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What about the workers? As the traditional set-up of institutionally owned, quoted companies conies under the microscope following the world economic crisis, we look at how employee-owned businesses and coopratives are flourishing, and flow the finance function is having to adapt accordingly.

When anti-capitalism protesters set up a camp outside London's St Paul's Cathedral, they sparked a political debate about the future of big business. But what many of the protesters may not have realised is that a growing number of senior managers are also questioning whether the conventional model of a quoted company with institutional shareholders is always the best way in which to organised a firm.



One of them is Marisa Cassoni, who steps down in May after six years as finance director at the John Lewis Partnership. "Our view is that there is room in society for different kinds of models that work, and that make society richer," she says.

"It doesn't mean that the quoted stock company is not right, but we seem to have become too skewed towards one type of model."

After all, it's not as though the institutionally owned, quoted company is the most effective at delivering financial returns. The Employee Ownership Index (EOI), which tracks the performance of businesses with more than ten per cent employee share ownership, has outperformed the UK's FTSE All Share Index by an average of 12 per cent each year for the past two decades. Anyone who invested. [pounds sterling]100 in EOI companies in 1992 would now have [pounds sterling] 639, compared with 216 for an investment in the FTSE All Share Index.

In January, British deputy prime minister Nick Clegg said that more companies should offer their employees shares to help to create a "John Lewis economy". Following Clegg's announcement, Norman Lamb, the business minister, appointed Graham Nuttall, a lawyer and chartered tax advisor, to advise the government on how to spread employee ownership more widely.

Nuttall, a partner at UK law firm Field Fisher Waterhouse, says: "My review will look at whether there should be a preferred model that is better promoted by the government so that there is a recognised starting point for anybody wanting to consider employee ownership."

Ministers in the coalition government believe that a boost to alternative forms of business organisation could usher in a new form of caring capitalism, such as co-ownership or co-operatives, where all stakeholders share in the fruits of their labours.

If the government succeeds, it will help Britain to keep pace with a growing trend that has seen the world's businesses adopt a wider range of employee-owned or co-operative business models.

Ed Mayo, secretary general of Co-operatives UK, points out that there are 328 million people around the world who own shares, but already more than a billion who are members of co-operative enterprises. In the case of co-operatives-unlike co-owned businesses - members may include customers and suppliers, as well as employees. In the UK, 9.1 million people own shares directly, compared with 12.8 million who are members of a co-operative.

Mayo sees the co-operative movement moving more into the business mainstream, with its focus on issues such as how to engage staff to make them more productive and how to win the passion and loyalty of customers. "It's not that every business should be a co-operative, but every business can benefit from being more of a co-operative," he says.

In the US, 11,300 companies run employee stock ownership plans covering 13 million employees, according to figures from the National Center for Employee Ownership (NCEO). The NCEO points to research that suggests that companies that turn to employee ownership grow 2.3 per cent a year faster than they would have done with only external shareholders.

In the Far East, there is a growing acceptance of different business models, especially in China. One of the world's leading employee-owned businesses is ICT provider Huawei. More than 65,000 of its employees own shares in the company. They elect 51 representatives and nine alternative reps who, in turn, elect members of the board of directors and the supervisory board. The company's most recent annual report described employee shareholding as a way of aligning "the personal goals of employees with the company's long-term development".


At the John Lewis Partnership, Cassoni says the co-ownership structure "brings back accountability to the owners. We have a virtuous circle so that what needs to be done to drive forward strategy and plans gets communicated back to the co-owners to get their ownership, commitment and drive.

"There is no dislocation between what the organisation and what our partners on the shop floor are trying to do. There is a complete I consistency of stakeholders. You won't see that in other organisations."

Cassoni argues that the John Lewis model enables the company to fight that City disease - short - term ism. "We would not forgo investment just because it hit short-term profit," she says. "Our investments have been on an increasing trend, notwithstanding the downturn."

Cassoni points out that other businesses need to manage their financial results so as not to disappoint the markets. But John Lewis's "partners", as it calls its employee shareholders, see results every week through the work they do, and are more attuned to where the business is going. "As a result, they will be more attuned to what that will mean to them for in-year bonus."

In March the John Lewis Partnership announced that its bonus - effectively a dividend - would amount to 14 per cent of basic salary. Bonus is paid at the same level for all staff. That represents around seven weeks' pay for a shop-floor worker. But, Cassoni says, it's less than a director of a FTSE 100 company could expect. "The only place where we can't match market rates is at board level," she says.

But it's those giant boardroom bonuses that have created the crisis in capitalism, according to its critics. "The real issue you are struggling with in the marketplace is that there are no sanctions for failure," says Cassoni. "I don't think anybody objects to people being rewarded for value creation - that's what our bonus is doing. But when staff are rewarded for no value creation, that's when people become anxious."

So can business models such as co-ownership or co-operatives create a new climate in which even big business's sternest critics will be won over? Giving employees a stake in a company creates a sense of organisational purpose that is greater than merely financial purpose, says William Davies, academic director of the Centre for Mutual and Employee-owned Business at Kellogg College, Oxford University, in the UK. "It leads to long-term investment decisions and higher productivity, when combined with the right management internally," he says.

"Ironically, the obsession with short-term earnings even defeats itself over the longer term, and profit maximisation eventually leads to smaller profits."

Davies points to the work of economist John Kay on "obliquity" - focus on the central I purpose of the company and profits will follow naturally - as underpinning the argument for employee ownership.

But, Davis argues in his new research paper, "All Of Our Business", to encourage employee ownership the government should restore the tax advantages for employee benefit trusts that the Labour government removed in 2003. That move would currently cost [pounds sterling] 51m, but Davies says it could be recouped from regressive share incentive schemes for high earners.

"Other tax incentive changes that would support the sector include extending the Enterprise Investment Scheme to employees, and not only to external investors, and to investment in preference shares and loans - at present restricted to ordinary shares."

No doubt Nuttall will be thinking hard about these as he ponders his recommendations for the government. He agrees that financial issues are some of the most difficult when it comes to creating and sustaining an employee-owned business.

"It's unfortunate that employee-owned companies perhaps have no other choice than to be taken over by another company, or seek a listing on the stock exchange as a way of raising additional capital," he says.

"We need more imagination in financing models. Perhaps there should be a market in preference shares, alongside an employee trust continuing to own the ordinary shares."

He points out that the John Lewis Partnership has preference shares listed on the stock exchange, which despite not carrying votes, do receive a dividend and are traded.

When he spoke to FM, Nuttall stressed that he had not yet reached any conclusions about what would appear in his report. He expects to deliver his findings in July and says: "I have received significant encouragement from the government that it wishes to turn the recommendations into action as quickly as possible."


Geoff Miller, group finance director at Tullis Russell, a [pounds sterling]175m-turnover employee-owned paper and board manufacturer, talks about the quarterly meetings he and fellow directors hold with investors.

"In a public company, you'd be sitting across from institutional investors who are financially literate and can ask searching questions about finance.

"But we are sitting across the table from people who are very much involved in the business. They know it inside out and can ask very robust questions about strategy and performance.

Miller points up one of the key differences for a finance chief working in an employee-owned business. The people he is facing across the table have been elected by their fellow workers onto the employee ownership board. Its purpose is to ensure that the management is fully aware of the views of the employee-owners of the business.

Tullis Russell was originally a family owned firm. It moved towards employee ownership when family shareholders wanted to sell out, but didn't want the independent firm taken over by a big conglomerate. If more companies become employee-owned in the years ahead, this could prove to be one of the main ways in which it happens.

But becoming employee-owned provides a challenge for the finance function. Explains Miller: "As a private company, we prepare statutory accounts and send them to shareholders. But the majority of employee shareholders would have difficulty working through statutory accounts to get the key messages." Instead, the company holds regular focus groups to explain what's happening in the company and provides a forum for questions.

And Miller warns that an employee-owned business may not be right for all managers. "The culture is participative and engaging so you have to be prepared to consult with people. We've interviewed people who are technically fantastic, but we know that they wouldn't fit in with the culture." Miller advises any company thinking of encouraging employee ownership to ensure that it has a strong underlying business model.

Middle managers must be on board because they're the ones who will make it work day by day. And you to have make sure that employees buy into the idea of ownership because it's a two-way street.

"You can put all the mechanisms in place, but unless the workforce understands what you're doing and are prepared to make it work, then it's going to be very difficult."

Peter Bartram is a regular contributor to Financial Management
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Title Annotation:Business
Publication:Financial Management (UK)
Date:May 1, 2012
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