Labour has promised “to give workers a stake in the company they work for” and a share of their profits. Companies with 250 or more employees will be expected to transfer between 1% and 10% of their ownership into “Inclusive Ownership Funds” (IOFs) that will pay out dividends to employees.
The proposal sits alongside another major plan in the manifesto to require one-third of company boards to be reserved for elected worker directors. To some extent these proposals may be in competition, particularly because not all manifesto proposals will become policy after the election.
The idea of employees having legal ownership rights over company assets is increasingly viewed as an antidote to inequality. Labour first mooted introducing IOFs in 2018 and a similar scheme has been put forward by US presidential candidate Bernie Sanders. They reflect a view that business owes it to society to finance wealth transfers and fund initiatives like a citizen’s income, social care, housing renewal or a green new deal.
Certainly, Labour’s IOFs represent the most radical change to corporate governance since a similar plan by economist John Maynard Keynes in the 1940s for war-time savings, which he argued would result in “economic equality greater than any we have made in recent times”. IOFs would give employees the direct benefit of sharing some of the wealth they help create for their companies.
Workers would, in some sense, own the IOFs and receive a dividend capped at £500 a year from ownership. While the shares would not be tradable, they would be collectively managed with voting rights held by a trust of worker representatives. Any excess dividends would be used to fund social projects or projects that contribute further to inclusive ownership. In fact, the IOF aims go beyond income redistribution to include increased worker motivation and productivity as well as higher private and public investment – objectives that are crucial to any progressive economic transformation.
The financing of IOFs via share transfers is a welcome challenge to the “shareholder first” concept that has been a tenet of liberal capitalism worldwide since the 1980s. That doctrine was defended by the argument that shareholders are uniquely vulnerable to their wealth being diverted by self-serving company bosses. By contrast, other stakeholders, such as workers, are less vulnerable as they are protected by contracts.
Increasingly this view is seen as absurd. Under the legal framework of limited liability, the public ends up paying for environmental damage or pension fund failures if these costs exceed shareholder capital. And apart from cyclical downturns, shareholders can sell out at any time, whereas worker contracts are set under shareholder-centric rules that often fail to fully reflect their work and commitment.
The best remedy?
While there is no denying that shareholder control needs countering, this does not mean IOFs are the best remedy. Control rather than ownership is the crucial issue. Stakeholder theory in management research suggests that control should be shared – including with employees.
Northern Europe has an alternative model of shared control known as co-determination. Here, workers sit on boards of directors and have full decision rights. This disperses power among employees, without the need for formal ownership.
While co-determination is a tried and tested system in several countries, the IOF scheme has a less developed history. It is modelled to some extent on a version introduced by Swedish Social Democrats in the early 1980s.
But there are significant differences. In the Swedish case, the funds were financed by joint taxation of workers and businesses and it had some support from both sides of industry. Its broad intention was to encourage business investment in a context of strong trades unions where high profits sparked demand for higher wages.
Employers saw an opportunity to contain wage demands by agreeing to invest profits. The eventual demise of the system was put down to the threat of capital flight in the changed political circumstances of the 1990s after which the funds were privatised.
Supporters of the British IOF scheme say that it has several advantages. First, it should have broader support than the Swedish scheme since it is not just linked to trade unions. Second, it chimes with previous schemes for widening share ownership within workplaces, which have received support from across the political spectrum and from employers in the UK and US.
Proponents also argue it would improve productivity through a sense of ownership. And finally it would improve equality both via the annual dividend to workers and the use of the income generating capital that would be diverted to public use.
Weighing the evidence
It is an important question whether these claims stack up in a way that makes IOFs a preferable policy to co-determination. On productivity, it has been shown that firms with higher levels of trust perform better.
But there is little evidence that trust is generated by employees holding a small fraction of company shares. Trust is most effectively generated by agreements between workers and employers to share control. And the proposal for one-third worker representation on large company boards is based on solid research by senior academics for the front bench.
Other effects on the economy and equality can also be argued to favour co-determination. For starters, wealth taxes – which is effectively what IOFs are – work best for non-productive and immobile assets such as land or housing.
Then there are concerns that IOFs will scare off investors. They may fear further extensions of the scheme above the modest capped rate of 10% of ownership being transferred to the funds. By contrast, a rise in corporation tax could achieve the same effect without the hit to investment if matched by conditional tax relief measures that are worth more to firms, the higher the tax rate.
Plus, paying dividends to workers out of capital transferred to public control is likely to be offset through lower wages, blunting any redistributive effect and possibly pressuring firms to declare dividends – already excessive in the UK – with further dangers for investment.
IOFs are not the worst possible policy and they do confront the nonsense of shareholder primacy. But it is reasonable to ask whether their desired effects could all be produced more simply and effectively by a combination of workers on boards, higher but exemptible corporation tax and a wealth tax on non-productive assets – many of which are in the Labour Party 2019 manifesto in some form and should be the focus.