WHOSE COMPANY IS IT ANYWAY? - Democracy and co-ownership are no way to run a business, say hardline capitalists, pointing to the United Airlines bankruptcy and the St Luke's bust-up. Could they be mistaken? David Butcher reports.

by David Butcher
Last Updated: 31 Aug 2010

Democracy and co-ownership are no way to run a business, say hardline capitalists, pointing to the United Airlines bankruptcy and the St Luke's bust-up. Could they be mistaken? David Butcher reports.

When employees own the company, strange things happen. At Aberdeen-based specialist engineers Woollard & Henry, for instance, workers on the shop floor, off their own bat and without being asked, managed to figure out a way to raise a machine off the floor so it could turn out larger components and the company could bid for better contracts Remarkable.

Or take John Lewis Partnership: recently, the employees' parliament voted to allocate pounds 70 million a year in pensions contributions where rival groups set aside nearer pounds 5 million. Impressive. Then again, workers at the advertising agency St Luke's once spent several days debating whether they should keep a parrot in reception or not. Barmy.

The parrot had to go in the end. But it engendered hours of heated discussion along the way, the kind of thing that people from St Luke's describe as 'empowering' or 'inclusive' but which managers in most firms would see as a ludicrous waste of time.

How you feel about employee-owned companies is rather like which football team or political party you support - it's an instinctive, tribal thing.

If you're by instinct a red-blooded capitalist then having the workers owning the show and calling the board to account whenever they feel like it looks like a travesty of the natural order of things. Your business sense tells you that everything from raising capital to making redundancies would become a minefield.

On the other hand, to many people, the idea that a company's capital should serve its workforce rather than the other way round has an irresistible logic. Surely you must get better productivity if everyone has a stake in the firm - why wouldn't you?

Testing either view isn't easy. It's like setting out to establish whether Labour or the Tories govern the country better. It's not really a question of evidence so much as a matter of faith. For advocates of co-ownership, the idea of a new alternative to capitalism has the force almost of a religion. One St Luke's executive described the agency in its early years as having a 'cultish feel to it', and a sense of evangelism, of wanting to spread the word, comes with the territory.

However, ammunition for the sceptics has come from two recent high-profile news stories. In December, United Airlines filed for bankruptcy, spelling the end of what was described in press reports as 'an ill-fated experiment in employee ownership'. And in March, the charismatic chairman of St Luke's, Andy Law, walked out after an almighty row with his fellow managers, prompting self-satisfied chuckles all over adland that the poster child of the '90s was finally getting its knees scraped.

It might look as though these failures signal a weakness in the model: employee-owned companies are fine in the boom times, but in a downturn they come apart at the seams. That's unfair: both incidents were arguably the result of setting up the scheme badly.

In United's case, the airline management did an unusual deal with its workers in 1994. Desperate to control its bloated cost base, it gave pilots and mechanics a 55% share in the company in exchange for huge concessions in pay and conditions. In the fraught world of labour relations at US carriers, this may have seemed like an enlightened move, but in retrospect it looks like a marriage of convenience founded on greed (once the pay deal ended, pilots got a 29% salary hike) and mistrust (managers worried that if they criticised workers, their cards would be marked by the union).

Worst of all, cabin crew weren't even included in the deal, so a large group within the company was excluded from the word go. If you're going to condemn the employee-ownership model on the basis of the United example, you might as well write off capitalism because Enron failed. A rotten apple tree doesn't damn the whole orchard.

In the case of St Luke's, the problems were different. By all accounts, it was founded in a blaze of energy and enthusiasm when the London branch of Chiat Day negotiated an employee buyout from Omnicom in 1995. In the late '90s it was on a roll, but in the heady flush of success some of the governance issues were never resolved, according to former managers. 'If you're going to be a co-operative, you have to be incredibly clear about what that means,' says Naresh Ramchandani, a former creative director at St Luke's. 'It was always fudged. The company was called a co-operative but it wasn't really run as a democracy, and that's where the trouble lay. It's a brilliant thing that everyone had a share in the business, because that should translate to motivation, performance and ultimately profits. But because there was a grey area on what that really meant, it got in the way.'

So the St Luke's story tells us less about employee ownership than about the tendency in parts of the advertising industry to prioritise being cool over being organised. In any case, St Luke's is still alive and kicking, though with a smaller roster of clients than it had. If the red-blooded capitalists want to hole the co-ownership model under the waterline, they need better ammunition than this.

One of their key arguments is to do with decision-making. The fact is, if co-owned organisations include a degree of employee involvement in making decisions (and not all do, particularly in the US) then not only are those decisions bound to be taken more slowly, but it's going to be harder to take the tough ones.

Not so, says David Erdal, who heads the Baxi Partnership, a pounds 20 million fund that invests in employee-owned companies. 'I saw a company that had to cut wages by 20% and more or less double the workrate,' he recalls. 'It came to an agreement with the workforce and within a couple of years the company was racing ahead and the employees got back all that they'd given up.'

Dr Mark Fenton-O'Creevy, senior lecturer in organisational behaviour at the Open University Business School, agrees. 'Employees can engage with tough decisions,' he says, citing the example of a Nissan redundancy programme where workers structured how the layoffs worked. 'Because employees had come up with it and owned it, it was much easier to make it happen, with little decrease in morale.'

This is a key advantage, for Fenton-O'Creevy, of employee involvement in governance. 'In terms of change management, it may take longer to reach a decision, but once it comes to implementing it, that all happens much more readily, with much greater support. It's seen as a more legitimate decision because employees have been involved.'

John Lewis Partnership (which has been owned by a trust on behalf of its employees, or 'partners', since 1929) has recently had to lay off staff at several branches, so personnel director Andy Street has seen this effect close-up. 'We are open with our partners in explaining why we have to take some tough decisions and involving them in that,' he says. 'Although that is challenging along the way, it gets you to a much better quality outcome, because our partners (the employees/co-owners) are fully bought in to the decisions that we collectively have taken.'

Whether it's in introducing a new computer system or changing shift patterns, The same effect can often be seen. Co-owned companies find that employee involvement can mean less institutional resistance, so once made, decisions ripple through the organisation more quickly.

But how you take them matters. You tend to find two types of democracy in co-owned companies: direct and representative. Direct meaning wide, low-level involvement in decisions about how the place works; representative meaning seats on the board for elected staff members as well as a council of employees that can hold executives to account. Both can bring productivity improvements, argues Fenton-O'Creevy.

'Many of the productivity improvements come from getting individual employees directly involved through, for example, continuous improvement schemes or team briefing processes,' he says. 'But the effectiveness of those processes often depends on the representative involvement, the feeling that there is a body looking after employees' interests on their behalf.

'The best circumstances are a high level of trust between the employees and the people who manage them, but it turns out that a good working substitute for that trust is the belief that there's a representative organisation that will make sure workers' interests are looked after.'

Erdal describes how Baxi organises the firms it helps move to employee ownership. 'We maintain a traditional company structure with a board that is responsible for appointing all the managers and running the company from one year to the next. On the board there are two elected directors, and anyone can stand for those. They are there to close the communication loop. Everybody sees that nothing is going on in secret - there are employee representatives in every key discussion. We are not having employee votes on the decisions, though.

'At the end of the year or every quarter, the board report to the employees and have a normal reporting-to-shareholder process, except that your employees are also your shareholders.'

All this asks a lot of top management, of course. They can't just dish out orders, posture to the stock market and look out for the next acquisition target. Says John Lewis' Street: 'The big challenge is to the executive decision-makers. They really do have to stand the scrutiny of their co-owners or employees. There can be absolutely no hiding place for weak decision-making, because anything you do can be challenged by your co-owners. That's a challenge inherent in the model.'

But it's one that makes managers focus on what really matters, according to Erdal. 'Being owned on the stock exchange means you have to go out and thump your chest a lot, so attention is focused out of the company to the stock market. If, instead, every time you talk to shareholders you're talking to employees and vice versa, everybody's attention is focused on 'how do we make this successful?' rather than on 'how do we appear good?''

Of course, not everyone will enjoy working in such an environment. Some people in any organisation will be natural worker ants, preferring to do their bit, then go home without either getting involved in bigger issues (if they're rank and file) or having to consult their subordinates (if they're managers). We're not all ready for empowerment. Fenton-O'Creevy tells the story that he once found himself talking to his secretary from a train, trying to solve a scheduling problem. In the end he suggested that since she knew how the process worked, she could sort the problem herself. 'Mark,' she told him, 'I know what you're trying to do. You're trying to empower me and I won't have it.' She had a point.

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