Labour’s plan to force large companies to give workers a 10% stake in them seems popular: Yougov reports that most voters and even a plurality of Tory supporters think it a good idea. On the other hand, though, it’s given the CBI a fit of the vapours. Carolyn Fairbairn says:
Their diktat on employee share ownership will only encourage investors to pack their bags and will harm those who can least afford it. If investment falls, so does productivity and pay.
She’s wrong, and the voters are right. Far from being anti-business, McDonnell’s plan might even be a way of shoring up capitalism. I say so for four reasons.
One is simply incentives; giving workers an ownership stake incentivizes them to work better. There’s a large body of evidence (pdf) which shows that worker ownership increases productivity. If it’s a good idea to give CEOs an equity stake in the business – so that their incentives are aligned with shareholders – why should it be a bad idea to give workers such a stake too?
Secondly, giving workers ownership gives them a voice: as Tom says, a 10% stake would make workers the single biggest owner of many listed companies. And this voice is worth hearing. There is, as Kenneth Boulding warned, always a danger that managers of large organizations “will be operating in purely imaginary worlds.” Worker voice can be a valuable corrective to this by bringing ground truth to CEOs’ attention: workers on the ground are sometimes the first to spot deteriorations in cash flow or product quality. And it’s easier to nip problems in the bud than solve big ones. This is therefore a step towards what Shann Turnbull calls network governance and cybernetic control.
The third mechanism operates at the political level. If workers have substantive stakes in their businesses, they will support more business-friendly policies, just as Thatcher’s right-to-buy policy created a constituency in favour of high house prices. That should increase support for productivity-enhancing policies, and decrease support for higher taxes on business.
Fourthly, worker ownership brings into play new methods of stabilizing output. Roger Farmer has proposed that the Bank of England acts to stabilize animal spirits by using a form of QE to directly raise share prices in a slump. Right now, this is ruled out on the grounds that it would increase inequality. If, however, shares are more widely held, this objection disappears.
All this raises two questions.
One is: if a worker stake is such a good idea, why is the CBI so opposed to it?
There is, in fairness, a minuscule element of validity behind Fairbairn’s hyper-ventilating. Giving workers a 1% stake each year would dilute the stake of current owners. That should slightly depress share prices; it’s a form of mini-rights issue. This matters, because there is growing evidence that weaker stock markets lead to both lower productivity growth and higher unemployment (pdf). Animal spirits matter. It is no longer the case that we can dismiss stock market fluctuations as Paul Samuelson did, on the grounds that they’ve predicted nine of the last five recessions.
Also, though, there’s a framing effect. McDonnell and many of his supporters are framing his proposals not as a means of helping capitalism, but as a radical, transformative plan. In their current form, however, they could equally be seen as a move to a shareholder democracy – the sort of thing Thatcher wanted but didn’t deliver*.
I suspect, however, that there’s an even less reputable reason for opposition. It’s simply that bosses’ sense of self-regard and entitlement has grown so huge that they resent even moderate counterbalances to their power. This might help explain why many Tory voters support McDonnell’s plan; small shareholders are sick of being ripped off by CEOs greed and incompetence and welcome any curbs upon these.
Which raises the second question: mightn’t these plans be just too mild? Is a 10% stake sufficient to create a feeling of ownership? Are £500 a year of dividends sufficient incentive to boost productivity? As Tom and Jon point out, these are mild social democratic plans, which might arguably give workers less power over firms than they currently have in Germany.
What’s going on here, I suspect, is that McDonnell is laying down some stepping stones. A 10% stake isn’t the end of things. If it proves mildly successful – as it might well – it’ll lead to demands for bigger stakes and a bigger worker say. And let’s face it, the case for worker-shareholders is in some ways** stronger than that for outside shareholders: it’s long been known (and was proven by the collapse of banks in 2007-08) that these are incapable of overseeing management properly.
In this sense, McDonnell’s plan would call into question the very nature of capitalism. Which means that what capitalists have to fear is not that it would fail, but that it would succeed.
* The proportion of UK shares held directly by individuals has fallen from 37.5% in 1975 to 12.3% now.
** The counter-argument here is one of risk-pooling: worker-owners put all their eggs into the basket of one firm, whereas outside shareholdings are a way of spreading risk.