Encouraging employee share ownership doesn’t create a “stakeholder society”. Instead, it can lead to disasters like Enron, where workers have too much riding on the success of one firm.
It is hard not to be in favour of employee share ownership. It gives the people who work for a business a share in its future, both literal and metaphorical. It helps to align the interests of the various stakeholders in a business. It allows everyone to benefit from a company’s success. It introduces people with small savings to the idea of equity investment, in the best way possible – by encouraging them to have shares in the business they know.
No wonder politicians of all parties and all countries have vied with each other to promote employee share ownership. The only opponents are the diminishing ranks of the hard left, who fear that it will blur the irreconcilable divide between capital and labour. That is exactly what most people like about it.
Yet despite all these apparent advantages, employee share ownership is not a good idea. Giving the people who work in a company a financial stake in its success misses the point. Employees already have a financial stake in the success of the business in which they work. If the company does well, they can expect to earn more, win promotion, and have a secure future. If the company does badly, they will lose out.
It has become routine for a company reporting disappointing earnings to announce a
wave of redundancies at the same time. In a knowledge economy, where the value of a company is in its people rather than its physical equipment, it is more and more obvious that the financial interest of workers and shareholders are bound together. You do not need to give employees a share of the company’s assets: they own them already.
Employee share ownership is a fair weather policy. It is fine so long as share prices always go up. A genuinely independent financial adviser, telling people who worked for a company how best to manage trade-offs between risk and return, would give simple advice: be short in the shares of the company you work for. You have too much invested there already.
Recent legislation, in the UK and the US, has aimed to give sufficient tax breaks to make employee share ownership attractive in spite of these disadvantages. The effect has been to compound the problem. Employee share involvement has grown because of tax advantages. But issuing stock rather than paying cash enables companies to pass business risk over to people who work there. That was what happened at Enron.
The models of employee share ownership that have stood the test of time – and of recession as well as boom – are very different. The employees of John Lewis do not hold any tradeable securities, as they discovered when some bright sparks suggested they should try to cash them in. Their stake is tied to the long term development of the business, and immune to the stock market. If the company fails they will lose their jobs but not their savings – unlike the hapless Enron employees, who are justifiably enraged that the company’s executives encouraged them to buy and did not tell – or even allow – them to sell But what would a scrupulous Enron executive have done? If an employee asks the chief executive of a company whether its shares are worth buying, how can he ever say no? What would become of a business whose managers told its workers ‘now is the time to bail out of our stock’?
No one will ever say that the executives of Enron managed the conflicts of interests involved in their various roles well. But such conflicts of interest are inevitable whenever managers and employees have trading positions in a company’s stock. The danger is that reaction to the Enron fiasco will be in exactly the wrong direction. The pressures are to make employee stock more readily tradeable, but the right response, as in the John Lewis model, is to make it less so.
When Tony Blair, the prime minister, first talked of stakeholding when he was in opposition, he understood that the issue was not how to give employees a stake in the businesses they worked for: it was how to recognise the stake they already had. The challenge was – and is – to develop a genuinely inclusive capitalism, that involves differences in the way companies behave, markets operate and business is regulated.
This is a type of capitalism in which shareholder return is the result, not the objective, of successful business;in which securities markets are mechanisms for financing and refinancing companies. rather than hyperactive casinos;in which employees and investors have the common objectives of satisfying customers and outperforming competitive products;in which the regulation of business, like law generally, is designed to enforce on a minority the behaviour which most people adopt naturally. A society in which everyone is having a punt on the stock market is not at all the same thing.
But under pressure from the people who bought tables at gala dinners, stakeholding was rolled back until all that was left was more tax breaks for employee share ownership and an unpopular new pension scheme. We see the results every night on our television. Pictures of unmasked fraudsters and unsuccessful speculators alternate with abrasive rail union leaders, religious fundamentalists and stone-throwing demonstrators against globalisation. The need to give content to a concept of a third way is ever more urgent.