Economic democracy quote #1

A Preface to Democratic Theory

Here’s a great paragraph on why economic democracy – giving people control and ownership of businesses – is a key way of creating greater equality.

Most interestingly, this is from Robert Dahl, a prominent democratic theorist whose big idea was the need for polyarchy rather than democracy, by which he means elites competing with one another for votes based on different interest groups and positions – a situation not that dissimilar from what we have now. Hardly the radical then.

As Dahl puts it:

” . . . differences in ownership and control of enterprises, while certainly not the origin of all forms in inequality, are deeply implicated in inequalities of many kinds: in esteem, respect, and status, in control over one’s daily life, in income and wealth and all the opportunities associated with them, in life chances for children and adults alike. It seems to me scarcely open to doubt that a society with significantly greater equality in owning and controlling economic enterprises would produce profoundly greater equality than exists in America today.”

Robert Dahl, A Preface to Economic Democracy, 1985, pp5-6

Taking power from the people

Yesterday will surely go down in history as a day of distasteful investor news, a day when power was taken from the people.

The big news for those of us in the co-operative and mutual sector was that the Co-operative Bank’s rescue bid will result in the customer members of The Co-operative owning just 30% of the Bank, the rest being taken primarily by institutional investors.

The big news for the UK as a whole was that the development of nuclear power plant will be financed and owned by a consortium of largely overseas companies and investors. Regardless of views on nuclear, this erodes the (admittedly very abstract) principle that the people should have control over their energy power.

Why the Co-operative Bank’s problems matter

So, the Co-operative Bank’s rescue bid – which involved a partial flotation on the stock exchange to raise capital whilst The Co-operative Group retained around 70% ownership – has failed.

Following very difficult negotiations, it now looks like the majority of shares in the Bank will be held by institutions, with The Co-operative Group retaining just 30% ownership.

There is – and will continue to be – an inquest into the causes of the problems that led to this. Hubris, failed expansion plans, disengaged members, executive failings and much else will surely turn out to be factors.

But what perhaps hasn’t been said, in simple terms. why it matters. For what it’s worth here, I think, is why it matters.

To society. The Co-operative Bank has been arguably the biggest force for good in the UK banking sector for the last 20 years – a prominent ethical bank that led the way on ethical investment and sustainability. Without it there will be less of an ethical counterpoint to standard banking practices.

To customers. The Co-operative Bank provided an alternative for customers, offering them an accessible mainstream bank where they could feel good about what their money was being used for. There are other ethical banks, but all are small and niche; there may be no easily accessible alternative anymore.

To co-operatives. The Co-operative Bank was perhaps the defining brand of the co-operative sector in the UK – when people think about the word co-operative they think about an ethical leader. In the short to medium term, this association will be damaged by the Bank’s problems.

To the economy. The tragic unfolding of events stem from a deeper problem – that the institutions governing banks and business favour one model of banking, despite the fact that the model has been shown to fail since 2008. Specifically, in this case, Standard and Poor’s downgrading of the Bank was partly a consequence of the rating agency ignoring the capital available to The Co-operative Bank because it was owned by a much larger Co-operative Group. A major catalyst for these problems was the blinkered view of acceptable banking practice.

If Vodafone was a mutual

What would happen if Vodafone was a mutual, owned by everyday people rather than shareholder investors?

Vodaphone announced recently that it was selling its 45% stake in the US mobile company, Verizon Wireless, for over £80 billion. With much praise in the press, Vodaphone said that £66 billion of the sale will go to its shareholders. With nearly 50%of its shareholders in the UK, this will give a much-needed boost to the UK economy, equivalent to around 2% of GDP and some in the press said, akin to quantitative easing.

That’s a lot of money, no doubt, and it shows the ability of businesses to generate and distribute wealth.

The thing is, though, over 75% of Vodafone’s shares are held by ten investment institutions. So only a small amount of money will go into the pockets of real people or into the economy in any meaningful sense. Most of the pay-out will be re-invested in the markets with little tangible impact for economic wellbeing and the wider economy.

If it was a mutual things would be different.

If Vodafone were owned by its 19.3 million UK customers, rather than shareholders, each customer owner would get around £3,500, giving them a significant chunk of money. If Vodafone were owned by its 84,000 staff, the share each would receive would be considerably larger.

Not only would a mutually owned Vodafone put money in people’s pockets and boost the economy, it would share the wealth generated by the business amongst around 40% of the UK adult population.

And that’s without even mentioning tax. Which, it turns out, Vodafone will pay very little of because of its clever tax arrangements. But that’s a different story.

Management theory and employee ownership

So, today, 4 July, is Employee Ownership Day. It’s the UK’s first annual celebration of employee owned businesses, led by government with support from the mutual sector.

It’s aim is to raise awareness of the employee owned business model which is already quite sizable, turning over around £30 billion and accounting for around 3 % of GDP.

There are pros and cons to ‘days’ like this. But one thing is for certain, now is a time to highlight the benefits of employee owned businesses.

A quick overview of recent management and businesses thinking (from people like Gary Hamel, Linda Gratton, Michael Porter, Bo Burlingham and others) brings to light some key ideas that are coming to define the way we think about, and do, business:

  •  To be productive, a business doesn’t just need good processes – it needs engaged employees who care about the business and share its vision
  •  As employees’ expectations change, leaders need to be adopt a more collaborative and participative style
  •  Innovation and product development should be welcome not only from the management and R&D  teams, but also from the wider workforce who have ideas and experience others don’t
  •  Long-term sustainability comes from putting the interests of stakeholders with an interest in the future of the business at its heart – the employees are the most significant stakeholders any business has, in this respect

Although it’s not said often enough, it’s blindingly obvious: employee owned businesses put these and many other new management ideas into practice, and have been doing for years.

The Co-operative Bank and the co-operative economy

Until a month ago, when the Co-operative Bank’s problems began to surface, it was regularly said that co-operatives are enjoying a renaissance. A new report on the co-operative sector shows that the recent difficulties at the Bank should be seen as an anomaly, not an example of the UK’s co-operative economy.

There are two arguments forwarded as to why co-operatives are enjoying a renaissance. First, customers are turning to known, trusted businesses and co-operatives exemplify this, both in the UK and elsewhere. Second, co-operatives are showing stronger financial resilience because they are not owned by outside investors and therefore are able to think long term rather than bow to short term shareholder pressure.

Both are simplifications of a complex business landscape, but as shown in Co-operatives UK’s new report,Homegrown: The UK Co-operative Economy 2013, both contain kernels of truth.

The recent revelations about the Co-operative Bank – which pulled out of a major deal to buy Lloyds bank branches, was subsequently downgraded by Moody’s to ‘junk’ status and then revealed a capital hole of £1.5 billion that resulted in a partial stock market flotation – has put both of these into question.

The Co-operative Bank is, after all, an iconic UK co-operative brand with very high levels of trust precisely because it is a mutually owned bank. Although it is a small part of the co-operative sector, accounting for only about 6% of the sector’s turnover, the knock on effect of the Bank’s high profile problems for other co-operative and mutual businesses are potentially huge.

Homegrown, though, shows that regardless of whether or not the Bank’s problems are significant as reported in the press, we must not extrapolate from the Bank to the wider co-operative sector.

– Co-operatives, the annual report shows, have grown year on year since the start of the credit crunch. Since 2008 turnover has grown by 23%, the number of members by 36%, and the number of co-operatives by 28%. The sector is growing at a startling rate in a terrible economic climate.

– It shows that trust in co-operatives is high. 52% of people describe co-operatives as trusted, whilst only 7% – yes 7! – say the same of PLCs.

– It shows that this can’t be down to one or two businesses. There are over 6,000 co-operative businesses. High profile examples like The Co-operative Group and John Lewis, but other also other large yet less well known businesses like Milk Link, First Milk, Midcounties Co-operative, Unimer, and many others.

– And it shows that co-operatives aren’t working in boom industries – the vast majority of the co-operative sector is made up of retailers and farmers, hardly two sectors you’d put money on to thrive over the last few years.

Clearly, co-operatives are no panacea for a struggling economy. They need to compete, financing growth is difficult, they suffer from many of the management issues other businesses have. The Co-operative Bank illustrates that.

But even the Financial Times, one of the papers most critical of the Co-operative Bank’s bid for expansion, recognised that the Co-operative Bank is an anomaly, not an example of the co-operative economy:

“Co-operative businesses grew in number, turnover and jobs last year, underlining the movement’s resurgence despite the travails of the Co-operative Group.”