Pitfalls in employee ownership

I’m in two minds about Nick Clegg’s call for greater employee ownership.

On the one hand, he’s right to say that such firms “often perform better”. There’s good evidence that they are more productive than orthodox capitalist firms and are just as likely to grow. This isn’t simply because employee owners are more motivated than ordinary workers. It’s also because in a world of bounded rationality and knowledge, the pursuit of growth and profits might be something best done obliquely rather than directly.

But I have two quibbles.

You might think that one of these is that companies sometimes need to raise more capital than they can get from workers investment alone, and so need external owners.

Not so. Between 2003 and 2007, UK companies were actually net buyers of shares, not sellers; they only became issuers in 2008, when banks needed to boost their capital bases. The stock market, net, is not really a source of capital; for most mature firms, growth is financed internally.

In this sense, when employees buy shares, they do so not to increase their firm's capital, but rarger to respect the property rights of existing shareholders. Clegg's proposal seems to be that workers should buy in to capitalism, rather than take control of it. 

And there are two problems with this.

One is that a little bit of employee ownership might not be enough to have the “hugely transformative effect over corporate culture” that Clegg desires. Bear Stearns and Lehman Brothers had large employee shareholdings - so did Enron, come to that - but both were incompetently and capitalistically managed.

Secondly, employee share ownership violates the first rule of investment - don’t put all your eggs in one basket. The worker who owns shares in his employer is risking not just his human capital but also his financial capital in the same venture. This is dangerous.

Granted, there’s an upside to this concentrated risk; the possibility of big losses can be a good incentive. But if this possibility is not accompanied by genuine control, then we have the worst of both worlds; workers take risk, but not power.

Herein, I fear, lies a blind spot that liberals have long had. They’ve long thought that the middle way between left and right is better than either. But it might be worse.

Comments

[Jim]

In an effort to induce engagement and innovation, I suggest we confuse ownership with hierarchy.

Even the significant psychological benefits of employee vestment will be undone by stifling organizational structures.

Firms are beginning to decentralize. I believe that will eventually lead to lower salaries at the top as well, including a more inclusive sharing of pain during bad times and sharing of profits during good times.

Some companies (very few) are already organized and have a culture like this. Every one I know tends to dominate their industry, or at least they are very profitable.

I believe strongly that both the hierarchical Taylor theories and assumptions, and the union response is incorrect; teams and organizations, like complex organisms, must be all-in together. The cultural story of the great leader is mostly wrong, just as the one about the heroic worker speaking truth to power.

The organization of the future will be much flatter, better at communication, and therefore much more adaptive and innovative. What happens to ownership is more a question of incentive than character.

[aragon]

Bear Stearns and Lehman Brothers, and Enron are all financialised companies, with shares distributed as salary, and are not representative of proper mutual companies.

Concentrated risk, is an issue partially offset by the state safety net. But once a company is well established the capital comes from retained profits (no returns to shareholders), rather than the workers, just look at building societies.

[Account Deleted]

Clegg's speech conflated two quite distinct things: employee ownership and employee share schemes.

Employee ownership is a good thing, in no small measure because the company stock is not listed, thus allowing you to ignore the short-termist opinion of the market. Re capital, as well as using retained profits, mutuals can also issue corporate bonds (as John Lewis have).

Employee share schemes do not seriously erode the controlling position of the existing owners (they'd be unlikely to implement such schemes if they did), so their impact on the business's ethical behaviour is exactly zilch.

They are also often biased towards the executive layer, which means many are not that different to the traditional partnership model employed by merchant banks, such as Lehmans.

In his speech Clegg also sang the old song about a "shareowning democracy." Despite the best efforts of the mad old bint, only about 10% of the FTSE is directly owned by individuals (ignoring our indirect ownership via UKFI), and only about 1 in 5 of the population own any shares at all (excluding indirect ownership via pension funds).

If we assume the government will not mandate that all PLCs have an employee share scheme, and if we take it as read that shareholding will continue to be more an oligarchy than a democracy, his speech was just a plea for more favourable treatment of mutuals and cooperatives, which is neither radical nor likely to achieve much.

Of course, if he goes on to demand the creation of workers' soviets in every business with more than 20 employees, I'll reconsider.

[Keith]

It is worth pointing out that John Lewis is not a cooperative or share holder business!! No one seems to have picked up on this elementary error by Clegg or which ever unpaid intern wrote his latest rubbish. John Lewis is owned by a perpetual trust and the partners have no control of the capital. A co op is owned by its members who can close it down and dispose of its capital as they please.

I agree about risking your capital in your employer could be a big mistake. But that is why this plan is a sure failure. The Spanish coops of mondragon have their own bank to redistribute risk between coops and act as a supervisor to stop Enron type corruption. They replace the stock market with an alternative regulatory device, which works much better. A stock market is always the play thing of a small wealthy minority and it often fails at its economic function of allocation too. Clegg is talking nonsense, it is 1982 all over again! We had it all before under thatcher. The wealth is still in the hands of the 1 per cent.

[rogerh]

Clegg and Gove are not stupid - so what is the motivation for floating their recent crop of palpably stupid ideas. Both must be aware these notions damage their credibility - so why do it?

[Keith]

How do we know Clegg and Gove are not stupid? Being well off and attending very expensive private schools is not the same as having ability. Very few MPs show much sign of ability. They can work the old school tie and "network" and gab glibly but ability? I am not convinced about that, I see little evidence for that belief.

[Dipper]

did I miss the bit where Clegg announced that the government, in which he is no 2, is introducing a scheme to ensure more government contracts go to firms which have employee share schemes? Did he quantify the savings govermment can make?