Labour’s plan for greater worker ownership is not ‘anti-business’

Image: Jonny Goldstein, CC BY 2.0

This week at the Labour Party Conference, John McDonnell announced new proposals giving workers a small ownership stake in the companies they work for, thereby also entitling them to a small proportion of dividend payouts.

Labour’s proposals are based on the principle that when a company does well and generates a profit and pays a dividend, it should share a tiny proportion with the workers responsible for its success. No normal person would object to this. Given the UK’s well documented problems with pay stagnation, low productivity and huge pay gaps between those at the top and everybody else, proposals that put a bit more money in workers’ pockets, and link a small proportion of their pay to company performance, might seem exactly what we need.

Yet the announcement was greeted with total hysteria. Business lobbyists like the Taxpayers Alliance and British Chamber of Commerce were quick to deem the proposals “control of industry by the backdoor” and “an unprecedented over reach” that would scare off the investment that Britain needs.

Their response amounts to a complete dismissal of the interests of wider society in a country where the typical CEO is paid 160 times the average UK worker – and a pretty dim view of the values and purpose of UK business. To understand why, it’s worth considering how little is actually being asked of businesses through these proposals. Under Labour’s plans, they would transfer a tiny amount of equity (1% per year) to an ‘inclusive ownership fund’ run on behalf of workers, until the fund owns 10% of total equity. In other words, workers will have some ownership of the company (and therefore some say in the governance) but not a controlling stake. They would take a small share of dividends, but other shareholders would still get at least 90%.

At a fringe organised by Warwick University at the Labour conference, one CBI representative admitted that over 80% of companies already make some form of share award to some of their workers. So Labour is merely suggesting that business do a bit more than it is already doing, bringing the laggards up to the standard of best practice and ensuring that all workers at all companies benefit to a meaningful extent.

Ordinary people will understandably be worried by threats to jobs and investments. But what critics of Labour’s plans actually mean is that if big businesses are asked to share a small proportion of the fruits of their success with workers – in line with the wishes of wider society – they will simply up sticks and move to a country with a government that is less wiling to stand up to their demands. This would be an extraordinary statement of disregard for basic fairness and public opinion. Indeed, there are strong grounds to think it is just bravado aimed at encouraging Labour to weaken its position. Worker voice in corporate governance structures is a pillar of business practice in almost every other country in Europe, so bringing the UK up to the level of Germany or Sweden is hardly controversial. Mandating a share of dividends to workers effectively redistributes from one set of shareholders (existing investors) to another (workers), so ought to be of no relevance to company boards who are supposed to be impartial to the interests of different shareholder groups.

It therefore seems unlikely that Labour’s proposals will undermine business investment on a meaningful scale. To accept the alternative argument of the Taxpayers Alliance and their ilk is to believe that our biggest companies are run by such greedy and venal individuals, that they will do whatever is necessary – including restructuring their entire business model or re-locating major operations – just to keep every penny of their profits for executives and wealthy investors, rather than sharing a tiny proportion with their workers.

This is quite an ironic position to be held by groups who frequently accuse the left of being ‘anti-business.’

  • William MacDougall

    It’s a mad and dangerous idea. Reducing returns to investment by 10% would lead to less investment, less growth, and less employment. Stealing 10% of the assets of British listed companies to give them to “workers” would merely lead to firms listing elsewhere, unless you prohibit foreign firms from employing people in Britain, hardly a good move for employment. And tying workers’ wealth and incomes to the success of their employers would increase their dependence on that employer, increasing their economic risks.

    • Alasdair Macdonald

      Why are returns on investment of more than 10% desirable? It seems to me that it is greed. ‘Maximising’ returns (or ‘shareholder value’) is usually achieved not be producing better products and increasing sales, but by depressing wages, reducing working conditions, asset stripping, mendaciously increasing ‘share prices’ so that those in very senior positions can earn large bonuses. Much of investment is ‘rent-seeking’.

      I am not against investment and over the centuries there have been many ethical investing approaches, which have encouraged wide share ownership and modest, but reasonable returns. Employees, who are the people who actually produce the goods and services should be given a proper stake in the equity and be paid a good wage, which is not dissimilar from those in the enterprise who have greater responsibility.

      The myth about ‘civil servants’ not being able ‘to pick winners’ is a myth. It has been public investment which has provided the seed corn which the privatisers flogged off, just as they did with natural monopolies like water (in England and Wales).

      There are many examples in the ‘first world’ where there is substantial public ownership and employee share ownership, with representation at board level via trade unions and other elected representatives.

      • William MacDougall

        I wasn’t and the Labour Party isn’t talking about profits above 10%. They are talking about a 10% cut in returns, so 5% becomes 4.5%, which would indeed affect activity on the margin.

        But when there are returns above 10% it normally means there is some anomaly that should be corrected, and the high returns stimulate fast correction and thus are good.

        The role of Greed is another question. You can have an economic system that depends on people not being greedy, e.g. Socialism, or you can have one that recognises that people in fact are greedy and nonetheless obtains good results. Capitalism doesn’t depend on greed or say it’s good, it just is a system that can work even when people are greedy.

        As for civil servants picking winners, there are countless examples – such as Concorde – of they’re being a dismal failure. Yes, capitalists make mistakes too, but it’s with their money not ours.

        • Alasdair Macdonald

          Thank you for the reply.

          I think your second paragraph is just glossing over the problem and is a variation of ‘the perfect market’ myth. There is, indeed, an ‘anomaly’ – the people who are producing the goods and service are not receiving a fair return for their input and have a powerlessly precarious position within the company. The ‘fast correction’ is usually the extraction of large amounts of capital and transferring them overseas, without investing to grow the business. The ‘fast correction’ is usually lay-offs, outsourcing and transfers of the business to different countries.

          With regard to ‘Capitalism’ it is a human construct: it does not say anything. It is a system operated by people and many of the most powerful people within it routinely rig the market in their favour. They are, indeed, ‘greedy’, and they do say it is ‘good’, because it is good for them and they have little sentiment for others.

          Much of the preliminary and exploratory work for processes are usually done in government funded research facilities, either stand-alone or in universities, such as Glasgow University’s Science Park just along the road from where I am now of Ninewells Hospital in Dundee (an NHS Scotland facility) There are contributions from businesses, often quite substantial. However, it is the public purse which is bearing the bulk of the risk and it is also the public purse which has paid for the education of the workforce, the transport and utilities infrastructure. When ideas become viable, there are then spin-off companies from these university research facilities. A good example is the computer gaming industry around Abertay University in Dundee.

          Finally, some private entrepreneurs are indeed gambling with their own money as my father often did, fruitlessly, on nags at Ayr or Ascot or Kempton Park! However, as we saw with the financial crash, it was the public purse which bore the cost. As Mr Mervyn King warned with his euphemistic phrase, moral hazard, the speculators had their hand around the government’s testicles and were threatening to squeeze.

          • 2simple

            The proposal from the Labour party is that companies hand over 10% of their shares if they have over 250 employees, and should the company be profitable then any dividends will be shared with the workers. The idea is to win votes. The problems are two fold. If the company has to raise money it will become more expensive. Normally you could go to your shareholders, but it would be unreasonable I think to ask your employers to pay towards a capital raise, at the same time you could not reduce their shareholding. The net effect is that it will cost British companies 10% more to raise capital to expand. Why would shareholders contribute towards that request and not a foreign companies request. Secondly any company that has 249 employees is unlikely to expand, the owners would loose 10% of the value, that is not 10% of the profit, dividends average about 3.5% so if you do the maths with a company worth £100m the Owners would be handing over £10m when they expanded. Assuming returns increased by 10% following the increase in the number of employees then they would gain nothing. British companies would be at a disadvantage to overseas companies and presumably wages would need to fall proportionately A more sensible idea would have been to increase corporation tax by 10% and used that to buy shares of both British and foreign companies. Those shares could then be used to support workers rights.

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