Building better businesses - employee ownership in the UK
Iain Hasdell, Chief Executive of the Employee Ownership Association
As we slowly but surely drag ourselves out of the economic downturn we will need to continually challenge and refresh UK industrial policy.
One of the fundamental issues that must be addressed as part of that 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. A recent report from Co-Operatives UK (The UK CoOperative Economy 2011) states that 50% of the people in the UK own 1% of the wealth, with the wealthiest 20% owning a huge 84% of the wealth.
This “Pareto principle” or 80/20 rule is a staple in scientific, economic and business texts and forms the basis for statements that over 80% of total wealth in the UK is owned by less than 20% of the population. And this is equally true in the US where, as economist Edward N Wolff of New York University has highlighted, since 2007 the top 1% of households in America owned 34.6% of all privately held wealth and the next 19% held 50.5% of the wealth. Leaving only 15% of the wealth for the bottom 80% of the people.
There has been recognition both at UK level and globally that the 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 (the model in which employees have significant ownership and involvement) can and should play a significant role in this structural reform and rebuilding of the UK economy.
I say this because employee ownership really works.
Evidence gained from our members suggested that employee owned businesses have more engaged workers, can be more profitable, more productive and have higher levels of innovation than conventionally structured businesses. Employee owners have high levels of job and life satisfaction, tend to be healthier and suffer from less stress. The business model achieves competitive profitability because it places a premium value on human capital.
This would immediately suggest that an Industrial Policy that places ownership at its heart, giving the populous greater ownership of industry, will lead towards a more efficient and effective economy. Employee owned firms have proven to be more resilient during times of economic stagnation and uncertainty and should therefore play a greater role in the economic recovery.
Employee Ownership - a mechanism that works
Employee ownership offers a brilliant mechanism in the private sector for quickly spreading business ownership from the few to the very many. Whether at times of start up or succession or at any stage in between it can protect what makes the company special and anchor the long term business. And by doing so, 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 valued and realised. Industrial Policy should firstly be built on what works, recognising the productivity of different types of businesses and business models. Decisions taken today about how we structure the UK economy must be future proofed and put people first.. Government and policy makers should be bold in seeking changes to the roots of how we undertake business and generate GDP.
Yet despite the benefits, employee owned businesses account for only around 2% of the corporate landscape in the UK.
Industrial policy in the UK needs to tackle this head on by setting a vision and target for significantly increasing this percentage and supporting its achievement and not just as a means to diversify business ownership.
Understanding ‘value’ - key to good policy making
Traditionally structured businesses in the UK operate with the goal of driving shareholder and investor value. Value can often be seen almost exclusively in terms of financial returns, especially when external investors are involved, and much of the traditional 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 are constantly encouraged to plan and look for opportunities to sell the business they are leading.
When the employees are the investors and 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 value rather than short-term demands for dividend.
Social gains do not detract from financial success
In formulating UK Industrial Policy we should be under no illusion: productivity and competitiveness are absolutely a central part of the DNA of employee owned businesses. Even a cursory glance at the performance and growth of Gripple Ltd, now trading in seven countries, or of Clansman Dynamics, a global leader in robotic handling equipment, gives ample testimony. And we should be alive to the evidence that employee ownership works especially well in the smaller knowledge-based companies, on which the UK economy increasingly relies.
Public sector reform can be driven by employee ownership
Employee ownership also provides one effective way to help to rebalance the economy by spinning out large parts of the public sector into the private sector whilst protecting the public service ethos of a workforce. It is hugely encouraging to see that many of the early pioneers who have led such spin outs have achieved increased productivity and much better service and social outcomes since becoming independent employee led businesses.
The key test of a successful Industrial Policy will be in productivity and growth
Productivity growth remains the key determinant of our ability to compete in world markets and 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.
It is because of the growth and competitiveness contribution it makes as well as the ownership diversification agenda that employee ownership should be a much more prominent and bigger part of our future economic environment.
So what might a pro-employee ownership industrial policy require?
1. Reform of taxation system
There are currently disincentives in the taxation system that constrain the growth of individual employee ownership, genuine employee trusts and the sale of existing businesses into employee ownership. In the US, which has a more modern approach to taxation for co-owned businesses, it should come as no surprise that employee ownership is a dynamic and growing sector that is increasing threefold.
The review currently being led by Graeme Nuttall will highlight the benefits of a clearer and more effective taxation framework that helps to encourage more employee ownership. If it does, that in itself will be an important contribution to industrial policy going forward, and one which we would urge the Treasury to seriously consider whilst conducting its own review of the tax and regulatory climate for employee owned businesses, as announced in Budget 2012and which is due to report before the Autumn Statement.
2 Greater awareness of employee ownership models
Simply put, not enough business owners, staff or entrepreneurs know that the model exists or, even if they do, know how to, or can afford to, adopt it. The onus is on Government and business to work together to promote and celebrate knowledge and understanding of employee ownership and its economic and social benefits to entrepreneurs, business owners, staff, advisors and funders.
And one component of this it needs to increase the demand side amongst employees for employee ownership.
In addition there are three other major obstacles to mass uptake of employee ownership in the UK, namely lack of awareness; difficulty in obtaining appropriate advice and support; and a dearth of available finance.
3. Better advice and support for individuals and businesses that want to change their structures
The government needs to replicate in the private sector the model being deployed through the Mutuals Information and Advisory Services for public sector spin outs and create a ‘one stop shop’ for advice, support, coaching and mentoring for those trying to achieve employee ownership deals. This need not be a complicated or costly process.
4. Greater availability and diversity of finance
Government needs to work even more actively with financial institutions and other providers of finance to help create a more sophisticated funding market for employee ownership transactions. The reluctance of banks and other financiers to take risk and lend at an affordable rate has played an important part in stifling growth in the employee ownership sector.
5. Building on the positive structures we now have in place
An industrial policy that puts employee ownership on a pedestal, simplifies the taxation system and puts within it more incentives for employee ownership, consistently markets and promotes employee ownership, guides people to high quality affordable advice and eases the lack of finance for employee ownership deals will take us a very long way forward.
The great news in the UK is that employee ownership is gaining more and more interest and support amongst businesses, in Government and across the political spectrum. As the membership body for co-owned companies across the UK, we are greatly encouraged by the interest and vocal support employee ownership has received from all political parties, and the recognition that employee owned businesses make a significant contribution to the economy and to society.
So there is a chance and a hope that a more enlightened industrial policy will emerge and that as a result employee ownership has an even brighter new future in the UK.
That is a very positive context to be in as we reflect on all forms of cooperative and collaborative working in this, the UN’s International Year of the Co-Operative.
Published and sponsored by TLG Lab