British firms can be saved by employee ownership, says Deputy Prime Minister

Employee ownership was highlighted as the saviour of British businesses by the Government, alongside proposals to establish a FTSE Index of the top employee owned organisations.

Employee ownership was highlighted as the saviour of British businesses by the Government, alongside proposals to establish a FTSE Index of the top employee owned organisations.

At the summit on Employee Ownership in London on Wednesday, Deputy Prime Minister Nick Clegg revealed a number of strategies to raise awareness of mutual and co-operative models from a number of recommendations put forward by employee ownership expert Graeme Nuttall, who has been charged by the Government to review the sector.

The Liberal Democrats Leader announced the formation of an Institute for Employee Ownership; that the Government will look at a new ‘right to request’ a transfer to a mutual model for employees; and a new set of ‘DIY packs’ will be published for companies looking to adopt an employee ownership structure for its business.

Also announced was a new FTSE Employee Share Ownership Index, which will highlight the performance of employee owned businesses that consistently outperform the FTSE Index of shareholder owned companies.

This will build upon the Employee Ownership Index, which is compiled by law firm Field Fisher Waterhouse and celebrated its 20th birthday on Tuesday by announcing the Index has risen by 648% since its inception. In monetary terms, an investment of £100 in January 1992 would equate to £648 today, while the same investment in the FTSE All-Share Index would be worth only £245.

EOI monitors share prices of UK public companies quoted on the London Stock Exchange and AIM where 10% or more of its issued share capital is held by or on behalf of employees. On average, employee owned organisations have performed 10% better each year compared to shareholder owned companies.

The new Index will highlight some of the "key benefits of encouraging employees to take an active interest in the future success of the companies in which they work", according to Xavier Rolet, Chief Executive Officer, London Stock Exchange Group. It will also help raise awareness of how significant employee equity ownership can be advantageous for both companies and employees.

At the Mansion House event in the City of London, the Deputy Prime Minister  revealed new figures on the employee owned business sector, which have been collated by Co-operatives UK. The figures show the UK employee-owned sector has grown at a rate of 1.1 per cent, compared to 0.7% for the economy as a whole. As such, the growth rate for employee owned firms is over 50% higher than the rest of the economy.

During the event, Mr Clegg drew parallels with the Barclays interest rate scandal this week by saying that it is a timely reminder the economy needs an injection of responsibility; greater checks on unaccountable power; power that should be in more hands.

He said: “It’s not enough to talk about a new kind of capitalism: more balanced, more sustainable, fairer. We need to roll up our sleeves and build it and that is what today is about. Yes, there will always be the immediate crises to deal with. As we meet here, the turmoil continues in the European financial system. Governments around the world are fighting to keep their economies safe and their banks alive.

“The UK coalition government is taking the difficult steps necessary to cut the deficit we inherited, and to keep our economy out of the danger zone. But we must also ensure that we emerge from this treacherous period with an economy that is not only bigger, but better. We need economic repair — but we need economic reform too and that’s where greater employee ownership comes in.”

He added: “Shared ownership means shared responsibility. Shared ownership means shared endeavour. That’s why employee owned firms have higher productivity and growth rates. Shared ownership means shared rewards. That’s why we see employee owned firms with smaller gaps between the pay at the top and ordinary workers.

“And, in these difficult economic times, I am struck by the evidence that the success of employee owned firms is typically more sustainable success too. Employee ownership is not a panacea – of course not. But these firms have shown that they are better placed to weather economic storms. They demonstrate the resilience needed to ride out recessions. Because they are built on shared foundations, they are built to last.”

On the formation of an Institute for Employee Ownership, Mr Clegg welcome dthe “new voice for employee ownership”. He commented: “The institute will be independent and expert. Providing information and advice to managers and employees; lawyers and accountants; business schools, researchers and Ministers too. A professional body, offering accreditation to its members. A body whose very existence will give this business model more of a presence – a bit more swagger – in our corporate world.”

The Government will also be looking into the report’s recommendations that encourage employees and bosses to consider the employee ownership model, which include a right to request a stake in the business. Mr Clegg launched a call for evidence, which will ask the sector for its views before a summary in autumn on a number of issues such as ‘what are the correct minimum number of employees needed to make a request?’; ‘should they be allowed at any time, or just at a specific point in the business lifecycle, like succession?’; and ‘is the best way to achieve this a new statutory right, or some other mechanism?’.

On staff buyouts, Mr Clegg called on employees to help save “great British firms”. He said: “Many owners would be delighted to sell the firm to the employees who have helped them build it up, rather than to whichever stranger has the biggest cheque book. More staff buyouts to save great British firms. Fewer takeovers and more stakeovers, if you like. We need to make this a natural choice, rather than an unusual exception to the rule.” 

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