Are you saying John Lewis isn’t perfect?
I hear that Nick Clegg has called for a “John Lewis economy”. Who could be against a John Lewis economy?
Indeed! All right-thinking people love John Lewis. It all starts with your wedding list and the love affair just goes on and on. My daughter told me she wanted to be the little boy from the adverts who can’t wait to give his parents their Christmas gifts.
How did she see the advert? You don’t even have a television.
Her primary school showed it to her. That’s how blandly all-conquering John Lewis has become: their advertisements are used in school assemblies. And don’t get me started on Waitrose!
I know – I discovered that those nice Padrón peppers are also available from Ocado. Amazing!
It is. Nick Clegg is clearly on to a winning policy here.
Quite so. What is there to dislike about a vision of Britain that awoke from sweet dreams under crisp Egyptian cotton sheets to sweep aside Tesco, Ikea and Primark, replacing them with John Lewis and Waitrose?
Nothing. But I suspect that Mr Clegg is more taken by the idea of widespread profit-sharing and share ownership.
That makes sense. John Lewis is owned by a trust for the benefit of its employees, John Lewis is profitable and John Lewis shops sell nice things.
Yes, but what we have here is an “n of 1” problem: just because these things are true about John Lewis does not mean they always go hand in hand. ExxonMobil is profitable but it is not owned by an employee trust and it is not usually regarded as a purveyor of nice things.
But surely it’s a good thing for employees to own shares in the companies they work for.
You might want to ask the former staff of Lehman Brothers and Enron about that. I’m sure it’s great if you get in on the ground floor of Microsoft or Apple, but the logic of employee share ownership is not so clear. The more shares an employee owns in a company, the more risk she is exposed to: she already accepts the risk that in hard times the company may sack her, cancel her perks or cut her salary. On top of that she is supposed to pin the value of her savings to the company share price?
Yes, if it will motivate her to work hard for the company.
If it does it will not be because of any financial logic. If you were exposed to just 0.1 per cent of the risk and reward of a £1bn company, you’d be facing a £1m risk – a 10 per cent drop in the share price would hit you by £100,000. And yet you would still enjoy only 0.1 per cent of any gains you created for the company, which is surely not enough to discourage you from stealing paper clips. There is a trade-off between providing proper incentives and exposing workers to excessive risks. I don’t think shares or share options provide a happy medium between the two.
Are you saying that employee-owned companies perform poorly?
No, I’m not aware of any evidence for that. A study by Alec Bryson and Richard Freeman of the Centre for Economic Performance at the London School of Economics found that employee ownership was positively correlated with productivity; it was also positively correlated with other measures of performance-pay and worker autonomy. What exactly causes what is a nice question, but there’s certainly little evidence of harm. Mr Bryson and Mr Freeman also surveyed other studies and conclude that none found any negative impacts of employee share ownership and some found positive effects. In any case, the theoretical case for the popular alternative – companies with highly dispersed shareholders – is also rather troubling. Adam Smith predicted that “negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company”. None of these things works in theory; whether they work in practice is another question.
So what’s wrong with supporting employee share ownership?
Nothing. The government already does with various tax incentives, and more than 60 per cent of workers have access to share-ownership or other profit-sharing schemes. Mr Clegg might consider whether it could be easier to convert existing companies into employee-owned co-operatives, because the economy is unlikely to be damaged by greater diversity of organisational forms.
Sounds sensible but bland.
What do you expect from a man who has just invented a very British version of motherhood and apple pie?
Also published at ft.com.
9 Comments
James says:
John Lewis works because the ownership part empowers the staff to feel more involved in the firm, and care more. As an ex-Waitrose employee, it is clear to see people do care more about the company than just being a job. This passes on well to customer service and as a result brings customers back. It works in a retail setting – but in something such as manufacturing and finance, I doubt it would be as successful.
21st of January, 2012Chris says:
I attended a talk from a John Lewis partner at Newman University College as they run an ethical business degree. I got the impression that they have a very strong culture – staff who aren’t ‘John Lewis’ soon leave. This has obviously served them well but I wonder if it would be able to adapt if the model is no longer suitable. However there must be a better model of governance than large, distant institutional shareholders
21st of January, 2012Hamish Atkinson says:
If 1000 employees jointly owned 100% of a company, then the strict “game theory” reward would only produce a 0.1% share in an individual employee’s extra effort. But the John Lewis method encourages feeling part of a team pulling together. If you’re confident that everyone else will put in 20% extra effort, doesn’t that encourage you to do the same, knowing that you’ll all share in the rewards?
What if team members in a large company were given shares in their “profit unit”?
With a team size of 1-30, the reward would be much less diluted, and working closely with the other members would enable peer pressure (or team spirit, if you prefer) to influence individual effort. Members of the hierarchy further up would own shares in the teams they manage or support.
The resulting lack of dilution would also enable normal shareholder capital to mix well with the benefits of, say, 50% employee ownership.
My vision would be a global “brotherhood” of employee-owned firms, with non non-employee capital only source from other employee-owned firms. They could hedge against risk in their own industry by lending excess cash to other employee-owned firms in different industries.
The problem with capitalism nowadays is the increasing disconnect between the interests of workers, shareholders and the management of companies. Disinterested shareholders (or those who don’t vote because they know their vote is meaningless compare to the votes owned by the managers and their friends (e.g. Pension fund managers they might have gone to school with).
21st of January, 2012The current system only seems to be serving managers and consumers well – most workers and shareholders are not doing very well out of it.
Al Shaw says:
It’s worth noting as well that “share ownership” is only one expression of this type of business model. A genuine co-operative business (which John Lewis isn’t) involves the workers/members not only sharing in the profits and losses, but also having a controlling voice in the key strategic decisions of the company.
21st of January, 2012Stephen Herlihy says:
Er, I worked for Hbos. Put savings into company sharesave scheme. I ‘sharekicked ‘ my £2,000 a year bonus into company shares which entitled me to a 50% uplift, so I had now £3,000 in shares not cash. I lost my job on the takeover, shares were worth nothing. Of course I deserved it as a ‘banker’ albeit actually earning £21k a year in IT.
21st of January, 2012Mo says:
Simply giving shares to employees, in an otherwise normal corporate enterprise, is pretty pointless from this point of view: because small shareholders are profoundly disempowered. For employee ownership to mean anything, the business has to also move away from the typical corporation model, in which managers and institutional shareholders (ie. the managers of other corporations) concentrate power. ‘Ownership’ without power is actually worse than useless, as Mr Herlihy’s comment above illustrates.
23rd of January, 2012David L says:
I like the sound of a John Lewis economy. If you don’t like it, you can take it back. [courtesy of the News Quiz on 20/1/12]
23rd of January, 2012Popup says:
Sounds like a Timpson Economy would be better…
Supposedly they have small teams of highly motivated staff with direct share in the profits of each individual store, as well as direct involvement in local decisions.
Or maybe it’s just a load of cobblers…
24th of January, 2012LadyH says:
Hmm, I also work for a Partnership and its a different kettle of fish to a corporate. A Partner has a direct share of profits, an employee who receive shares has remuneration based on the future capital value and income of the company which may diverge over short term periods (if the capital value declines, your yield goes up but I doubt you’d be doing cartwheels when the divi cheque comes in). Shares can also be freely traded which Partnership shares cannot. Its not comparing apples and apples. Partnerships have a priority to maximise and maintain income, shareholders to drive capital value. One implies a far more considered and long term point of view. For example, one way to cash in your capital value is to get taken over for a premium but that may not be in the long term interests of the company of (fellow) staff.
31st of January, 2012