Laying the groundwork for employee-ownership to thrive
Much has happened in the ten months or so since Deputy Prime Minister Nick Clegg used a City speech to call for the creation of a “John Lewis economy” in which increased employee ownership – a company in which a controlling stake is held by or on behalf of all employees – would usher in a new era of “responsible capitalism”.
An independent review, commissioned by the Lib Dem leader and conducted by government adviser and tax lawyer from Field Fisher Waterhouse LLP, Graeme Nuttall, delivered 28 recommendations in all, aimed at overcoming insufficient awareness, scant resources, and complexities inhibiting the employeeownership model.
A Treasury review examining the role of employee ownership in stimulating growth and, part and parcel of that, the scope to remove tax barriers, is expected to conclude business ahead of Chancellor George Osborne’s Autumn Statement.
All the while, the International Year of Cooperatives (IYC) 2012 – declared by the United Nations – has sought to draw attention to a business model that accounts for more than 100 million jobs worldwide.
However, as the IYC comes full circle with the closing ceremony at UN headquarters in New York this week, one problem continues to plague progression – an ample awareness of what the “John Lewis economy” entails.
“Employee ownership is insufficiently understood,” relayed Nuttall in this summer’s Sharing Success review. Regarded as a staple of the British high street, the 100 per cent trustowned John Lewis has, as the largest employeeowned company in the UK, become a beacon of good practice.
Logic dictates, with 81,000 permanent staff partners involved in the John Lewis Partnership, it does indeed embody a stellar illustration of what can be achieved. It is not the only one, however, given that the retail giant’s annual turnover represents less than a third of the £30bn plus such businesses reap across the UK.
The need to communicate this whilst dispelling “a number of myths” that often preempts an impartial assessment of the employee-owned model falls to a tight-knit team of six at Co-operative Development Scotland (CDS), led by Chief Executive Sarah Deas.
In the six years since its inception, the ‘hidden gem’ that is employee ownership has become “less hidden”, Deas tells Holyrood, though her aspiration of a ten-fold increase in the next ten years intimates the extent to which she believes the model can multiply.
A subsidiary of Scottish Enterprise, CDS has worked in partnership with Highlands and Islands Enterprise (HIE) as well as Business Gateway to increase the contribution of cooperatives to the Scottish economy, a sum that already sits at a combined turnover of more than £4bn and almost 29,000 jobs.
Employee ownerships, one of three cooperative models advised on by CDS, are offered much-needed expertise on both the structure and finance underpinning the arrangement, as well as advice on heightening levels of employee participation that such a model not only demands but seeks to foster.
In 2011-12 alone, the agency supported the creation of 26 new co-operatives and four employee-owned businesses that are expected to deliver around £9m to the national economy over the next three years.
That financial output, according to Deas, owes its roots to the “anchor mechanism” that employee ownership offers, ensuring jobs remain rooted while diminishing the ability of dividends to bypass the local economy. Beyond these tangible benefits, assertions of a ‘hearts and minds’ effect of employee engagement driving productivity and subsequent growth are commonplace and, it would appear, backed up a substantial body of evidence.
New research conducted by Professor Ron McQuaid of Edinburgh Napier University Business School that has compared wellbeing in employee-owned companies with other forms of ownership, drew to a close in recent months. Funded by the Employee Ownership Association (EOA) and John Lewis Partnership, detailed findings are yet to be published, though early indications intimate that the way such companies organise and manage their work proves to be a positive force.
A questionnaire survey of 1,037 staff across eight employee-owned businesses found 59.3 per cent either agreed or strongly agreed when asked if employee ownership makes them more motivated to do their job well.
“It’s also about what type of society do we want to live in,” observes Deas on the issue of stimulating an entrepreneurial culture within the employee-ownership model. “If you have an external investor-driven economy, you tend to get a short-term focus because the investor wants to realise the benefit quite quickly.
“The difference of co-operative models, including employee ownership, is that people are in it for the longer term and longevity is built into the model… John Lewis, if you take their mission, it’s about today’s and tomorrow’s employees, and tomorrow’s are as important as today’s, so they’re always thinking, will this be right for the next generation coming into the business? And that really does bring a different perspective. It also means that the business may be more cautious, more risk-averse, but it will generally be stronger because of that.”
Figures on the economic resilience of employee-owned companies at the height of the recent economic downturn appear to give credence to such an assertion. Sales growth per annum rested at 11.08 per cent in 2008-09, up from 10.04 per cent between 2005 and 2008. For comparison purposes, non-employeeowned companies plummeted from a higher growth per annum initially of 12.10 per cent to a mere 0.61 per cent over the respective time period.
The old maxim, ‘Slow and steady wins the race’ is one Dick Philbrick, managing director of East Kilbride-based Clansman Dynamics, appears to have invested his faith in, shrugging off the allure of “sexy rapid growth which is invariably followed by rapid decline” in favour of a “solid, stable-like organic growth”.
A manufacturer of robotic handling equipment for the forge and foundry industries, Clansman completed the switch to an employee-owned model in December 2009, amid concerns that with 95 per cent of sales exported – almost 30 per cent in China alone – many more of the thirty to forty staff could follow Philbrick on the way out, almost two decades on from the company first being launched.
“Because we slowly built a reputation for making good robust reliable machines doing a difficult job in these forge/foundry industries, the company had a moderately high profile in our tiny niche, so there were a number of German and Italian buyers who kept phoning me up saying, ‘Dick, we must meet, we must have dinner, we’d like to talk about how we could maybe get together for some future activity in Clansman’.
“And they wanted to buy the company and [they made] lovely schmoozy noises – ‘we’ll help with development, we’ll help with marketing,’ probably they could, ‘we’ll help with finance,’ which we didn’t need – and I just know from watching the press, that normally leads to a year or two of activity here and then the first cold wind blows and off it goes, so I was keen to keep the company here, if possible.”
Having seen turnover increase 60 per cent from £7m to more than £11m since, it is a transition that Philbrick has embraced fully and one he credits as having worked “fantastically well”. “I’d been keen on the idea ever since I went to work in a kibbutz in Israel forty years ago,” Philbrick tells Holyrood, “I just found difficulty in seeing how I could implement it.”
That hurdle is one the Suffolk-born MD has sought to clear in his role as chair of CDS and one of ten Employee Ownership Ambassadors who are drawn on by CDS to give prospective employee ownerships a source of practical comfort when weighing up whether to pursue the less publicised route.
Given family firms account for a reported 85 per cent of private enterprises in Scotland, susceptibility to the ‘succession timebomb’, as it is now known, is being considered a future catalyst for employee ownership.
“There’s pent-up demand from owners who need to sell their businesses,” says Deas. “Also, there’s the baby-boomers effect – so there are more senior people leading businesses who need to find an exit.”
Almost as a prelude, Cabinet Secretary for Finance John Swinney will host an Influencers’ Dinner before the end of this month designed to impart to business advisers, including lawyers, accountants and bankers, the urgency of raising employee ownership with their clients as an option worthy of being on the table.
However, the task of educating owners as to the merits of such a model is one CDS would rather occurred much earlier in the process, long before the boardroom.
In this vein, educational charity, Cooperative Education Trust Scotland (CETS), has attempted to embed early thinking within all phases of the education curriculum, from primary school through to higher education.
In March, the first SQA Awards in Cooperative Studies were approved, with discussions now ongoing with a “handful of schools dotted about the country” who are starting to take it up, says CETS Director Hugh Donnelly, who remains in talks with one Edinburgh secondary school about becoming a school of co-operation in line with the council’s new co-operative approach. “The sooner you can get kids exposed to the idea then the more likely that they’re going to pick up on it and do something,” explains Donnelly.
In the meantime, CETS continues to endorse, from the outset, what CDS emphasises, namely, that the task is not without its challenges. Twenty-four hours before speaking to Holyrood, Donnelly sat down with a class of fifty Honours graduates at a Glasgowbased university before leaving almost aghast at what he discovered.
“They knew virtually nothing about what a co-op was or even examples of co-ops despite the fact that the room we were sitting in… sits on top of a Co-op food store – it’s right underneath them and they don’t even know it’s there.”
That gap between school and business is cited by Deas herself as a source of immediate concern, albeit one she hopes a suite of resources recently developed by CETS, in conjunction with the University of Aberdeen for use across the HE sector, can help bridge.
“The challenge now is we need to keep talking with universities and make sure it is brought into the curriculum,” admits Deas.
“Having the content is one thing. We’ve made that content available to the world and it’s creating lots of interest. However, we now need to embed that knowledge and the associated values in order to make a difference. That’s what interests me.”
Signs emanating from within the Department for Business, Innovation and Skills in recent weeks have proved encouraging. Announced by Minister for Employment Relations Jo Swinson on 30 October, the UK Government has vowed to establish an implementation group, bringing together representatives from business and professional services and the employeeownership sector to press ahead with Nuttall’s key recommendations.
A consultation on the viability of setting up an independent institute for employee ownership is also among commitments laid out, while a guide for staff interested in requesting employee ownership is in the pipeline. “I hope that this will enable employees to feel comfortable to have a conversation,” comments Deas of the ‘Right to Request’ principle that was consulted on earlier this year.
Firmly within her sights, though, are the results of the Treasury review expected when Osborne addresses the House of Commons in two weeks time. “What would make a significant difference is if there were an announcement from [the] Treasury that gave some incentives,” explains Deas. “That would also bring the model to the attention of professional advisers.” A simple yet effective building block towards the Deputy Prime Minister’s vision.