Making It Mutual: Employee ownership is our industrial future

26^th March 2013

Employee ownership has a significant role to play in the UK economy, argues Iain Hasdell of the Employee Ownership Association

Employee ownership is now the most prominent and popular alternative to conventional forms of business ownership in the UK. Interest in it within business communities is increasing daily. It is currently growing at an annual rate of around 10%. [1]

Employee ownership makes an important contribution to the UK economy and has vast potential. This should and must be reflected in future UK industrial policy.

The current level of UK fascination with and enthusiasm for employee ownership is unprecedented. More and more people are listening to and endorsing the argument that employee ownership is a permanent key part of our economic growth strategy. There is a growing realisation that employee ownership in its many forms drives economic growth, innovation and quality whilst spreading wealth and optimising the fulfilment of employees.

Employee ownership is the model in which a business is totally or significantly owned by its employees. It already contributes, according to figures from the Employee Ownership Association, more than £30bn each year to UK GDP. [2] It flourishes in every sector of the economy from information technology through to retail, with professional services and manufacturing being the two most prominent sectors within which it thrives.

There is hardly any part of the economy in which employee ownership is not now an important part of the growth agenda. From the global infrastructure provided by Mott MacDonald, to the agriculture and leisure products of Galloway and MacLeod, through to the chemicals of Scott Bader, the paper and packaging of Tullis Russell, the precision engineering of Gripple, the brilliant cash and carry operations of Parfetts, the advanced textiles of Scott and Fyfe, the world leading blades and scalpels of Swann Morton and the project and programme powerhouse that is CH2M Hill, employee ownership is leading the way on economic growth.

Employee ownership takes one of three forms: the workforce directly owning a large proportion of the share capital of the business; the share capital of the business being held indirectly in trust for the benefit of the employees; or a hybrid of these two approaches. These various forms of employee ownership are all in use across the economy.

The fact that it is a growing economic force in the UK is partly a reaction to our economic context. The UK economy remains in transition as we face up to the mistakes of the past. Stagflation is an ongoing risk. This context has called into question the short termism of conventional forms of business ownership and the consequences of that on the economy and our communities.

But the emerging popularity of employee ownership is also a response to the compelling evidence of its benefits. Employee ownership makes massive economic sense.

Employee-owned business tend to have higher productivity, greater levels of innovation, better resilience to economic turbulence and more engaged, happy workers who are less stressed than colleagues in conventionally owned organisations. Economic competitiveness and high performance are a central part of the DNA of employee-owned companies. Crucially, over the last 15 years, shares in employee-owned businesses have considerably outperformed those in the FTSE All-Share Index. [3]

Employee-owned businesses out there in the real economy, selling high quality services including world class public services and making marvellous products, compete, succeed and outperform others as a direct result of being employee-owned.

Employee-owned organisations adhere to a unique set of corporate governance principles. All of them combine ownership by their workforces with deep engagement of their employees in the management of the business, transparency about financial performance and equitable distribution of rewards. They make prudent decisions for the long term.

Traditionally structured businesses in the UK tend to operate with a dominant goal of driving shareholder and investor value. Value is often seen almost exclusively in terms of financial returns, especially when external investors are involved, and much of the corporate sector operates on the basis of short or medium term gain both in terms of product and staff development, and the strategic vision of the business. Too many in UK businesses are constantly looking to create opportunities to sell the business they are leading and have some equity in.

When the employees are the owners, the emphasis is different. They create environments in which people are able to develop and progress, and in which they permanently focus on exceeding customer expectations. Employee-owned businesses think and plan for the very long term and are driven by the development of broad value rather than short-term financial gain. By doing so they retain the associated jobs, skills and wealth in local communities by redefining the company as much more than a set of liquid and fixed assets to be financially valued and cashed.

A crucial part of UK industrial policy

However, employee ownership has not yet secured a position in the mainstream of UK industrial policy. Industrial policy is, broadly, an attempt by Government in partnership with business to chart a strategy on skills, inward investment, infrastructure, exports, finance, growth sectors and regulation that can lead to sustainable prosperity.

Employee ownership deserves to be in the strategy from both a macroeconomic and a competitiveness perspective. On the macroeconomic side, we all know that one of the fundamental issues that must be addressed as part of UK industrial policy is economic ownership.

Business ownership and wealth in the UK has become, as the recent report of the Ownership Commission testifies, incredibly concentrated amongst a small number of individuals and institutions with the plc model for businesses being over-dominant. 50% of the people in the UK own just 1% of the wealth, with the wealthiest 20% owning a huge 84% of the wealth. [4]

This unequal nature of economic ownership in the UK will, if unaltered, have major negative social consequences and costs. There is, therefore, a burning need for UK industrial policy to help nurture and achieve greater diversification of ownership of wealth and business. Employee ownership can and should play a significant role in this structural reform and rebuilding of the UK economy.

On the second front, that of competitiveness, productivity growth remains the key determinant of our ability to compete in world markets. UK industrial policy should focus squarely on this. The capacity for productivity growth lies largely within domestic businesses, although foreign investment will continue to play a role.

Thus, promoting economic environments that make domestic firms thrive, grow and compete is critical. Because of the growth and competitiveness contribution it makes, including in the smaller knowledge-based companies on which the UK economy increasingly relies, employee ownership needs to be a much more prominent and become a bigger part of our future economic environment. This should be reflected in our industrial policy.
So what should UK industrial policy include about employee ownership?

It should contain a long term vision for the major role that employee ownership will play in the future. This should be accompanied by a target for increasing the number of employee-owned organisations so that they contribute 10% of UK GDP by 2020.

It is also imperative that UK industrial policy has short term ambitions for employee ownership. These should focus on four priorities.
Firstly, by raising awareness of employee ownership, its benefits and options for implementation. This requires a brilliantly resourced and creative marketing and profile raising campaign sustained over several years throughout the UK. It is vital that Government invests significant financial and human resources in this.
Secondly, the simplification of implementation is a massive part of the way forward. This is the agenda that Nick Clegg refers to as employee ownership ‘in a box’ – the provision of standard legal and financial documentation and procedures to ease the journey for those who want to create employee-owned organisations.
The third priority is access to finance. The creation of an asset class of patient capital and social investment that aligns with the financial requirements of employee ownership remains imperative.

Fourthly, the policy needs to broker significant tax measures that help grow employee ownership. The options span a long continuum from the limited re-introduction for employee-owned businesses of profit related pay reliefs for standard levels of remuneration linked to profitability and paid on an equivalent basis to all employees, through to such things as raising the upper limit for entrepreneur’s relief to incentivise owners to transfer their ownership to employees or broadening the availability of entrepreneur’s relief to owners of less than 5% of the shares in the business they work in.

If we are to drag ourselves out of the economic downturn we will need to continually challenge and refresh UK industrial policy. Through industrial policy, Government can play a vital role to support business innovation and growth through funding, inducements for overseas investors and changes to the business and personal tax regime. The policy challenge is to identify and nurture the right parts of the economy. Employee ownership is one of these parts.

The conditions for employee ownership achieving this appropriate recognition and importance within UK industrial policy appear to be in place. This context was boosted in late 2012 when Government and opposition parties formally endorsed employee ownership as an important part of the UK growth agenda. At the same time, the Coalition announced its intention to bring to the table a range of resources to increase the number of employee-owned businesses.

2013 is absolutely the time for the words of support to be reflected in bold radical action via industrial policy. Progress towards much more employee ownership is a natural part of the on-going modernisation of our country. It completely fits with the Marquis de Condorcet philosophy of development that foresees continuous improvement in the freedoms and rights of individuals in society and the economy. It is a successful business model in every sector of the economy that constantly challenges the conventional wisdom of how businesses should be owned and run.

The overall case for employee ownership being a core part of UK industrial policy is overwhelming.

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.