Annual bonuses, pay rises, people before profits ... It may sound like some sort of workers’ utopia, but employee-owned companies are creating a kinder, gentler form of capitalism. With the number of such firms doubling in just six years, Deputy Business Editor Mark Latham looks at how the model could change the economy.

SURELY in these times of squeezed wages and tumbling working conditions it is every employee’s dream: to get together with your colleagues and buy the company you work for from under your boss.

It seems that the dream is increasingly becoming a reality, as employee ownership is now the fastest growing form of business ownership in the UK leading to claims from its proponents that this is the decade of employee ownership.

The number of businesses owned by their own employees has doubled in Scotland over the last six years while, UK wide, employee-owned companies now account for £30bn or 4 per cent of GDP.

But has the time for this more cuddly model of capitalism really come and is it really the unifying and more egalitarian model of capitalism it seems?

Working for a company where workers are given a say in the running of the company and a share in its profits ought, at least on paper, to be a more rewarding and enjoyable experience than slugging one’s guts out for a corporation whose main interest is the maximisation of shareholder value.

But, although the number of employee-owned businesses is growing in the UK at just under 10 per cent a year, UK workers still have comparatively little say in the running of companies compared with other developed countries.

Although it is a far cry from full employee-ownership, in many continental European countries, worker representation on the boards of companies – virtually unthinkable in the UK - has been a legal right for years, giving workers a say in the running of companies without having to risk any capital.

The UK’s embrace of the Anglo-Saxon free market capitalist model is reflected, at a cultural level, in the large number of UK restaurants, cafes and pubs which are run by chains such as Starbucks or Pizza Express, where salary levels rarely exceed the minimum wage.

By contrast, Europeans on the other side of the Channel mostly keep away from corporate-owned eateries, preferring to be served (rather than queue for) their cappuccinos in family-owned cafes free from shareholders where workers are more likely to share in the businesses profits.

In the US, meanwhile, a surprisingly large number of American workers share in their employer’s success through profit-sharing schemes, share ownership or stock options. Thirty-two million US workers now own stock in the companies they work for and the number is rising.

In the UK the largest and best known employee-owned company is the John Lewis Partnership, one of the UK’s retail businesses which includes John Lewis and Waitrose stores, of which there are ten in Scotland. The company’s 88,700 “partners” - that’s members of staff to the rest of us - receive benefits that employees at other retailers can only dream about.

These include receiving an annual bonus paid from the company’s profits (which last year amounted to 11 per cent of each employee’s salary), a generous pension scheme of 15 per cent of salary, six months of paid leave after 25 years of service, discounts in shops, subsidised stays at one of the group’s five holiday venues and access to company yachts.

The Partnership’s constitution states that its ultimate purpose is “the happiness of all its members, through their worthwhile and satisfying employment in a successful business”. It’s a vision of an employee paradise unlikely to be included in the strategy and mission statements of most traditional shareholder-owned company.

Speaking to the Sunday Herald last week on the fringes of the largest ever conference on employee ownership to be held in Scotland, chief executive Sir Charlie Mayfield said that the employee ownership model “is not just a nicer way of doing business: it is also a better way of doing business”.

Mayfield’s views contrast with those of the neo-liberal economist Milton Friedman who believed that companies perform best when they are run in the interests of their owners and not their workers.

According to Mayfield, workers in an employee-owned companies are more engaged, more productive and more innovative and this makes employee-owned companies more profitable.

Because staff are directly involved in the running of the company (including having the power – so far never used – to sack the company’s chief executive) and have a financial stake in the business, staff turnover and absenteeism at the John Lewis Partnership are less than half the average for the retail sector, Mayfield says.

“One of the key things is that partners cannot sell their shares if they don’t like something that is happening in the company. That means people have no choice but to work to make the business better,” he said.

“We set out to make sufficient profit not the maximum profit: we say that very explicitly. In most businesses there are ways to increase profits in the short-term but we make decisions for the long-term.”

The previous coalition government encouraged what has been dubbed the “John Lewis economy” by creating tax incentives to encourage employee ownership. As a result, bonuses paid to workers by employee-owned companies are now free of income tax up to £3,600. Prominent developments since then include the privatisation of the Royal Mail in 2013 which saw ten per cent of the shares being distributed to workers.

But a call by the former deputy prime minister Nick Clegg to encourage more employee ownership by giving workers a legal right to buy shares in the companies they work for did not come to pass.

According to Sarah Deas, the chief executive of Co-operative Development Scotland, the government agency tasked with furthering the development of co-operative and employee-owned enterprises across the country, the tax changes introduced in 2013 have been a “game changer” for the sector and the long-term benefit will be a “fairer and more sustainable Scottish economy”.

There are now 71 employee-owned businesses and worker co-operatives in Scotland, accounting for 6,500 employees and £900,000m in turnover. Aside from John Lewis and Waitrose stores, these range in size from a small veterinary practice with a handful of staff in Shetland to a home-care firm in the Highlands which employs 350 people.

But not everyone agrees that employee ownership is a panacea to the unfairness inherent in the capitalist ownership model.

Stephen Boyd, Assistant Secretary at the Scottish Trades Union Congress (STUC), has doubts as to whether the productivity hikes claimed by proponents of employee ownership are really as high as have been claimed.

Boyd also believes that not all forms of employee-ownership make an enormous amount of difference for workers or businesses. “Simply handing out shares that will soon be traded back for cash to supplement wages is a façade,” he said.

While employee ownership breaks down the traditional divide between capitalist owners and the workers, Boyd points out that firms owned by workers, in particular larger ones, can also suffer industrial relations problems like any other company.

However, he added: “The STUC is generally supportive of employee and other forms of cooperative ownership as it broadens economic power, contributes to industrial democracy and helps overcome the current lack of ownership and control within our borders.”

So far in the UK, no large stock market quoted company has transitioned to employee ownership but that is not the case in the US. When United Airlines was restructured in 1994, when it was in financial difficulty, employees were given shares in return for pay cuts in an attempt to keep the company going. But the experiment failed eight years later when the company filed for bankruptcy protection.

Other prominent US employee-owned companies which fell from grace include Lehman Brothers which was 30 per cent owned by its workers.

Despite these hiccups, most of the evidence seems to point to employee-ownership leading to higher wages and greater happiness levels for those involved but whether employee-ownership will ever become the dominant ownership model remains to be seen.

Transitioning a large company to employee-ownership is often dependent on having owners sufficiently benevolent to accept a lower price when they decide to part with their company than if they sold it on the open market. Without state intervention to speed up the process the shareholders of the UK’s largest companies are unlikely to relinquish power willingly.

The West Highland Free Press

The Skye-based West Highland Free Press moved to employee ownership in 2009 when the original founders and shareholders looked for an exit strategy as they reached retirement age. It is now the only employee-owned newspaper in the UK.

The previous owners were keen to ensure that the £1 million turnover paper remained independent and offered the employees the option of buying the business. Without that, a trade sale would have been the most likely scenario and the paper could have lost its independence, its place in the community and – probably – many of its employees.

The company’s Annual General Meeting is a far more interesting event than is the case with other companies, says Managing Director Paul Wood, as the shareholders are the employees with informed knowledge of the business. This encourages a wide ranging debate on any aspect of the company’s strategy or performance in contrast with the AGMs of many companies, where rapacious shareholders are often only interested in tabling financial questions and “clamouring for a dividend”.

HeraldScotland: Some of the employees at the West Highland Free Press at the time of the buy-outSome of the employees at the West Highland Free Press at the time of the buy-out

The current employees paid the previous owners an undisclosed “market rate” for the company, with the employees being given an exclusivity period in which to complete the deal. Since the sale, there have been no redundancies at the title, and, apart from the last two years, employees have received inflation rate pay rises.

Wood said he was “gobsmacked” that, in an environment where hundreds of commercially viable but low margin local weekly newspapers have been closed in recent years, no title in the UK had gone down the route of employee-ownership other than the West Highland Free Press.

Clansman Dynamics

When Dick Philbrick, the owner and founder of East Kilbride based Clansman Dynamics, a designer and manufacturer of robotic foundry handling equipment, started to look for a succession model for the company that offered safeguards for both the company and its staff he made the decision to move the company to employee ownership.

The decision followed an inspirational visit to the huge Mondrogan Co-operative in Spain’s Basque region where Philbrick says he saw first-hand how employee ownership could motivate staff.

Although Philbrick received several offers to buy the business which he had founded in 1994, he did not accept them as they would have resulted in the company relocating overseas. “Scotland has a proud tradition of engineering and I wanted the company to remain here,” he says.

HeraldScotland: Employees at Clansman Dynamics with Dick Philbrick in foregroundEmployees at Clansman Dynamics with Dick Philbrick in foreground

“Engineering needs long-term development and is not suited to the Anglo-Saxon method of fattening to sell fast. In my darker moments I could not believe that we could persuade hardened North Lanarkshire engineers to part with hard-earned cash for a piece of paper called a share certificate,” he recalls.

But the sale went ahead in 2009, since when profits have more than doubled with turnover recently reaching £12m. In 2014, the 41-employee company – which exports more than 90 per cent of production - recorded its busiest year yet for technical developments. “We don’t shrink from telling people the bad as well as the good news about the company,” Philbrick says, who is now the company’s managing director.

The three main modes of employee owndership:

1 Direct ownership where individual employees directly own shares in the business they work for.

2 Indirect ownership where an employee trust owns shares in the business on behalf of beneficiaries who are the existing employees, past employees and future employees. The trust holds these shares with no intention of ever selling them and any benefit derived from holding them goes solely to the beneficiaries.

3 Hybrid ownership which is a mixture of both direct and indirect ownership, whereby individual employees directly own shares and an employee trust also owns shares on behalf of the employees.