FactCheck: Why Clegg’s right about the “John Lewis economy”
“Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors. In fact, they often perform better…They weathered the economic downturn better than other companies.”
Nick Clegg, January 16 2012
The background
The deputy prime minister caught the eye of the headline writers on Monday when he called for a transition to “more of a John Lewis economy”.
Mr Clegg held up the high street giant for praise because of its unusual model of ownership.
The £8.2bn business, which 29 John Lewis department stores and 272 Waitrose supermarkets, is wholly owned by the chain’s 76,500 staff, who receive a bonus each year based on the firm’s performance and get to vote on company policy.
That’s the kind of thing Mr Clegg wants to see more of, saying: “We need more individuals to have a real stake in their firms.”
But it’s not all about encouraging democracy, he said, claiming that companies that are partly or wholly owned by their employees do better than rivals owned by shareholders, and have weathered the recession more successfully.
It’s no secret that John Lewis has bucked recent negative economic trends. Last year the chain reported a 20 per cent rise in profits as other retail giants went to the wall.
But is there any evidence that employee-owned companies in general do better than ordinary listed companies?
The analysis
A 2010 study by Cass Business School compared more than 40 companies whose employees own between 32 and 100 per cent of the business with a control group.
The report, carried out by academics with financial backing from the John Lewis Partnership, found little difference in raw measures of overall profitability between the two kinds of business.
But it did find that employee-owned businesses (EOBs) of small and medium sized tended to make more money than shareholder-owned companies of the same size.
EOBs also create jobs faster, and the more say employees were given in company decision making, the more likely they were to sustain performance as they grew larger.
Most importantly, John Lewis-style firms were more resilient to shocks in the economy.
From 2005 to 2008, before the global downturn, traditional companies had slightly higher share growth than employee-owned businesses - 12.1 per cent compared to 10 per cent – but when the recession hit the trend was sharply reversed.
The average sales growth of John Lewis-type companies was 11 per cent between 2008 and 2009, compared to just 0.6 per cent in the control group.
The authors put their greater stability down to the fact that they found it more difficult to get financing from banks than ordinary listed companies in the boom years, and so were forced to build up cash reserves instead of borrowing.
When the credit crunch hit, the John Lewises had much smaller debts than their rivals and more money to invest on increasing sales in a difficult market.
An independent review of research into shared ownership by analysts Matrix Evidence found more evidence of the same effect.
One US study looked at all American public companies between 1988 and 2001, and concluded that employee-owned firms were 25 per cent less likely to go bust in any given year.
The Matrix overview found that most studies have shown a positive relationship between increased control by employees and a range of outcomes like productivity, innovation, investment return, number of sales per employee, job security and growth.
The shares owned by employees have tended to perform better too. Field Fisher Waterhouse’s Employee Ownership Index began tracking the performance of FTSE All-Share companies with companies where employees own more than 10 per cent of the shares.
Despite a recent downturn, employee-owned companies outperformed the others by on average of 12 per cent each year. Over successive three-year periods they have outperformed by 37 per cent and over successive five-year periods by 71 per cent, according to the law firm.
The verdict
Across a wide range of indicators, there’s good evidence that the John Lewis effect is not just a fluke. Employee-owned companies, particularly the smaller businesses the government is so keen to back, often do better than others.
The question of what exactly the government ought to do to encourage more employee ownership remains unclear, and Mr Clegg made few concrete proposals this week.
He did hint that Chief Secretary Danny Alexander should look at the tax arrangements around shared ownership, presumably with a view to offering tax incentives, but there’s reason to be cautious about that.
A major report for the Treasury in 2007 found that employee share schemes tended to increase productivity in general, but schemes where the government had offered tax incentives to workers who joined up by did not perform any better than others.
Tax breaks for employee shareholders were costing the Treasury about £800m by 2004/05, but the study concluded: “It is not clear whether subsidising share schemes is a good use of public money.”
By Patrick Worrall
There are 4 comments on this post
[...] Unilever – sadly this hasn’t enabled me to prevent them from cutting my pension. Channel 4’s Fact Check blog has confirmed that employee-ownership often makes for better [...]
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Clegg may well be correct: co-operation is an important road ahead.
Moreover, the Co-op Bank may soon be announcing an agreed deal to buy back the TSB and C&G Building Soc branches and restore them to their former co-operation and customer/employee ownership. Which would be a dramatic reversal of the Thatcherite ‘individualism’ agenda that led to their privatisation in the 1980s.
But is the evidence on a link with employee ownership a coincidence or some causal relationship. Betcha Clegg doesn’t know which!
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Of course he’s ‘right’. Many people would prefer a ‘John Lewis’ economy. However, this government has a huge department (Ministry of Funny Talks?)devoted to making all the right noises, whilst orchestrating a shock-doctrine, wealth-plundering coup.
Surely, the point is not whether he is right, but his motives, given that most company owners are understandably reluctant to part with their profits, and – crucially – this government is devoted to looking after its own. It said so on the tin, if anybody cared to look.
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My daughter worked for a while for a John Lewis store, and was very enthusiatic about the working conditions. she certainly was encouraged to sell more, as she had an incentive to make the store perform well.
I think Nick Clegg has the right idea.
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