3 March 2020

Employee-owned companies are a great thing – up to a point


A new report is on the way which argues that worker co-operatives – businesses which are collectively owned and managed by the workers – are a fine thing which should be encouraged and financed to a much greater degree.

Stefan Stern, formerly of the High Pay Centre and a regular in the Guardian – no prizes for guessing his political views – says that an employee-ownership model “binds colleagues together, supports innovation, enterprise and risk-taking, wins engagement and commitment, and rewards people well for their efforts”.

That all sounds terrific, but it doesn’t necessarily follow that there should be more companies set up along these lines.

As it happens, the playing field is already tilted somewhat in favour of this kind of organisation. That’s something Julian Richer benefited from when he sold 60% of his company Richer Sounds to an employee-owned trust and paid no tax – a mechanism that beats the much-maligned Entrepreneurs’ Relief into a cocked hat (though it should be noted that Mr Richer handed over a not inconsiderable £3.9m to his staff too).

So, when is a company better off with a traditional corporate structure, and when would it do well with staff ownership? The answer, as with most things in economics is simple – it depends.

It’s trivially easy to look around, as Stern has done in this report, and see that there are employee-owned companies doing well. The classic example used to be John Lewis, although given recent difficulties that’s a little out of fashion now. But focussing on the successes risks falling into the trap of survivorship bias – we only get a snapshot of the ones that did well, not the failures. What we really need is to look at common factors between organisations that succeed, whatever their ownership structure.

Doing that makes clear that the claimed superiority of the employee-owned firm is illusory. Sure, one can argue about the greater commitment of staff who have a direct stake in their employer’s profitability. You might even extend that logic to point out that private industry, where self-interest reigns supreme, is generally more efficient than government, where things are a great deal more arm’s length.

But if workers owning the shop really made for a better shop, surely we would have dispensed with capitalist-owned chains by now.  Indeed,the fact that companies owned by private individuals or external shareholders do very well suggests the benefit of employer ownership is not all it’s cracked up to be.

In fairness, Stern does alight on one of the reasons this is the case. For the co-op model to work well, the companies need to be selective about who becomes a part of the whole – not everyone is suited to that joint working and owning gig. Clearly, some prefer the turning up and gaining a simple wage mode of life.

But the big missing part of the co-op jigsaw, and what’s so great about capitalism, is the ability to have large scale economic adventures. If what can be done by an organisation is limited to the capital financing abilities of those in that organisation, then nothing above a certain capital requirement can be done.

A blast furnace for steel-making, for instance, costs somewhere in the region of £200 million. If there are, say, 5,000 workers – an overestimate these days – then each worker would have to put £40,000 in to get it started. Clearly that’s a sum which most workers don’t have lying around and would be insane to put into just one machine if they did. The entire point of capitalism is that it is possible to go outside the labour force to find the necessary capital. It’s simply not possible to have capital-intensive industry under any other system. Of course, it is possible to assume that the state will provide it, but the 20th century tried that route and the results were not pretty.

On the other hand, when the necessary capital resides in the workers themselves, then employee ownership of the organisation makes a great deal of sense. This is why most professional services firms are partnerships, which is itself a form of worker ownership (it’s just these workers are particularly well compensated).

The conclusion here is not that one form of ownership is inherently worthier than another, but that the capital-providing method should correspond to the task at hand. Now, that is not something that is precisely calculable before the process starts. As with evolution and survival of the fittest, it all depends on the external environment and its pressures. In that sense there is a market in forms and structures of enterprises, just as there is in the goods and services they provide.

Anyone is entirely at liberty to start up a co-op, a capitalist firm, or whatever. The end result is emergent: what is right for the specifics is what survives. Given that a market economy already contains the systems to sort through these rival claims, there really isn’t much need for further action.

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute