It’s an argument occasionally used against employee ownership.Apparently these businesses can’t/don’t grow.
The economist Larry Summers suggested in 2019 that co-ops/employee-owned (“EO”) businesses were at best slow plodders. Inward looking, with minimal long-term vision/drive.
“When you put workers in charge of firms and you give them substantial control over the firms,” he said, “the one thing you do not get is expansion. You get more for the people who are already there.”
There’s numerical logic to this
Let’s imagine business finances are very simple. Each worker:
– generates 3 income,
– costs the business 2 salary,
– there’s no other costs.
Each worker therefore makes the company 1 profit.
If the company has 10 employees, it has 30 income, 20 costs, hence 10 profit for owners.
If it has 50 employees, it has 150 income, 100 costs, hence 50 profit for owners.
300 employees means 900 income, 600 costs, hence 300 profit for owners.
Where there’s a small, fixed number of owners (perhaps just one person), there’s clear financial incentive for growth.
If the business is EO, the number of owners grows as the number of employees does. Now each worker gets not only their £2 salary, but is also entitled to £1 profit. They get £3 each. This doesn’t change whether the company has 10 employees or 5,000 employees.
Why therefore would workers in a 10 staff EO company have any desire to grow it?
Of course business income/costs per worker won’t be fixed or as simple in the example above. But from a financial perspective, the logic is staff will try to increase the £3 each worker generates. But they’ll be less bothered about employing more workers.
They’ll want to streamline the business as much as possible. Pushing it to £4 income per employee, without growing worker numbers. Maybe they’ll even go a bit “Lord of the Flies”, looking to push out any staff deemed less productive than average. Those are the routes for each employee to maximise their income.
That’s essentially Larry Summers’ argument.
The real world demonstrates this doesn’t really happen. EO companies admittedly do appear less likely to go for aggressive growth. But they do tend to demonstrate healthy, organic, stable growth.
EO companies are less likely to take huge risks with the business.
The upside if it all goes well is financially modest for each worker (as demonstrated above), bearing in mind the extra stress it adds. The downside if it goes badly is many people losing their jobs. In an EO company, that’s devastating. In the privately owned world, it gets more of a “meh, that’s efficiency savings” attitude.
But desire for growth is still there
Even if we stick to purely financial motivations, most EO companies don’t pay all staff equally. Senior staff will earn more than junior staff.
The senior team of a company with huge turnover employing ‘000s can justify much higher salaries than the senior team of a much smaller company. Hence leaders in EO businesses may want to push for growth for that reason.
It’s about more than finances
Be part of something bigger than you
People want to be part of something successful, where growth is one key indicator of success. We see that even in the privately owned world. There may be some limited scope to link these for higher employee earnings, but it’s more just about personal pride.
If you’re part of something that’s doing brilliantly, you can be confident your efforts contributed.
Taking a stand for/against something
Some EO firms have elements of activism to them. A group of people who feel strongly about something, and are doing something about it. It could be welfare related, environmental, political. They have a purpose that goes beyond finances. They want to change the world in a positive way. The bigger they grow, the more significant that impact is.
Each staff member doesn’t mind that their personal input may be only a small part of it. They are part of it, that’s what matters.
Money not the sole motivator!
So, we accept there may not be many “overnight” unicorns in the employee world. The risk appetite often isn’t there, for good reason. It’s debatable whether that side of capitalism is good for the world or the people inhabiting it.
However, the suggestion they’ll have zero ambition and will only think about short term profiteering for existing staff, is both offensive and demonstrably false.
Real world examples
John Lewis is the main, long term, UK employee owned company. Including associated companies like Waitrose, they have sales of ~£12.5 billion and has ~80,000 “partners” (ie employee owners).
Looking further afield for a real world demonstration, Google “Mondragon”. The story was started by a priest in a poor area of Spain about 80 years ago.
Initially it involved educating less fortunate individuals. Some of these became expert engineers. They returned to the area to start various small co-operatives, mainly in manufacturing.
They grew over the years, investing heavily in the training and wellbeing of their workers. Whenever a new problem arose in the area, a new co-operative would be created to solve it. The group is currently a similar size to John Lewis/Waitrose, now employing ~80,000 workers, with turnover of ~11 billion Euros.
The USA has multiple large and successful employee owned companies too. The biggest being Publix Super Markets, with ~$45 billion turnover, and 225,000 employees.
All the above are serious forces to be reckoned with. Not tiny entities some right wing commentators depict all EO businesses to be!
Summary
Employee Owned companies not only tend to trade profitably, but grow nicely too.
- Risk appetite of EO companies is normally lower.
- Hence growth won’t match fastest Silicon Valley types.
- EO companies still have hierarchies, so often will have financial incentives for growth.
- Stability for the workers is key.
- Mass staff redundancies may be acceptable to privately owned companies, far less so for EO companies.
- Long term steady organic growth is often the result.