The Deputy Prime Minister’s plans to encourage more John Lewis style companies will only get us so far. He needs to be more radical and consider greater worker participation within firms
I had the pleasure of hearing Nick Clegg live for the first time on Monday as he spoke at the CentreForum event about creating a more responsible capitalism – the new in-vogue topic for all self-respecting politicians. But how far did it take us?
Clegg mainly focused on incentives to more share ownership and a few bits and pieces about shareholders and company executives who turn up as non-executives on remuneration committees of other companies.
Some of this is fair enough and may help a bit towards the world the deputy prime minister says he wants to create. The cause of more employee share ownership has been around for many years – and John Lewis is regularly trotted out as an example of what we all would like capitalism to be like.
But economists have struggled over the years to find convincing evidence that increased employee share ownership really does produce a great increase in productivity, long termism, wellbeing or anything else. Indeed, the people I know who are paid to some degree in shares in their own company spend an inordinate amount of time watching the share price and cheering on their management when they get it to rise – even if that is through short-term measures.
In addition, any incentives to change behaviour in this area can easily be abused. Many years ago, when I was a young Treasury economist, the Chancellor of the day, Nigel Lawson, brought in a tax break to encourage profit-related pay in the hope that this would boost the economy.
In fact, firms and accountants soon found ways of taking the tax break without really affecting the way they treated their staff and a vast tax loophole had to be speedily brought to an end, discrediting the whole concept. That is often the way with incentives to share ownership too.
All this means that justifying significant subsidies, tax breaks or new laws to increase share ownership is problematic. In any case, most experts believe it unwise for individuals to put all their eggs in one basket. An investor would be daft to only own shares in one company – why would an employee want to own shares in the company they also draw their salary from so doubling the risk to their income if the company gets in trouble?
Despite the problems, the general objective of trying to create a different sort of capitalism is a just cause. However, it is not an easy one. In my view, the last Labour government did make an effort to try to restructure the way that capitalism in this country worked – and did pretty well overall.
Competition policy was significantly strengthened, the labour market was to some extent re-regulated, regional institutions were developed to try to break the stranglehold of the south east, new social enterprises were encouraged and help was given to the not-for-profit sector more generally.
It was too timid in some areas (and kowtowed to the CBI too often), some of it was not pursued hard enough, some never worked, and Labour of course made a major mistake with respect to regulation of the financial sector.
What this shows is that to develop a different dynamic in the form of capitalism is tough especially since we live in globalised markets, which limit our freedom of manoeuvre in at least some ways. A few minor tax breaks or hopes of replacing to any significant degree the classic private company with mutuals, John Lewis firms and the like is just not going to get us that far. Action in many areas is needed over a number of years.
But Clegg and Labour leader Ed Miliband are right that if we are to get further, we need to change the way that firms themselves operate. Labour in office had a major Company Law review but did not change enough.
If Clegg really wanted to be radical he would not only re-visit that agenda but might take more notice of the CentreForum paper given out to us at the event on Monday, that argues for more worker participation within firms. Now that really would make the CBI jump.
Dan Corry is chief executive of charity think tank and consultancy, New Philanthropy Capital, and a former Downing Street and Treasury adviser
