ourEconomy

Make capital work for us! A real-world proposal for gradual transformation of the economy

Employee ownership is crucial for economic democracy, but worker controlled firms can struggle to raise needed funds.

Guy Major Jonathan Preminger
9 October 2019
Image: Steve Rhodes, CC by 2.0

In response to growing popular discontent with traditional shareholder capitalism that works “for the few”, we increasingly hear calls across the political spectrum for widening the range of organisational forms, including ownership structures.

One such form is employee ownership and/or control. Indeed, employee-owned or controlled firms in the UK have developed into a vibrant and growing community, which aspires to be an integral part of existing institutions and has gained mainstream political support. Moreover, employee ownership has been given a boost with the 2014 Finance Act, which granted tax breaks to founder-owners selling their firm to their employees, and tax benefits to the employee-owners too.

However, firms with this ownership structure tend to rely on repayable loans for raising capital (with interest rates not dependent on the success of the firm), and are less successful at attracting external, non-repayable, explicitly risk-sharing equity investment. In what follows, we would like to propose a mechanism that locks worker interests in a partially employee-owned firm with those of investors, while retaining worker control over the firm. This, we believe, would create a solid base of mutual interests between the worker-owners, who can run the firm democratically, and external investors (also owners, but non-controlling), thus making investment in employee-controlled firms a more attractive proposition.

Moreover, firms with higher levels of democracy tend to take the interests of a broader range of stakeholders into consideration (including issues of ethics, social justice, and environment). Thus, by facilitating the retention of workplace democracy, this mechanism is also a step towards compelling capital to work for society.

The problem

The standard shareholding structure frequently decouples ownership and control and exacerbates the democratic deficit in capitalist firms. While employee ownership can be a limited model, merely granting a certain level of ownership to employees, in the UK it usually includes aspirations to some level of workplace democracy and employee control of the enterprise. It can, therefore, go a long way towards countering the deficiencies of shareholder capitalism. Moreover, there is a growing body of evidence showing the substantial benefits of employee ownership for firms’ sustainability, resilience, productivity, income and growth, and for the job satisfaction and health of their workers. These improvements stem from the combination of profit sharing and the flattening of workplace hierarchies, along with some form of participatory or democratic management and “ownership culture”.

However, worker-controlled firms have tended to suffer from underinvestment. Democratic firms struggle to attract external capital because they are seen as too risky for both workers and investors, and as not providing adequate returns on capital. Clearly, there are fewer opportunities for capital to extract value from labour in worker-controlled firms, but in addition, such firms are frequently ideologically hostile to seeking external capital, and structure themselves to prevent it. As a result, these firms often struggle to achieve an optimal mix of capital and labour to maximise productivity, innovation and growth, and can be outcompeted by “standard” capitalist firms.

A number of organisations specialise in lending to employee-owned firms. However, such debt finance absorbs or shares far less risk than equity finance, due to the need to pay (generally) fixed or externally determined interest – as opposed to variable or discretionary dividends dependent on the firm’s success. The requirement to pay back or refinance the loan amount itself (the principal) is an additional serious drawback not suffered by equity finance.

Our proposal

We propose a mechanism that overcomes the underinvestment problem of democratic worker-controlled firms by locking together the interests of workers and investors. The firm’s ‘value-added’ (sales minus non-labour costs) is split equally among a number of ‘slices of the cake’. Each worker gets a pre-agreed number of slices, effectively their variable pay, and each share gets one slice as its dividend. Workers would have an incentive to maximise value-added to increase the amount split among the ‘slices of the cake,’ thus increasing their earnings. But in doing this, they would also be maximising earnings per share, hence dividends, and would thus automatically pursue and protect the interests of the investors. This would apply over the longer term too, because workers would also aim for job security and growth.

Shares would be non-voting under normal conditions, and the firm could then be governed democratically, by one-worker one-vote. Thus the firm could be democratically controlled by its workforce, yet investors’ interests (long-term dividend and share value maximisation) would be ensured as an inherent, built-in part of the arrangement, by being tightly locked to the workers’ overall incomes and prospects.

To reduce workers’ income risk, the scheme can be modified to ensure each worker takes home a minimum ‘base wage’, a pre-agreed multiple of the national minimum wage (averaged across workers). What is shared between the slices is then the ’surplus’ remaining after the total base wages are subtracted from the firm’s value-added.*

This surplus sharing mechanism is very flexible, and allows for differential pay, as the allocation of the workers’ slices between the different workers can be decided democratically. Thus different workers could be paid different numbers of surplus (profit) slices, reflecting skill levels, etc., or according to other democratically-agreed criteria, so long as the average number of slices per full-time equivalent worker is kept to the pre-agreed number – or, more practically, within some pre-agreed range (so that workers cannot undercut investor dividends by voting to pay themselves more, or to work fewer hours).

Making capital work for us

In short, we suggest that this surplus-sharing mechanism can solve the underinvestment problem often experienced by worker-controlled firms, as it opens up a route for external, non-controlling but risk-sharing ‘ethical’ equity investment into such firms. It thus enables investment while retaining worker control. In this, it counters the widespread assumption that it is impossible to have both workplace democracy and sufficient capital investment.

Our proposal, then, is a modest step towards replacing standard shareholder capitalism with economic democracy while at the same time retaining the benefits of the decentralised economic decision-making and resource allocation provided by trade and markets. Bringing democracy into the hands of a firm’s employees is potentially game-changing. If we can achieve that, yet still harness the power of capital, we have made a real step towards making capital work for us, rather than us working for capital.

We have considered many other details about this simple yet very flexible mechanism, but we do not have space to elaborate on these here. However, we would be happy to discuss them with anyone who is interested. Indeed, our hope in presenting this proposal is that it will open debate and encourage further thought into how to reform our economic frameworks and systems so that they benefit the widest possible spread of people, based on direct worker control and participatory, economic democracy. In a world in which old imagined “alternatives to capitalism” have lost their lustre, it is these incremental steps that will counter the excesses of the current dominant form of hyper-competitive, wealth-concentrating shareholder capitalism.

*Thus: each worker gets a pre-agreed number of slices (k) as their variable pay (averaged across all workers). So the total number of slices is equal to the (number of shares) + k × (the number of full-time equivalent workers). If there are S shares and W workers, there will be (S + kW) slices, so for value-added £ V, each slice will be £ V/(S + kW).

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