I’m reading Beyond the Corporation by David Erdal at the moment and so have been thinking a lot about employee ownership. It’s making me wonder why we accept so little in the way of rights at work than we otherwise enjoy in the free and democratic societies we live in.
In a democratic country we have the right to choose the leadership and hold them to account; we have a right to transparency and information and we have the right to speak our minds, dissent, make our voice heard and participate.
In almost all businesses the employees have no equivalent rights. The rights belong only to the owners of the business – the shareholders. The shareholders are the only people with rights to information, to appointing or removing the management and ultimately deciding what the business does. Further, the shareholders are the only people with the rights to the profit and capital gains that it generates. Shareholders can sell these rights to whoever they choose in spite of any feelings the employees may have about it. The employees in the business create all of the value that it generates, yet they are merely ‘rented’ in return for pay, like a piece of machinery.
Why is it that we accept so little in the way of rights at work that we take for granted in society? Perhaps it’s because life is generally OK and we don’t feel hugely repressed, in spite of the lack of rights. Perhaps it’s because the status quo is so deeply entrenched in our history that we accept it as ‘the way things are’ and it cannot be changed. I wonder if this the same as the burgeoning middle classes in China who have decent jobs and access to consumer goods and perhaps don’t worry too much about the fact they cannot oppose or hold their politicians to account or have access to free information. But surely we can do better than this.
I am convinced that the solution is more than just democratic organisations. It is full ownership of companies by the employees. Only by the transfer of all rights from external shareholders to employees can we have true democracy at work.
Many democratic organisations are not actually true democracies at all. Whilst there are 10 principles of democratic organisations, what sets a true democracy apart is inalienable rights, not just operating principles which can be changed at the whim of the owners.
Most ‘democratic companies’ are actually benevolent dictatorships. The company I co-founded (and have now left but am still a shareholder in), NixonMcInnes, is a classic example. The company truly buys into democracy and has been independently assessed and shown to be living by the 10 principles. There is a huge level of transparency and employee involvement, from fully open financial information to guest seats for employees to attend board meetings. Employees have a say in selecting and evaluating managers, contribute heavily to strategy and planning, and have the right to ‘dissent’ by raising their own ideas, challenging anything that they are not happy with, and know that they will be listened to. There is also a generous profit sharing scheme in place. However, none of these things are actually rights – they are the policies set by the owners and can theoretically be reversed at any time, and the owners still have the right to sell the business to anyone they like who would be free to do as they please.
At NixonMcInnes, the concept of employee ownership has been discussed at length. I remember when we first talked to the employees about the idea and all of the rights that it would give them, they weren’t as excited as I thought they would be. The reason for this was that they felt they were already enjoying a lot of the benefits through the democratic principles, and the only real difference would be a big chunk of debt to pay off the old shareholders. In other words, life was OK under the benevolent dictatorship. I had to agree that this was a fair point, but I think there is something bigger at stake here.
Perhaps I am wrong, but I can’t help thinking that there is something hugely important about concrete rights that are set in stone forever – hopefully hundreds of years in the case of NixonMcInnes and certainly beyond the lifetime of everyone working there today. Rights that cannot be eroded over time or given up to new masters who want to do things differently. I think there is a massive difference between principles and true rights.
This is all sounding very socialist which is not a notion I’m terribly comfortable with to tell you the truth. In talking to socialist friends, they often say that the solution is for workers to unionise and to force (usually begrudging) employers to give them better rights. Personally I think the goal of better rights for employees is spot on, but the further polarisation of the situation into ‘them’ and ‘us’ is incredibly negative. It actually accepts and reinforces the status quo of the shareholder-employee relationship and misses out on huge opportunities to build amazing businesses that benefit the employees as well as society and the planet as a whole.
I would like to see far more employee ownership in order to give people these enduring rights at work. Perhaps unions could work towards raising finance to buy companies outright for the employees. I would also like to see bids for public companies to be taken out of the hands of short-term investors on the stock markets and into the hands of the people who work there.
This is not just social ideology. It is actually great business sense too and this is what gets me excited as an entrepreneur. In Beyond the Corporation, the myths about the supposed flaws in employee ownership (lack of innovation, inability to make tough decisions, bureucracy, short-termism etc) are thoroughly debunked by the reality of employee-owned companies like John Lewis, Arup and Publix who consistently out-perform their peers across all traditional measures of business success. It’s clear that employee owned companies can actually be more agile, innovative and better able to cope with tough times.
There are compelling reasons why employee ownership would be a far better and fairer standard framework for business than the current shareholder model. To test this theory, imagine for a moment that employee ownership was already the standard and employees had parallel rights at work as they do in society. Would any sane person suggest that it would be a good idea to remove all of these rights and give them up to owners who don’t actually create the value within the firm? Would anyone believe that these businesses would perform better? Would anyone think it would be better for society? Of course not. The current model only hangs on by virtue of the fact that it is ‘the way things are.’ But I don’t think it should or even can hold on forever. The day of the employee-owned firm is coming.
Tom Nixon 
Tom,
The word which recurs throughout your piece above is ‘ownership’. What exactly do you mean by ownership?
Is it something which you acquire automatically when you join an organisation and lose automatically when you leave that organisation?
Or is it something which, however you acquire it remains yours forever and, possibly, is capable of being passed on to yours at your discretion.
Or is it a wholly new concept of what ownership means, e.g. what you own has no material / monetry value but is merely a right to have a meaningful say in how the organisation of which you are a part is managed / operated? If this then, logically, your ownership would automatically terminate when you left the organisation either to join / found another organisation or to retire from ‘the rat race’ and you would have no right to pass it on to yours.
I’m sure that you’re right; many, if not most, people would like to work within a ‘democratically’ managed organisation. But there would be some caveats in most peoples’ minds:
– Will this organisation provide me with sufficient income to permit me to satisfy what I assess as being the ‘basic’ needs of me and mine (those for whom I choose to accept emotional and material responsibility).
– Is this organisation a secure employer, i.e. is it likely that the organisation will be around to be able to offer me employment for a reasonable period of time?
– How will I know that I am performing at, at least, an acceptable level within the organisation, i.e. who will evaluate my performance against what criteria and how will this assessment effect both my income and my level of ownership of the organisation.
You seem to have a problem with the concept of ‘a democratic dictatorship’. I fully agree that it is risky as Democratic Dictators have been few and far between in history but where it has happened, e.g. in Singapore with Lee Kwan Yew or in Rome under Octavius, it has been of huge benefit to those over whom the Democratic Dictator has ‘ruled’. For that I believe to be pragmatic reasons I am orientated towards the concept of Democratic Dictators where they are subject to appropriate constraints but I’m very aware of the problems associated with
– How do we get from here to there and
– What pool do we fish in to increase the liklihood that we hook a good Democratic Dictator.
‘Tis a complicated old world, eh! Can’t imagine why we’ve taken so long to get it right! But I am of the view that, over time – with multiple hiccups along the way – we are getting it righter.
Employee ownership can take many forms as you have outlined. The mechanism I’m most keen on at the moment is starting a business with traditional private equity but with an employee-owned trust also holding a significant stake (say 25%.) The shares owned by the trust are locked in forever and belong to the current employees. Once the business is sufficiently well-established and profitable, the employee-owned trust buys the remainder of the shares from the private investors through a bond which is repaid over time out of future profits.
This appeals to me as an entrepreneur because I can invest my own money and time as well as attract other investors to get a new business off the ground, whilst also enjoying the benefits of employees who are real owners and know that eventually they will own the whole thing. It’s also a much fairer deal for employees, who, once the initial investors have been fairly paid off can enjoy ALL of the rights and benefits of ownership for ever, since they are the once who’ll actually be creating all of the long-term value.
There’s an interesting model at Mondragon in Spain where new employees have to invest in the company a large sum (around a year’s salary which I guess they take as a bank loan or mortgage.) 20% of this goes into the company’s reserves and the rest sits in that employee’s ‘capital account’ – very similar to having bought shares. Every year, the company effectively pays a dividend which is partly realised in cash and partly as growth in their capital account. When they retire of leave they are able to withdraw this to directly benefit from the value that they’ve helped to build over time.
I think there’s a huge amount of innovation still to come around ownership models which will lead to very strong businesses and very attractive and fair outcomes for employees.
Working for an employee-owned, democratic company certainly carries risk just like any other type of employment or investment. But the principle is that by employees actually being owners and having the rights and benefits associated with that then it’s far more within their control to reduce the risk and make it work. This seems to be why employee-owned companies perform so well.
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Wonderful piece, Tom. I’d be interested to learn more about the history at Nixon / McInnes. After forty years in business, the last 20 as an owner or CEO, I’d say that this discussion would have rung truer in the ’70s and ’80s than today. I find that my current employees, though incredibly talented, are not that interested in ownership–not if it would interfere with their personal lives. I don’t think employee ownership is impossible. But it would require a cultural change, perhaps one that is already occurring. Most people given the choice between a good job with a good salary and benefits and stability would not trade that for ownership if it came with personal financial risk or nights worrying about how you’re going to meet the next payroll. But that is just what entrepreneurship entails for many people. Until the average business has enough revenue and real profit to support ten or twenty employees, or fifty, it’s probably useless to talk about employee ownership. Here in Silicon Valley there are a lot of “employee-owned” startups, but in truth the young employees really have stock options that amount to a lottery ticket (with better odds than the state lottery offers).
I can imagine a different state of affairs, one in which a large group of employees shared responsibility. But at some point in the growth of the business it seems the owners–be they the employees or outside stockholders– must “hire” someone to lead and manage certain functions in the business.
There is a big exception. Valve, the game company that has no hierarchy whatsoever. http://articles.businessinsider.com/2012-04-25/strategy/31396641_1_peer-review-ideas-employee
Thanks for the comment Phil, you make some good points. It sounds like you must have created a great work environment and company. I wonder if your employees would think differently about ownership if you were to sell the company to new owners who might not care about them so much?
Employee ownership does not necessarily mean personal financial risk for the employees. There are mechanisms for employee ownership which don’t require them to put in their own money, and their liability is limited too, just like in a standard corporation.
There’s certainly more responsibility for employee-owners. They would worry much more about the company finances. This is a good thing though and leads to deeper engagement, motivation and performance. In most companies, employees don’t have to worry about meeting the payroll, but this is just a form of blissful ignorance and they are often hit with a shock announcement of redundancies when times are hard, and then it’s very much their problem!
I agree that in most companies you need to have people to lead and manage certain business functions. The question is to whom are these people accountable? I think it’s far more powerful to have them accountable to employee-owners than to external shareholders.
If you’re planning to retire or sell the business one day, would you consider selling it to the employees?
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Hi Tom,
I struggle with this because clearly our current system of capitalism is dysfunctional. However, in three decades as an entrepreneur I’ve known very few employees who wanted the responsibility of ownership. In every small business I’ve been in, there’s been someone whose job is to worry about the next payroll or the health of the whole business, or someone who has to land the biggest clients. I’ve even had employees tell me they are glad they don’t have those responsibilities, or that they would never start a business because the demands can be so great. In a larger business like Publix, you are really running it like a private corporation with a management team and board of directors. But more egalitarian, smaller enterprises seem difficult.
What you describe is part of a larger challenge in society and that is that some people are quite willing to leave all the tough challenges and leadership to others. Spontaneous leadership arises on every schoolyard, playground, neighborhood association, club, and team. The converse is that some people feel disempowered, which leads to low participation, non-voting, etc. You are after an “ownership attitude” at Nixon MacInnes. But there are two types of ownership attitudes. One is fearful, controlling, suspicious, selfish, and Machiavellian. The other is loving, responsive, caring, unselfish and willing to take blame as well as credit.
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