This week marks the first anniversary of the collapse of Lehman Brothers, when the world’s biggest bankruptcy plunged the financial markets into freefall, with more than £50 billion wiped off the FTSE 100 index in a single day. Some mainstream commentators raised the spectre of the end of capitalism as we know it.
Economic Armageddon has been avoided. As stability has been returning to the financial markets, the temptation is to hope that with a little fine-tuning of the banking system normal service will be resumed. We should resist that temptation.
The banks that nearly brought down our economy were structured on the traditional corporate model — limited companies run by a board of shareholders and executives. In the debate about how to avoid such a crisis happening again the focus has been on bankers’ pay and bonuses. Instead, policymakers and regulators keen to avoid “moral hazard” should recognise a much more fundamental problem — the imbalance in the ownership of risks and rewards. Is the plc the best model for future business?
Every day we scour the economic data for evidence of green shoots. Capitalism is no longer in meltdown, but it is still at a critical juncture. For many years the pursuit of “shareholder value” was seen as the best way to motivate management and to maximise value for shareholders. Companies felt compelled to deliver consistently higher returns for shareholders every quarter. The crisis has exposed the limitations of focusing solely on short-term, maximum gain.
Our businesses have not always been structured like this. In the 19th century some of Britain’s most successful companies were privately owned, with a philosophy that reflected the philanthropy of their owners. Cadbury, now the subject of a takeover bid, was typical.
William Davies, of the think-tank Demos, has been examining whether organisational pluralism would benefit our economy. In a new report he says: “This economic and political context creates an exciting opportunity to rethink the firm, its ownership, its management structures, its mechanisms of accountability.”
In the past, banks and other institutional investors have not been well disposed to novel structures, despite evidence that they often increase productivity by creating a motivated workforce and accountable management. In the post-credit crunch economy, a return to sustainable growth will require more long-term investment. It will also require a more positive response from banks and institutional investors to alternative ownership models and corporate governance structures that can generate wealth as well as positive benefits for society and shareholders alike.
Employee ownership — where companies are wholly or substantially owned by employees — is one form of alternative ownership and already contributes about £25 billion annually to Britain’s GDP. Successful employee-owned companies based in the UK include the engineering firm Arup (designers of the iconic bird’s nest Olympic stadium in Beijing), the logistics group Unipart, the paper company Tullis Russell and many others.
The John Lewis Partnership itself was founded in 1929, at the very start of the last Great Depression. Its underlying principle then, and now, is to be a fairer form of capitalism where labour should employ capital, not the other way around. It was set up in the belief that a business could put the happiness of its employees at the heart of everything it did, play a socially useful role and generate healthy profits. If it is still a radical idea today, imagine the reaction to it 80 years ago.
Now that the urgency of the banking crisis has abated, business leaders, policymakers and commentators have an opportunity to reflect on what alternative capitalist structures might better align the interests of all stakeholders, be more resilient in the long term and reduce the risk of future crises. In his address to Congress in 1935 F. D. Roosevelt said: “We find our population suffering the old inequalities, little changed by our sporadic remedies.” We seem to have learnt much about how to respond in the short term to a global financial crisis; let’s hope we have also learnt to go beyond “sporadic remedies” in the aftermath.
Our success in that aftermath and our future economic growth will depend on knowledge-based companies working in new areas of business such as genetics and climate change technology. Such businesses tend to thrive when the people with the knowledge feel they have a stake in their future. Innovation will also be key to their success.
They will not grow into sustainable businesses unless they are built on a structure that encourages a long-term approach to investment and gives the people involved a stake in their success. The modern plc may not be it.
Charlie Mayfield, chairman of the John Lewis Partnership.