Labour's worker shares plan: HR experts react
Jenny Roper, September 25, 2018
Labour’s party conference announcement that it would force all large firms to give workers shares has received a mixed reaction from reward and corporate governance experts
In his main party conference speech shadow chancellor John McDonnell set out plans for "inclusive ownership funds". Under these plans the amount of share capital available to workers would be capped at £500, with the rest going into a fund to pay for public services and welfare.
The scheme would apply to companies with more than 250 workers, meaning 40% of the UK's private sector workforce – around 10.7 million people – would initially be covered by the scheme. Smaller firms could set up similar funds voluntarily, Labour stated.
The funds would be held and managed collectively, with a bar on selling or trading shareholdings. Workers' fund representatives would have voting rights in companies' decision-making processes in the same way as other shareholders.
Carolyn Fairbairn, director-general of the CBI, rejected the value of the proposals, however, stating that Labour was "wrong to assert that workers will be helped by these proposals in their current form".
She said: "Their diktat on employee share ownership will only encourage investors to pack their bags and will harm those who can least afford it. If investment falls so does productivity and pay."
Sandy Pepper, professor of management practice at the London School of Economics and Political Science (LSE), agreed with Fairbairn’s concerns. “This all adds to the huge uncertainty currently facing the corporate sector,” he told HR magazine. "The latest proposals… look more like a step towards nationalisation than employee share ownership.”
He added: “Workers will be eligible to receive dividends from these funds up to the value of £500 per employee per year. But here’s the rub: any dividends received on the inclusive ownership funds’ shares in excess of that amount will be appropriated by the government and used to pay for public services. That looks like a tax to me.”
Michael Littlechild, director of business ethics adviser GoodCorporation, said that in his opinion there are more valuable ways of creating fair responsible businesses.
"To build responsible corporates that work for shareholder and worker alike we have long been arguing for greater engagement between companies and their employees. While share ownership schemes recognise the contribution of the workforce to a company’s success, they do not necessarily provide the type of engagement needed to ensure that the views of the workforce are adequately considered," he told HR.
"To build an economy that works for everyone and address the UK’s poor productivity levels greater engagement and involvement of the workforce is needed," he continued. "This is more likely to be achieved through improved workforce consultation, possibly including employee representation at board level, than through a mandatory share scheme that does little to give employees a real voice."
Stephen Perkins, senior research fellow at The Global Policy Institute and co-author of Response to the greenpaper on corporate governance reform, said that “the devil is in the detail”, adding that the proposal “simply marks the start of a consultation”.
He told HR magazine: “While there may well be merit in political moves intended ‘permanently to rebalance the economy in favour of working people’, careful questioning of the underlying premise and proposed means to enact any change to avoid unintended adverse consequences will be needed.
“Which is where, borrowing from that pioneer of serious thinking about organisations Kurt Lewin, there may be ‘nothing as practical as a good theory’ to shape the consultative envelope here.”
Questions as yet unanswered on the proposals, said Perkins, include: “How will underlying decisions be made around distributions of shares and dividends, and who will lead them? How transparently? Will the ‘10% initiative’ interact with proposed appointments of worker reps to corporate boards? Will the process operate via intermediating institutions such as trade unions?”
He added that issues around incentivising productivity and being clear on worker versus employee rights could also be created if care is not taken. “What will other proposals trialed to address concerns about treatment of ‘gig economy’ workers mean in this regard?” he asked. “And will employment rights status automatically extend to collective capital dividends as well?”
Ben Spigel, senior lecturer in entrepreneurship at the University of Edinburgh Business School, countered that the plan could be part of the answer to the UK’s productivity crisis, however.
“The best evidence available supports the idea that employee ownership offers a small but statistically significant boost to productivity,” he said. “The UK is currently far behind both the US and its European counterparts in productivity: some version of John McDonnell’s scheme could form part of the solution.
“In addition, fears that an employee ownership plan will stifle innovation and investment are largely misplaced. We need to bear in mind that dynamic start-ups, the engines of growth, are too small to be affected by the plan initially and often reward employees who work in the business at the beginning with shares anyway.”
Professor of finance at London Business School Alex Edmans commented that employee shares are a fair way of ensuring success is evenly rewarded throughout a company, as long as executives are also rewarded through shares and not through separate long-term incentive plans (LTIPs) for example. But he added that he “would not advocate that this be mandatory”.
“It’s up to companies to decide what’s the best way to reward employees in their particular circumstance,” he told HR magazine. “In some cases shares may not be liquid, or employees would prefer the certainty of cash or a non-pecuniary reward such as training and superior working conditions.”
Other plans unveiled at the Labour party conference in Liverpool include worker representation on company boards and proposals to make employers provide up to 10 days' paid leave for victims of domestic violence.