An ESOP Fable

At the 2018 Labour Conference, Shadow Chancellor John McDonnell announced a new policy on employee share ownership…

 

John McDonnell is absolutely right to say that employee share ownership is a fair, democratic and desirable path for business to take. He might even add ‘and it’s in the long term interests of business to promote it’. But his way of going about achieving this goal, outlined in Liverpool recently, has been ham-fisted and counter productive, prompting the likes of the CBI to rail against a policy they actually support – in principle.

If, ten years go, you had invested in a portfolio of shares from the 69 listed companies where more than 3 per cent of shares are owned by employees then your return on investment today would be massively higher than if you had invested the same money in the FTSE Index generally. Business – as the CBI acknowledges – understands the value of employee share ownership; it gives bosses greater insight into their operations, better powers of risk management and all the employee engagement benefits that arise from being involved in a shared endeavour. The Employee Ownership (EO) sector already has a turnover of over £30 billion and enjoys greater workforce stability than the mainstream, not to mention special EO-transfer tax breaks. In very few EO businesses (excluding co-ops) do workers own the majority of shares.

But what Labour proposed in Liverpool was not a standard ESOP (employee share ownership plan). It was an ill-disguised tax grab. The figure of ten per cent of all shares in all larger public listed companies to be gifted to employees is arbitrary, the idea that personal gains to employees should be limited to £500 per year is unfair (when other shareholders might earn more), and giving the balance of dividends earned to the state was simply cynical. It felt like another route towards the nationalisation of the 100 biggest monopolies, and we know where that policy ended up.

But John did highlight a dilemma: on one hand we have the John Lewis model, where every employee has a stake in ownership through a trust that owns all the company’s shares on their behalf, and when you leave the company you don’t take your stake with you. On the other, there’s the Post Office, where individual employees own some of the company’s shares for life – or, more likely, until they sell them on the open market, which dilutes the link between employee and company interests over time. The former model, whether owning some shares or all, is the more sustainable.

The principle of employee ownership – especially through co-operatives – has long been a tool in the socialist toolbox. But it’s also in tune with the ‘people’s capitalism’ that Cameron, May and even Thatcher espoused; an excellent report on the subject, the Nuttall Review, was written for the Coalition government. And a Bill that entitles businesses to get loans at favourable rates where the owner transfers ownership to employees has just been passed – in Donald Trump’s America.

I think McDonnell is confusing a number of issues: profit-sharing is not the same thing as EO, though both can benefit the business through higher productivity. If you want more money from business then reverse the cuts to Corporation Tax, easy to do whilst retaining UK’s ‘competitive’ global position in the tax stakes, and reform corporate governance, not least by bringing the 2006 Companies Act up to date in relation to promoting the interest of stakeholders and not just shareholders. And devise an acceptable model of promoting employee representation on company boards.

Let’s build a sovereign wealth fund, and through it, on behalf of all the people, invest in ethical companies to generate a profit which can be used to pay for pensions, health and social care. Pie in the sky? It’s exactly what happens in Norway, recently re-confirmed as the world’s most socially progressive nation.

Employee ownership and employee share ownership should both be encouraged, but not forced through. Let’s make the case for businesses to be more inclusive in their ownership by showing that it’s in their interests, in the long run. 

Not every tide flows in this direction: whilst we all welcome Amazon’s recent decision to pay above the Living Wage to all employees, who noticed that they’re paying for this by scrapping an employee profit-sharing scheme?

Tom Levitt is a former Labour MP and the author of The Company Citizen