In the debate on so-called crony capitalism two things are clear. First there is genuine and widespread anger at corporate greed and irresponsible capitalism. Second, politicians from the left have been groping around, without much success, trying to come up with convincing responses. Ed Miliband drew a distinction between producers and predators. But he failed to offer any answers.
We see power and wealth concentrated in the hands of the few – the benefits of success going to those at the top rather than being fairly shared between all those who generated that wealth. Even worse, company bosses too often get far more than their performance could ever justify. Last year, total earnings of directors of FTSE 100 companies increased by 49% whilst their companies saw only a 3% rise in value.
As the world struggles to adjust to the shock that the economic system has faced over the last three years, we are searching for a more sustainable, more responsible and fairer form of capitalism.
Yesterday, Nick Clegg came up with some answers. In particular, he argued that this should be the decade of employee share ownership. I hope that his speech comes to be seen as a seminal moment.
John Stuart Mill identified the ‘standing feud between capital and labour’. He argued that employee owned firms could be the answer. Ever since then Liberals and Liberal Democrats have advocated this cause.
In opposition, as Shadow Secretary of State for Trade and Industry, I argued for Royal Mail workers to benefit from a John Lewis style Trust. Now in Government we have legislated for this. But the agenda is far wider.
Some traditionalists dismiss employee ownership as a woolly Liberal ideal which will always be peripheral. They are wrong. The economic evidence is clear.
Research by the Cass Business School shows that employee owned businesses are just as profitable as traditional companies. During the recession they proved to be more resilient. Their performance is more stable over the business cycle. When times were really tough employee owned businesses grew sales much faster than their traditional counterparts. Crucially, employee owned businesses consistently recruited more staff and rewarded them with higher wages. Other evidence shows that, invariably, the pay gap between the top and the average worker is much smaller – meaning that the fruits of their labours are shared more fairly.
Productivity also outshines the traditional company. Performance is best when a share in ownership is matched by empowering staff to play a part in decision making. And when you think about it, this isn’t rocket science. In my time as an employment lawyer, I heard countless stories of frustration from staff who knew their workplace better than anyone, who had ideas about how you could work more efficiently, yet they were never listened to. This experience is commonplace in both public and private sectors. Give those people some autonomy in decision-making and they are likely to rise to the challenge. Give them a stake in the business and they will feel a sense of ownership. Motivation grows. Importantly, happiness at work can grow.
So, Liberals understand why this makes sense. But how do we spread the message? How can we make this more than peripheral to the economy?
Action is needed in three areas.
First, we have to increase the awareness of employee ownership in all its forms and break down the barriers which prevent growth. For those setting up a company, there must be an off the shelf option they can consider. And as Nick announced yesterday, the Government will appoint an independent adviser – an expert in the field -who will shortly report on how we can simplify employee ownership.
For existing employees, we must look at introducing a right to request that their company establish an employee share scheme. This is a good nudge in the right direction. Company owners may then be encouraged to consider, perhaps for the first time, the potential financial benefits of giving employees a stake.
Second, we have to look at tax incentives. If we have evidence of the value of employee share ownership to the economy, doesn’t it make sense to improve the incentives for companies to set up share schemes?
Third, we have to examine the critical issue of access to finance. Companies need finance to grow but for businesses owned by employee benefit trusts – such as John Lewis – they face real difficulties, particularly in the early stages, in getting access to finance. What role can the banks and other institutions play? Should we consider a dedicated venture capital fund for mutuals and employee owned businesses?
This is an exciting moment. Liberal Democrats in Government are leading this debate. And the first steps set in motion by Nick Clegg this week could have a decisive, Liberal impact on our economy and in our workplaces that will be felt for years to come.
* Norman Lamb is MP for North Norfolk and was Liberal Democrat Minister of State at the Department of Health until May 2015. He now chairs the Science and Technology Select Committee
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10 Comments
Oh dear. Sadly, the only way this could possibly work would be if employees, once apportioned shares in their company, were forbidden to sell them. Otherwise, its off to my stockbroker we go!
If I understand it right, the ownership rights come in the form of a trust so are not up for sale. Can anyone here confirm that?
Well said, but a few points.
Firstly, it’s not the ownership per se of a few shares that makes any difference. I have worked at two different large companies both of which had share shemes (and with tax incentives to help!) and it made not one shred of difference to their behaviour which, in one firm in particular, had an extremely short horizon and was geared mainly to the expected retirement date of the CEO.
The conclusion has to be that there should be an effective sanction on Execs. “Owners” in the formal sense of shareholders often own the shares for nanoseconds and regard them as only gambling chips. This shouldn’t be so but it is and the quickest way to introduce change would therefore be to give employees some sort of German-style involvement via a supervisory board. Employees have the strongest possible interest in the continued health of the firm, particularly when jobs are hard to come by and I think it would soon show through in improved performance and less looting by unaccountable executives.
And if formal ownership in the sense of shares is not, of itself, the important thing then giving employees more formal involvement in oversight of their management would work equally well in the public sector. How about starting with head teachers?
Agree with most of it but:
How does the right to request work? Of course the right to request is already covered by freedom of speech legislation. What seems to be meant is meant is the right to force. How would that work with sole trader employers and private ltd. companies?
Many smaller businesses try to employ as far as possible only within their family group, why isn’t that going to get worse if we are proposing an enforceable right to get shares? Why won’t we see more outsourcing and contract work as a result?
Industrial democracy requires that employees have their shares by right of their status as employees (partners) in the company. This means they cannot be flogged off outside the company and are reliquished when they cease to be employees.
Employee shareholders must also have the opportunity to actively engage in the development of the company, and in selecting the board and holding them to account. co-ownership shares are not just ‘gambling chips’
Well done to Nick and our team in government to raising the profile of co-ownership, and exploring ways in which we can promote it in government. Some of us remember that it was an issue pursued the last time we had some influence (much less than now) over a government- the Lib/Lab pact of 1976-8.
@Richard Church
Do suppliers and clients also have the staus of partners entitled to shares? Why not? Wouldn’t you be more or less likely to want to give someone a job if you knew you were going to be forced to cut them in? Wouldn’t you be more likely to try to get them as an external contractor? How does this all this work if I am sole trader employing people?
@Generally, I think it’s important that we make it clear what we as a party are proposing and let the arguments follow from that – getting rid of the administrative hurdles is fine, but it needs to be clearer if companies can be forced to go along with this or it’s meant to be voluntary. How does it scale to different sizes of companies? Also, are we really going to propose adding yet another page to Tolley’s to add a new plc-only tax break? A debate is about a proposal. At the moment it seems a bit like we are not leading the debate as much as thinking aloud about what proposal to start a debate upon.
“Do suppliers and clients also have the status of partners entitled to shares?”
Partnership in this sense means ’employees’, except because the employees own the company they are effectively self-employed.
So, partnership means professionalism.
It might help to offer a wider range of alternative examples of ‘partnerships’: law firms, accountants, architects and medical practises tend to be the most common operators of partnership structures and it should be no surprise that they are the most professional of services – perhaps these industries would be most willing to talk up the case for this policy concept.
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
@Corey – Thank you for that.
@Oranjepan – The lawyers, architects etc. usually only include the top level as partners. They don’t cut in everyone who works for them.
I think we have to make it clearer that we are doing this by removing existing government barriers, not by creating a new crime of consent, “Money-only-Employment without Shares”.
I recommend taking a look at the EUROPEAN FEDERATION OF EMPLOYEE SHARE OWNERSHIP (EFES) , a grassroots organisation that I and my Supervisory Board colleges of the time were involved in the establishment of back in the late 1990’s.
Whilst I endorse the promoting of Employee Share Ownership, I think we do need to understand why so few companies actually make use of the very favourable (ie. tax efficient) schemes HMRC operates for employee share holding and profit share.
My suspicions are that if we are serious about making Employee Share Ownership more of a reality then we need to be prepared to create the necessary legal coersion/imperative; as you ain’t going to get a major company to voluntarily put 10% or more of its issued share capital into an ESOP overnight.