Different business models have flourished across Britain for centuries. But it was the employee-ownership (EO) model that was thrust into the spotlight in March when the British poster child for this style of organisation, the John Lewis Partnership, revealed it was having a mid-life crisis. Or as many would have it, an end-of-life crisis.
John Lewis, an employee-owned business since the 1920s, is to review its structure because of the need to turn the business around. To listen to the commentary, you might think that chief executive Sharon White had announced she was ending the more than 100-year-old structure of the business. This is where the lack of awareness about the employee-owned business model hits home.
Employee-owned businesses are a broad church. According to research by thinktank Ownership At Work (OAW), there are today more than 1,300 such businesses in the UK, and the number has more than doubled in the past three years.
“What’s frustrating about the [John Lewis] debate is that it shows there is still some lack of understanding around the EO model,” says Campbell McDonald, CEO of OAW. “It’s treated as binary – that is, if you stop being 100% EO, then you no longer provide benefits to employees as owners, which is nonsense. EO is a broad church, and many businesses thrive and deliver outstanding benefits at less than 100% shareholding.”
Demonstrating this, of those more than 1,300 EO businesses the structure varies from totally employee owned – as with John Lewis – to 25% employee owned – such as fragrance manufacturer Fragrance Oils. So even if John Lewis goes ahead with a reduction in the number of ‘partners’, it is highly unlikely that the EO model that’s been in place at the retailer for more than 100 years will come to an end.
The beloved department store, like many retail businesses, is facing major business and economic challenges, not least high inflation. On 16 March the John Lewis Partnership, which includes Waitrose supermarkets, announced a worse-than-expected £234m full-year loss. Employees also missed out on their annual bonus. It prompted White to say that the business now has “catch-up investment to make”; it has tripled its costs savings target from £300m to £900m, with White also suggesting: “As we need to become more efficient and productive, that will have an impact on our number of Partners.”
The CEO has promised that no decision will be made to dilute the employee-owned model without consultation. However, the announcement has raised the question of whether such business models are viable.
Many lenders are still not keen on financing EO businesses but, says McDonald: “While lenders are not always familiar with the model, there is a big difference between the scale of capital required for a very large retailer to execute a turnaround in a highly disrupted marketplace, and the kind of capital requirements that the vast majority of this sector have, where most of them are SMEs.”
Indeed, McDonald argues that John Lewis’s ability to flex its structure further highlights the nimble nature of the EO model: “The fact that John Lewis is in a position to say, ‘We might temporarily dilute some of our shareholding in order to repair our market position and then buy it back later to get back to 100%’ is further evidence that this can be a very agile and resilient business model, rather than that the whole thing’s broken,” he says.
Alive and thriving
OAW is conducting a large-scale research programme in conjunction with the Employee Ownership Association “to establish a new baseline for the economic, social and environmental impact of employee ownership businesses in the UK”. Although the report is not due to be published until the autumn, provisional findings suggest that as far as business owners are concerned, rather than a crisis of confidence in the agility of the EO model, there is substantial growth.
Examples of companies that have switched to the model include Richer Sounds, founded by Julian Richer who transferred 60% of his shares to employees in 2019, and Riverford Organic Farmers, the vegetable-box provider founded by farmer Guy Singh-Watson. Riverford became an employee-owned business just under five years ago, in June 2018.
Singh-Watson chose the employee ownership model “to protect Riverford’s values and ensure its independence” after rejecting outside investment. The model also, Riverford says, offers “higher productivity, higher morale, and less debt”.
The index for the Top 50 Employee-Owned Businesses by size, compiled by RM2 and published by the Employee Ownership Association (EOA), shows a median productivity increase of 5.2%. At a time when focus on UK productivity is at its greatest, given the lacklustre productivity record Britain has seen over the past decade this should be a shining light in the dark tunnel of low productivity.
Significantly, the success of EOs seems to be sector-neutral too, including professional services, construction, manufacturing, retail and wholesale, and information and communications enjoyed marked growth. The list of UK EOs includes household names such as Arup, Unipart and Go Ape – another new joiner.
EOs are also typically viewed as more being socially and environmentally focused, productive and agile in times of economic turmoil. At a time of increased investor and consumer focus on the social and environmental credentials of companies, and the need for businesses to act with purpose as well as for profit, it may be surprising that the model of employee-ownership is even under debate.
Kingsley James, board member of the Employee Ownership Association and founder and executive chairman of the creative communications agency Emperor, led his company into an employee-owned model in January 2020, selling 67% of the business to an employee ownership trust. He said the overarching reasoning for the switch was about succession planning, but the benefits to employees, the wider business and economy were also great incentives: “The transition was about selling down a stake in our business in a controlled way, which enabled us to manage our succession, while retaining the independence of the business, protecting our people and our clients.”
The obvious alternative would have been a trade sale, with the potential for a high sale price, but he and his co-founder didn’t see that route as the best for their business. Moreover, a trade sale is usually a more protracted process with less control for the owners: “The transaction itself, including the legal and the finance and valuation part, is actually quite straightforward,” he says.
Besides the varied social, environmental, business and economic advantages, there are tax incentives, too. For example, business owners pay no capital gains tax in an EO transaction, and employees can receive tax-free annual bonuses.
However, although tax benefits are significant, James doesn’t imagine many, if any, EO businesses switch to an EO model solely for these reasons. “There’s enough evidence to demonstrate that [EO] businesses are more productive, more profitable, have lower staff turnover and, increasingly, are more responsible. A lot of employee-owned businesses are becoming B Corp [a certification of for-profit organisations recognising their social and environmental performance], which is an accreditation we have also achieved. That ability to be in control of our own destiny, and not governed by an investor with short-term expectations, is what we wanted. Employees are the ultimate patient shareholder.”
As the debate over EO evolves, and John Lewis takes the next steps in its transformation, it is hoped that a greater understanding of the business model will spread among the business community and particularly lenders. Accountants clearly have a greater role to play in advising companies such as Emperor and its peers on how best to approach a model that promises, among other benefits, superior productivity and profitability at a time when Britain needs that boost.
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