William Davies: Employee ownership can be answer to business future

THE takeover of another Scottish PLC in Forth Ports renews the debate about ownership and the future of Scotland's economy. How can a nation grow and prosper when its companies are bought and sold like trading chips?

Employee ownership offers a compelling solution. I started researching the subject two years ago at Demos, the independent think tank, and have become increasingly convinced of its role in building more sustainable economies built on long-term foundations.

Employee ownership embeds businesses in their communities by locking in ownership. The employees own the company's shares directly or through an employee benefit trust, so the shares can't be traded on the open market and can only be bought and sold by other employees.

You might assume that these companies are therefore parochial, un-businesslike and small. It is true that, without access to the capital markets, employee-owned businesses must rely on debt finance for growth. However, it does not follow that these businesses underperform or are insignificant.

The UK's employee-owned sector is worth some 25 billion - just under 1bn of it in Scotland - and features major players including John Lewis Partnership, Arup, WL Gore, Martin Currie and Scott Bader. Some of these companies make huge profits. But unlike their conventional counterparts, they are not profit-maximising.

This is because theirs is not the shareholder value creed, in which only the stock price reflects the company's true value. This ignores the intangible assets - including people, knowledge, relationships and reputation - that are so vital to every organisation's success. These are forms of capital that can be invested in and grown over time, but not "owned" in the conventional sense.

In fact employee-owned companies often outperform their conventional counterparts and survive for longer because they do things differently. The most successful employee owned businesses involve their staff in decision-making as well as giving them a financial stake.

Having a greater say in how their workplace is run increases satisfaction and lowers stress. Productivity and efficiency rises because decisions are being made on the shop floor rather than travelling up and down the chains of command. Managers take fewer taxis on expenses and there is less sick leave.

Levels of pay inequality are lower and there is more information sharing. Having employees on board with management decisions helps the business weather economic ups and downs. A recent report by London's Cass Business School and John Lewis Partnership found that employee-owned businesses created jobs almost five times faster than other businesses during the recession. Employee-owned companies have also outperformed the FTSE All-Share by an average of 11 per cent a year over the past 17 years, according to the Field Fisher Waterhouse Employee Ownership Index.There is a huge opportunity for Scotland to exploit this alternative model of ownership, and Co-operative Development Scotland recently invited me to present the business case as I see it to Scottish Enterprise and Scottish Government staff.

My own research has been informed by interviews with two kinds of business owner - those who have chosen to sell to their staff and those who have opted for the more traditional exit of a trade sale or private equity buyout. The comparisons can be striking, juxtaposing steady growth for the employee-owners on the one hand with the destruction of value in a business that has been managed purely to deliver a rapid return on investment.

In the coming years, Britain must experiment with new models of the firm if it is to create a sustainable economic future - with employee owners leading the way.

• William Davies is a research fellow at Sad Business School, Oxford, an associate of Demos and author of Reinventing the Firm. CDS is a Scottish Enterprise subsidiary set up to grow the contribution of co-operative and employee-owned businesses to Scotland's economy.