Employee-owned businesses

Businesses owned by their employees have proved more resilient than other companies in the downturn, and could be a model for a fairer form of capitalism after the financial crisis, according to a study* by two academics at Cass. Joseph Lampel, Professor of Strategy and Entrepreneurship in the Management Faculty, and Dr Ajay Bhalla, Senior Lecturer in Information and Knowledge Management, found that employee-owned businesses (EOBs) had a higher rate of sales growth and job creation in the recession than companies in conventional ownership. Over the combined boom-and-bust period of 2005-09, EOBs also generally created new jobs more quickly and were at least as profitable as their counterparts. The findings - based on a survey of more than 60 senior executives of both types of company, and financial data from more than 250 firms - back up other studies that show that EOBs typically outperform those companies in which employees do not have an ownership stake or the right to participate in decision-making. "The advantage for EOBs comes from taking a stakeholder rather than a shareholder view of management," says the study. "Employees who have a stake in the company they work for are more committed to delivering quality and more flexible in the face of the needs of business." Professor Lampel says an "unremitting focus" on maximising shareholder value in modern business strategy and public policy has meant that sustaining employment and growth through economically difficult times has been neglected as a crucial aspect of company performance.

Happier workforce
EOBs tend to be "slow-to-hire, slow-to-fire, steady businesses", he says. "Business leaders and policymakers should be looking at the resilience associated with the employee ownership model - and how it could benefit the economy as a whole." In the wake of the financial crisis and what Professor Lampel calls a "crisis in loyalty" among many corporate employees, the study suggests that the strengths of the employee-ownership model - such as accountable management, a happier workforce, closer alignment of risk and reward and a fairer distribution of profit - could help to build a "fairer form of capitalism" with a greater culture of responsibility and trust. Indeed, David Cameron, the Prime Minister, has even talked about the virtues of employee ownership in the public sector as a way of improving services. Government plans for the part-privatisation of Royal Mail could also include employee-shared ownership. British businesses wholly or substantially owned by their staff are estimated to turn over £25 billion a year, or about two per cent of GDP, and include retailers, manufacturers and financial firms, as well as public sector organisations delivering health and community care. The sector employs about 200,000 people, with the John Lewis Partnership - the retail group that includes the Waitrose supermarket chain - being the single biggest and best-known EOB. Professor Lampel says the success of employee ownership in the public sector would depend on the execution. "Leadership training would be crucial," he says, adding that employee-owned businesses tended to work best where employees were involved in strategic decisions but managers retained firm operational control.

Employee initiative
The study suggests that the employee-owned model offers particular advantages to companies in knowledge and skill-intensive sectors, where EOBs were found significantly to outperform competitors, and to smaller businesses. EOBs with fewer than 75 employees made more profits and more profit per employee than non-EOB equivalents. Professional services firms, hi-tech start-ups and others where employee initiative is vital are among those where employee ownership tends to work best, say Professor Lampel and Dr Bhalla. It is also, generally, most successful in high value-added businesses, rather than where price is the differentiator. John Lewis's retail success, Dr Bhalla adds, is built around its strong customer service skills rather than low prices, despite its "never knowingly undersold" slogan. The study found that EOBs with high sales growth tended to be those that allowed more employee participation in decisions, while those with high profitability per employee were more decentralised. The employee ownership model is less helpful in businesses where output is easily measured, such as direct selling, where individual incentives are key. Or, the academics suggest, where a company is on the point of insolvency. "It's not a good turnaround model - in such cases decisive management and redundancies may be what's needed," says Professor Lampel. A key challenge for EOBs is how to retain the advantage of a potentially more committed workforce as the business grows bigger and more complex.

Speed and flexibility
"Increasing size could put greater distance between frontline employ-ees and senior management. It could also make it more difficult to maintain inclusive decision-making without sacrificing the speed and flexibility that is essential for high performance in today's dynamic commercial environments," says the study. It adds that EOBs that adapt their organisational structures and employee involvement as the business grows are more likely to sustain their performance. Obtaining favourable financing from institutions that are more accustomed to dealing with listed companies can be a barrier to growth. "Lenders are not entirely comfortable - they don't know how to measure the risks, and assets are not easily collateralised," says Professor Lampel. Governments have generally been in favour of the idea of employee-owned business, the authors note. But the process of converting to an EOB can be complex and, the academics say, tax breaks would be an encouragement - though such incentives might be optimistic given the state of the public finances.

*Model Growth: Do Employee-Owned Businesses Deliver Sustainable Performance? Professor Joseph Lampel, Dr Ajay Bhalla, Dr Pushkar Jha; January 2010; commissioned by the John Lewis Partnership.

Steve Lodge is an investment writer for the Financial Times.