Ideas ... Sustainability Management
Michael Townsend

Michael Townsend ... Sustainable Business Strategy Series ... PART 4: OWNERSHIP IS EVERYTHING

Burgess COMMENTARY

I like this essay. The way a business entity is organized certainly does make a difference, but it is not enough to change the organizational structure and the ownership structure. I argue that there must be some clarity about the 'purpose of the economic activity' and metrics about how the economic activity is performing from not only the perspective of the owners/investors as stakeholder, but all the other stakeholders. I have no problem with an investor owned business that has really good metrics and does well for all the stakeholders. I have a problem with entities that cloak themselves with a veneer of 'doing good' but when you drill down they are merely fronts for some awful things. Whenever I read discussions about organization, ownership and decision making, I am reminded of the prevailing German model where workers are represented at the highest level of decision making in their industrial companies. It seems to be effective ... though I have not studied it in great detail for a very long time.

You can't be sustainable without tackling the thorny issue of ownership

As our Sustainable Business Strategy series continues, Mike Townsend delves into ownership models and asks: Can we really be sustainable without addressing this fundamental factor?

“Remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.” John Maynard Keynes

Ownership is everything. It is difficult to conceive of how any business could call itself sustainable, without due consideration of ownership; it lies at the very heart of equality and fairness in business, and in society.

Ownership provides power and authority, to make decisions in the long-term interest of all our stakeholders (including the planet), and therefore affects our ability to deliver sustainable business strategies. This is ultimately a very important consideration, especially in light of the limitations associated with the short-term behaviour of our stock markets.

Ownership also provides the power to distribute wealth – all of which has a major impact on how we run our economies, our businesses, and how we live our lives.

And as Noble Prize economist Paul Krugman points out, the current high of the stock market is no cause for celebration – it just shows the major disconnect between productivity and wages – resulting in an unfair distribution of the fruits of our combined labour.

Krugman: The current high of the stock market is no cause for celebration – it just shows the major disconnect between productivity and wages

How different this allocation might be, if we all owned the businesses we worked for?

And dropping down a level, when executing sustainable business strategies, we talk of the need for engagement – can there be true worker engagement, or so called empowerment, without ownership? This also aligns with the principle of subsidiarity – raised by Charles Handy almost twenty years ago – that greater levels of commitment will come through membership and having a financial stake.

An increasing body of research shows that combining share ownership with a greater influence in how the organisation operates, can lead to superior business performance.

According to a recent CASS Business School report, employee owned businesses report productivity levels between 9%-19% higher than similar traditionally structured businesses.

Worker co-operatives and co-owned businesses tend to be more sustainable, are less likely to fail, and are able to take a longer term view as there are no external shareholders requiring short term returns. Employee-owned businesses are found to be more resilient: their performance is more stable over business cycles, and they have outperformed the market during the downturn.

And in addition to the high levels of engagement and commitment, ownership also increases staff retention and reduces absenteeism. Employee ownership also tends to benefit the communities within which they operate, as the rewards are shared amongst the people who work within the business, rather than going to a single owner or external shareholder, as is the case in more traditional structures.

Returning to the big picture, we should also be mindful of our need for a system that allows greater distribution of wealth, to help close the inequality gap – genuinely regenerating personal spending power – and so delivering more customers into the market for (sustainable) goods and services. This not only makes good sense, but as the recent UNCTAD Report shows us, the better performing economies in the world are those with greater income distribution.

Shared value, or shared wealth?

And for me, this is why Porter doesn’t go anywhere far enough with his notion of Shared Value.

The approach does provide some strategic worth for businesses, in urging them to innovate, and create new value by addressing unmet social needs; treating societal problems as opportunities to create wealth and competitive advantage, while providing a clear benefit to the community. But, I’m not sure this goes much past a refocusing of markets, stakeholder inclusion and mild philanthropy.

While Shared Value makes for a broader, more community focused business, the ownership format is still much the same - very narrowly focused, with real power and wealth still concentrated in the hands of the few. In that sense it is still very much Capitalism 1.0, albeit with a slightly more caring veneer.

Many have promoted the virtues of co-operative capitalism, including Nick Clegg with his call for a John Lewis Economy

At best it provides a more positive impact for communities, but not necessarily shared wealth. At worst, by signposting the opportunities for big businesses to focus on social needs, it could just be a vehicle for global corporations to concentrate their power and wealth even further; displacing the smaller, local and community based enterprises that might be serving such niches presently.

A cynic might even suggest it only provides a minor concession by capitalists, in order to preserve their perceived position of power, without necessarily getting to the point of greater distribution of wealth, that can only come through shared ownership.

The case for greater shared ownership seems strong enough, but may be seen as a threat, by many large businesses, large shareholders, and other incumbents that have prospered under the old order. But need it?

Give a little, to get a lot?

By adopting more shared ownership models, we could arguably provide the greatest good to the greatest number. But could this approach not only lead to a more sustainable and equitable future, but also enable continued wealth creation, too?

The current paradigm for big business is breaking down – the writing is very much on the wall. Let us remember, that continued prosperity is itself being undermined by the deficiencies of our system of business and commerce. In a zero sum game, where do you go when the minority of players have accumulated most of the wealth, and our planet can no longer sustain human life?

If we don’t transform what we do, to sustain our planet, our communities, our jobs, our shared wealth, and our ability to be paying customers – then we all go down. Better to have shared wealth, than no wealth at all.

And surely, the forces that made globalisation work are now in retreat, and so we will see a shift towards more regional and local solutions and economies, with re-localised production, closer to demand. Any business organisational and ownership model predicated on global market domination is unlikely to continue to succeed: unless, of course, we can balance our desire for scale with genuine local solutions, including ownership.

For the established larger or global businesses, it might mean re-structuring along more local, resilient models with production closer to demand, and with more shared/local ownership. This way it might be possible to retain global presence, but not necessarily domination – a smaller share of a still very substantial pie.

This approach might also help big businesses deal with the call to break up their market dominant positions, in a way that could be positioned in a very sustainable light. Tesco, for example, could transform its ownership model and enhance its sustainability credentials at a stroke – creating a more devolved and local structure, greater local wealth, and real employee commitment, but also retain brand presence, and a significantly enhanced reputation.

The Mondragon co-operative in Spain is a great example of resilience. Member businesses have continued to prosper, and jobs have been preserved at a time when unemployment in Spain has risen to 25%

Of course it would mean lower returns to external shareholders, or even a transition completely away from the stock market altogether. But, with the present systemic failings, something has to give – and real progress might mean a different model. But would Tesco and others be brave enough?

This radical suggestion might not be as outlandish as it first seems. I recall a discussion back in 2011, between a senior NGO representative and a company executive, representing a global ‘sugar + water + brand’ business model. It was suggested that in order to generate sustainable solutions, especially in poorer nations, global corporations should consider giving up a major share of ownership to the communities in which they operate.

The response was of course duly conservative – as might be expected – that the corporation wouldn’t wish to lose control of decision-making power, by following such a path. But surely that is the point; corporations with shares traded on the stock market have already lost this control. And when thinking about sustainability, isn’t it better to have decisions made by those with a closer and greater proximity to the impacts associated with such decisions?

Towards collective ownership: a quiet revolution?

Could it be that universal ownership – not by the state, but by the people – is the ultimate sustainable format for business? Some might suggest this model offers the way forward, including Jonathon Porritt promoting the virtues of co-operative capitalism, and Nick Clegg with his call for the John Lewis Economy.

Global organisations like the Co-operative movement are certainly brining collective ownership models back to the fore – an approach that has experienced a great resurgence in interest since the financial crisis, as co-operatives are proving to be more resilient, and more competitive than conventional businesses.

The co-operative economy in the UK outperformed the overall market for a fourth consecutive year in 2011, with a growth of 1.5%, as compared with 0.7% in rest of the economy. And while the real level of GDP is 1.7% lower than in 2008, the turnover in UK co-operatives has grown by 19.5% during this period.

And back to the point on resilience, 98% of co-op businesses are still in operation after 3 years, compared with a figure of 65% for all businesses. The Mondragon co-operative in Spain provides a great example of resilience – where member businesses have continued to survive and prosper, and jobs have been preserved - at a time when unemployment in Spain has risen to 25%. A key enabler here is described as “a deep culture of egalitarianism”, according to Manuel Escudero, an economist at the Deusto Business School in Bilbao.

And this is not just a UK or European experience, collectively co-operatives provide a major part of our global economy: equivalent in size to the world’s ninth-largest economy – the movement has 1 billion members, and employs 10% more people than all the multinationals and their subsidiaries put together. With two trillion US dollars in annual revenue among the worlds 300 largest co-operatives alone, this is potentially a major, global, economic force.

Co-operatives are not about making big profits for shareholders, but creating value for customers – this is what gives co-operatives a unique character, and influences their values and principles.

Collective ownership is the key ingredient – which itself renders the model inherently democratic – spreading power for decision-making and wealth distribution – one member, one vote means decisions are made for the common good, not just for the benefits of one party or interest. And whether profits are ploughed into the community, back into the business, or shared, it is the members that decide.

Developing a co-operative model is not just for start-ups, either; many successful businesses didn’t start their life as a co-operative, but have made the transition from being owned by an individual, family, or small number of people, to being owned by their members.

Transferring business ownership has the power to transform communities. Community ownership of pubs like the The Bell Inn, Bath offers an attractive way forward

Anglia Farmers was formed in 2003, as a result of the merger of two long established Norfolk based buying groups, and has now become the UK’s largest agricultural purchasing group – providing bulk purchase discounts for 1,500 full and 700 associate members.

Part of the attraction, especially in these challenging times, is also the co-operative model’s power to transform. It provides a way forward for businesses under threat of closure, such as Remploy – one of UK's leading providers of specialist employment services for disabled people and those experiencing complex barriers to work – where it is hoped that a workers buy-out could help save 200 disables jobs. This one is a work in progress, and one can only wish for a positive outcome.

It is also about the transformation of business – an opportunity for workers to buy out and turn-around a business that may have been failing under a conventional form of ownership – and thus preserve their jobs, livelihoods, and pride.

A new documentary and report produced by CECOP provides some interesting case study examples, including Fonderie de l’Aisne – an aluminium foundry located in the north-east of the Champagne region – which has been transformed from a position of liquidation in May 2009, to become a €1.3 million profitable enterprise by 2011 – by taking the worker co-operate route. Two third of profits are now retained for reinvestment, and one third distributed equally to the workers. “Today we know for whom we are working”, says Pascal Foire, the manager of the foundry.

Transferring business ownership also has the power to transform communities and local economies. At a time when so many pubs are closing down – between twelve and fifty each week in the UK, depending on which report you read – community ownership of pubs, such as The Bell Inn, Bath, offers an attractive way forward.

Using this approach, the community takes over the asset and ensures they continue to perform for the benefit of the community. This local model makes good sense; if the larger pub companies can’t make the numbers work within their paradigm, then the co-operative model offers an attractive alternative.

This also has the added benefit of keeping money circulating in the local economy. According to a new report by economic analysts K2A, co-operative businesses boost the local economy – generating a quantifiable benefit of an additional £40 for local suppliers, customers and employees, for every £100 of sales. This is what they call “sticky money”.

And shared ownership really does mean shared wealth – as we have recently seen, with the continued success at John Lewis - its 84,700 staff are sharing in the profits of the business, each member receiving an annual bonus worth 17% of their salary – the equivalent of nine weeks' pay. And of course, presumably a fair proportion of this will flow back into to the economy – invaluable at this time of continued austerity.

And there is a desire to spread-the-word, to improve awareness of the possibilities and the benefits of making the transition to a co-operative ownership model.

Following up on the International Year of the Co-operative in 2012, the Blueprint for a Co-operative Decade sets out an ambitious plan for the co-operative form of business to become the acknowledged leader in economic, social and environmental sustainability, the model preferred by people, and the fastest growing form of enterprise. Grand plans, indeed – that could, over time, lead to a quiet revolution in our economies.

Towards a sustainable economy – one business at a time

If we want to deliver truly sustainable business, we have to consider our organisational formats and ownership structures. This is important, not just so that we sufficiently incorporate all people-based perspectives – including equality and equity – but also to ensure we have the right organisational vehicles to ensure the full range of sustainable outcomes becomes a genuine possibility.

We need the right governance and control structures that will support and enable long-term decision-making, that will allow us to address all sustainability perspectives, and yet still retain our business focus. Alternative formats like the certified B Corp add much value in this respect - to help formalise our purpose, our goals, and our integrated business strategy. And when backed up with the right legal underpinning, it becomes a powerful combination.

But we might also need to consider moving our businesses away from the volatility, short-term perspectives, and remote decision-making power of conventional stock markets. The Triodos model does present an interesting alternative model for publicly traded companies, but we might also consider the potential for direct ownership, or through a more collaborative co-operative structure.

Shared ownership models signal a positive way forward – and could bring about genuine transformation – not just in the sustainability of our businesses, but also for the sustainability of our economies, too. Universal ownership – by the employees, not the state – could create a much fairer economy, where hard work is genuinely rewarded, and without the need to get bogged-down with emotive and ideological arguments about taxation, benefits policy, or the size of the state. Fairness is built in, without the need for workarounds.

In fact, shared ownership provides an opportunity to for all of us to reclaim our economies – one business at a time. Now, that would be a game changer.