Richer Sounds which will become the second most well-known employee-owned company after John Lewis. Roger Utting/Shutterstock

Employee-owned companies perform better, but are resisted by banks, lawyers and governments

Sick of seeing our shelves full of Beatles and Bob Marley LPs with no record player upon which to play them, our son visited Hi-Fi emporium Richer Sounds to buy us one. On finding it didn’t work he returned it to the nearest branch where they realised he’d been given the wrong cable, supplied the correct cable, issued a refund, and explained clearly how to set it up. If someone had asked me who should be running the company, the assistant serving us would have deserved consideration.

News that Julian Richer has now passed ownership of his company into an employee-owned partnership, like that used at John Lewis, it so happens that that able shop assistant has in a way come to be his own boss. Most (60%) of the company’s shares will be placed in an employee ownership trust, with its 522 employees at 53 stores around the UK set to receive a share of a £3.5m payout. Richer has passed running the business to the management board, which will be advised by a newly arranged advisory council made up of current staff.

Julian Richer, who after turning 60 has handed 60% of his company to an employee-owned trust. Mick Atkins/Shutterstock

At the John Lewis Partnership (which includes Waitrose), a portion of the profits each year is paid as a bonus to its employees, much like other companies pay a dividend to shareholders. John Lewis suffered a squeeze in profits in 2018-19, causing the bonus to be lower than at any time since 1953, when it was zero. However, John Lewis still paid a bonus, equal to 3% of salaries.

On the same day as the Richer Sounds announcement, the Institute for Fiscal Studies announced a review of inequality in Britain by Nobel Prize-winning economist Sir Angus Deaton, who warned: “There’s a real question about whether democratic capitalism is working, when it’s only working for part of the population.”

But as a form of stakeholder capitalism, the evidence shows that employee ownership boosts employee commitment and motivation, which leads to greater innovation and productivity.

Indeed, a study of employee ownership models in the US published in April found it narrowed gender and racial wealth gaps. Surveying 200 employees from 21 companies with employee ownership plans, Joseph Blasi and his colleagues at Rutgers University found employees had significantly more wealth than the average US worker.

The researchers also found that the participatory management practices that accompanied the employee ownership schemes led to employees improving their communication skills and learning management skills, which had helped them make better financial decisions at home.

Obstacles to employee ownership

If research over the years has found that employee ownership is a successful corporate model, this raises the question of why, if this makes companies more successful, it is not more widely adopted.

Most obviously, current companty owners may wish to retain their ownership, regardless of how much better their employees might prove to be as co–owners.

And for most public listed companies, the real owners of the company are institutional shareholders such as pension funds and the like, in which case there is no easy mechanism for bringing about employee ownership. And even where there is a single owner, such as Richer, the advice from banks and legal advisers will be to consider floating on the stock exchange or selling up to a bigger firm. Corporate institutional culture is largely ignorant about employee ownership, or otherwise outright hostile towards it.

Dropped political pledges

The UK Coalition government of 2010-2015 pledged to banish that ignorance and hostility. Liberal Democrat leader Nick Clegg announcing they’d establish a centre to promote the benefits of employee ownership, including for succession planning. It never happened – while less well-known than Clegg’s U-turn on student university fees, it was probably more damaging to the long-term success of the economy.

The Coalition government also pledged to promote corporate diversity, including in the financial services sector, but that pledge too was broken, with an index of corporate diversity showing no improvement over subsequent years.

So employee ownership can be more effective and such companies tend to have better outcomes. But these benefits don’t follow automatically: they require a considerable and sustained effort from management. This includes managers getting used to the idea that they’re answerable to the employees rather than shareholders. Research has found this can be a major hurdle, not so much for the senior management who will generally appreciate the potential gain, but for middle management, who will have got used to the old, adversarial ways of giving orders.

It also requires the support of government, in the form of legislation and regulation. All three political parties claim to be supportive of employee ownership. Despite their failures in the Coalition government, the Liberal Democrats remain committed to promoting employee ownership; when Theresa May became prime minister, she made supportive noises that included proposals to put employees on company boards (later quietly shelved). Shadow Chancellor John McDonnell pledged that a Labour government will introduce employee ownership.

The key to the success of John Lewis over the decades has been not just the positive effects of employee ownership on employee motivation, commitment, innovation and productivity, but also that the employee trust is committed to promoting the interests of current and future employees. This has allowed them to sustain a more long-termist outlook, for example in rejecting takeover bids that might provide current employees with a windfall, but offer bleaker prospects for future generations of employees.

However, UK company law governing employee ownership trusts includes a rule against perpetuity: such trusts are limited to 125 years (previously 80). To establish the John Lewis Trust required an Act of Parliament, and relied upon a version of the non-perpetuity rule – dating from the time of the Crusades – under which the trust is limited to “21 years after the death of the last survivor of the descendants then living of the British monarch at the time”. In this case, 21 years after the death of Queen Elizabeth II.

This has to change. Otherwise, all gains from employee ownership that are won will prove temporary.