{"id":1776,"date":"2019-11-05T13:17:33","date_gmt":"2019-11-05T12:17:33","guid":{"rendered":"http:\/\/blogs.cardiff.ac.uk\/business-school\/?p=1776"},"modified":"2019-11-04T13:41:29","modified_gmt":"2019-11-04T12:41:29","slug":"make-capital-work-for-us","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/business-school\/make-capital-work-for-us\/","title":{"rendered":"Make capital work for us!"},"content":{"rendered":"\n
\"\"
Employee-owned or controlled firms in the UK have developed into a vibrant and growing community. <\/figcaption><\/figure>\n\n\n\n

In our latest post, Dr Jonathan Preminger and Dr Guy Major make a real-world proposal for gradual transformation of the economy. They argue that employee ownership is crucial for economic democracy, in a climate where worker-controlled firms can struggle to raise needed funds.<\/h3>\n\n\n\n

In response to growing popular discontent with traditional\nshareholder capitalism that works \u201cfor the few\u201d, we increasingly hear calls\nacross the political spectrum for widening the range of organisational forms,\nincluding ownership structures.<\/p>\n\n\n\n

One such form is employee ownership and\/or control. Indeed,\nemployee-owned or controlled firms in the UK have developed into a vibrant and\ngrowing community, which aspires to be an integral part of existing\ninstitutions and has gained mainstream political support. Moreover, employee\nownership has been given a boost with the 2014 Finance Act, which granted tax\nbreaks to founder-owners selling their firm to their employees, and tax benefits\nto the employee-owners too.<\/p>\n\n\n\n

However, firms with this ownership structure tend to rely on\nrepayable loans for raising capital (with interest rates not dependent on the\nsuccess of the firm), and are less successful at attracting external,\nnon-repayable, explicitly risk-sharing equity investment. In what follows, we\nwould like to propose a mechanism that locks worker interests in a partially\nemployee-owned firm with those of investors, while retaining worker control\nover the firm. This, we believe, would create a solid base of mutual interests\nbetween the worker-owners, who can run the firm democratically, and external\ninvestors (also owners, but non-controlling), thus making investment in\nemployee-controlled firms a more attractive proposition.<\/p>\n\n\n\n

Moreover, firms with higher levels of democracy tend to take\nthe interests of a broader range of stakeholders into consideration (including\nissues of ethics, social justice, and environment). Thus, by facilitating the\nretention of workplace democracy, this mechanism is also a step towards\ncompelling capital to work for society.<\/p>\n\n\n\n

The problem<\/h3>\n\n\n\n

The standard shareholding structure frequently decouples\nownership and control and exacerbates the democratic deficit in capitalist\nfirms. While employee ownership can be a limited model, merely granting a\ncertain level of ownership to employees, in the UK it usually includes\naspirations to some level of workplace democracy and employee control of the\nenterprise. It can, therefore, go a long way towards countering the\ndeficiencies of shareholder capitalism. Moreover, there is a growing body of\nevidence showing the substantial benefits of employee ownership for firms\u2019\nsustainability, resilience, productivity, income and growth, and for the job\nsatisfaction and health of their workers. These improvements stem from the\ncombination of profit sharing and the flattening of workplace hierarchies,\nalong with some form of participatory or democratic management and \u201cownership\nculture\u201d.<\/p>\n\n\n\n

However, worker-controlled firms have tended to suffer from\nunderinvestment. Democratic firms struggle to attract external capital because\nthey are seen as too risky for both workers and investors, and as not providing\nadequate returns on capital. Clearly, there are fewer opportunities for capital\nto extract value from labour in worker-controlled firms, but in addition, such\nfirms are frequently ideologically hostile to seeking external capital, and\nstructure themselves to prevent it. As a result, these firms often struggle to\nachieve an optimal mix of capital and labour to maximise productivity,\ninnovation and growth, and can be outcompeted by \u201cstandard\u201d capitalist firms.<\/p>\n\n\n\n

A number of organisations specialise in lending to\nemployee-owned firms. However, such debt finance absorbs or shares far less\nrisk than equity finance, due to the need to pay (generally) fixed or\nexternally determined interest \u2013 as opposed to variable or discretionary\ndividends dependent on the firm\u2019s success. The requirement to pay back or\nrefinance the loan amount itself (the principal) is an additional serious\ndrawback not suffered by equity finance.<\/p>\n\n\n\n

Our proposal<\/h3>\n\n\n\n

We propose a mechanism that overcomes the underinvestment\nproblem of democratic worker-controlled firms by locking together the interests\nof workers and investors. The firm\u2019s \u2018value-added\u2019 (sales minus non-labour\ncosts) is split equally among a number of \u2018slices of the cake\u2019. Each worker\ngets a pre-agreed number of slices, effectively their variable pay, and each\nshare gets one slice as its dividend. Workers would have an incentive to maximise\nvalue-added to increase the amount split among the \u2018slices of the cake,\u2019 thus\nincreasing their earnings. But in doing this, they would also be maximising\nearnings per share, hence dividends, and would thus automatically pursue and\nprotect the interests of the investors. This would apply over the longer term\ntoo, because workers would also aim for job security and growth.<\/p>\n\n\n\n

Shares would be non-voting under normal conditions, and the\nfirm could then be governed democratically, by one-worker one-vote. Thus the\nfirm could be democratically controlled by its workforce, yet investors\u2019\ninterests (long-term dividend and share value maximisation) would be ensured as\nan inherent, built-in part of the arrangement, by being tightly locked to the\nworkers\u2019 overall incomes and prospects.<\/p>\n\n\n\n

To reduce workers\u2019 income risk, the scheme can be modified\nto ensure each worker takes home a minimum \u2018base wage\u2019, a pre-agreed multiple\nof the national minimum wage (averaged across workers). What is shared between\nthe slices is then the \u2019surplus\u2019 remaining after the total base wages are\nsubtracted from the firm\u2019s value-added.*<\/p>\n\n\n\n

This surplus sharing mechanism is very flexible, and allows\nfor differential pay, as the allocation of the workers\u2019 slices between the\ndifferent workers can be decided democratically. Thus different workers could\nbe paid different numbers of surplus (profit) slices, reflecting skill levels,\netc., or according to other democratically-agreed criteria, so long as the\naverage number of slices per full-time equivalent worker is kept to the\npre-agreed number \u2013 or, more practically, within some pre-agreed range (so that\nworkers cannot undercut investor dividends by voting to pay themselves more, or\nto work fewer hours).<\/p>\n\n\n\n

Making capital work for us<\/h3>\n\n\n\n

In short, we suggest that this surplus-sharing mechanism can\nsolve the underinvestment problem often experienced by worker-controlled firms,\nas it opens up a route for external, non-controlling but risk-sharing \u2018ethical\u2019\nequity investment into such firms. It thus enables investment while retaining\nworker control. In this, it counters the widespread assumption that it is\nimpossible to have both workplace democracy and sufficient capital investment.<\/p>\n\n\n\n

Our proposal, then, is a modest step towards replacing\nstandard shareholder capitalism with economic democracy while at the same time\nretaining the benefits of the decentralised economic decision-making and\nresource allocation provided by trade and markets. Bringing democracy into the\nhands of a firm\u2019s employees is potentially game-changing. If we can achieve\nthat, yet still harness the power of capital, we have made a real step towards\nmaking capital work for us, rather than us working for capital.<\/p>\n\n\n\n

We have considered many other details about this simple yet\nvery flexible mechanism, but we do not have space to elaborate on these here.\nHowever, we would be happy to discuss them with anyone who is interested.\nIndeed, our hope in presenting this proposal is that it will open debate and\nencourage further thought into how to reform our economic frameworks and\nsystems so that they benefit the widest possible spread of people, based on\ndirect worker control and participatory, economic democracy. In a world in\nwhich old imagined \u201calternatives to capitalism\u201d have lost their lustre, it is\nthese incremental steps that will counter the excesses of the current dominant\nform of hyper-competitive, wealth-concentrating shareholder capitalism.<\/p>\n\n\n\n

*Thus: each worker gets a pre-agreed number of slices (k) as\ntheir variable pay (averaged across all workers). So the total number of slices\nis equal to the (number of shares) + k \u00d7 (the number of full-time equivalent\nworkers). If there are S shares and W workers, there will be (S + kW) slices,\nso for value-added \u00a3 V, each slice will be \u00a3 V\/(S + kW).<\/p>\n\n\n\n

Dr Jonathan Preminger<\/strong><\/a> <\/strong>is Lecturer\nin Work and Labour Relations at Cardiff Business School.<\/strong><\/strong><\/p>\n\n\n\n

Dr Guy Major<\/strong><\/a> is a Senior\nLecturer in the School of Biosciences at Cardiff University.<\/strong><\/strong><\/p>\n\n\n\n

This article was written collaboratively and originally published on Open Democracy<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"Employee-owned or controlled firms in the UK have developed into a vibrant and growing community. In our latest post, Dr Jonathan Preminger and Dr Guy Major make a real-world proposal […]","protected":false},"author":1654,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[547],"tags":[1159,449,368,28,100,239,1161,1158,115,257,12,244,301,1162,243,37,411,366,128,188,642,1164,95,168,109,980,1160,1165,32],"class_list":["post-1776","post","type-post","status-publish","format-standard","hentry","category-uk-economy","tag-2014-finance-act","tag-capital","tag-capitalism","tag-cardiff-business-school","tag-cardiff-university","tag-community","tag-debt","tag-democracy","tag-economy","tag-environment","tag-ethics","tag-finance","tag-funding","tag-growth","tag-income","tag-innovation","tag-investment","tag-labour","tag-management","tag-organisation","tag-ownership","tag-pay","tag-policy","tag-politics","tag-productivity","tag-school-of-biosciences","tag-social-justice","tag-value","tag-workers"],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/paOfaS-sE","meta_box":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/1776","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/users\/1654"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/comments?post=1776"}],"version-history":[{"count":2,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/1776\/revisions"}],"predecessor-version":[{"id":1780,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/1776\/revisions\/1780"}],"wp:attachment":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/media?parent=1776"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/categories?post=1776"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/tags?post=1776"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}