1997 - Employee share ownership
gathered at the annual convention of the Institute
of Directors at the Albert Hall in London last
week were asked to address what for some may have
been an uncomfortable observation.
Stuart Hampson, chairman of the
John Lewis Partnership, said: "It cannot
be right that in most businesses, incentives and
rewards are focused on senior management and high
flyers who, through bonuses and share options,
reap a disproportionate share of the company's
Hampson suggested that undue
emphasis was placed on the salaries of those at
the top. "Does the smooth talking of the
chief executive or the finance director really
move the share price forward or is it the fundamentals
of the whole workforce's competence and commitment?"
These were searching questions
for the audience. Hampson had no doubt about the
answer. "If it's worth a company's while
to produce a generous package to make a chief
executive feel valued and motivated, it must be
worth the company's while to do the same at other
levels of the business," he said.
Those who are not convinced by
Hampson's argument might take a look at the new
UK employee ownership index published this week
by Capital Strategies, a corporate finance company
which specialises in employee share ownership
plans (Esops). It measures the relative share
price performance of UK quoted companies which
have more than 10 per cent of their issued share
capital held by or for employees other than directors.
Shares of the 30 companies in
the index have outperformed the FTSE All-Share
index by 89 per cent since its inception in January
Various caveats are attached
to the index. There is astrong weighting towards
transport and support services, two sectors which
have tended to outperform the market.
But the same cannot be said of
350 companies listed in a similar index run by
American Capital Strategies, an affiliate of the
UK company, which monitors a much broader range
of quoted companies. It found an investment in
a basket of securities in public companies with
more than 10 per cent broad employee ownership
between 1992 and 1995 would have seen a return
of just over 80 per cent compared with just under
49 per cent across the Dow Jones Index.
The Esops movement in the US
grew rapidly after a statutory framework was laid
down in 1974, supported by various tax benefits.
According to the National Centre for Employee
Ownership, the US now has almost 10,000 plans
covering some 11m employees and controlling about
$ 150bn (?92.5bn) of corporate stock. Another
$ 100bn is held by other forms of employee ownership.
The centre says that employees now control about
6 per cent of US corporate equity.
Some 1,500 US companies have
a majority ownership of employees. Among the largest
of these are Publix Supermarkets, United Airlines,
Science Applications and Avis, the car rental
Jeffrey Pfeffer, professor of
organisational behaviour at Stanford business
school in the US, says in his 1994 book, Competitive
Advantage Through People , that employee ownership
has two important advantages. There is less conflict
between capital and labour, and it encourages
employees to take a long-term view of the business
and its investment policies.
The US has witnessed far greater
involvement of trade unions in employee share
transactions, not something which has been hitherto
encouraged in the UK. But this may be about to
change. Earlier this year, the Trades Union Congress
significantly shifted its posture towards encouraging
employee shareholdings and at least one union
has had discussions about employees taking shares
in a UK business.
One problem for the TUC, as yet
unresolved, is its ideological opposition to privatisation.
Nigel Mason, managing director of Capital Strategies,
says that had it not been for trade union reticence,
employees could have had a far greater share of
the British Rail sell-off.
Many of the companies with large
employee shareholdings offer employees a role
in decision-making. Companies such as FI Group,
the UK outsourcing and information and technology
services company, have demonstrated that employee
involvement fosters greater understanding and
mutual respect between employees and management.
"We find that the motivation
of our staff is very high," says David Best,
finance director. Between 75 and 100 of the company's
900 employees, he says, have personal shareholdings
in the business each worth more than ?50,000.
Not all businesses with large
employee shareholdings have been able to maintain
employee involvement to the degree that they may
have once envisaged. National Freight Corporation,
which bought itself out from the state sector
using employee shareholdings, has seen its employee
holdings diluted by rights issues in the past
few years. Employees now own less than 10 per
cent of the company.
But employee ownership is coming
of age in the US. It only seems a matter of time
before the movement begins to take a greater hold
in the UK.
© 1997 Financial Times Ltd.
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