Since Nick Clegg announced his plans for more employee ownership, many have made the old argument in favour of the status quo. It goes like this:
“Share prices can go down as well as up, so holding shares is risky. That means that we, the wealthy who hold shares, are bold risk-takers. And we are being public spirited as well as courageous: we get rich for the good of the economy—the invisible hand makes it so.
“Employees, on the other hand, are not rich, and therefore should not take risks. They can’t afford to be jaunty in the face of uncertainty, because they are poor. If they are encouraged to buy shares, the shares could go down in value – a risk they can’t afford and should be protected from. The best way to protect them is to make sure that they don’t hold shares. So we’ll just hang onto them ourselves.”
There are, however, other ways of reducing risk. Firstly, we should distinguish between the risk of holding shares as an outside owner, and the risk of holding shares as an employee owner. An outside owner reduces risk through lack of commitment—by diversifying his or her portfolio. An employee-owner reduces risk through commitment—by helping to make the business succeed. The whole point of an outsider’s investment is to get rich while minimising risk. The whole point of an employee-owner’s investment is to link the individual directly with the results of that single business. They make money by making the business thrive.
That is why study after study has shown that companies with employee ownership are more productive than their conventionally-owned equivalents. The employees are more committed: they stay longer, they are absent less, and their increased efforts end up creating more wealth.
Since the employees are making the company more productive and creating extra wealth, that extra wealth can be shared with them. It is not a zero-sum game. So the company should want to fund the transfer of shares to the employees. And the government should want to fund it too, through the tax system. There already exists a way for this to work: the Share Incentive Plan. Companies use SIPs to give shares free to employees, and match shares bought (from tax free money) by employees.
So here is a way to make Clegg’s idea work: require all companies above a certain size to give shares to…