Labour takes aim at shareholder capitalism

It might not have been his intention, but Julian Richer recently became a socialist hero. In May this year, the owner of the hi-fi and TV retail chain, Richer Sounds, did something that does not happen very often. He transferred his controlling stake in the business with its 53 stores to a trust for the benefit of its 530 staff.

It was not a political gesture. Mr Richer, 60, has no children and simply wanted to ensure that the company he built up over 41 years had a stable succession. “My father dropped down dead at 60, so I was keen for this to happen in my lifetime,” he explains.

Creating an employee trust a bit like John Lewis Partnership, the famous UK retailer, wasn’t an easy choice. It cost Mr Richer the chance to sell for the highest price to private equity or a trade buyer. Instead he flogged the shares to the trust at concessionary rates.

He did so partly to reward his employees who had helped him build the business. But it wasn’t just sentiment: Mr Richer also felt they would be better stewards of the business than a distant and financially driven investor.

“We own 90 per cent of the stores as freeholds, and I didn’t want someone selling those off at the first opportunity to pay a dividend,” he says.

Employee ownership has historically been the minority choice among British businesses. With its £200m in sales for the last financial year, Richer Sounds is one of the largest of the 350-odd companies to have adopted the employee ownership trust (EOT) model. 

But it is a path the Labour party hopes to encourage many more to take in the future. Under Jeremy Corbyn’s leadership, Britain’s opposition is seeking not just to change corporate governance, but the way British companies are financed and owned. 

“It is about building a new model of economic democracy,” says James Meadway, an economist and former adviser to the shadow chancellor John McDonnell. 

“We need to look beyond the old dichotomy of ownership between private sector and public sector, and engage with the wide range of options that lies in between.”

Ownership has always been central to Labour’s credo. Ever since Sidney Webb, the social reformer, wrote Clause IV of its 1918 constitution, calling for workers to secure control of “the means of production, distribution and exchange”, such questions have preoccupied the party’s thinking on economic issues.  

True, there was a hiatus under Tony Blair and Gordon Brown, when these ideas were dropped as outmoded, and the “filthy rich” enjoined to pay their taxes. But under the leadership of Mr Corbyn they have come roaring back.

Much of the public focus has been on nationalisation as the flagship of this new ownership agenda. In the autumn of 2017, Mr McDonnell promised to bring “ownership and control of the utilities and key services into the hands of people who use and work in them”. Labour has identified natural monopolies such as water, electricity transmission and rail, as well as the Royal Mail postal service, as targets for state buybacks.

But the agenda goes far beyond nationalising utilities. Labour thinkers believe they can tap into the same desire to “take back control” that drove the Brexit vote to push through far-reaching changes designed to give staff a greater say in the places where they work.

“Just as nationalisation underpinned the postwar consensus and privatisation drove Thatcherism, new pluralistic and democratic models of ownership will be vital to moving beyond neoliberalism,” says Mathew Lawrence, an influential figure in Labour circles and founder of the Common Wealth think-tank.

Part of the strategy is to promote alternative structures to the dominant public limited company model, which Labour argues leans too much towards the primacy of external shareholders.

The idea is that worker ownership could spur greater productivity by allowing workers to participate financially in its fruits. Placing a lock on the assets — workers would get the economic and voting benefits of ownership, but not the right to sell the shares, under the Labour proposal — would create the commitment that is often absent in conventional shareholder ownership. 

Proponents such as Rebecca Long-Bailey, the shadow business secretary, claim this would limit the ability of owners to push down wages and cream off excess profits — a traditional critique of shareholder capitalism that has been revived loudly in recent years by academics such as Thomas Piketty. 

She also believes it could help industry adjust to the sweeping changes that lie ahead as Britain deals with such challenges as artificial intelligence and decarbonisation. “A worker would have a very different decision mechanism in looking at their job over the next 20-30 years as against a shareholder who may have a very short-term measure,” says Ms Long-Bailey. 

Such an approach includes forgoing dividends if workers could see investments being raised that would increase productivity and make them better off. “It is something that already happens in workplaces where there is high worker engagement,” she adds.

Evidence suggests that companies with greater levels of worker ownership are both more stable and willing to tolerate long payback horizons on investment. A review by Cass and Manchester business schools in 2017 concluded that such firms had “either superior or similar economic performance” to non-employee owned firms. This became more marked at times of economic stress. 

The harder question is how to create enough of these corporate paragons to make a difference. Labour plans to encourage them through a series of corporate nudges, including tax breaks and soft loans through state investment banks to make it easier for co-ops to buy out private owners or to start new firms. 

It would also use state (and local government) procurement to favour companies that extend social ownership, while its energy policy lays great stress on encouraging community providers to play a greater role in meeting local power needs.

One model is that of Preston in Lancashire, where council leaders have deliberately focused spending on local businesses, increasing the proportion being spent locally from 14 per cent in 2012 to about a third now. That included even the council’s food supplies, which were broken into lots and tendered to local farmers.

Yet even supporters are sceptical about whether all this will deliver a genuine transformation. “Getting more co-ops and social enterprises is a very worthy objective,” says one Labour source. “But you wonder whether these sorts of tweaks will really move the needle much.”

One worry is that only weaker companies will convert, as happened in the 1970s when, as industry secretary, the late Tony Benn, forged worker co-operatives at a handful of failing businesses such as Kirby Manufacturing and Engineering, a Liverpool-based radiator maker, and the Meriden motorcycle company. All of them went on to collapse. That is a far cry from the exciting new growth ventures — such as a “People’s Uber” — that Mr Meadway would like to see in the ride-hailing sector.

There is also a concern that the co-operative model tends to work mainly for less capital-intensive sectors, such as retail and services. 

A recent report from the New Economics Foundation set the target of converting “just 5 per cent” of the 120,000 smaller UK businesses that are expected to change ownership in the next three years for succession purposes. Even if that figure was achieved, it would only amount to 6,000 companies.

That’s why Labour has a second string to drive ownership changes, one designed to ensure that worker involvement is spread throughout the economy — not just in those businesses that have adopted EOTs or co-operative forms.

Among the most contentious of these are plans for “inclusive ownership funds”. Announced last year, these are trusts into which all companies (whether UK owned or subsidiaries of foreign firms) with more than 250 employees would have to transfer a tenth of their shares. Under the broad brush proposals Labour has sketched out, employees would get dividends on the stock worth some £500 a year each with the surplus going into social funds administered by the government.

Critics have attacked the plans, both for their sheer complexity and for the way they would expropriate owners without compensation. Some see the “social funds” as little more than a covert way to increase corporation tax.

There are also plans to reform corporate governance, with a third of the seats on boards being reserved for workers’ representatives. Labour is looking at the auditing profession, with a review by accounting academic Prem Sikka recommending that a statutory body take over the auditing of banking and other financial institutions. 

Boardroom pay has come under the spotlight, with (as yet unadopted) proposals to give customers a vote on remuneration at Britain’s 7,000 largest companies. Plans have been floated to scrap options for executives and to make public how much they earn.

The ownership funds are modelled on a far-reaching scheme dreamt up by Sweden’s Social Democrats in the mid 1970s, known as the Meidner Plan, which aimed to create a series of “wage-earner funds” financed by private companies giving employees a share of their profits in voting shares. The objective was for workers to end up with majority control of Swedish industry — then controlled by a tight circle of powerful families.

The plan was finally enacted in the 1980s when the Social Democrats were re-elected, having lost power in 1976. But it had been heavily watered down under huge pressure from employers. The funds suffered the final indignity a decade later of being sold off in one of Sweden’s privatisation waves.

Labour’s funds have already stirred similar growls of hostility from business. Carolyn Fairbairn, head of the UK employers’ trade body the CBI, has warned that the scheme if implemented would hit the value of 60 per cent of its members. Analysis by the FT and Clifford Chance estimates the capital value transferred would be about £300bn. 

“That’s an immediate hit to investors, many of whom are pension funds, and it makes it harder for businesses to raise capital for future growth,” she wrote in a letter to members.

Lawyers say seizing shares without compensation could amount to unlawful expropriation, and be challenged under European human rights law, investment treaties and World Trade Organization rules. 

“The amounts at stake are so gargantuan that we would likely see a series of disputes that could easily keep the proposal stalled in the courts for years,” says Dan Neidle, a partner at Clifford Chance. 

Ms Long-Bailey is already stressing that Labour doesn’t have a “one-size-fits-all” approach to worker ownership. “Some fantastic businesses already have their own funds and what we don’t want to do is to say: ‘You have to do it this way,’” she says. However, all schemes will have to offer more than just a share in the profits. The asset lock and worker representation are also non-negotiable, she insists.

While some of its ideas may not feel completely thought through, the Labour party is in some ways pushing at a half-open door with its search for new models of governance. 

Many see merit in reforming a system that often tends towards short-term results and aggressive value extraction. Theresa May’s government looked at reforming governance, while experts such as City economist Andrew Smithers worry that the incentive structures baked into quoted companies actively discourage innovation and long-term investment.

“The free market experiment has just about run its course, and after four decades what we can see is that the result is fairly dismal,” says Diane Coyle, a former adviser to the Treasury. “Low productivity, regional inequalities and a system that doesn’t respond to long-term risks or the need for long-term investment. The market just doesn’t do that sort of co-ordination.”

She favours a more mixed approach to ownership, citing the creative industries as an example. “The [state-financed] BBC provides the training and the market for small producers,” she says. “There’s also the wider effect on the sector, which induces competition around quality.”

Ms Coyle fears, however, that Labour’s obsession with ownership conceals something more regressive. “Rather than an opportunity to do a pragmatic rethink, it’s about going back to the 1970s; talk of sector deals, surrendering to producer lobbies.” 

She also worries that there is not enough focus on rebuilding the quoted sector of the UK economy. “We have got too much private equity and not enough PLCs,” she says. “Where we really need to focus is around increasing their numbers and strengthening their governance.”

For all Mr McDonnell’s talk about forging a new economy, some of the party’s ideas have a sepia-tinted feel. The energy and water utilities would, once nationalised, be stripped of their independent regulators and control over pricing returned to “democratic control” (aka politicians). In the 1970s and 1980s that was a recipe for under-investment, not the environmental splurge Ms Long-Bailey envisages.

Labour thinkers talk about their ideas making the UK more like Denmark or perhaps Germany — countries seen as having less Darwinian corporate systems. “En route to a socialist economy, there might be a moment when a different capitalism emerges — a more benign one,” says Hilary Wainwright, a well known sociologist and Labour activist.

But the question remains whether Britain’s system under Mr Corbyn will really learn from other countries’ experience — or simply slip back into Labour’s interventionist past.