The case for employee ownership in the United Kingdom
Submitting Institution
City University, LondonUnit of Assessment
Business and Management StudiesSummary Impact Type
PoliticalResearch Subject Area(s)
Commerce, Management, Tourism and Services: Business and Management
Psychology and Cognitive Sciences: Psychology
Summary of the impact
Research on employee ownership (EO) conducted by Professors Lampel and
Bhalla at City
University London has made a substantial contribution to the evidence base
used by the UK
government to formulate and introduce policies aimed at boosting employee
ownership. Evidence
on the resilience and flexibility of EO firms, as well as the barriers
that they confront, played an
important role in the launch on 4th July 2013 of a new
government policy to make employee
ownership more accessible, including the injection of £50M annually to
support EO models.
Greater adoption of the EO model in the private sector benefits employees
and employers and
improves the wider economy. The evidence provided by this research has
also led to a greater
focus on EO in the public sector, with government policies now being
formulated to encourage
greater adoption of EO, specifically in the areas of health and social
care, benefiting additionally
the recipients of services and their families.
Underpinning research
In the past decade, research in the UK has shown that employees who have
a stake in the
organisation they are employed by have greater commitment to quality and
are more flexible in
responding to the needs of the organisation. Joseph Lampel and Ajay Bhalla
at Cass Business
School, City University London (Professors at City since 2002 and 2001
respectively), have been
researching the impacts of ownership structure on decision-making and firm
performance since
2007. In 2008, they were invited by the John Lewis Partnership to submit a
proposal to study
employee ownership in the UK. After successive competitive rounds, Lampel,
Bhalla and Jha
(Northumbria University, former Cass PhD student) were awarded the study.
Lampel and Bhalla's conceptual approach was based on their preliminary
research, which
indicated that employee-owned businesses (EOBs) face challenges as they
grow in size and
complexity (Lampel and Bhalla, 2010). EOBs are defined as firms which are
substantially or
wholly-owned by employees; their stake underpins the organisational
structures that ensure
employee engagement. The researchers posited that the governance model
that confers
advantage in a small EO firm may come under pressure as the firm exercises
its natural propensity
to grow. As EOBs scale up their operations, they introduce more managerial
controls that reduce
the advantages of employee involvement and participation. The increasing
size puts a greater
distance between front-line employees and senior managers, making it more
difficult to maintain
inclusive decision-making without sacrificing the speed and flexibility
that is essential for high
performance in today's dynamic commercial environments.
The Lampel and Bhalla study sought to alert policy-makers and managers of
EOBs to these
issues. The study examined how EOBs deal with the issues of size and
growth and addressed the
following questions. (i) As EOBs pursue growth, how do they perform
relative to non-EOBs? (ii)
How do EOBs retain the employee-ownership advantage as they scale up? And
(iii) how well do
EOBs perform during an economic downturn relative to their performance
during a period of
economic growth and relative to non-EOBs?
To answer these questions, company financial and commercial data were
collected and interviews
that focused on key issues of relevance to EOBs were conducted. This was
of particular salience
when difficult economic circumstances tested the employee-ownership model
(Lampel and Bhalla,
2012a). The findings of the study therefore concern not only the
challenges facing EOBs as they
grow in size and complexity, but also how employee ownership performs as a
governance model
that is both fairer to employees and more resilient.
The key findings showed that the EO model offers particular advantages to
small and medium-
sized businesses with fewer than 75 employees. EOBs experienced greater
employment growth
than their non-employee-owned counterparts during the period of strong
economic growth from
2005 to 2008. After the recession began during 2008/09, this rate
continued, with EOBs increasing
employment numbers by more than 12.9% compared with 2.7% in non-EOBs. This
reflects the
common belief held by EOBs that staff recruitment and retention are
crucial in economic recovery:
nearly three-quarters of EOBs strongly believe that employee commitment is
a central advantage
of the employee-owned model (Lampel and Bhalla, 2012b). More importantly,
the profitability of
EOBs correlates with giving employees greater autonomy in decision-making.
Of particular practical importance are the researchers' findings
indicating that EOBs that adapt
their organisational structures and empower their front-line employees are
more likely to sustain
their performance as the increase in size. EOBs are more resilient to the
changing economic
conditions: their performance is more stable over business cycles and
displays less sales
variability.
Finally, the EO model confers particular advantages in knowledge
intensive sectors such as
specialist engineering and architectural services.
References to the research
Publications 1 and 2 are practitioner-oriented research outputs which
employ robust research
methodology but are written to engage practitioners and to be directly
usable by them. The
Association of Business School Journal Quality Guide lists European
Business Review and
European Management Journal as 2* journals.
Details of the impact
The 2010 report caught the Government's attention and featured in a
discussion in the House of
Lords on 25th February 2010 [1]. The striking vulnerability of
many corporate and private
businesses during the recent economic downturn gave rise to keen
government interest in the EO
model as an alternative to the reliance of the UK economy on private and
shareholder — ownership
models. This interest extended to the discussion of EO as a promising
alternative to the
privatisation of state-owned and not-for-profit public services. Scotland
and Wales, which have
proportionally more small firms, cooperatives and family-owned businesses
than England, are
moving in the same direction. `Making a positive difference to public
services', a 2011 policy paper
by Cooperative Development Scotland (CDS), refers to evidence from the
Lampel/Bhalla report to
make the case for the benefits of the EO business model. CDS is a premier
policy and business
advisory body supporting the development of cooperative and employee-owned
enterprises across
Scotland [2]. The Wales Cooperative Centre, in a report by its Bevan
Foundation, also makes a
case for the benefits of cooperatives, citing evidence from the
Lampel/Bhalla study [3].
The coalition government has continued the previous Labour government's
commitment to the
development of social enterprises to deliver health and social care as
part of a programme of
public service reform. A 2010 Department of Health report sought to
encourage health care
providers to consider EO and the development of mutuals, with the aim of
creating the largest and
most vibrant social enterprise sector in the world. In a report titled `Social
Enterprise in Health Care
— Promoting Organisational Autonomy and Staff Engagement' (August
2011), the King's Fund, a
premier charity in the health and social care sector, recognised that the
new policy environment
presented both opportunities for social enterprises to play a significant
role as providers of health
care and several challenges and risks which meant that they would need to
develop effective and
sustainable business models [4]. The report, which contains key
recommendations for government
on reforming the health and social care sectors along the lines of the EO
model, cites the
Lampel/Bhalla findings extensively to support its arguments.
In a speech at the Mansion House on responsible capitalism on 16th
January 2012, the Deputy
Prime Minister, the Rt Hon Nick Clegg MP, focused attention on employee
ownership, citing the
Cass study: "Lower absenteeism, less staff turnover, lower production
costs. In general, higher
productivity and higher wages. [EO firms] weathered the economic
downturn better than other
companies"[5].
In February 2012, the Department of Business, Innovation and Skills (BIS)
initiated the Nuttall
Review of Employee Ownership to review promoting the benefits of employee
ownership in the
private sector and invited Lampel and Bhalla to contribute to the review
and conduct further
analysis on the long and short-term benefits and consequences of the
employee ownership model.
This research, conducted over a four-month period, provided further
evidence to support the EO
model [6] [7]. On 4th June 2012, the BIS study: 'The
Employee Ownership Advantage: Benefits and
Consequences' was released in conjunction with 'Sharing Success:
the Nuttall Review of
Employee Ownership'. Both studies were presented at the Summit for
Employee Ownership held
on 4th July 2012, which opened with a keynote speech by the
Deputy Prime Minister and at which
Lampel presented the Cass research findings. Other speakers included Sir
Charlie Mayfield,
Chairman of the John Lewis Partnership, the Rt Hon Francis Maude MP and
the Rt Hon Norman
Lamb MP. The two reports and this event generated a commitment from the
Government and a
wide range of stakeholders to take forward the Nuttall recommendations for
increasing employee
ownership and removing barriers to it occurring. The Government published
its formal response,
'Next steps for employee ownership`, in October 2012.
Another policy perspective recommending and laying out a template for the
public sector's move
towards EO can be found in the BIS position paper `Mutualisation of the
Post Office'. This report,
published in September 2011, cited the central finding of the
Lampel/Bhalla research in making a
case for `mutualisation' or employee ownership. The Government's response
to the consultation
published in July 2012 also cited the Cass research in relation to
sustainability of EO firms through
economic downturns and the potential for the engagement of staff to
improve the Post Office's
financial performance under the proposed new model [8].
Lampel and Bhalla were subsequently invited to join the Government's
Implementation Group for
Employee Ownership [9] which was formed in November 2012 with a remit to
advise the Minister
of State on the implementation of EO policy. The Group is chaired by Jo
Swinson MP, Minister for
Employment Relations and Consumer Affairs, meets bi-monthly and brings
together other
government departments, the business and professional services sector and
the EO sector. The
recommendations of the group have informed recent policy initiatives
launched to promote
employee ownership. For example, on 4th July 2013 the
Government announced plans to make
£50M available annually to encourage EO in the UK and launched a
consultation on providing two
new forms of tax relief [10].
The research also informed the Liberal Democrat policy 106 on employee
ownership [11]. On 27th
March 2013, the Deputy Prime Minister launched a consultation on 'a relief
on tax on bonuses paid
through benefit trusts, where a significant chunk of the business is owned
by employees`. In his
speech announcing the consultation, Nick Clegg said: "Employee
ownership works because it so
neatly aligns incentives and puts the workers at the heart of the
business.... The Cass Business
School concluded in 2010 that employee-owned businesses are between nine
and 19% more
productive than traditionally structured companies. So not only does
employee ownership help
build a more motivated, more committed workforce, but it improves the
bottom line too"[12].
The research has received extensive media coverage which has raised
general awareness of the
benefits of employee ownership [13]. Print media coverage has included
articles in the Financial
Times and The Economist. Following the Deputy Prime
Minister's Mansion House speech, Bhalla
was invited to present the key findings on the BBC News on 18th
January 2012. The study was
discussed at length in the BBC Newsnight programme on 25th
May 2012, during which, in
response to a question from Emily Maitlis on what British businesses can
learn from the
partnership model, Norman Lamb, Minister for Employment Relations, said: "Cass
Business
School demonstrated that they [Employee-owned firms] have been more
resilient through difficult
economic times and they have been more profitable. So this is a powerful
concept and the key is
how we can unlock the potential of this for use in the rest of the
economy." On 17th July 2012, the
research was acknowledged in a discussion about mandating all companies to
have employees on
boards during a House of Commons Debate on Enterprise and Regulatory
Reform Bill [14].
In March 2013, the Deputy Prime Minister backed a call from the Employee
Ownership Association
for a threefold increase in the value of EO firms to UK GDP (currently
standing at 3% of GDP) by
2020. The Deputy Prime Minister said: "Through tough economic times,
these firms can outperform
others...from April next year we will inject £50M into the sector,
making it easier for staff to take
over the running of companies and for new firms to set up under EO
models" [12]. On 30th April
2013, while outlining changes to over-burdensome share buy-back rules
aimed at boosting direct
employee ownership and cutting red tape, Jo Swinson MP, Minister for
Employment Relations and
Consumer Affairs, again cited the Bhalla/Lampel report to support the case
for employee
ownership.
The Cass research has had a substantial impact on government policy by
providing evidence that
has enabled policy-makers to argue the case for EOBs as an attractive
organisation model. The
key beneficiaries of these developments are: (i) companies, with the
potential for increased
flexibility in the workforce leading to new initiatives and increased
productivity and staff retention;
(ii) employees, both financially through the sharing of profits and
through greater job satisfaction
and wellbeing; and (iii) communities which benefit through the quality of
services delivered (for
example, EO firms such as Waitrose are well regarded for their charitable
giving activities). This is
of particular significance at a time when the knowledge and
skills-intensive sectors are critical to
long-term economic sustainability. It is also significant for employment
in sectors such as health
and social care where those in need of care benefit because care
professionals may have a
stronger sense of commitment when they have a stake in the health or care
organisation.
Sources to corroborate the impact
- House of Lords Debate, `Employee-owned
Organisations', 25th February 2010, Column 1093,
Hansard.
- Scottish Enterprise (2010). Making
a positive difference to public services: Co-operatives and employee
owned businesses in public services delivery,
A report by Cooperative Development
Scotland.
- Wales Co-operative Centre (2012). Co-operatives
in the Welsh Economy report Published: 9th
January.
- Addicott, Rachael (2011). Social
enterprise in health care, The King's Fund, Published 4th
August.
- Rt Hon Nick Clegg MP Speech
on Responsible Capitalism. 16th January 2012.
- Department of Business Innovation and Skills (2012). Nuttall
review of employee ownership,
Ref: BIS/12/933, Published: 4th July.
- Lampel, Joseph; Bhalla, Ajay and Jha, Pushkar (2012). Employee
Ownership Advantage: Benefits and Consequences.
Department of Business, Innovation and Skills. Published: July.
- Department of Business Innovation and Skills (2011). Consultation:
Mutualisation of the Post Office,
(Consultation ran from 19th September to 12th
December 2011).
- Department for Business, Innovation & Skills and HM Treasury
(2013). UK
Government Employee Ownership Implementation Group
web site. Last updated 4th July.
- Department for Business, Innovation & Skills (2013). Government
measures boost direct employee ownership,
Press Release: 30th April.
- Liberal Democrats (2012). Mutuals,
Employee Ownership, and Workplace Democracy, Policy
Paper 106.
- Wintour, Patrick (2013). Nick
Clegg proposes tax breaks on bonuses at employee-owned firms,
The Guardian, Wednesday 27th March.
- Groom, Brian (2012). Expansion:
Chief Executives express caution about pace of growth in the sector.
Financial Times, 2nd July
- House of Commons Debate (2012). Enterprise
and Regulatory Reform Bill, 17th July, Column:
689, Hansard.