x Abu Dhabi, UAEThursday 18 January 2018

Workers united make better business owners

With companies struggling to retain talent, employee-owned outfits might be worth considering. After all, someone has to own the firm. Why not the staff?

With annual revenues of £6.2bn and 69,000 staff or partners, John Lewis is the largest European employee-owned business.
With annual revenues of £6.2bn and 69,000 staff or partners, John Lewis is the largest European employee-owned business.

At the end of Muhammad Ali's commencement address to students and professors at Harvard University in 1975, a member of the audience asked him for a poem. The former world heavyweight boxing champion spontaneously coined what is regarded as the shortest rhyme in the English language. It went like this "Me, We."

This sentiment is echoed by the chief executive of a private equity firm whose company is owned by the employees, because they are the most important element to its success. He is putting "we" and not "me" first. His employees are co-owners of the firm that prides itself on having a collective spirit of winning. But surely if employees own the business, it is the start of a slippery road that begins with staff having a slack attitude to work? That then leads to them not showing up when they don't feel like it. And it creates excruciating situations in which the frequency of slipping out for young Johnny's sports day becomes regularised to once a week.

It is akin to the means of production falling into the hands of the proletariat and the petit bourgeoisie being banished as revolution stirs in the office. History shows us where that scenario ends up. Before you think I may be harbouring a secret copy of Manifesto of the Communist Party by my bedside for late night reading, let me inform you that in the UK alone employee-owned businesses contributed £20 billion (Dh115.39bn) in total annual turnover.

In fact there does not need to be a whiff of Trotskyism in the air for the conditions to exist for an employee-owned business. Some factors to employees taking over the show are when the owners decide to sell to the workforce for succession purposes; or where insolvency or hostile takeover threatens closure and an employee buyout is a means of recovery; or where a visionary founder has a firm belief in employee ownership.

The latter is the case with the John Lewis Partnership. With annual revenues of £6.2bn and 69,000 staff or partners it is the largest European employee-owned business. Its founder, John Spedan Lewis, created a trust which owns the partnership for the benefit of all of the employees, with a written constitution that places the happiness of the partners (employees) at its heart. At face value there does appear to be some competitive advantage to this approach, including fostering a more entrepreneurial spirit from staff; an employee commitment to the firm and its stakeholders; higher employment standards and more opportunity to innovate.

Generally, where businesses have been handed over to employee ownership it can take three forms. First, direct employee ownership, where employees are registered individual shareholders and own a majority of the company. Second, indirect ownership, in which a trust collectively holds the shares on behalf of the employees. And finally a hybrid form, where there is a mixture of individual and collective ownership.

Some small companies have a similar structure. Make architects is a normal UK limited private company in which the entire share capital is owned by a trust that is solely and specifically for the benefit of the employees. "Effectively this means all employees are partners," says Matthew White, the executive director for the Middle East at Make. "In our case all profits are distributed over a two-year period," says Mr White. "The majority of profits are allocated according to salary to reflect experience and responsibility, and a part is allocated proportionally according to an annual peer vote, which can be a lot of fun. I remember one particularly outstanding part: one student attracting so many votes that she was able to pay off her entire student debt."

Willie Watt, the chief executive of the investment managers Martin Currie, which looks after an investment portfolio of £11.8bn and is employee-owned, says: "The company has to be owned by someone and I'd rather it was by the people working in the business. We believe employee ownership is the best way to fund, retain and develop talent." Mr White agrees. He says there is a huge commitment from all employees from day one, as they feel it is their company and want to make it work. As a result Make can attract and retain the best staff, which is essential in an architectural practice.

With businesses struggling to retain talent in this region, employee ownership ought to be regarded as a serious option, even and perhaps more so in family-owned businesses. What better way to make staff feel welcome to the family than to present them the opportunity to be part of it. The long-term sustainable framework presented by employee-owned businesses is a viable one, particularly where a trust, in which the shares are never sold again, owns the company for the benefit of the employees. The trust finances the acquisition with money from the company, or takes a loan, which is then paid back to it. Either way there is no personal risk to the employees since they have part of the share capital in a trust, which then owns a limited liability company.

In some cases owners have resorted to employee ownership as a defensive strategy to avert a hostile takeover. Wilkin and Sons, the makers of the Tiptree jam and foods brand, established in 1885, resorted to becoming employee owned by setting up an Employee Benefit Trust in 1989. Peter Wilkin, the chairman, said at the time: "One major concern was that the company was very vulnerable to being taken over and asset-stripped. We have always felt, and I still feel today, that our independence is what gives us credibility, and without it a lot of the strength of our name would be lost."

This is a sentiment that some of the disgruntled employees of Cadbury can relate to. I cannot see their new owners, Kraft, running an employee ownership scheme after completing their hostile takeover. And why would any employee want to take on the mountain of debt that Kraft has just loaded on to Cadbury? A regime of "me" not "we" is unfortunately the likely outcome in that once employee-focused organisation.

Rehan Khan is a business consultant and writer based in Dubai