Some wider economic effects of employee ownership

By March 21, 2016No Comments

This article is re-posted with the kind permission of the team at the WPART Project

by David Erdal

An important under-researched area is the wider economic effects of businesses being owned by their employees. This blog post analyses data on financial distribution in the five financial years to 2015 by two major British retailers, Marks and Spencer (M&S)and the John Lewis Partnership (JLP). The M&S shares are publicly traded on the Stock Exchange and are overwhelmingly owned by financial institutions such as investment funds. The JLP shares have since 1929 been owned entirely by a trust for its employees, all of whom are known as ‘partners’. JLP includes the food retailer Waitrose in its group. M&S’s financial year end is March, JLP’s January.

The businesses are similar in size. In the year ending early 2015 their turnovers were £10.3 billion and £10.9 billion respectively. (M&S numbers are given first). M&S employed some 82,000 people and JLP 92,000, but in terms of Full Time Equivalent (FTE) employees their numbers were nearly identical: 59,096 and 59,200. This means that JLP was 5.9% more productive than M&S in terms of sales per FTE, a result typical of businesses owned directly or indirectly by their employees.

Turning to the main focus of this post, over the last five years M&S has distributed £1.33 billion in dividends to shareholders; in the same period JLP has distributed £929 million in its annual lump-sum bonuses to all its partners. This bonus represented on average just under two months’ salary, paid as the same percentage of salary for all partners. The range during the five years was between 5.7 and 9.4 weeks’ salary, averaging 7.8. Retail salaries are low; consequently the bonuses will have been spent mainly on the things that low-paid people buy. That is, they will have been spent by over 80,000 people in the real economy, boosting local businesses wherever there is a JLP or Waitrose store.

The destiny of the £1.3 billion paid as dividends by M&S was very different. The JLP bonuses had virtually no transaction costs, being paid through the existing wages system. By contrast, overwhelmingly the M&S dividend was paid into financial institutions. The management estimate that around 70% of their shares are held by institutions, although the figures show 84%, because some people hold their shares through their own private companies. Institutions charge fees for handling investments, as do the managers of the investment funds into which the money is invested. The managers of financial institutions are on average at the wealthier end of the income distribution; consequently these fees will have added to payments to wealthy people. In terms of the economic effect, this will have impacted mainly on the market for luxury goods and the London property market.  But the great majority of the sum will have been extracted from the economy by being used to purchase a range of financial instruments, from shares to financial derivatives. The economic multiplier of such payments is trivial compared to the multiplier of a similar amount of money being distributed widely among people who are lower than average in wealth, as with the JLP bonuses.

In addition to the effect on the economy, it is worth noting the effect on inequality. The M&S fees go to wealthy financiers; some 15% of the dividend goes to people wealthy enough to have personal investment companies. The average ‘staff cost’ per FTE in M&S in 2015 was less than £24,000. The equivalent figure in JLP, including the bonus, was over £30,000 — over 25% higher. Included in those figures are the pension costs, on which JLP spent more than twice as much as M&S: £191 million as opposed to £85.4 million. Relative to the M&S employees, the JLP partners are being given a significant lift, reducing inequality. Since the bonus is distributed as the same percentage of salary for all, it does not reduce inequality within JLP, but since the vast majority of workers in all industries do not receive such uplifts, it has the effect of reducing inequality relative to the UK population. In addition, it is reasonable to assume that low-paid retail workers sometimes find their children living in poverty. The JLP bonuses reduce the probability of a child living in poverty.

My conclusion is that the John Lewis Partnership gives benefit to the economy, by creating a higher economic multiplier, and, again in economic terms, to its employee-partners, quite independently of the significant benefits they derive from its open, democratic, participative culture. In purely economic terms the vigour of the economy and the inequality of wealth are thorny questions that the currently prevailing system has found no way of addressing, and indeed is exacerbating. John Lewis addresses both of those questions, with a vigorous economic multiplier, a high productivity and a wide distribution of wealth to the people who create that wealth. This is a good way of doing business.

* Dr David Erdal is Hon Research Fellow at the School of Management, University of St Andrews.