Making It Mutual: Achieving the economic benefits of a more plural economy

25^th March 2013

Charlie Mayfield, Chairman of the John Lewis Partnership, on the benefits of employee ownership

Interest in employee ownership is, in my experience, most often motivated by a desire for a fairer and more responsible form of capitalism and a drive to encourage personal responsibility among employees. Those benefits are certainly real, and the interest in the former is stronger than ever in the aftermath of the financial crisis. But I believe that such attention should not just be driven by dissatisfaction with the dominant model of capitalism, but by the positive benefits of other models. A greater plurality of ownership in the UK would be good not only for workers but for the competitiveness of the economy as a whole.

There is a growing consensus that the plc model, at least in the way that it currently tends to operate – based on a narrow and short-term pursuit of ‘shareholder value’ – is not always the best way to maximise long-term value for shareholders or the health of the economy. Last year, the Government commissioned the Nuttall Review, which found that employee owned businesses are associated with long term economic benefits – they out-perform other businesses in job creation, and are more resilient with a lower risk of failure – as well as being happier and more satisfying places to work. Research also suggests that businesses owned and run by their employees exhibit higher productivity and greater innovation.

Despite these advantages, employee ownership is relatively rare in Britain. There are some well established examples: the engineering firm Arup, the chemicals manufacturer Scott Bader, and many less well-known but innovative and thriving companies in sectors from hi-tech engineering to architecture to media. But employee-owned businesses still only account for about 2% of GDP. This is below the EU average, and far lower than countries like the US, France or Germany. The anatomy of our corporate landscape differs in other important ways too. In the UK it includes a number of global giants, and thousands of much smaller companies, but compared to other economies there are fewer mid-sized companies in between. We also lack the plural mix of ownership that has come to characterise the markets of other countries. In Germany, for example, there are four times as many non-plc owned companies as in the UK.

Growth takes time. It requires patience and long-term investment. It requires the accumulation of capability and the development of people. These are natural strengths for employee-owned businesses, and many family-owned businesses. I’m talking here about culture; and while to some that might sound like a vague term, it in fact goes to the heart of the matter of competitiveness and growth. At the John Lewis Partnership, shared ownership means engaging our Partners and inspiring them to deliver more for our customers and more for the business, and then to share in the rewards. It means having elected directors on the Board who represent the interests of Partners, and an elected Council which meets twice a year to discuss issues from business planning to pay to pensions.
Conventional business thinking tends to shudder at the potential ‘loss’ of power or speed from this sort of participation. But that misses the point completely – this isn’t about participation, it’s all about performance. In our experience, where people have responsibility they most often they rise to it. In our business, Partners don’t simply perform the roles of employees; they are expected to perform as owners, and to take responsibility for some of the difficult decisions. In exchange they have a right to know how the business is performing, and to hold the management to account for that performance. For example, a recent internal debate regarding efficiency quickly developed – at the urging of Partners themselves – into a debate around how partners can take greater ownership of the drive for efficiency through a stronger performance management framework and changes to training and skills development.

Partners own the business today and they will own it tomorrow. As a result, it’s completely natural that everyone looks not just to performance this year, but what’s needed in the future. In a retail market which is changing so rapidly, along term focus provides a powerful competitive advantage. It is also highly relevant to how the UK secures its position in a global economy. If we want more long termism and a fairer and more sustainable sharing of the rewards in our economy, then a good place to start is to encourage forms of ownership that are naturally focused on those outcomes. But we have to ask ourselves whether the conditions are in place to encourage those forms of ownership; at present there are some serious imbalances, which do exactly the opposite. The playing field is currently weighted against businesses owned by their employees via a trust – the form of employee ownership recommended in the Nuttall Review. The tax system makes it much less advantageous for employees who own their business in this way to share in its success, compared to employees who are given shares or options in publicly listed companies. At the same time, tax incentives for entrepreneurs are mostly triggered on the sale of companies. If entrepreneurship is a good thing, surely we should be giving entrepreneurs an incentive to stay in rather than exit?

The Government is starting to take forward many of the recommendations of the Nuttall review, including raising awareness of employee ownership, making it easier to establish employee-owned firms and improving access to finance. But a step change will only happen if the imbalances in the underlying incentives are addressed.

We know that giving all employees a direct personal stake in the long term success of their business is a powerful way of aligning their interests, to the benefit of the wider economy. Let us be clear: employee ownership is not a panacea for our economic ills. But it does represent a different, and arguably better, way of doing business; and a way of addressing a fundamental problem in the way we think about ownership in this country. For too many and for too long, ownership has implied the right to sell, when I would contend that good ownership really amounts to the responsibility to nurture, develop and sustain organisations for the long term. This requires a change in culture, which is never easy. But if we can get this right, the outcome couldn’t be more important or optimistic: a new generation of high-growth businesses, greater productivity and job growth, and a more resilient economy to cope with the turbulence we will face in the decades ahead.

This article was originally published in ResPublica’s Making it Mutual: The ownership revolution that Britain needs, a collection of essays covering all areas of policy – energy, financial services, education, infrastructure, welfare, public services, competition – proposing entrepreneurial and innovative policy proposals for structural reform.