Should we embrace employee-owned firms?
Britain would benefit from more John Lewis-style employee-owned firms, while companies with share listings should be subject to stricter controls, a report has recommended. The ownership commission, which was set up by the former Labour government to look at corporate ownership in the country, will present its findings to Business Secretary Vince Cable. The commission, chaired by left-leaning commentator and former head of the Work Foundation Will Hutton, said Britain should use tax incentives to build up a German-style ‘mittelstand’ of middle-sized companies to support the economy. Britain’s economy remains anaemic after limping out of recession following the banking crisis. A lack of lending by banks to smaller and medium-sized businesses remains a hot topic and has been the subject of frequent criticism by Cable. “The financial crisis and the protracted problems in its wake has opened up the debate about how well our economy is owned, run and managed. Good ownership is indissolubly linked to good capitalism,” said Hutton, ahead of the report launch. Suggested committee proposals to introduce more plurality in corporate ownership include measures to allow mutually-owned companies to raise capital and support for employee-owned firms so they are not taxed “inappropriately”. Employee-owned John Lewis, Britain’s biggest department store group, has been praised by Prime Minister David Cameron for its business model, which provides for an annual bonus to be paid to its 81,000 ‘partner’ staff. The company’s chairman Charlie Mayfield was on the commission, as was Peter Marks, chief executive of Britain’s largest mutual, The Co-Operative Group, and British Gas owner Centrica’s chairman Roger Carr.
Taking advantage of the natural energy of a workforce can be difficult for large companies to accomplish without giving up at least some control. Even small improvements in processes, customer experiences and products have the power to drive growth and increase margins, which is why so many large corporations claim to encourage innovation. Yet if you ask experts how effective companies are when it comes to stimulating entrepreneurial thinking, they will tell you that most are still getting it wrong. J. Brock Smith, who teaches entrepreneurship and marketing at the Peter B. Gustavson School of Business at the University of Victoria, where MBA students can specialize in entrepreneurship for a semester, says the most important factor in encouraging innovation is creating a culture to support it. “Large corporations are not set up to nurture creative people,” says Smith, who teaches students everything from searching for and screening opportunities to financing, growth and internationalization. “Ideas people are simply weeded out or aren’t hired in the first place. If they are hired, they don’t like to conform and don’t always work well with others, so they are not promoted and they leave.” Since corporations have a lower risk tolerance for unproven technologies compared to smaller businesses that risk their future on them every day, Smith says conservative thinking permeates large companies from the top down. “Because creatives have a high emotional intelligence, the subtle signal they pick up is that they are not in a place that values risk,” he says. Another challenge for companies, Smith says, is retaining and motivating creative types who aren’t typically driven by money, power and status. This is especially acute since many corporate environments typically value and reward the very things that disinterest the creative class.
6% of UK’s wealthiest pay less than 10% tax
Some six per cent of Britain’s wealthiest people used tax reliefs to reduce their tax bills to less than 10 per cent, according to data published by Britain’s finance ministry, which it said highlighted the need to make the tax system fairer. Last month’s decision by chancellor George Osborne to cap the level of tax relief on charitable donations to 25 per cent of income has drawn howls of protest from within his own Conservative party as well as from charities, who argue that the move will significantly hit donations. The Treasury figures show that 3 per cent of people with earnings of between 1 and 5 million pounds paid less than 10 per cent tax in the 2010-11 financial year. That proportion increased to 4 per cent of those with an income of 5 million -10 million pounds and 6 per cent of those with an income of above 10 million pounds. In Britain, anyone earning up to 34,370 pounds is liable to income tax of 20 per cent, while those earning over 150,000 pounds must pay 50 percent, though that is set to fall to 45 percent from April 2013. The Treasury said its figures illustrated the importance of the principle behind the government’s cap on reliefs, showing that people on the lowest incomes paid a higher rate of tax than millionaires. “We’re capping benefits and these figures clearly show why it’s fair to cap tax reliefs for the wealthy as well,” said a Treasury spokesperson. Critics of the cap on tax relief for charitable giving argue that the policy is at odds with the Conservative party’s flagship “Big Society” ideal to encourage voluntarism and philanthropy. The Treasury defended the move, however, saying that it wanted to encourage a US-style culture of giving, with low income tax rates for the wealthy, and said it would work with charities and donors over the next year to limit the impact.
Learning the lending lessons of the past
Misgivings over how effective the UK government will be with its credit-easing initiatives aimed at boosting bank lending to smaller companies have led to calls in some quarters for David Cameron to follow the blueprint of countries such as Germany and create a state lender to give SMEs access to bond market funding. In the rush to delever and meet a swathe of incoming regulatory capital requirements, banks have been cutting back on lending, even though the European Banking Authority has specified that it wants less than 1% of deleveraging to come from cuts in lending to the economy. The UK Treasury has followed its European counterparts in putting in place national schemes to encourage bank lending. The UK government announced a £20bn National Loan Guarantee Scheme last year, whereby it will underwrite loans to remove some of the risk from banks’ balance sheets and encourage more lending. William Morello, a spokesman for the UK Treasury, said the government hopes to finalise the details and get the scheme up and running by spring, although critics say £20bn will not be enough and the banks have little incentive to comply, thus compounding the squeeze on lending. George Magnus, senior economic adviser at UBS, said: “I don’t think it’s going to work particularly well, because the banks are in the process of shrinking their balance sheets and cutting back on loans.” Duncan Wheldon, senior policy officer at the Trades Union Congress said: “In the grand scheme of SME lending or bank lending to non-financial companies, it is not a huge deal. We would like to see a state investment bank set up where SMEs could borrow in bond markets, modelled on KfW in Germany.”