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Company ownership reform could create three million employee-owners

Mathew Lawrence
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New ownership models that give people a stake in a stake and a say in economy the best way to genuinely ‘take back control’. Contributor Mathew Lawrence, Senior Research Fellow, and co-author of the report – IPPR

New models of company ownership could help reduce inequality and spread economic power, according to a new report today for the IPPR Commission on Economic Justice. The report recommends the expansion of Employee Ownership Trusts, which give employees majority ownership of companies, with the aim of creating 3 million employee owners by 2030.

The new IPPR report finds that ownership of economic assets is highly unequal in the UK:

  • The wealthiest 10 percent of households own 45 percent of the nation’s wealth compared to just 9 percent for the bottom half.
  • The median net financial wealth of the richest 10 percent is £153,900, including stocks and shares, while for the least wealthy half of households, it is just £400.
  • Individual and British pension fund ownership of the FTSE has fallen dramatically since the 1980s; the rest of the world now own more than half of UK shares.
  • The value of land has increased more than fivefold since 1995 – and at £5 trillion now represents more than half of UK total net worth
  • Those with an income of over £1 million a year receive 20 percent of their incomes in dividends, interest and property income, compared to less than 5 percent for those earning between £20,000 and £30,000, and almost nothing for the poorest households.
  • The UK scores poorly as an economic democracy, coming 25th out of 32 among advanced economies.

Unequal ownership of economic assets drives inequality because the share of national income going to capital in the form of profits has been increasing, and is likely to rise further, while the share going to labour, in wages and salaries, has declined. If a greater share of national income goes to capital owners, and capital ownership is narrowly concentrated, inequality is likely to rise. The report also outlines other trends likely to increase the share of national income going to capital, including automation, the rise of ‘superstar’ digital platform companies, and the growing value of land.

To counteract rising inequality, the new IPPR report sets out three ways to expand ownership to give more people a stake and say in the economy:

  • A national sovereign wealth fund
  • New tax incentives to encourage employee ownership trusts
  • New support for co-operative and mutual businesses

Employee Ownership Trusts (EOTs) are a form of business model in which a majority of a company’s ownership is vested in its workforce. Established by the Coalition Government in 2014, there are currently around 170 EOT businesses. Such trusts enable over half of company profits to be distributed to workers, and also means workers exercise a much more significant role in the governance of the firm.

To encourage the more rapid growth of EOTs, the report recommends reforms to corporation tax and inheritance tax to encourage business owners considering sale of their business to establish an EOT, and to encourage external investment. The report also recommends that the required rate of pension saving under auto-enrolment is increased to 15 percent, with employees able to credit the additional savings to their EOT shareholding.

There are 7000 co-operatives in the UK owned by their workers or consumers, with around 223,000 employees and a combined turnover of £35.7 billion. To increase support for cooperatives, the report recommends the establishment of a Co-operative Capital Development Fund, financed by a levy on the profits of co-operative firms; and a specialist Co-operative and Mutual Development Bank to finance co-operative enterprises.

Mathew Lawrence, IPPR Senior Research Fellow, and co-author of the report, said: “The structure of capital ownership powerfully shapes how economic power is distributed in society. With a rising share of national income going to capital, inequality is likely to rise unless we can broaden ownership in the economy. If we really want to ‘take back control’, expanding ownership is a durable, meaningful way to give people and communities a powerful stake and a say in their workplaces and economy.  The aim of our reforms is to give more people a share of capital, both as useable wealth and for its income returns; and to spread economic power and control in the economy.”

Nigel Mason, Director of the RM2 Partnership and co-author of the report, said: “Employee ownership trusts are a proven way of turning conventional businesses into employee-owned firms. With some simple tax reforms the number of such firms could be rapidly expanded, and millions of workers could own a stake in their own companies.”

Rebecca Long-Bailey MP, shadow secretary of state for business, energy and industrial strategy: “Capital Gains highlights not only how unequal the ownership of wealth is in the country but the increasingly unequal shares of national income which result from this. Forces like automation and the rise of large digital firms make this trend likely to continue.

“This is why, in the Labour Manifesto, we wanted to widen the ownership of the economy through measures like nationalisation of key utilities and the expansion of the co-operative sector. However, Labour wants to develop and refine these ideas and others to broaden ownership. This report makes a valuable and thoughtful contribution to this important issue.”

Vince Cable MP, Leader of the Liberal Democrats: “As Business Secretary in the Coalition Government, I helped to deliver useful reforms to increase the rate of employee ownership, including the introduction of employee ownership trusts. I welcome the IPPR’s recommendations on boosting the number of companies owned by EOTs, which over the next decade could plausibly create millions of new employee owners. And as this report points out, there are other models of ownership – including mutuals and co-operatives – that also have a crucial role to play in transforming the UK into a true capital-owning democracy. Empowering an ever-greater number of people to own the companies they work for would put Britain on a fairer footing and dispel some of the anger currently directed at capitalism and the market economy.”

Nick Boles MP: “Why should people support capitalism if they don’t own any capital? In its latest report on business ownership the IPPR’s Commission on Economic Justice grapples with this fundamental challenge to the modern economy and suggests some practical ways to achieve wider ownership of valuable productive assets.”

 Ed Mayo, General Secretary, Co-Operatives UK: “There are few dynamics in economic policy that are more fundamental but less understood than that of economic ownership. Co-operatives are businesses that share ownership, control and profit and we believe in the power of widening ownership in the UK economy. In the context of an uncertain economic climate in the UK, this report could not be more timely or important.”