In this article, Julian Le Grand and Jonathan Roberts explore the possible end of employee-ownership at John Lewis, and question how cooperatives might survive in the modern world.
The department store John Lewis is an employee-owned firm, often described as a workers’ co-operative. It has been in the news many times since its inception, usually because of its excellent customer service or for the annual bonuses given to its ‘partners’ – its employees. However, it has recently made the headlines for an apparently less positive reason; the suggestion under discussion by its management that it might offer a minority stake to shareholders and thereby dilute its ownership structure. Indeed, some commentators have even suggested that John Lewis might demutualise altogether – that is, convert its ownership to one of entirely equity-shareholding – although any such intention has been denied by management.
Since the days of John Stuart Mill, workers’ cooperatives have been much praised by social thinkers. Mill himself was a fan, writing;
“The form of association, however, which if mankind continues to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.”
However, co-operatives also have their critics. In the 1970s and 1980s labour economists modelled the behaviour of what they called the labour-managed firm, under the assumption that the sole motivation of the workers who controlled the firm would be to maximise their income: their wages plus their share of the profits. The models led to predictions that workers’ co-ops will:
- employ fewer workers than conventional firms making similar profits.
- contract, not expand, if market price goes up.
- invest less, since some employees would leave before the investment paid-off. This was termed the ‘horizon’ problem.
- innovate less, because much innovation is labour-saving.
- have poor work incentives due to the ‘free-rider’ problem; hence workers would put in less effort and be less productive.
In practice, evidence on the behaviour of co-ops seemed to support the predictions of their supporters and not those of their critics. In a series of papers in the 1990s our LSE colleague, Saul Estrin, and collaborators showed that, ceteris paribus, John Lewis hired more workers, than its major competitors, while also demonstrating that it performed better in terms of overall growth, diversification, investment and productivity. More general evidence collected by Virginie Pérotin suggests that private sector employee-led co-ops, as compared with private sector profit-making firms:
- expand employment
- have higher productivity
- generate greater customer satisfaction
- show greater resilience in face of economic downturns, and
- have a higher staff morale
- show no sign of the horizon or free-rider problems
All this of course immediately raises the question: so what has gone wrong with John Lewis? One answer, of course, is simply trouble in the retail sector. Department stores, under threat from online shopping and the decline of town centres, increasingly seem out-of-time and have financial results to prove it. In the UK major department stores and chains – House of Fraser, Debenhams, Jenners – have disappeared or radically shrunk. John Lewis’ popular retail food chain, Waitrose, has also been under pressure from the rise of online shopping. Thus, even if John Lewis does have a competitive advantage from its structure of employee-ownership, as Estrin’s evidence shows, this may not sufficiently compensate for the effects of a sector in decline.
But there is a further question. Why, in this challenging situation, is the firm looking to change its ownership structure? Or, to rephrase the question, what is it about the structure of employee ownership that may hinder restructuring, diversification or other responses to this challenging situation? The answer, of course, is capital.
Capitalism is so-called because of a reason. Small firms need capital to grow; big firms need capital to maintain their position, especially in times like the present when there is rapid technological change. The co-operative, if it wishes to preserve its ownership structure, has really only one way of raising outside capital – by incurring debt. Debt finance is inflexible and often limited in scope – limited, among other things, by the amount of security that the firm can offer. The share-owned firm has an enormous advantage in that it can raise capital by simply issuing shares.
The difficulties in raising capital faced by co-ops can be illustrated by the recent experience of the credit-risk consultancy 4most, majority owned by its employees, which last year appointed a broker to sell a minority stake of up to 30% on Aim. The IPO was originally set up for February this year but was withdrawn when it became apparent that investors were reluctant to invest in a business where they did not have majority control. Instead, the firm sold a majority stake to a private equity firm, with the employee ownership trust having a stake of 43% instead of just over half as under the IPO plan. According to a report in the Times (April 24th), the Chief Executive said ‘Some institutional investors saw [the trust] as a majority owner they were concerned by’, adding that ‘the private equity bidders had held similar concerns about the trust being a majority shareholder, but were able to compensate [the trust] by selling more of its share by increasing upfront payments to staff’.
So, if, as seems likely, the current idea for minority share-holding collapses, the John Lewis management will be confronted by a dilemma. The firm can retain its employee ownership structure and go into debt (perhaps heavily) to pay for whatever restructuring is planned. Or it can relinquish employee control to institutional or other share-holders – or even to private equity. If they do go down the latter route, and offer compensation to the ‘partners’ for the loss of control, it would be interesting to see how the partners respond: take the money and run or make a principled refusal and put their jobs and livelihoods at risk? Akin to the spate of building society demutualisations in the 1980s and 1990s in the UK, the individual worker may see benefit in exchanging cash for control – but the effects will be felt by future workers who will have neither control nor a cash dividend.
A broad question often asked by economists and others is: if cooperatives have been historically so successful why are there so few of them? The current experiences of John Lewis and 4most give one answer: the difficulty of raising capital while retaining employee control. As John Lewis’s son, Spedan Lewis, demonstrated by his handing over ownership of the firm after his father’s death to his employees in 1929, philanthropy can help in individual cases. There is some emerging interest in the role of impact investors in bridging the capital gap, particularly if they are prepared to accept below market risk-adjusted rates of return. But it is probably only government that can intervene at the necessary scale. Labour has of course long been committed to the cooperative dream; the Labour Party and the Cooperative Party have an electoral pact and there are 26 Labour and Cooperative Party MPs following the 2019 election. The Coalition Government of 2010 committed itself to extending cooperatives into both the public and private sectors, a policy supported under the subsequent Conservative Governments of David Cameron and Theresa May. But, if any government is to make progress in this area, this capital market failure will have to be addressed.
Bradley, K., Estrin, S. and Taylor, S. (1990) Employee Ownership and Company Performance, Industrial Relations: A Journal of Economy and Society, 29:3, 85-402. https://doi.org/10.1111/j.1468-232X.1990.tb00760.x
Bradley, K., & Estrin, S. (1992) Profit Sharing in the British Retail Trade Sector: The Relative Performance of the John Lewis Partnership, The Journal of Industrial Economics, 40:3, 291–304. https://doi.org/10.2307/2950541
Estrin, S. & Pérotin, V. (1987) Producer cooperatives: the British experience, International Review of Applied Economics, 1:2, 152-175, https://doi.org/10.1080/758528895
Mill, A., (1870) Principles of Political Economy with some of their Applications to Social Philosophy, 7th edition.
Pérotin, V. (2012). The Performance of Workers’ Cooperatives. In P. Battilani & H. Schröter (Eds.), The Cooperative Business Movement, 1950 to the Present, Comparative Perspectives in Business History, 195-221. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9781139237208.011