Worker ownership: threat or promise?

Labour’s plan to force large companies to give workers a 10% stake in them seems popular: Yougov reports that most voters and even a plurality of Tory supporters think it a good idea. On the other hand, though, it’s given the CBI a fit of the vapours. Carolyn Fairbairn says:

Their diktat on employee share ownership will only encourage investors to pack their bags and will harm those who can least afford it.  If investment falls, so does productivity and pay.

She’s wrong, and the voters are right. Far from being anti-business, McDonnell’s plan might even be a way of shoring up capitalism. I say so for four reasons.

One is simply incentives; giving workers an ownership stake incentivizes them to work better. There’s a large body of evidence (pdf) which shows that worker ownership increases productivity. If it’s a good idea to give CEOs an equity stake in the business – so that their incentives are aligned with shareholders – why should it be a bad idea to give workers such a stake too?

Secondly, giving workers ownership gives them a voice: as Tom says, a 10% stake would make workers the single biggest owner of many listed companies. And this voice is worth hearing. There is, as Kenneth Boulding warned, always a danger that managers of large organizations “will be operating in purely imaginary worlds.” Worker voice can be a valuable corrective to this by bringing ground truth to CEOs’ attention: workers on the ground are sometimes the first to spot deteriorations in cash flow or product quality. And it’s easier to nip problems in the bud than solve big ones. This is therefore a step towards what Shann Turnbull calls network governance and cybernetic control.

The third mechanism operates at the political level. If workers have substantive stakes in their businesses, they will support more business-friendly policies, just as Thatcher’s right-to-buy policy created a constituency in favour of high house prices. That should increase support for productivity-enhancing policies, and decrease support for higher taxes on business.

Fourthly, worker ownership brings into play new methods of stabilizing output. Roger Farmer has proposed that the Bank of England acts to stabilize animal spirits by using a form of QE to directly raise share prices in a slump. Right now, this is ruled out on the grounds that it would increase inequality. If, however, shares are more widely held, this objection disappears.

All this raises two questions.

One is: if a worker stake is such a good idea, why is the CBI so opposed to it?

There is, in fairness, a minuscule element of validity behind Fairbairn’s hyper-ventilating. Giving workers a 1% stake each year would dilute the stake of current owners. That should slightly depress share prices; it’s a form of mini-rights issue. This matters, because there is growing evidence that weaker stock markets lead to both lower productivity growth and higher unemployment (pdf). Animal spirits matter. It is no longer the case that we can dismiss stock market fluctuations as Paul Samuelson did, on the grounds that they’ve predicted nine of the last five recessions.

Also, though, there’s a framing effect. McDonnell and many of his supporters are framing his proposals not as a means of helping capitalism, but as a radical, transformative plan. In their current form, however, they could equally be seen as a move to a shareholder democracy – the sort of thing Thatcher wanted but didn’t deliver*.

I suspect, however, that there’s an even less reputable reason for opposition. It’s simply that bosses’ sense of self-regard and entitlement has grown so huge that they resent even moderate counterbalances to their power. This might help explain why many Tory voters support McDonnell’s plan; small shareholders are sick of being ripped off by CEOs greed and incompetence and welcome any curbs upon these.

Which raises the second question: mightn’t these plans be just too mild? Is a 10% stake sufficient to create a feeling of ownership? Are £500 a year of dividends sufficient incentive to boost productivity? As Tom and Jon point out, these are mild social democratic plans, which might arguably give workers less power over firms than they currently have in Germany.

What’s going on here, I suspect, is that McDonnell is laying down some stepping stones. A 10% stake isn’t the end of things. If it proves mildly successful – as it might well – it’ll lead to demands for bigger stakes and a bigger worker say. And let’s face it, the case for worker-shareholders is in some ways** stronger than that for outside shareholders: it’s long been known (and was proven by the collapse of banks in 2007-08) that these are incapable of overseeing management properly.

In this sense, McDonnell’s plan would call into question the very nature of capitalism. Which means that what capitalists have to fear is not that it would fail, but that it would succeed.

* The proportion of UK shares held directly by individuals has fallen from 37.5% in 1975 to 12.3% now.

** The counter-argument here is one of risk-pooling: worker-owners put all their eggs into the basket of one firm, whereas outside shareholdings are a way of spreading risk.

Comments

[Luis Enrique]

what's your thinking on whether wages would adjust to (partially?) offset the effect on workers' total compensation?

[Dave Timoney]

One aspect of McDonnell's speech that hasn't garnered much coverage is the idea that "a proportion of revenues generated by the ‘inclusive ownership funds’ will be transferred back to our public services as a social dividend".

This provides a way of increasing taxation without necessarily changing the headline level of Corporation Tax, and in a manner that is likely to command popular support. Significantly, this hints at a path towards a possible UBI rather than just a conventional sovereign wealth fund.

In other words, McDonnell appears to be interested in something wider than just workers' equity within a subset of industry.

[Fëanor]

Philip Aldrick in The Times today claims this is a sneak tax, as pointed out by 'From Arse to Elbow' above. "Under Labour’s proposals, every company in Britain with more than 250 staff, including listed multinationals, would be compelled to hand over a tenth of the business to its employees, staggered over ten years. Staff would collect the first £500 of their dividend entitlement, with the state taking the rest." https://www.thetimes.co.uk/edition/business/mcdonnell-s-employee-ownership-is-a-stealth-tax-on-big-business-k0xz9mqzt

[Jim]

The workers won't own f*ck all, because they can't sell it. Just like when 'everyone' owned the nationalised industries, no one got their bit to sell. Ergo the workers will have no more say in how the company they work for is run that the workers had in the nationalised industries. Its all just a way for the likes to McDonnell to get more power in his hands. The workers won't each get a vote for 'their' shares at the AGM, it'll be done as block vote stitched up in a back room somewhere by some Momentum thug, in the same manner those 'votes' were taken for strikes in the 70s - vote against and get beaten up.

This is all great stuff anyway, I hope it happens, then the workers will find out what socialism is all about, good and hard. Lots of 'democratic rights' in theory, f*ck all freedom in practice.

[TickyW]

Great post Chris!

Just one point though: The share issue will be more like a bonus issue than a rights issue since no cash will change hands. Moreover, the pre-emption rights that normally accompany a share issue will have to be negated in respect of the share issue. I presume legislation will achieve this.

[Christopher H.]

I think this is a good plan although I like the SWF-UBD plan better.

Exciting that Labour is being ambitious.

Supposedly the Meidner plan in Sweden was fought viciously by business interests b/c they understood it was a democratic challenge to their power.

[cjcjc]

Needless to say the details have not been published - no doubt they haven't been thought about very much at all - but the devil will certainly be in those details.

I understand that this will apply only to UK listed firms. Is that right?
The Guardian's resident genius Aditya Chakrabortty claimed it would not apply to Apple or Google, though he "wasn't sure" about Amazon...LOL...
So no such scheme for them or Ford, Nissan, Microsoft, Oracle, Merck, GE...though of course most will have their own (sensible) schemes anyway.
Can this be avoided by the simple expedient of shifting domicile and/or listing?
Should the London Stock Exchange begin winding itself down now?

[Luis Enrique]

is it right that workers won't be able to sell their shares? In which case:

"Roger Farmer has proposed that the Bank of England acts to stabilize animal spirits by using a form of QE to directly raise share prices in a slump. Right now, this is ruled out on the grounds that it would increase inequality. If, however, shares are more widely held, this objection disappears."

The objection does not disappear. Why do workers care if the prices of shares they cannot sell goes up?

[Alwalad]

It's quite a bad policy. Giving workers ownership of the company like this does NOT empower them, nor does it give them a voice, it doesn't even give them a higher share of profits. The shares are held by a trust, which will distribute dividends and vote proposals. Given that setting up an individual trust for every business of more than 250 employees in the UK would be an enormous waste of resources, it would have to be a centrally run one, so who decides how workers vote their stakes?

As for the dividend - depending on who they work for, workers could see effective taxes on dividends of over 99% (example of shell cited here: https://www.bbc.co.uk/news/business-45626043). No other shareholder receives this treatment - why exactly is a government that is pro-worker willing to treat workers far worse than rentiers?

[Tony of CA]

Capitalism has already failed, the financial elites just don't want to admit it.

[Brutto Buono]

What's going on here? Workers turning into owners? Great...are they prepared to share the downside as well as the upside: and I mean REAL downside, not that you have fixed income, regardless...

Oh, I misread: it's just another way to tax business while profiling Labour as the well-meaning speaker for ignorant workers...