The joys of employee ownership

For Chris Dillow and other advocates of employee ownership, the last few days have been heady indeed. On Saturday it was revealed that the boards of the UK's two biggest co-operatives have agreed the terms of a merger that would form the world's largest consumer co-operative group, with a combined workforce of more than 87,000 staff and more than 4,500 sites. On Sunday The Observer reported that John Lewis plans massive expansion:

John Lewis Partnership is embarking on a highly aggressive expansion strategy which will see the employee-owned business create 35,000 new jobs and double its turnover to £12bn. ...A 10-year business plan, signed off by the partnership board in recent days, will see the retail concern boost its total workforce to 100,000 by 2017. The plan envisages John Lewis significantly increasing its 26 department stores and 184 Waitrose supermarkets.

Yesterday the Employee Ownership Association has published a new paper by Richard Reeves, CoCo Companies: Work, Happiness and Employee Ownership (PDF). Its argument, previewed in the latest New Statesman in a piece called We love capitalism, is that co-ownership is not only a better alternative to public limited companies (or private equity), it is also a potential answer to the UK's productivity problem:

Most policy-makers view the co-ownership sector in the same way as the royal family: a good thing, slightly anachronistic . . . and a bit wet. But firms where workers not only own a real stake but also play a real role in running the firm - where the co-owners are also co-creators - are not for the soft-hearted. These are not reheated co-operatives: pay differentials tend to be lower than in comparable firms, but there is no expectation that everyone will get a same-sized slice of the pie.

One of the sources of higher productivity in these "CoCo" companies is tougher peer policing: it is harder to "pull a sickie" when the co-workers who "welcome" you back will be poorer as a result. Information-sharing and innovation levels look to be higher in CoCo firms.

The best study undertaken of relative performance suggests a 19 per cent productivity lift from co-ownership. Applied across the economy, co-ownership would make the UK the most productive nation in the world. In a survey of managers in co-owner firms, 72 per cent reported that staff worked harder than in competitor companies, and 81 per cent that they took on more responsibility.

Of course, bottom line is the usual 10-point list of demands, including tax breaks. But it seems to me they have a better case than most industry sectors, if the evidence on productivity, employee commitment and job satisfaction in the report proves robust.

...CoCo enterprises should be the next-generation capitalist business model. A new organisation, the Employee Ownership Association, will start a campaign this month to raise political and public awareness. The timing is auspicious: the public limited company, until now the mainstay of capitalism, is in some danger from private equity firms (at this very moment, a ravenous group is circling Sainsbury's). It might be possible to throw a few legislative or regulatory obstacles in the path of these latter-day pirates.

But the whole point of a public limited company is that its stock is publicly traded. If a private equity firm offers my pension fund a great price for its stocks in Sainsbury's, the fund might well be obliged to accept it. Most CoCo firms, however, are impregnable to outside raiders: the stock has to remain in the hands of employees. It is also easier, in such firms, to take longer-term decisions without too much fear of the impact on short-term share prices.

...As a business model co-ownership seems hard to beat. Yet if this was the end of the argument, it would be hard to get very excited. After all, productivity per se is scarcely relevant: what counts is how it is arrived at. But CoCo capitalism has other advantages, in its human engagement with work and an increased sense of citizenship that spills over into life outside work. For one thing, it seems that co-owned firms are less likely to award vast salaries to their chief executives, and may act as a brake on runaway wage inequality.

...There are certain policies that might help with the cultivation of co-ownership, from changes in tax treatment to better data collection and the provision of advice. However, the argument has to be won first. For the left, this requires a significant shift in focus. The primary locus of political attention in the past half-century has been on the state and its relationship to the individual. Taxation, regulation, redistribution and public services are the staple diet of Labour types. The fruits of this philosophy, especially the welfare state, are obvious and real, but the party has to start living up to its name again.

Reeves is probably correct in argung that trade unions won't like it. But even for a Labour government, that's no good reason to support this sector.

Comments

[Laurent GUERBY]

This seems to be a vastly under-studied area of economics, thanks for the hightlight!

Copied and linked here:

http://www.eurotrib.com/story/2007/2/24/7369/59357

[Bob Deed]

One area of the economy where productivity appears to have failed to keep pace (and maybe even fallen) in recent years is in public services. Employee-owned companies clearly have a role in the NHS and other services alongside the "independent sector" and social enterprises.

[Lafayette]

NE: "Most policy-makers view the co-ownership sector in the same way as the royal family: a good thing, slightly anachronistic "

It's both old and new.

The new bit is the motivation of staff by means of stock-options, which gives them ownership ... but that is not what motivates them. Equity appreciation is their incentive.

Another, more subtle motivation is employee stock purchase over time that does tend to link people more intimately with their company.

Stock options give ownership rights to workers. Which means, in principle, that they should have a say in the running of a company. Only in Europe is this right acknowledged and worker representatives sit on the board, if only in a minority. But, this also means that there's a lot less hanky-panky.

Frankly, the way Boards are "packed" with cronyism in the US is scandalous. Only will participative ownership, meaning a position on the Board by staff representatives, give a more proper balance.

Does this means that economist need study the matter? Perhaps the relationship of the Board with the corporations ownership should be a part of that study.

[Lafayette]

BD: "Employee-owned companies clearly have a role in the NHS and other services alongside the "independent sector" and social enterprises"

Frankly, I do not see why people think that certain public services need be provided by civil servants.

These mammoth organizations, often badly run, are costly and all too often sinecures. For non-defense related public services, why not establish a charter of quality (a sort of Terms of Reference) and subcontract to privately owned companies - with a preference to those companies that are employee owned?

Then the public administration need only be concerned with supervising quality control and customer appreciation of the service. When the appreciation dips below an acceptable level, the contract is put out to bidding. This will help companies to meet the charter objectives ... knowing that they might lose the contract. Civil servants could care less about the level of service, which is why it is often inadequate.

[Lafayette]

NE: "There are certain policies that might help with the cultivation of co-ownership, from changes in tax treatment to better data collection and the provision of advice."

I would seem possible for salaried employees to save otherwise doomed companies, by means of a "probationary bankruptcy". Instead of having them bought out by a venture capitalist, only to be "flipped" after a couple of years, why not give the employees the opportunity to resuscitate the company.

A company that is about to fail typically does so because it cannot meet its debt commitments. Perhaps the state could assume those payments for a maximum probationary period of three/four years, the time to turn the company around.

New management could be found to recenter the company on a workable business strategy, whilst units that do not correlate with that strategy can be divested ... paying off some of the debt. Employees could take a significant pay cut during the probationary 3/4 year period, in return for company ownership via stock options (that become viable once the company debt has been either repaid or settled in some manner).

My point: There is no reason to wait for a venture capitalist to obtain control of the company simply to turn it around. The management competence to turn around a company is obtainable almost anywhere. Even retired corporate directors can be called upon, perhaps, to assist. New management can be offered minimal salaries (again with stock option dated in the future) in order to entice them.

If the company can be saved, then the employees benefit first. (Venture capitalists can stick to new investment funding to make their next millions. They wont be missed.)

There are two major benefits. (1) Probationary bankruptcy avoids unemployment of a considerable number of people (perhaps their pay cut can be augmented by state employment subsidies for the period). (2) When and if the company is turned around, the Board will certainly contain employee Directors - which is more socially responsible than having a bankrupt company flipped by VCs.

[Lafayette]

NE: "For one thing, it seems that co-owned firms are less likely to award vast salaries to their chief executives, and may act as a brake on runaway wage inequality."

Precisely. And both are goodness.