Employee-Owned Companies Are Not a Fix for Crony Capitalism

Economist: The feeling is mutual

… Giving workers shares in a firm may have commercial benefits. Employee-owned companies are more productive and hardier in a recession, according to a 2010 study by Cass Business School. John Lewis, which also owns Waitrose, a posh grocery chain, seems to bear this out. Staff turnover is low; the shop beat many competitors on Christmas sales. Firms with similar structures concur: Arup, an engineering outfit, attributes its business range and “family feel” to being owned by its 10,000 employees.

All of which seems less likely to make the blood boil than reports of huge executive pay-offs. But there is little evidence that shared ownership makes capitalism more “responsible”, as Mr Clegg hopes. It does not prevent bad decisions: having a quarter of shares in employees’ hands did not save Lehman Brothers from bankruptcy. And the benefits for staff are questionable. It is rash to put a worker’s livelihood, savings and pension in one basket case; many employees lost everything when Enron, an energy-trading company, collapsed in 2001.

Companies that are wholly-owned by their staff may face barriers to growth. Many firms need a flexible capital base to expand—one reason the partnership model in banking declined. Employee mobility promotes innovation. At base, it is unrealistic to expect many bastions of capitalism to turn their shares over to their workforce, reckons Ian Brinkley of the Work Foundation, a think-tank. It is, he says, hard to imagine someone like Sir Fred Goodwin, the acquisitive former Royal Bank of Scotland boss who oversaw its demise, “being reined in by some workers’ committee.”