An ‘employee ownership bank’ is needed to support a more diverse economy, which could restore faith in alternative business structures following the failings at the Co-op Bank, the Social Market Foundation claims today in a new report, Mutually Assured Growth: Employee Ownership and the UK economy, supported by the John Lewis Partnership.
Informed by analysis of the PLC-dominated business landscape in the UK, the SMF study finds that there are many benefits to a more diverse economy, including greater resilience to economic shocks. The think tank draws on figures showing that employee-owned businesses increased their turnover by 11% during the recent downturn compared to 0.6% in traditional businesses, and productivity in these firms is up to 5% higher than other companies.
Despite this, the SMF finds that access to finance remains a major barrier to businesses seeking to adopt alternative structures. The research identifies some of the underlying problems including poor awareness among financial institutions of alternative businesses structures, investor short-termism and a lack of market scale.
According to the SMF, Government backed employee ownership bank would provide loans and guarantees to firms that were at least 50% employee owned or to support firms seeking to become majority employee-owned. It would enable the Government to set conditions for employee participation, corporate governance and voting rights for any firms applying for money. A similar proposal is currently under consideration in the United States.
Nigel Keohane, the report’s author said:
In the wake of the financial crash there has been much soul-searching by politicians about the shortcomings of the market economy. This has led to increased interest in business diversity, such as mutuals and employee-owned businesses. But the recent failings at the Co-op Bank take us to a fork in the road.
If we want the benefits of a more diverse economy, then Government will need to intervene to restore public faith and help businesses overcome the barriers to adopting alternative structures. A Government backed bank will make a real difference to easing access to finance, and by setting stringent conditions on the loans it offers, the bank would only support responsible, viable businesses.
Commenting on the SMF’s research, Sir Charlie Mayfield, Chairman of the John Lewis Partnership said:
The SMF’s proposal for an employee ownership lending bank is an exciting addition to the excellent work being done by this Government to raise awareness of employee ownership, making it easier to establish employee-owned firms and improving access to finance.
Employee ownership is good for growth. Increasing evidence shows that it offers particular advantages to small and medium-sized businesses and in knowledge and skill-intensive sectors, where employee-owned companies significantly outperform competitors.
Commenting on the report Iain Hasdell, Chief Executive of the Employee Ownership Association, said:
This new report from the Social Market Foundation is a very timely contribution to the debate about the future of the UK economy. It echoes our long standing view that the diversification of business ownership through more employee ownership is an essential part of building a more sustainable economy.
I also welcome the analysis in the report that highlights the need for more availability of patient finance to support employee owned businesses throughout their lifecycle. This has been a major priority for the EOA for some time and will continue to be so.
The SMF study also recommends a series of other policy interventions to increase the diversity of businesses, including:
- Setting out how the Government’s proposed tax relief for firms using an Employee Benefit Trust should work in practice, including recommending that the £50m pot set aside for the policy is increased as the sector grows in the future;
- Reforming the UK’s centralised banking structure by importing the localised banking model in use in Germany;
- Placing a statutory duty on employers to consider a request from employees for employee-ownership at certain points in the business lifecycle – such as when the firm is being sold.
Notes to Editors
- The Social Market Foundation’s study is the result of a series of roundtable discussions on business diversity held in spring and summer 2013.
- The study is sponsored by the John Lewis Partnership and the SMF retains absolute editorial control over its outputs.
- The Treasury consulted on new tax reliefs for companies with indirect employee ownership (i.e. where the shares are held collectively on behalf of the employees, often through an employee benefit trust).
- The United States Employee Ownership Bank Act was introduced to the Senate by Senator Bernie Sandars. The proposed legislation was referred to the Senate Banking, Housing, and Urban Affairs in July 2012 and is due to be re-introduced by Senator Sandars.