Building a More Meaningful Business Environment Post-Crisis

Then came the piece in 2011. I think this was the year that I was inspired by John Lewis to write about their partnership values and about meaningful business models:

Dec 2011

One of the most popular television ads this holiday season depicts a little boy counting down the days to Christmas. Time just can’t seem to pass by quickly enough for him, and one assumes this is because he can’t wait to open his presents.

However, the final sequence of the ad – where he wakes up on Christmas morning – sees him running past the pile of presents at the foot of his bed to retrieve an awkwardly-wrapped package from his wardrobe. As he presents the gift to his sleepy parents, the tagline appears on the screen: For The Gifts You Can’t Wait to Give. 

This is the sort of feel-good ad that most people have come to expect from John Lewis, the UK’s favourite retailer. Much loved by Middle Britain, the John Lewis brand is often associated with exceptional customer service, reliability and trustworthiness, qualities that have been attributed to its unique business model.

The John Lewis Partnership – which owns the John Lewis departmental stores and Waitrose supermarkets – is an employee-owned company; all permanent staff are ‘partners’ who own a share in the business and participate in its profits. This sense of ownership is seen as a strong incentive for employees to perform well; its executive chairman Charlie Mayfield has been quoted as saying that ‘if we treat our partners well, it will lead to good customer service.’

The global financial crisis and the ensuing economic recession in much of the Western world has given rise to much anger and disillusionment, as demonstrated by the Occupy protest movement against economic and social inequality. And in an effort to restore better accountability, ethics and trustworthiness to business practices, business and government leaders have been prompted to seek alternatives to the current shareholder value model and its short-termist view of profits and share ownership by distant, disengaged shareholders.

As such, the John Lewis model of employee ownership and other similar business models such as co-operatives and mutuals which promote a stronger sense of ownership and greater stakeholder involvement, are increasingly being seen as alternative business models for the future. So much so that the British government is keen to see such models replicated not just in businesses but also in the delivery of public services.  

Research by the Cass Business School show that employee-owned businesses create jobs faster, are significantly more resilient in an economic downturn, deliver far better customer satisfaction, and boast substantially higher value added per employee, The Guardian reports. In the UK, they contribute some £25 billion to the British economy, and according to law firm Field Fisher Waterhouse’s UK Employee Ownership Index, outperform FTSE All-Share companies by an average of 11% annually.

John Lewis’s partnership model has enabled it to weather the current challenging times; despite the downturn, the company saw a 20% jump in pre-tax profits to £367.9 million in the year ended Jan 29, 2011. The business shared £194.5 million in the form of bonuses with its 76,500 partners, equivalent to 18% of their individual annual salary.

Finance mutuals

In the financial services sector, remutualisation is now being seen by some as a way to restore faith in the industry. When the government put up nationalised bank (and ex-building society) Northern Rock for sale, there were many calls for it to be remutualised into a new building society.

Mutuals in the British financial sector are represented mainly by building societies. They are owned by their customers, known as members, and therefore are expected to act in the interests of their members rather than being driven by external shareholder pressure for profits.

There is however only a handful of building societies left in the UK, as 10 of the largest 12 building societies demutualised to become banks in the mid-1980s. Ironically, mutuals were then derided for their inability to fulfil the ideal norm of the shareholder value model due to limits on participation in wholesale funding and high-risk businesses; these constraints in fact safeguarded them during the financial crisis. Interestingly, none of these demutualised societies exist independently today, having been either merged or taken over by a larger bank.

Building societies have reportedly weathered the financial crisis well; a majority of them have remained profitable despite continuing difficult market conditions including very low interest rates and low mortgage activity, KPMG’s Building Societies Database 2011 reports.

The case for remutualising failed financial institutions was put forth in a report by Oxford University’s Centre for Mutual & Employee-Owned Business, which noted that building societies are less prone than banks to pursue risky speculative activity. Having more diverse models of financial service providers would also help produce a more stable financial sector and enhance competition within the system, it added.

There is no denying the appeal of mutuals and employee-owned companies in these troubled times. Increasingly, more people are drawn to the principle of building businesses that also benefit employees, customers and society as a whole, as opposed to the individualistic, profit-oriented practices which many believe were the root causes of the current financial chaos.

Such business models are however not without their downsides. For one, they are more complex to run, depending on the ownership and management structures. There are also questions as to how much business risk they can take, and how an external injection of capital would affect mutually-owned organisations. Financial Times’ Tony Jackson also pointed out that Lehman Brothers and Bear Stearns had very high levels of employee ownership when they imploded. And of course, pro-capitalists would be downright uncomfortable with the socialist and communist connotations of such business models.

One can however hope that there is some real effort to seriously reflect on the failings of the current economic system, and rather than just going back to ‘business as usual’ when things improve, that we may find ourselves with a more meaningful business environment; one that goes beyond making profits in the short term and looks at gaining value not just for shareholders but for society as a whole over the long term.