Monday, 24 September 2018

A Positive Policy for Economic Empowerment

The CBI’s reaction to John McDonnell’s employee share ownership plan was to be expected. Not only might such a plan place an initial administrative hinderance on many firms throughout the country, but in the longer term the ability for workers to lever shareholder power over executives shifts the dynamics of executive/employee power.

These are the arguments the CBI could be making – namely, that the plan is disruptive to business. Instead, across the media an almost myopic rebuttal to McDonnell’s plan can be heard. There are claims the plan will reduce productivity, reduce business investment, and drive businesses aboard, ultimately harming jobs. Above all, the CBI claims that such legislation is unnecessary as businesses already give employees the chance to become shareholders.

Partly due to disdain, partly due to inaccuracy, and partly due to the political and economic climate we find ourselves in, these arguments may be dismissed.

Consider productivity. As the Office for National Statistics (ONS) reports, UK productivity since the financial crisis has increased from an indexed value of 95.7 to 100.7. Over the 10 years prior to 2008, productivity increased from 84.9 to the cited 95.7. Of course, these are simply the figures for a problem that has not gone unnoticed: in March, July and August of this year the Financial Times (amongst others) highlighted the UK productivity issue, with a speech by the Bank of England’s chief economist Andrew Haldane on the issue being published in June.

The CBI’s claims that McDonnell’s proposal will harm productivity seems to ignore the elephant in the room, therefore: there is already a productivity problem in the UK. What is interesting, and in many ways encouraging, is that this plan may actually increase productivity, with even the CBI acknowledging that employee ownership often has a positive effect on employee motivation and thus productivity.

Of course, a productivity argument might be made when considering reduced business investment. The argument might go that the burden of this plan will disincentivise businesses to invest, causing productivity gains from new technology will be lost. Unfortunately, business investment since the financial crisis hasn’t changed much either, going from an indexed value of -0.3 in 2008 to 0.2 in 2017 (figures from the ONS). In other words, whilst business investment, or lack thereof, may drive productivity growth, given there has been very little business investment over the past decade it is a dubious argument to attack Labour’s proposal with the threat of further disinvestment.

Though this ignores a wider point. If employees have an ownership stake in businesses, they can encourage and thus counter any disinvestment that it is claimed might occur. Why? Well, following the prevailing theories of investor motivations, those employees/shareholders will want to maximise their return just as all other investors would. This, ultimately, is a more compelling argument than I think is immediately obvious: just because 10% of the company is owned by the employees, it does not mean the remaining 90% of shareholders are going to tolerate disinvestment and the forgoing of profitable endeavours. Presently, executives attempt to maximise shareholder value; they do not care who the shareholders are.

Perhaps, however, the best way to maximise such value is to move abroad and avoid Labour’s proposal. Ignoring the administrative costs of doing such a thing, let us take note of two things. Firstly, as a consequence of Brexit, firms are already leaving this country. For many, the question will be asked what difference will this policy really make? Secondly, this supposed threat of emigration has been raised countless times, be it in opposition to higher corporate taxes, greater sector regulation, increases in wages or trade union bargaining power and so on. Many times, politicians have bought into this threat – implicitly underestimating the value of the UK to these businesses – and have not acted. Now many look around and see the barren, economic desolation that such concessions have brought them. For a great many workers, if the price of keeping these businesses is low corporate taxes, low regulation and weak workers’ rights, low wages and little bargaining power, their desire to appeal to business to stay will be found to be lacking.

For a great many, now is the time to call business’s bluff.

Finally, we must address the claim by the CBI that many firms already allow employees to become shareholders, often by allowing said employees the opportunity to purchase shares at a discounted price. This statement is true, and to be sure it’s generally a positive idea. But it is not fair to bring up such a statement in the context of McDonnell’s proposal.

Whilst those working on the shop floor or the assembly line will be given these share purchase opportunities in their lifetimes, for those who are struggling to pay their rent or struggling to put food on the table because their pay is so low; for those who cannot afford to pay into their pension pot, or perhaps must leave the heating off in the winter; for those people, no matter how good the share offer is objectively, they will never be able to part-take. And even if they did, what power would their voice have versus the vast ownership shares of angel and institutional investors?

For the CBI to dismiss John McDonnell’s plan because similar means of empowering workers already exist, they are either blind to the realities of the everyday worker, or they are intentionally selling a false equivalency.

To be sure, the details of this proposal need to be checked, and checked again. It is foolish to assume all the nuances are known, all the problems are ironed out. But given the arguments offered thus far, primarily by the CBI, this plan remains – in my opinion – a positive policy for economic empowerment.

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