Unsung benefits of employee ownership

Firms owned by staff have beaten the FTSE all-share. So why aren't there more?

by The Guardian
Last Updated: 23 Jul 2013

John Lewis employees enjoy many benefits as partners in the company, including heavily subsidised hotel accommodation and discounts on theatre tickets. But the biggest perk of being co-owners is a share of the profits.

This year thousands of John Lewis partners received an 18% bonus, equivalent to nine weeks' full pay. This year profit before tax at the partnership was £319m, with £164m being reinvested. The rest, £155m, was shared between the partners.

John Lewis Partnership is probably the best-known employee-owned company in the UK. Its 68,000 permanent staff own its 26 John Lewis department stores, 185 Waitrose supermarkets, online catalogue John Lewis Direct, three production units, a farm and a tickets, travel and insurance service. The whole group had a combined turnover of nearly £6bn last year.

Despite its success, employee-owned companies are only slowly emerging as a credible business model. Equity Incentives, which provides a share plan service to private and quoted companies, has compared the financial performance of employee owned companies with those listed on the FTSE. Since 1992 it shows £100 invested in an index of these companies would have been worth £349 by the end of June 2003; the same £100 invested in the FTSE all-share index would only have grown to £161.

The Employee Ownership Association carried out a survey in 2005 that revealed that 72% thought staff worked harder under a co-ownership structure, 81% said they took more responsibility, 49% thought competitiveness was enhanced and 44% confirmed profits were higher.

Despite this, co-owned companies make up only an estimated 2% of the economy, or £25bn in annual turnover. Director of personnel at the John Lewis Partnership, Tracey Killen, says: "The great strength of the partnership's model is that employees have a real stake in the business ... co-ownership allows the partnership to take a long-term view, because we do not have to answer to external shareholders who are usually seeking quick returns."

A John Lewis spokesman adds: "In the 1990s, performance was quite sluggish. If we were a listed company shareholders would have been asking questions. We invested a lot of money ... but we didn't see the consequences until four, five, six years down the line."

The investment seems to have worked. John Lewis has come first in the Which? survey of the nation's favourite retailers. It has now made a £500m investment in 11 new stores to be built within 10 years.

Loch Fyne Oysters is another example. The company (separate from the Loch Fyne restaurant chain, which was sold to Greene King for £68m last week) turns over £10m a year. It was bought by more than 100 staff in 2003 after they borrowed £2m from the Baxi Partnership and about £1m from the Royal Bank of Scotland.

Virginia Sumsion, marketing manager at Loch Fyne Oysters, says co-ownership "gives employees a sense of security" but the system requires participation which has not always been easy. She says co-ownership means middle management has to get employees more involved. "In the early stages it's quite difficult to know what to ask." But after the teething problems, she says, the culture of the company has become more open.

Mark Constantine, chief executive of Lush, the natural cosmetics shop, is considering co-ownership. While he stresses the idea is still in the embryonic stage, he wants the 5,500 employees who have contributed to Lush, which has a turnover of £145m a year, to get something back. He says one reason would be to prevent a buyout from a company that doesn't share Lush's ethics, including its stance against animal testing.

Shared ownership has its critics. Some doubt the ability to make the right decisions and make them quickly, and the level of risk that can be taken with so many people dependent.

But supporters says that it's a misconception that everybody has to be consulted to make every single decision. Mr Constantine dismisses the worries: "Decision-making can become slow at any time. It's about the quality of the management."

But if the benefits are so clear, why is co-ownership not more widespread? Jonathan Bland, chief executive of the Social Enterprise Coalition, says Britain has a very "thin" model of business. The reality, he says, is that there are "a range of fantastic business models but a real ignorance about the fact we can use them and be successful".

Bland lays some of the blame on government and business advisers. When Gordon Brown scrapped tax relief on company contributions to employee benefit trusts in 2003, a move mainly aimed at tax avoiders, it made it more difficult for companies to be trust-owned, he says.

John Alexander, managing director of the Baxi Partnership, agrees. Having been in operation for seven years and helped eight companies with 700 staff become employee-owned, he feels employee-ownership could be given a boost if the government brought in capital gains tax relaxation for anyone who sells into a co-owned structure.

"If there were a nil-rate band for businesses transferred into a co-owned structure, " he says, "it would be brought to the attention of every single accountant and lawyer in the country."

Workers enjoy fruits of their labour
Antoinette Odoi, The Guardian
Monday August 20, 2007

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