Business Models: Employee Ownership

Business Models: Employee Ownership

Throughout this blog I will be evaluating the advantages and difficulties faced by employee owned companies (EOC).  Given an increasing number of companies are adapting this approach within the UK, I will look at a company currently using this method and whether it has been successful for them.

The main concept behind EOC’s is the idea of putting people first, involving the workforce in key decision-making and realising the potential and commitment of their employees (John Lewis Partnership 2014). Giving employees a valuable shareholding within the company provides a direct link between the company’s performance and their individual gain. An increasing number of companies are adopting this approach within the UK; they have an estimated value of £30 billion (Employee Ownership, 2014). 

John Lewis Partnership is a great example of a company that has successfully used this approach to their advantage.  Employees aim to achieve future success for the company in order to gain the rewards through dividends, it creates goal congruence and reinforces a sense of common purpose.  This in turn has created a high quality of customer service and therefore, customer satisfaction; something the shop is renowned for.  This develops customer trust within their shops and the brand, which is likely to increase repeat custom.  

A number of studies have all shown that EOC’s have an increased productivity and performance (Sauser, 2009).  EOC’s gain loyalty from their staff, therefore reducing staff turnover, resulting in reduced recruitment and training costs. Last year John Lewis’ staff received a bonus 15% of their salary, almost equivalent to 8 weeks’ pay, a significant perk of the job (BBC News, 2014).  This would be difficult to replicate elsewhere, therefore trained staff are highly unlikely to move to a John Lewis competitor, for example Boots.

Looking at this through a Contractual Theory point of view, it seems companies and employees build a network of contractual agreements that both parties must participate.  Employees agree to make explicit arrangements through their employment contract and implicit through their initiative and reliability, in return for their salary and agreed bonus schemes (Arnold, 2013).  Furthermore, employees must ensure that they perform to the best of their ability in order to make sure the company is generating enough cash flow to be able to afford their bonuses.

More recently, Royal Mail have adapted to this approach by giving their employees a 10% stake in their company when they privatised in October 2013 (Royal Mail Plc, 2014). This was done in order to give staff an incentive for the company’s profitability and give them a sense of ownership.

For John Lewis this has proved to be a successful technique and the risk has paid off for them however, there are many drawbacks to EOCs. Many companies may float their company on the stock exchange as an opportunity to gain extra capital.  If a company is solely owned by their employees this restricts their ability to further increase capital and they would have to be able to get this from other sources.

Managers may make decisions for the business solely focusing on their bonus’ rather than increasing the value of the company over a long term period.  Their motivation is to gain dividends, therefore their decisions may just represent their own self-interest and welfare rather than the company as a whole.  This appears to contradict the main aim of an EOC.  By taking a short term view to maximize shareholder wealth they would reduce any risks that could be beneficial to the company over time and cut costs to improve profitability.  The cost to train staff may be reduced, which could impact the quality of the service provided. It is essential for some companies as customer service is one of their key focuses. This goal separation could create a conflict of interest between employer and employees.

Shareholders buying into a company as an investment may seek the highest return possible, usually achieved through higher risk investments. Unlike John Lewis employees, standard shareholders are not jeopardising their job when taking risks. If outsider shareholders are unhappy with the decisions being made, they have the option to either vote for change during annual general meetings or sell off their shares.  Employees do not have this opportunity or the power to make change individually.

For large organisations, the bonus’ are split equally by a percentage throughout the workplace, therefore it is not necessarily motivating on an individual basis.  The hard work from several employees would be split between their colleagues that may not be putting in as much effort, which is demotivating in itself.  Staff may become reliant on this bonus as part of their paycheck and become dependent, unsurprisingly due to the increase of the cost of living.  This also raises the question of whether their salary is inline with their industry competitors or whether their bonuses are taken into consideration.

To conclude the evaluation of EOC, although John Lewis is a perfect example of a company that successfully use this method, I believe this model would not be suitable for many other organisations.  This technique allows companies to improve motivation, reduce staff turnover and create goal congruence, however, I believe there are too many drawbacks to this method to justify these advantages.  These benefits could be gained through other techniques or giving employees a smaller stake in the company, such as Royal Mail mentioned above.  There are large risks with having a company solely owned by employees and also capital restrictions, this therefore shows this model would be unsuitable for smaller companies. It will be interesting to see if any future companies will follow John Lewis’ success or whether the majority of organisations will cap their employees’ stake. 

Thank you for reading, any further discussion or advice would be greatly appreciated.  I have included the list of references used below for anyone wishing to read into this further.

References

Arnold, G. (2013). Essentials of Corporate Financial Management. (2^nd ed.). Essex: Pearson Education Limited

BBC News (2014). John Lewis staff get 15% annual bonus. Retrieved from http://www.bbc.co.uk/news/business-26462969

Employee Ownership Association (2014). Employee Ownership Benefits. Retrieved from http://employeeownership.co.uk/what-is-employee-ownership/employee-ownership-benefits/

John Lewis Partnership (2014). A guide to employee ownership. Retrieved from http://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/our%20responsibilities/our%20employees/Guide_to_Employee_Ownership.pdf

Royal Mail Plc (2014). Annual Report and Financial Statements. Retrieved from http://www.royalmailgroup.com/sites/default/files/Annual%20Report%20and%20Accounts%202013-14_DDA_0.pdf

Sauser, W. I., (2009). Sustaining employee owned companies: Seven recommendations. Journal of Business Ethics, 84(2), 151-164. doi:10.1007/s10551-008-9679-2