Owning the business can incentivise staff

Many companies see the merits of staff becoming owners, even as John Lewis mulls seeking outside investment
by Brian Gorman


The retailer John Lewis is reportedly planning to seek outside investment, thus diluting the proportion of its business owned by staff, but the news has highlighted some of the advantages of employee-owned businesses (EOB) as well as the drawbacks.

An article in Retail Gazette by Gemma Goldfingle says that “the business has been struggling” and it cannot pay its annual staff bonus. It has reported a loss of £234m, and the company is looking to raise between £1bn and £2bn.

An article in This is Money by Archie Mitchell notes that John Lewis cannot raise money from staff, and its debt level – £1.7bn – makes more borrowing difficult.

Mitchell notes that the plans would bring in outside investors for the first time in more than 70 years and be a “dramatic shift” for John Lewis. “It would require a change to the firm’s constitution to water down its mutual status.”

In 2012, then-deputy prime minister Nick Clegg said the firm’s partnership structure “should be the model for the whole economy,” writes Mitchell.

Several parties have expressed concern about the reports. Mitchell quotes Labour MP Gareth Thomas: “If John Lewis lost its mutual status it would be devastating for staff as well as families around the country who have cherished the business for decades. Staff ownership makes John Lewis special.”

Thomas said there should be a new law to allow mutuals to raise money without giving up their mutual status.

Growth in EOB

However, many businesses are looking to become employee-owned, even as John Lewis contemplates taking a step in the other direction.

An article on syndication platform Mondaq highlights the strong growth in EOB. The authors of the article, Louise Jenkins and Samantha Lenox of professional services firm Alvarez & Marsal, say the sector is “going from strength to strength”.

Drawing on Financial Times figures, they report that nearly 500 employee ownership trusts were created in the UK in the year to September 2022, up from 235 in the previous 12 months and 56 in the year prior to that.

They write: “A sale into an employee ownership trust (EOT) is a succession route for business owners to consider alongside options such as a trade sale or a sale to private equity. It allows company owners to sell more than 50% of their business to a trust for the benefit of their employees, free from capital gains tax.”

They say the advantages include:

  • Preserving the culture and values of the business.
  • Employees are aligned with the business because they have a stake in it and are incentivised to drive long-term value. They may share in the business’s future growth, success and wealth creation.
  • Evidence that EOBs are more resilient than non-employee-owned businesses during an economic downturn.

All sizes

An article on Knowledge at Wharton, the business  journal of the Wharton School of the University of Pennsylvania, points to the EOB sector booming in the United States.

“When many people think of employee-owned companies, an artisanal cheese shop or organic cafe springs to mind,” writes the article’s author Angie Basiouny. “But, the 6,000 US companies that are partly or wholly owned by their employees come in all sizes – from small firms to large, publicly traded companies.”

The article quotes Corey Rosen, founder of the National Center for Employee Ownership:  “We know employee ownership works because there are extensive data and studies that show that the employees in these companies have substantially greater wealth than employees in comparable companies. “

He says EOB companies perform a lot better and lay people off at dramatically lower rates.  

Published: 23 Mar 2023
  • Corporate finance
  • employee ownership

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