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Stephen  Bevan

Can employee share ownership undermine ‘crony capitalism’?

Authors: Stephen Bevan Stephan Bevan

16 January 2012

Amid all the talk of ‘Good Capitalism’ it was only a matter of time before proposals to re-invigorate share ownership among UK employees were dusted off again. The rationale is clear. Executive pay, which in too many cases appears to bear no relation to the performance of the business, is widely regarded as being out of control. Pay at the top has raced away from that of the ‘great unwashed’ at the bottom of the organisation and too little of the success which firms have is shared among those who help to generate it. If employees have a stake in their company, the logic goes, the more committed they will be and the harder they will work. 

The John Lewis Partnership – everyone’s favourite example of an employee-owned venture – has made this work, and they outshone the competition in the recent Christmas trading wars, so why can’t it work across the economy?
Well, in principle, there’s no reason why the John Lewis ‘effect’ shouldn’t work in other businesses. Yet the UK experience of such schemes has not been hugely positive. As long ago as 2002, The Work Foundation and Birkbeck college carried out research to find out why. We came up with several reasons:
Many employees remain sceptical about share schemes, mainly because they fear that getting shares will mean that their wages will be reduced to cover the costs and because they fear that shares will go down in value and become a liability rather than an asset;

  • Some Trades Unions don’t like the idea, partly because share schemes tend to be very individualised, and are seen as a way of eroding collective bargaining rights;
  • Many employees, if they are to own shares, would prefer to spread the ‘risk’ by owning shares in other companies too;
  • Many managers are unwilling to engage in the participatory approaches to management and communication which research has shown enables share ownership to be successful;
  • Even if shares appreciate in value, many employees regard the dividends they get paid as a ‘windfall’ rather than the result of their individual or collective efforts. Of course, share prices vary considerably over time and can be affected by global events which have nothing to do with the success of the business.

But perhaps the biggest obstacle is that ‘financial participation’ by employees has to be accompanied by other forms of participation if it is to make any sustainable difference to business performance. This is very challenging for many CEOs and senior executives because they have not shown themselves to be big fans of employee consultation or staff involvement that affects decisions about how work is conducted or how big decisions should be implemented. Recent suggestions that an employee representative should sit on remuneration committees to help moderate executive pay were met with lukewarm or even hostile reactions. This is a good illustration of the concern that would accompany proposals to give employees more of a ‘voice’ in the running of companies.
So, Nick Clegg’s call to extend employee share ownership is welcome, but unless the implementation of any proposals takes full account of the overwhelming research evidence about how to make such schemes work, my fear is that we won’t make the kind of progress we need towards enhancing the voice of employees in modern workplaces.

Comments in Chronological Order (Total 1 Comments)

Melissa Whitaker

22 Jan 2012 7:50PM

The idea of giving employees 'shares' I think can be viewed as a positive step regarding trying to get employees involved.

After recently attending a fiance lecture, the issue of the 'effective market hypothesis' arose and we discussed the 'John Lewis Economy' idea. We came to the conclusion that employees being given shares can be viewed as creating uninformed investors, essentially an argument I expect CEO's will no doubt put forward to prevent this idea. However, it is possible that if this idea were to go ahead it could in theory create a 'false boom'.

Also it works on the assumption that all employees are motivated in monetary terms and fully informed. Employees on lower incomes whom require some government support will suffer from this, as will have to declare shares on any forms when trying to claim benefits, and no doubt employees will be the lowest ranking share holder.

If this were to go ahead, and employees were given a 'voice' and actually was to sit on remuneration committee, i imagine any 'suggestions' regarding CEO pay would not be met well and may create internal conflict towards those in higher positions against those in lower positions.

I think its a good idea, but I'm not convinced it will work in practice.