Last week David Cameron and Ed Miliband both sounded their commitment to tackling excessive payouts in the financial sector. Today was Nick Clegg’s turn. The speech he delivered to CentreForum and the City of London this morning was all about ‘responsible capitalism’ and ‘unlocking shareholder power’.
He talked about vested interests in the British economy and the need to shine a light on boardroom practices. He also expressed a desire to see wider employee share ownership – trust in people, rather than the “interventionist state” – and the move towards a “John Lewis economy”. Clegg said:
[Liberals] recognise that narrowing wage inequality is not solely a task for the state. We also need to put much more power in the hands of other stakeholders in the economy – shareholders and employees – when it comes to setting top pay.
City bonus season is just
round the corner, so it is easy to see why the party leaders are talking tough on boardroom remuneration. Ed Miliband is keen for this to be one of the battlegrounds on which British politics is fought. “Bring it on” he asserted last Tuesday.
But as Clegg said today, “whether you call it a new economy, an ethical economy, moral markets, responsible capitalism, there is a big difference between having strong views on bonus culture or excessive top pay and wanting real change in the practices and principles that guide corporate life”. The true test will be whether something is actually done about the ‘fat cats’. Labour isn’t in power, so the ball is in the coalition’s court.
It is important here that the government doesn’t get too bogged down in efforts to curb excessive boardroom pay. Creating a more ‘responsible capitalism’ will require more than that, as Clegg acknowledged in his speech.
A week ago my CentreForum colleagues (Chris Nicholson and Patrick Briône) set out a whole package of measures for the government to consider. Making companies’ remuneration policies more transparent was one of them. The rest can be looked at here.
Evidence shows that empowering employees – giving them a real stake in the company that employs them – boosts performance and discourages the kind of short-termism that led to the financial crisis. It is “a hugely underused tool in unlocking growth”, says Clegg, who announced today that he wants this to be the “decade of employee share ownership”.
And why shouldn’t it be? Inviting a representative from the shopfloor to express disapproval at remuneration committees is tokenism. If you want employees to have a real stake in their company, you should give them the option of becoming shareholders. It’s a classic liberal idea and one that Clegg rightly places at the top of the agenda for ‘responsible capitalism’.
Tom Frostick is head of press and communications at CentreForum, the liberal think tank
* Tom Frostick is head of press and communications at CentreForum, the liberal think tank.
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26 Comments
Ed Miliband’s response is the classic ‘the state knows best’, and the coalition are rightly seeking an individual, market response. Liberals were always the original advocates of an ownership democracy and popular capitalism; Thatcher stole it from us.
Nice to see Clegg rightly reclaiming economic liberalism from the Tories.
“Liberals were always the original advocates of an ownership democracy and popular capitalism.” – er, no, that was the unreconstructed Free Trade Liberals with their touchingly naive attachment to market forces. Now we have the same putrid nonsense about the Wundah Of The Free Market being exhumed, having a few thousand volts shot across its corrupt brain and getting dressed up in a new tux before being shoved out onto the stage.
What kind of individualism is it that extolls market responses but decries and denigrates collective ones? A fake one, of course.
– From the pen of a social democrat.
@ mike, no one is renoucing the power of the collective repsonse, but Lbaoru define collective to mean ‘government’ and thus ignore those people who are part of the process but not part of the government, I was under the impression that it was in seeking to represnet these people more that the SDP was created.
Vince Cable, an economic Liberal and proud of it, is creating the government response as we speak, the High-pay commision is a government response. economic liberals back both of those,
as for the social consequences of city bonuesss? lots and lots of tax, 11% of GDP is egenarted by the financial sector, now Lbaours repsonse to that was ‘light touch regualtion’ so as not to scare them away.
The coalitions response, is to ensure that the rewards are distributed proprtionately. but aslo that the proportions are decided by the people who are stakeholders, not by remote gobvernments doing as they please and calling it the ‘collective response’
I thought the SDP favoured decentralising of power away from the centre? Thats what nicks speach advoactes, because that happens to be classic liberalism, you need a mix of reposnes, some, like the high pay commision, the increased regaultion and different taxation, which have come from the government, others must come from the stakeholders who know their indusstry best, and surely thats social democracy?
or is it only social democracy when its suggested by someone other than an economic liberal?
It is worth contrasting the speech with the former Liberal Party’s policy:
‘Liberal industrial policy has three objectives. Firstly, employees must become members of their companies just as shareholders are, with the same clearly defined rights. Secondly, it must be accepted that directors in public companies are equally responsible to shareholders and employees. Employees should be entitled to share in the election of the directors on equal terms with shareholders, and Works Councils representing all employees must be set up at plant level with wide powers to negotiate pay and conditions of work. Thirdly, employees should share in the profits of the company and the growth of its assets.’
The Liberal party policy was statutory- not down to companies being ‘nudged’ and a share in decision making was not dependent on share ownership. As David penhaligon used to joke under our proposals an employee would only have to buy one share for there to be a workers majority!
@mike cobley
We could always abandon the free market and turn to European style social markets. Remind me, hasn’t half of Europe been downgraded, lacks competitiveness and struggling with spending levels worse than ours?
Interesting that the ‘John Lewis’ economy is a remarkably successful model.
In the 2008 crash John Lewis did well, outperforming almost all the other major retailers, and again in the current uncertainty they have come out with flying colours.
What are they offering/doing that is so successful in difficult times.
You had your opportunity to show your commitment to employee ownership with Northern Rock. Instead of selling the company off you could have used it as a paradigm for the employee ownership model you are floating. Frankly, I don’t believe that this will ever happen and that Clegg is only doing this because Ed Miliband is leading the campaign for responsible capitalism and Labour is once again pulling ahead in the polls.
Anyone who thinks employee ownership is on the cards because Labour have been talking about it in the last month must have been drunk for the previous hundred years (or perhaps their history lessons). It’s being talked about because it’s been a liberal ideal since before Ed Miliband’s Grandparents were born.
mike cobley: perhaps — controversial suggestion this, but bear with me — a social democrat is not the best person to go round telling people that ‘true’ liberalism is social democracy redivivus?
Keith: what are JL offering? Over-priced goods to middle class consumers with a guilt complex, from what I can see.
With these kinds of suggestions, I always wonder what they look like for unquoted and small businesses. Quoted corporates are easy to see and understand in many ways, but why should the Saturday girl at the hairdresser get to vote on the remuneration her employer draws from the business? And if the proposal is that she shouldn’t, how we tell the difference between the cases?
The real test of the success of a John Lewis economy will not be executive pay. Executive pay is rising in the UK because the skills required to run a global corperation are highly exclusive: they are falling in the United States because they’re becoming less exclusive than they were. Globalisation is the cause of high executive pay, not just greed. The real issue is making corperations more long-termist and less risk-inclined.
Giving workers a say on executive pay without making them shareholders first is a recipe for the same problems we had at British Leyland. Opening employees to both profit from and make decisions for the company is an excellent proposal not just for moderating the short-termism or the high pay of corperations, but also for giving people the oppertunity to feel that they matter. A perfect middle way between out of control unionism and out of control corperatism. If you’ll pardon the plug, but I’ve written more on my blog, comparing this to the Big Society.
I think that Liberals, Social Democrats, Greens and Socialists can all happily support worker cooperatives and mutuals. Usually not Conservatives because john Lewis is the exception rather than the rule. Free markets on the whole do not deliver on worker cooperatives, it needs government intervention to make it mmore likely to happen. We should consider that the current structue of capitalism is very illiberal. Management dictates its will to its employees, and employees have to do what they are told. Not all companies have this culture by any means, but a good many do.
I would like to know how ambitious this government is on cooperatives and mutuals. What are the chances I will be working for a cooperative by say 2015? Look forward to seeing where the beef is, to coin a phrase.
Mike Bird
“Anyone who thinks employee ownership is on the cards because Labour have been talking about it in the last month must have been drunk for the previous hundred years ”
So, the Labour party has no links with the co-operative movement? Which brings me on to Clegg – did he receive an education at school? – how else could he fail to know that John Lewis is not owned by shareholders, but is a workers’ co-operative? The fact that the likes of building societies (organisations set up for the benefit of their members) were floated on the stock-exchange, led directly to the current financial/economic crisis. I would have thought it fairly obvious that we need more mutualised and co-operative organisations and less share-holder driven organisations. It would help if we had a deputy prime-minister that knew the difference between them as well.
@ Steve
I was addressing the ridiculous assertion that Nick has somehow reacted out of fear of Ed Miliband’s powerful message: that he was “only doing this because Ed Miliband is leading the campaign for responsible capitalism”.
Of course, I acknowledge the relationship between the Co-operative and Labour parties, though like many Lib Dems, I find the closeness confusing at times. Did Labour do a great deal for co-operatives in their 13 years of high-majority office? If you’d like to show me how the speech conflated employee ownership, please show me where. I thought his assertion that the coalition should be “empowering two groups in particular: shareholders and employees.” was particularly clear. Evidently we read the texts of different speeches.
Dig through if you like:
http://www.politics.co.uk/comment-analysis/2012/01/16/nickclegg-s-city-speech-in-full
Employee share ownership is, indeed, classic liberalism. It sounded fresh, new and exciting when Jo Grimond campaigned for it. However, the world moved on, and Thatcher found a different way to tackle (and, of course, cause!) industrial strife.
Employee share ownership also became classic Thatcherism. Employees along with the public were encouraged / bribed to accept privatisation by offers of cheap shares. It didn’t make a lot of difference to the way the newly privatised companies were run.
John Lewis are exceptional. No doubt this is because there is rather more to their partnership principles than just bunging a few shares in the direction of their workforce. Even with JL, it hasn’t been a panacea. They have been successful for a long time, but now seem – as do the Co-op – increasingly at risk of getting stuck in a rut. Meanwhile, there are Tesco, a predatory capitalist company if ever ther was one – but boy, don’t they jump to it and do something about it when the market tells them they have been getting it wrong!
So, let’s not do the usual British thing and rely on endless reorganisation to achieve success. Just dishing out shares to workers won’t change anything much. And paradoxically, going to the opposite extreme and creating real genuine co-operatives can also fail, when these producer-focused entities lose touch with the markets in which they operate.
As indeed they must. It’s easy to overlook, but one thing that both liberalism and free-market capitalism have in common is this: the freedom to fail is fundamental. Every person and organisation must be allowed to fail, if it makes choices that lead to failure. If not – if it will be overruled when it makes the “wrong choices” – then it has no freedom at all, merely an illusion.
Most new companies fail. The same should be true of co-operatives. This has to happen, because it is (rightly) very easy to create a new company or co-operative, and (inevitably) very hard to make it successful.
In no sense does this reflect on whether co-operatives are a good idea or not. Which would be my point.
Not only was Nick Clegg’s speech great, it covered a much wider spectrum than is discussed here. He also dealt well with a wider range of questions.
All he has to do now, is to apologise for signing that ‘pledge’ against raising tuition fees,and we will be on our way!
Speaking as an employee, shares in the company are of less interest than a share of profit – as this is more directly linked with staff performance. Back in the nineties I remember a good government scheme which was unfortunately phased out (info from http://www.employeebenefits.co.uk: However, since tax breaks on approved profit-sharing schemes were phased out by the government in December 2002, to make way for share incentive plans, standalone profit-sharing schemes have now become the exception rather than the rule … Although relatively few firms now operate standalone profit-sharing schemes, some employers still see a value in doing so. At the John Lewis Partnership, which employs 64,000 staff, for example, profit sharing remains central to its partnership ethos.)
The discrepancy of wage ratios between managers and workers is largely overcome by inclusive profit-sharing.
John Lewis gave out nearly £200m in dividends to employees last year – equivalent to an 18% bonus on the the average annual salary of a JL partner. Somehow I doubt many directors would agree to this if the mutual ownership amounted to less than 50%, in the same way as bankers can hoard bonus awards by reducing dividends because of their ownership structure.
Non-mutuals suffer from passive investors who can generally do very little to influence performance, so Clegg highlighting the advantage of active citizenship in business is very welcome. Hopefully he’ll link this to encouraging entrepreneurs too.
@David Allen
Tesco’s expansion into non-food business means the company is more exposed to cyclical pressures than before and current 4.4% yields look precarious.
Tesco lost £5bn share value (15%) just this week – their largest daily fall in living memory… it’s not exactly the best time to be holding them up as a paragon of economic virtue!
The actual proposal seems to be that the govt should get out the way and remove the hurdles for companies to pay their workers partly in shares if they want to offer that. Great idea however you look at it, but not likely to lead to the worker or ex-worker majority people are talking about in the company unless practiced for a long time. That the Tories are not the ones leading on opening this up is another example of why they are not a serious free-market party if it is not in the interests of who they see as their kind of people
I like the idea with the hairdresser in a worker ruled company. At the job interview the boss asks ‘what ideas do you have about salary?’ and the girl says ‘mine or yours?’ – setting up yet another reason to offer jobs through contacts rather than openly.
The reason why worker cooperatives form rarely is that the alternative of a start-up with everyone taking shares makes more sense as you are able to leave later without leaving the value of your work in building up the business behind, and you don’t see your share continually cut with the addition of new workers as a result of your success in building up the business. Second reason may be that the services of bosses in organising work is valued more by people who need work organising for them than by centre-left politicians.
Apologies if that is incoherent, I am using this on my phone.
“I don’t value employee ownership because I somehow believe it’s nicer, a more pleasant alternative to the rest of the corporate world, those are lazy stereotypes.” That’s a pity. I thought it might improve people’s control over their own lives, in a nice way, reducing some of the alienation and conflict that arises in much of the corporate world.
The John Lewis model is just used as an example of employee ownership, it’s direct employee involvement seems too extreme to be something to aim for. One of the greatest failures of modern capitalism is the impotence of individual small shareholders.
Northern Rock was a disappointment, the proposals for the Post Office another missed opportunity. I hadn’t realized share ownership schemes was what the Party was working for. I’ve got the beard and the sandals, but this seems so far away from the traditional aspirations of the Liberal Party, were we really all marching around with red and black flags?
@Mike Bird.
“It’s being talked about because it’s been a liberal ideal since before Ed Miliband’s Grandparents were born.”
Really? I looked in your 2010 manifesto but could find nothing in there about it. There seemed to be a commitment to seek to turn tNorthern Rock into a building society though. Really achieved that one didn’t you? Couldn’t find anything about plans for creating employee shareholders in your famous Coalition agreement either. No, you are only on to this now because Ed Miliband is leading the way on responsible capitalism.
“We believe that mutuals, co-operatives and social enterprises have an
important role to play in the creation of a more balanced and mixed economy.
Mutuals give people a proper stake in the places they work, spreading wealth
through society, and bringing innovative and imaginative business ideas to
bear on meeting local needs.”
Pg. 27, Lib Dem Manifesto 2010. While having a look, I also found stuff on employee ownership from 1992 and 1959. Was Ed Miliband leading the debate then?
It is not really good practice to sink your life savings into your existing employer. What happens if it goes bust?
“We believe that mutuals, co-operatives and social enterprises have an
important role to play in the creation of a more balanced and mixed economy.
Mutuals give people a proper stake in the places they work, spreading wealth
through society, and bringing innovative and imaginative business ideas to
bear on meeting local needs.”
This could mean anything. It doesn’t exactly spell out that workers will be given shares does it? And the genesis of the Labour Party was connected with the co-operative movement. Was Clegg around then? And er, just remand me, how many co-operative sponsored Lib Dem MPs are there?
While Nick Clegg’s speech on the importance of employee ownership is encouraging, allowing employees to demand shares in their company is simply not going to achieve what he wants. I am the founder of the National Center for Employee Ownership in the U.S. (www.nceo.org). We and many academics have long studied what makes employee ownership work. Plans must cover most or all employees (not just those who can afford to buy shares), companies must practice open-book management, and companies need to provide structured opportunities for employee input into decisions affecting their jobs. These companies, the research shows, grow about 6% or more per year than would have been expected absent these plans.
In the U.S. the main mechanism for employee ownership is the employee stock ownership plan (ESOP), which provides tax incentives to employers to contribute shares to an employee trust that holds the shares for most or all employees, with shares allocated relative to pay (up to a maximum of $245,000 per year) and distributed only after people leave. This allows the trust to acquire large stakes in the companies, often 100% in closely held companies where ESOPs are most often used to buy shares of departing owners of successful firms. ESOPs have the greatest impact of the various employee ownership plans on performance and provide employees with retirement assets two to three times that of what they would have had otherwise.
Another popular approach is broad-based option and similar equity plans. These companies also perform better, but not as dramatically as ESOPs, probably because the employees do not accumulate large percentages of their companies through these plans and the companies tend to be less committed to the kind of John Lewis ownership culture so much praised in the U.K. (and very common in ESOP companies).
By contrast, plans that allow employees various tax incentives to buy shares, or offer them at a discount, have relatively low rates of participation (in the 30% range), are skewed towards higher income employees, and have no discernible effect on performance. These companies are no more likely to open book or have high involvement management systems than other companies. Having some employees own some stock is simply not enough to make management want to change. An ESOP with a large percentage of stock usually is. Some of these plans also induce more risk for many employees than they should carry because unlike options and ESOPs, it is their own money they are investing.
John Lewis is majority employee owned and will stay that way. Its culture is aligned with its ownership. To expect that corporate performance or corporate governance will change based on a minority of employees buying a minority of the shares is, sadly, delusional, even if well intentioned.
The U.S. has more experience with this area than any other country. Employee ownership is a major part of our economy (there are 13 million participants in ESOPs and 9 million in broad-based option plans). It would be wise for the U.K. to look at what we have learned here before moving forward.
Corey Rosen
National Center for Employee Ownership
how many co-operative sponsored Lib Dem MPs are there?
Ed Balls is the most prominent MP sponsored by the Co-ops. He is not noted for his cooperativeness, and in his recent statements as Shadow Chancellor he has indicated a preference for state intervention over cooperation, as the policy which most accurately represents the interests of the Labour and Co-op movement.
If Ed Miliband is so keen on employee share ownership, he’d be well advised to win the debate in his own ranks first since his right-hand man is undercutting him at every turn and undermining Labour’s residual credibility.