in the early 80s Liberals were going on about it in the face of the choice between socialist state capitalism and the unbridled free marketeers of the far right of the Conservative Party. We used to look to successful economies like West Germany for a lead on how labour could work with capital for the greater prosperity of society as well as giving people a say over a major aspect of the lives. I wonder how West Germany businesses and workers got on with that “socialist nonsense,?”

  • Eddie Sammon 29th Mar '13 - 2:49pm

    Al, I was aware I was opening myself up to rebuttals when I used that term, it reminded me to stick to reasoned argument instead!

    People say industrial democracy could be good for businesses, and it might be, but if it is good for businesses then let the business owners try it out and if it is good then others will follow. I don’t believe in telling business owners how to run their business and I think industrial democracy is too much of a risk to take in the global market place.

    It’s not just this employee ownership thing where I think the government is intervening too much, take the new childcare tax relief which discriminates against stay at home mothers. I am worried that Nick Clegg has started to play God and mess with things he shouldn’t be messing with, but that said, I don’t see anyone else in the party who looks like they could do a better job. But I am not an expert on our parliamentary party.

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