Will employee ownership work for you?

Ian Urquhart, partner at John Lewis Partnership, joined other business professionals at the South Wales Chamber Business Breakfast on Employee Ownership on 4 March.

The event, sponsored by Social Business Wales, looked at the specific nature of employee-owned businesses.

Mr Urquhart – business manager at the Cardiff store who has been working for John Lewis since 2009 – took the opportunity to highlight the benefits of the employee ownership model.

The history of John Lewis

Founded over 150 years ago by a Victorian draper, it made the transition to employee ownership in 1929. Spedan Lewis, son of founder John Lewis, believed that by sharing profits with employees the business would become even more successful. This principle still guides John Lewis Partnership, said Mr Urquhart.

“In the UK, we embrace the public limited company model more than in almost any other developed country,” her said. “Yet there is evidence that employee ownership can deliver increased profitability and greater levels of innovation than other forms of business ownership. Employee-owned businesses are more resilient during economic downturns. They have more engaged employees who benefit from higher levels of wellbeing and experience less stress,” he said.

Mr Urquhart described employee ownership as “the bedrock” on which the business’s commercial success was based. He said the partnership was balancing the “happiness of partners” with the commercial decisions to remain competitive. In 2013 the partnership stripped a whole layer of management from its department stores. In 2015 its 11% bonus was at a 12 year low.

Advantages of employee ownership:

Employee owned businesses cannot be sold

“Companies like the John Lewis Partnership cannot be sold, which means that we remain focused on the lasting success of the business. Because we have no option to sell our shares and invest elsewhere, each of our 90,000 partners at John Lewis and Waitrose has an incentive to throw all their energy and passion into making this year better than the last,” he said. “In a highly competitive retail environment, that gives us a powerful advantage.”

This makes the business invest for the long term. For instance, 15 years ago when it chose to move online, John Lewis lost several million pounds in the first few years. But online now accounts for over 40% of John Lewis sales.

Staff are more engaged and productive

Another advantage, says Mr Urquhart, is the higher level of engagement among staff members. Absenteeism at John Lewis is at 3.4%, less than half the retail sector average. The average length of service is seven years while 81% of partners rate the Partnership as a great place to work.

Employee ownership also leads to more resilience, said Mr Urquhart. “Our partners will do everything they can to make the Partnership work. As co-owners in the business, we strive every day to make our business operate on an ever-more sustainable and responsible basis.

“The last few years in retail have been ferociously competitive, in which household names like Woolworths, Phones 4 U and Comet have closed. Of course, we’re not immune from wider market pressures, but in this competitive landscape we’ve not only survived, we’ve thrived.”

Stronger links to communities

Another advantage is the business’s strong links with local communities, through its 90,000 partners.

“We invest around 4% of our pre-tax profit annually – £13m last year – in charitable causes, and have volunteered more than 278,000 hours. In Cardiff, we’ve partnered with a range of organisations, from Age Cymru through to the Children’s Cancer Charity, Latch. We’ve also provided a community room in the branch, where local groups can meet, free of charge,” said Mr Urquhart.

Increased level of trust

Trust is a key driver for customer loyalty, said Mr Urquhart. Employee ownership gives the business more stability, which, in turn, leads to better relationships with suppliers.

“There are many fledgling companies with whom we’ve built long-term relationships, which have grown into international businesses in their own right. For instance, based in Powys, Cradoc’s crackers started supplying two Waitrose branches in 2012, and now supply 180 branches nationwide. The same can be said of brands like Stoats Porridge, Mo’s Cookie Dough, and the Bristol Beer Factory.”

Barriers to employee ownership:

While employee ownership is a successful business model, it continues to face a number of challenges, said Mr Urquhart. Addressing the audience in Cardiff, he pointed out the key barriers faced by employee-owned businesses.

Owners sell their business before it has reached its full potential

“For employee ownership to thrive, we need to address perceptions of what it means to be a business owner. Of course there is a right to sell – but there’s also a responsibility to nurture, develop and sustain a business, so employees can thrive long-term.

Mr Urquhart looked to John Lewis as an inspiring example. “Most entrepreneurs will have made a personal commitment to their business for many years and – like Spedan Lewis 90 years ago, will have built a community of people – friends, business partners, suppliers – with which they will want to leave a legacy.

“Successful business owners are entrepreneurial by spirit, far-sighted, investing long-term when they set up. If we can encourage the same spirit when they come to exit, we’ll create a whole generation of businesses to benefit the economy for decades to come.”

When previously, there were penalties to becoming employee owned, now there are incentives

Lack of awareness

“Employee ownership is often confused with not for profit. Legal and financial advisers, and business owners are often unaware of the commercial benefits it can offer. When it comes to succession planning, family businesses often aren’t aware of the financial incentives to sell the business to employees. Banks can sometimes take a restrictive view when it comes to lending – although thankfully times are changing,” he said.

Also, the employee-owned model might not suit everyone, he warned.

Positive signs

In spite of these challenges, employee ownership is growing at a rate of 10% per year across the UK – helped by changes to government policy.

“When previously, there were penalties to becoming employee owned, now there are incentives,” said Mr Urquhart.

“For instance, businesses which convert a majority of shares to an Employee Ownership Trust benefit from Capital Gains and Inheritance Tax exemptions. Bonuses to staff, up to £3,600, can be made income tax free.

“These changes are making a big difference, and employee ownership is becoming a more viable and attractive option as business owners consider succession.”