Employee ownership: when workers own their companies

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2005

Patrick Burns would no doubt be very happy if he could sign up Royal Mail as a member of his organisation. As executive director of JOL (previously Job Ownership Ltd), he runs an association which brings together about twenty British employee-owned businesses, including most notably the retailer John Lewis Partnership whose 60,000 employees own the business together through an employee benefit trust.

JOL is aware, however, that Royal Mail will not be knocking on its door just yet. Royal Mail chairman Allan Leighton's hints in recent months that he favours some element of employee share ownership for the Royal Mail have been controversial, certainly at the postal union CWU which is hostile to any moves away from traditional public ownership for the post office. The UK government itself has a manifesto promise to keep Royal Mail public.

Patrick Burns is frustrated that, to date, the debate has not moved beyond newspaper headlines. “If Royal Mail is going to face increased competition, trying to find some way to make its workforce feel more committed to it would be highly fruitful. What needs arguing about, and in public, is the best way to do this,” he says.

A new study commissioned by JOL, to be published at the time of the Trades Union Congress next month (Sep), will claim that businesses which are structured as employee-ownerships generally outperform their competitors by benefiting from marked productivity gains. The report, which draws in part on the Irish experience of privatising Telecom Eireann (now eircom), adds the caveat that workers need to be given adequate participation in decision making processes.

As well as John Lewis, the disparate group of businesses who are currently signed up with JOL include the advertising company St Luke's Communications, jam maker Wilkin and Sons, seafood specialist Loch Fyne Oysters, and paper manufacturer Tullis Russell. David Erdal, who as Tullis Russell's then chairman oversaw the conversion in 1994 of a family business to employee ownership, now heads Baxi Partnership, a capital fund tailored specifically at employee owned companies. He draws a clear distinction between firms which may have minority employee shareholdings and those where employees, individually or collectively, are in the driving seat. “Control is very important. If it's less than 50%, then it's not control,” he says.

In practice, forms of employee ownership can vary widely, some being based on individual employee share holdings (usually using one or more tax advantageous share plans), some on indirect employee ownership (typically through an employee trust) and some a combination of the two. In general, employee trusts are considered a more satisfactory solution. Advocates of employee ownership still recall the 1980s experiment at privatised freight operator NFC (now Exel) where a strong focus on employee share-ownership eventually foundered when staff sold their individual shares on the open market.

For David Erdal, effective employee ownership requires good internal democratic structures and communication. “You have to put resources into educating people. If you do, you get it back in spades in terms of productivity,” he says. He also argues that employee-owned businesses tend to have healthier corporate governance. “Compared with a shareholder-owned company where shareholders are sometimes ignorant of what's going on, employees know it backwards, who's good and who isn't. Directors have to play straight,” he says.

Chris Lightfoot, support services director of the Sheffield-based school uniform supplier School Trends, claims another benefit. “I've worked for plcs where short-term decisions had to be taken to maintain the share price,” he says. “Here we can take long-term decisions – we haven't got to be profitable every single year”. School Trends, with 130 employees and an £8.5m turnover, transformed itself from a conventional privately-owned company last autumn with the acquisition of a majority shareholding by an employee benefit trust, funded by a sale and leaseback deal.

Though JOL's Patrick Burns appreciates the publicity value of a Royal Mail-type conversion, he accepts that the potential of employee ownership is primarily for smaller businesses of this size, in situations where owners want to retire or take out their capital. “ Britain is quite bad at business transfer and a huge number of business failures are because of botched succession. Accountants and advisers are missing a trick if they're not advising clients to consider employee buy-outs,” he says.

Anyone beating the drum for employee ownership, however, clearly knows they will encounter scepticism. Patrick Burns goes out of his way to stress that his member organisations have conventional management structures. “JOL companies have strong, firm, professional management teams who do what managers are supposed to do. This isn't democracy gone mad. And it's not shop floor versus management,” he says. Managers are shareholders too, he points out.

But if internal management structures in most employee-owned businesses are little different from those of conventional businesses, the difference perhaps comes later. Senior managers know the decisions they take will be scrutinised very carefully and that the shareholders undertaking this scrutiny have a very direct and personal interest in how the business is doing.

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