Firm believer

For Will Davies now is the time to bring employee-owned businesses 'out of the wilderness' and into the mainstream of the UK economy.

And he believes the John Lewis Partnership, as the largest co-ownership in the UK, has a leading role to play.

'The employee-ownership model is not well known in Britain – probably the only one people have heard about is John Lewis,' says Will, author of the report Reinventing the Firm, which is published by the think tank Demos with support from the Partnership.

'That the Partnership is so successful and well thought of makes it an excellent example to follow.'

Will, who is Research Fellow at the Institute for Science Innovation and Society at the Said Business School in Oxford, believes the recent financial crisis has called into question core assumptions about economic structures, governance and the reliance on shareholder value.

'It has given us an exciting opportunity to rethink the firm: its ownership, its management structures and its mechanisms of accountability. The report aims to broaden people's business horizons and challenge – what I would argue has been the norm for too long in Britain – a corporate monoculture in which firms are treated simply as the property of their shareholders.'

He points out that there are lots of different models out there ready and willing to do the challenging – from John Lewis, which operates an 'indirect' employee ownership structure, to a 'direct' employee share ownership where employees own shares directly.

All the models have one thing in common: they are designed so that not only shareholders but also employees, the economy and society profit.

A critical juncture

Will's report highlights the diversity of ownership and governance structures using three case studies: Parfetts, a family business where the retiring management team were looking for an alternative to a private equity buy-out; Make architects, which started as an employee ownership; and Quintessa Consultants, a 'human capital collective'.

'Capitalism is at a critical juncture, and so is our politics,' he explains. 'The fiscal environment is suddenly very different, and a general election is coming.'

He believes that these factors make 2010 fertile ground for the growth of employee ownership, and an ideal time to push government to make tax changes to benefit such companies. 'Tax incentives are by far the most powerful of the tools for influencing company ownership and financial structure.'

For Will, the most significant impediment to the growth of employee-owned businesses, at least where indirect ownership is concerned, is the 2003 reform that removed tax advantages from the creation of employee benefit trusts (EBTs), save where shares were transferred to employees.

This was done because some companies were misusing the existing scheme to avoid tax. However, it makes the indirect model significantly less attractive.

The Employee Ownership Association (EOA) has put forward a proposal in which the existing (tax advantaged) Share Incentive Plan (SIP) could be expanded to include EBTs. 'Any politician or policy maker seeking to support growth in this area should treat this as the highest priority,' says Will.

A good blend

Being a successful employee-owned company is about more than who owns it: 'The structure of the company must include good democratic representation,' says Will. 'Then you can create a virtuous circle between workplace democracy and productivity where people are prepared to work hard for the greater good because they genuinely feel ownership and care about the company.'

He is in no doubt that mutual and employee-owned models of business operating with longer time horizons will achieve higher levels of performance and customer satisfaction.

'I think you have got to be wary about overselling the social benefits of employee ownership in case you end up underselling the economic benefits. I argue in the report that with successful companies there is a very good blend of the two. Treating someone well makes economic as well as social sense.'

Contributing to the debate

The Partnership's Chairman, Charlie Mayfield, believes the UK faces major decisions about the way we run our economy, the role of the state and the kind of society in which we live. He says that the Partnership is well placed to make a significant contribution to this debate.

'There has been huge interest in the John Lewis Partnership and our ownership model following the financial crisis,' says Charlie. 'That reflects the need to look again at the way that businesses are owned and managed – because the decisions taken in the boardrooms of banks and other companies affect all of us.

'We need to create a balanced economy that supports long-term sustainable growth and a fairer society. That requires us to rethink what companies are for, asking not simply about the wealth they produce, but how they create value and for whom.'