Employee Ownership as an Antidote to Short-Termism?

As memories of the last recession begin to fade in the collective corporate conscience, and with the latest ONS figures signalling healthy pre-crisis GDP levels, it is not too late to reflect on the famed hypothesis of the economist Hyman Minsky: Stability breeds Instability. Minsky argued, quite simply, that the hubris of ‘good times’ innately leads to greater confidence and consequently dangerous risk taking, with disastrous outcomes such as market bubbles and speculative mania. Nowhere is this more clearly demonstrated than in banking, finance and (far too often) many company boards where short-term gains remain a central and regular goal. Contentious as Minsky’s prognosis may be to some, how do Finance Directors (FD’s) of large -and not so large – Employee Owned Businesses deal with the pressure of performance?

 

A recent article* explored what it means to be a Finance Director (FD) in an Employee Owned Company. Unsurprisingly, Employee Owned Businesses (EOBs) afford FD’s more latitude to consider the long term interests of the Company, unencumbered by short-term expectations. One FD says it means that he is “not standing up in front of analysts and institutes to shareholders every five minutes and you’re not trying to manage the performance to hit a quarterly target.” “And, just as we encourage our shareholders to own the shares for the medium to long term, as FD I can take medium- to long-term decisions.”

 

Hitting (and preferably beating) quarterly targets is the driver for listed companies, but it may be at the expense of longer term success. The same FD affirms that in his role as FD in an Employee Owned company this allows him to manage, not for performance expectations, but for long term growth, with results that bear witness to its ability to insulate the company from turbulent times. Research consistently attests to this; employee owned businesses grew sales by 11.1% during the recession compared to just 0.6% for non-employee owned businesses. Moreover, further research reveals that EOBs show significantly higher growth in employee numbers during recession and superior employee contribution to profitability despite maintaining higher employment levels during recession. While EOBs are not immune from recessionary pressures, they appear to have been better able to withstand the downturn.

 

Another highlight for the FDs is how employees are represented at board level. This is a central aspect of EOBs, where almost all such organisations will have some form of employee representation. The poster boy for such an arrangement has long been John Lewis, epitomising how a large company is able to integrate its ethos into a large structure and remain competitive. Within its governance system there is direct election of partner representatives to the company’s board and a Partnership Council, which comprises partner representatives from across the business.

 

Any company contemplating becoming employee-owned should know that there are several ways of structuring employee ownership, any of which can have designed into them an effective form of employee representation. An early key task will be to overcome a lack of awareness of the diverse forms Employee Ownership can take and how these may operate. Employee Trusts are often more suitable for larger companies wishing to open up ownership to a wider base of beneficiaries, but smaller companies have a wide choice of employee ownership structures. They may find it easier to provide for individual employee share ownership, perhaps sometimes including discretionary share schemes for key employees, such as EMI options.

 

Resilience in the form of a broader ownership base has proven itself to play an important role in our economic recovery. Its solid foundations are better able to weather economic downturns. When considering, as Minsky succinctly put it, that “success breeds a disregard of the possibility of failure”, it is never too late to explore whether Employee Ownership could be one answer to this.

*   Owning Up – Christian Doherty – please note the full article is only available to ICEAW articles