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tim hartford (writes for financial times)

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Dec 11, 2009
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Tim Harford The Undercover Economist
Are you saying John Lewis isn't perfect?

I hear that Nick Clegg has called for a "John Lewis economy". Who could be against a John Lewis economy?

Indeed! All right-thinking people love John Lewis. It all starts with your wedding list and the love affair just goes on and on. My daughter told me she wanted to be the little boy from the adverts who can't wait to give his parents their Christmas gifts.

How did she see the advert? You don't even have a television.

Her primary school showed it to her. That's how blandly all-conquering John Lewis has become: their advertisements are used in school assemblies. And don't get me started on Waitrose!

I know – I discovered that those nice Padrón peppers are also available from Ocado. Amazing!

It is. Nick Clegg is clearly on to a winning policy here.

Quite so. What is there to dislike about a vision of Britain that awoke from sweet dreams under crisp Egyptian cotton sheets to sweep aside Tesco, Ikea and Primark, replacing them with John Lewis and Waitrose?

Nothing. But I suspect that Mr Clegg is more taken by the idea of widespread profit-sharing and share ownership.

That makes sense. John Lewis is owned by a trust for the benefit of its employees, John Lewis is profitable and John Lewis shops sell nice things.

Yes, but what we have here is an "n of 1" problem: just because these things are true about John Lewis does not mean they always go hand in hand. ExxonMobil is profitable but it is not owned by an employee trust and it is not usually regarded as a purveyor of nice things.

But surely it's a good thing for employees to own shares in the companies they work for.

You might want to ask the former staff of Lehman Brothers and Enron about that. I'm sure it's great if you get in on the ground floor of Microsoft or Apple, but the logic of employee share ownership is not so clear. The more shares an employee owns in a company, the more risk she is exposed to: she already accepts the risk that in hard times the company may sack her, cancel her perks or cut her salary. On top of that she is supposed to pin the value of her savings to the company share price?

Yes, if it will motivate her to work hard for the company.

If it does it will not be because of any financial logic. If you were exposed to just 0.1 per cent of the risk and reward of a £1bn company, you'd be facing a £1m risk – a 10 per cent drop in the share price would hit you by £100,000. And yet you would still enjoy only 0.1 per cent of any gains you created for the company, which is surely not enough to discourage you from stealing paper clips. There is a trade-off between providing proper incentives and exposing workers to excessive risks. I don't think shares or share options provide a happy medium between the two.

Are you saying that employee-owned companies perform poorly?

No, I'm not aware of any evidence for that. A study by Alec Bryson and Richard Freeman of the Centre for Economic Performance at the London School of Economics found that employee ownership was positively correlated with productivity; it was also positively correlated with other measures of performance-pay and worker autonomy. What exactly causes what is a nice question, but there's certainly little evidence of harm. Mr Bryson and Mr Freeman also surveyed other studies and conclude that none found any negative impacts of employee share ownership and some found positive effects. In any case, the theoretical case for the popular alternative – companies with highly dispersed shareholders – is also rather troubling. Adam Smith predicted that "negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company". None of these things works in theory; whether they work in practice is another question.

So what's wrong with supporting employee share ownership?

Nothing. The government already does with various tax incentives, and more than 60 per cent of workers have access to share-ownership or other profit-sharing schemes. Mr Clegg might consider whether it could be easier to convert existing companies into employee-owned co-operatives, because the economy is unlikely to be damaged by greater diversity of organisational forms.

Sounds sensible but bland.

What do you expect from a man who has just invented a very British version of motherhood and apple pie?

Also published at ft.com.
21st of January, 2012 • Since You Asked • Comments welcomed
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