Alternatives to Actual Existing Capitalism?
Let's be positive! The first piece is from The Guardian, and deals with possibilities for mutualism. Sorry if you're offended by the Wayne Rooney references.
A stake in success: Like Wayne Rooney, employees want to be part of a winning team
Jonathan Michie, The Guardian, Friday October 21, 2005
Business people and corporate executives lose more sleep - at least one night a week according to research by Capgemini management consultants - over their employees' performance than over almost any other issue, including share price nerves and their own pay. That's why successful companies are spending more on training and consultation to boost productivity. It's also a key reason for the rapid growth of employee share ownership schemes as a lever to increase commitment and performance.
In the US there is widespread use of employee share ownership, linked to an ideology of "people's capitalism". But it's also on the rise across Europe. Gordon Brown is keen for more British companies to sign up to employee share ownership, hoping that the motivational effect could help close the UK productivity gap with the US. The chancellor's tax incentive scheme for employee share ownership has already had an impact. But if the motivation relies solely on share price rises, the effect can be the opposite when stock markets fall. Motivation can go down as well as up.
The evidence suggests that employee ownership of companies - such as the John Lewis Partnership - may offer significantly bigger productivity gains. For any kind of employee ownership to produce improved performance demands real involvement and participation. Without that, the company management's commitment to sharing success won't be believed.
Most existing employee share ownership schemes are neither large enough nor structured enough to give employees a real voice. However, the employee-owned sector - where employees hold majority or outright ownership - is growing fast. There are hundreds of workers' cooperatives, but the main growth recently has been among "classic" companies where the owner has sold up to the employees.
The expansion of this employee-owned business sector - with a turnover of more than £20bn a year in the UK - is partly explained by the failure of existing employee share schemes to deliver the participation and collective voice that boosts corporate performance. This week the chancellor pointed to the success of the papermaker Tullis Russell, a medium-sized employee-owned business in his own constituency. As employee motivation becomes increasingly important in a skills-based, globalised economy, Brown has argued, employee ownership will become more relevant.
There is clear evidence of employee share ownership delivering improved performance across the developed world. But these benefits are only reaped when the schemes are considered genuine and combined with genuine participation systems giving employees a voice. If they're seen as a fad, or a trick to avoid wage rises, they can be counterproductive. Hence the cool reception from the Communication Workers Union to Allan Leighton's announcement on Tuesday that he wants 20% of Royal Mail to be owned by the workforce. The CWU fears a slippery slope to privatisation. The union might be right, but it doesn't have to be. Shares could be held in a trust, to which any employee leaving is obliged to sell their holding, so that ownership remains locked into the state and the employee shareholding trust. This could benefit Royal Mail and its customers through improved employee motivation. And the Treasury would receive funds in return for the shares, plus higher tax revenues from a more profitable Royal Mail.
Employees need to feel that together they have a sizable stake, along with a genuine say. For this, the evidence suggests, the shares need to be held collectively in a trust. Employees can still cash in by selling their shares to the trust - indeed, in many schemes they're obliged to when leaving the company. So the collective holding remains intact. And with it the belief that the ownership represents a genuine stake.
The growth of the employee-owned business sector, along with the companies that have substantial employee share ownership schemes, is creating a biodiversity of business models that adds value to the economy. There used to be a view that the lesson for business from biology was "survival of the fittest". The real lesson from biology is that the enormous diversity that has characterised human societies is a strength - which applies equally to institutional arrangements.
But further growth of employee ownership and shareholding needs changes to legislation. At present, unlike for individual shares, there are no tax breaks for employee trusts with long-term shareholdings - precisely the sort of policy that is needed.
The task for any organisation is to get all employees contributing. Some may "free ride", leaving it to others to make a success of the enterprise. This year's Nobel prize in economics was awarded to a set of theories analysing this issue. But you don't need a prize to know that the way to improve someone's effort is to make them part of the team. Even Wayne Rooney wants to be loved, rather than played out of position.
The government must ensure the tax breaks are well targeted. Companies taking advantage of them should include the participation measures that actually deliver results and a payback for the taxpayer. And the tax breaks need to include employee trusts with long-term shareholdings. Will the chancellor do it?
Professor Jonathan Michie is the director of Birmingham Business School and a co-author of Shared Company: How Employee Ownership Works, published today by Job Ownership Limited.
j.michie@bham.ac.uk
The other piece is a summary of the ideas of Chris Cook, who is emerging as the economic guru at the radical devolutionary group Devolve (http://www.devolve.org). I have said before to him, and he does agree to a certain extent, that the phrase "Open Capitalism" is a bad one. I prefer "Open Economic Partnerships", as that is a more accurate description of what is advocated. With that health warning, I present Chris' basic argument:
OPEN CAPITALISM
DEFINITIONS
'Open Capital' is defined as 'a proportional share in an Enterprise for an indeterminate time'.
'Enterprise' is defined as 'any entity within which two or more individuals create, accumulate or exchange Value'.
For discussion/definition of Value, see the Behind Economics page.
BRIEF HISTORY OF THE ENTERPRISE
Early Enterprises were partnerships and unincorporated associations. However, the need for institutions which outlived the lives of the Members led to the development of the Corporate body with a legal existence independent of its Members.
In the UK the earliest Corporates were created by Royal Charter - a possibility which exists to this day. The key development in the history of Capitalism was the creation of the 'Joint Stock' Corporate with liability limited by shares of a 'Nominal' or 'Par' value, typically £1.00. The UK Industrial Revolution was fuelled by Capital raised through Joint Stock Corporates largely created by Act of Parliament.
From 1844 onwards, the creation of Corporates through registration under Companies Statutes further streamlined the process and over the next 150 years the Limited Liability Corporate evolved into the Public Limited Liability Corporate at the heart of the malaise deriving from the process we know as 'Globalisation'.
THE UK LIMITED LIABILITY PARTNERSHIP
ORIGINS
The story begins in that bastion of democracy - Jersey.
In the early 1990's major professional partnerships such as Andersen became increasingly concerned at the risks run by individual partners of bankruptcy caused by their unlimited liability for actions or omissions by their fellow partners.
Two of the leading UK professional partnerships commissioned a major City law firm - at a rumoured cost in excess of £1m - to draw up an Act of the Jersey 'States' Parliament establishing a new form of Limited Liability Partnership (LLP).
Suitably placed UK press articles raised the spectre of a mass migration by professional firms to Jersey and the Conservative Minister Michael Heseltine then in office ordered the commencement of the consultative and legislative process subsequently continued by New Labour which eventually resulted in the UK's Limited Liability Partnerships (2000) Act which came into effect on 6 April 2001.
The outcome is an economic entity or 'Enterprise' which is both novel and supremely simple but, confusingly, is specifically not a partnership but is instead a Corporate body.
For the first time anywhere (unbelievably) it is possible to form a corporate body (ie an entity with a legal existence independent of its individual Members) which has:
(a) collective limited liability (not to be confused with the pre-existing form of UK Limited Partnership or the US form of LLP, both of which have one or more Members with unlimited liability and others with individually limited liability);
(b) the mutually beneficial collaborative and co-operative characteristics of Partnership.
THE OPEN CORPORATE
It is possible for all stakeholders, whether staff, management, investors, suppliers, service providers or customers to subscribe to a suitably drafted Member Agreement, rather than to complete adversarially negotiated Contracts of Employment, Supply Agreements and the like.
Thereby putting the 'Open' in the proposed 'Open Corporate'.
OPEN CAPITAL
It is now possible - through suitable provision in the Member Agreement - to create a new form of 'Open' Capital in the form of proportional shares /partnership interests (eg one half, five tenths, 500 thousandths - as opposed to fixed shares of say £1.00 'Nominal' or 'Par' value).
This model has already been (albeit unwittingly) demonstrated by the Hilton Group in its recent sale for £350m of 10 hotels to an LLP in which it is the 40% owner and 'Occupying' Member (or Capital User), while another LLP - itself with three Members including Bank of Scotland - owns the balance of 60% and is the 'Financing' Member (or Capital Provider).
Hilton pays to the financiers each year for the 27 year term £3m plus 28.8% of the hotels' gross revenue, subject to a 'floor' of £17.5m pa.
There is no debt, and no mortgage: equally there is no Freehold/Leasehold 'sale and leaseback' either of which would have given rise to a fixed overhead to the Hilton group and therefore to a divergence of interest between the provider of Capital and the User.
The outcome is that sharing of risk and reward characteristic of a true partnership: if Hilton has a good year the financiers do too.
One interesting consequence of the model is of a method of financing property purchases which is Islamically sound, being outside the debt/interest paradigm.
CONSEQUENCES
Any Enterprise or economic entity: from a co-habiting couple to a government sponsored PPP or PFI; from a football club to a software firm; may be constituted using one or more Open Corporates.
An Open Corporate is an optimal Enterprise model in the way that it allows all stakeholders to work together co-operatively and collaboratively to maximise the Value created by the enterprise: as opposed to the current model, where one constituency of stakeholder competitively attempts to extract value from the others.
Due to its optimal nature, commercial enterprises which adopt the model will in due course be able to undercut those enterprises who do not - the 'Co-operative Advantage' referred to by the co-operative movement. There is no 'Profit' and 'Loss' in an Open Corporate: these concepts give way to the mutual creation and exchange of economic value created by individuals collaboratively and co-operatively working together.
The outcome will be a web of networked and non-hierarchical partnerships with a new capital and monetary market infrastructure based upon an open and transparent architecture.
Moreover, existing political thinking becomes obsolete as the economic assumptions underpinning existing political analyses break down in the face of a new phenomenon.
Redistribution through extracting Value from one constituency of stakeholder (however undeserving) and allocation to another becomes irrelevant. The alternative is now pre-distribution whereby the Value generated by "Open" Capital is more equitably distributed through revenue sharing agreements giving rise to a new balance between Equity and Equality.
" In five years time we'll all look back and say how simple and obvious it all was... " - David King
Open Capitalism is an 'emergent' phenomenon which will supplant the existing form of Capitalism (which was itself an unplanned, emergent process) and it is emerging in the same manner that a 19 year old single-handedly destroyed the business model of the global music business through his invention of the 'Napster' music file-sharing mechanism. Or the same way that the small community of global oil traders commenced trading oil and oil products in Yahoo instant messaging 'chat rooms' without their management even being aware of the fact.
Capital is and always has been 'broken' by the conflict within it between 'Permanent' Capital (eg Freehold property or Equity in the form of shares in a limited liability company ) and 'Temporary' Capital (eg Leasehold property or Debt finance).
Open Capital - a proportionate share in an enterprise held for an indeterminate period of time - is a concept so simple that, as JK Galbraith said of the creation of Money by private Banks, " ...the mind is repelled ".
Open Capital resolves the conflict between the financiers and the financed, to the mutual benefit of both, and thereby opens the way to a truly collaborative and open society.
Chris's website is at http://www.opencapital.net
A stake in success: Like Wayne Rooney, employees want to be part of a winning team
Jonathan Michie, The Guardian, Friday October 21, 2005
Business people and corporate executives lose more sleep - at least one night a week according to research by Capgemini management consultants - over their employees' performance than over almost any other issue, including share price nerves and their own pay. That's why successful companies are spending more on training and consultation to boost productivity. It's also a key reason for the rapid growth of employee share ownership schemes as a lever to increase commitment and performance.
In the US there is widespread use of employee share ownership, linked to an ideology of "people's capitalism". But it's also on the rise across Europe. Gordon Brown is keen for more British companies to sign up to employee share ownership, hoping that the motivational effect could help close the UK productivity gap with the US. The chancellor's tax incentive scheme for employee share ownership has already had an impact. But if the motivation relies solely on share price rises, the effect can be the opposite when stock markets fall. Motivation can go down as well as up.
The evidence suggests that employee ownership of companies - such as the John Lewis Partnership - may offer significantly bigger productivity gains. For any kind of employee ownership to produce improved performance demands real involvement and participation. Without that, the company management's commitment to sharing success won't be believed.
Most existing employee share ownership schemes are neither large enough nor structured enough to give employees a real voice. However, the employee-owned sector - where employees hold majority or outright ownership - is growing fast. There are hundreds of workers' cooperatives, but the main growth recently has been among "classic" companies where the owner has sold up to the employees.
The expansion of this employee-owned business sector - with a turnover of more than £20bn a year in the UK - is partly explained by the failure of existing employee share schemes to deliver the participation and collective voice that boosts corporate performance. This week the chancellor pointed to the success of the papermaker Tullis Russell, a medium-sized employee-owned business in his own constituency. As employee motivation becomes increasingly important in a skills-based, globalised economy, Brown has argued, employee ownership will become more relevant.
There is clear evidence of employee share ownership delivering improved performance across the developed world. But these benefits are only reaped when the schemes are considered genuine and combined with genuine participation systems giving employees a voice. If they're seen as a fad, or a trick to avoid wage rises, they can be counterproductive. Hence the cool reception from the Communication Workers Union to Allan Leighton's announcement on Tuesday that he wants 20% of Royal Mail to be owned by the workforce. The CWU fears a slippery slope to privatisation. The union might be right, but it doesn't have to be. Shares could be held in a trust, to which any employee leaving is obliged to sell their holding, so that ownership remains locked into the state and the employee shareholding trust. This could benefit Royal Mail and its customers through improved employee motivation. And the Treasury would receive funds in return for the shares, plus higher tax revenues from a more profitable Royal Mail.
Employees need to feel that together they have a sizable stake, along with a genuine say. For this, the evidence suggests, the shares need to be held collectively in a trust. Employees can still cash in by selling their shares to the trust - indeed, in many schemes they're obliged to when leaving the company. So the collective holding remains intact. And with it the belief that the ownership represents a genuine stake.
The growth of the employee-owned business sector, along with the companies that have substantial employee share ownership schemes, is creating a biodiversity of business models that adds value to the economy. There used to be a view that the lesson for business from biology was "survival of the fittest". The real lesson from biology is that the enormous diversity that has characterised human societies is a strength - which applies equally to institutional arrangements.
But further growth of employee ownership and shareholding needs changes to legislation. At present, unlike for individual shares, there are no tax breaks for employee trusts with long-term shareholdings - precisely the sort of policy that is needed.
The task for any organisation is to get all employees contributing. Some may "free ride", leaving it to others to make a success of the enterprise. This year's Nobel prize in economics was awarded to a set of theories analysing this issue. But you don't need a prize to know that the way to improve someone's effort is to make them part of the team. Even Wayne Rooney wants to be loved, rather than played out of position.
The government must ensure the tax breaks are well targeted. Companies taking advantage of them should include the participation measures that actually deliver results and a payback for the taxpayer. And the tax breaks need to include employee trusts with long-term shareholdings. Will the chancellor do it?
Professor Jonathan Michie is the director of Birmingham Business School and a co-author of Shared Company: How Employee Ownership Works, published today by Job Ownership Limited.
j.michie@bham.ac.uk
The other piece is a summary of the ideas of Chris Cook, who is emerging as the economic guru at the radical devolutionary group Devolve (http://www.devolve.org). I have said before to him, and he does agree to a certain extent, that the phrase "Open Capitalism" is a bad one. I prefer "Open Economic Partnerships", as that is a more accurate description of what is advocated. With that health warning, I present Chris' basic argument:
OPEN CAPITALISM
DEFINITIONS
'Open Capital' is defined as 'a proportional share in an Enterprise for an indeterminate time'.
'Enterprise' is defined as 'any entity within which two or more individuals create, accumulate or exchange Value'.
For discussion/definition of Value, see the Behind Economics page.
BRIEF HISTORY OF THE ENTERPRISE
Early Enterprises were partnerships and unincorporated associations. However, the need for institutions which outlived the lives of the Members led to the development of the Corporate body with a legal existence independent of its Members.
In the UK the earliest Corporates were created by Royal Charter - a possibility which exists to this day. The key development in the history of Capitalism was the creation of the 'Joint Stock' Corporate with liability limited by shares of a 'Nominal' or 'Par' value, typically £1.00. The UK Industrial Revolution was fuelled by Capital raised through Joint Stock Corporates largely created by Act of Parliament.
From 1844 onwards, the creation of Corporates through registration under Companies Statutes further streamlined the process and over the next 150 years the Limited Liability Corporate evolved into the Public Limited Liability Corporate at the heart of the malaise deriving from the process we know as 'Globalisation'.
THE UK LIMITED LIABILITY PARTNERSHIP
ORIGINS
The story begins in that bastion of democracy - Jersey.
In the early 1990's major professional partnerships such as Andersen became increasingly concerned at the risks run by individual partners of bankruptcy caused by their unlimited liability for actions or omissions by their fellow partners.
Two of the leading UK professional partnerships commissioned a major City law firm - at a rumoured cost in excess of £1m - to draw up an Act of the Jersey 'States' Parliament establishing a new form of Limited Liability Partnership (LLP).
Suitably placed UK press articles raised the spectre of a mass migration by professional firms to Jersey and the Conservative Minister Michael Heseltine then in office ordered the commencement of the consultative and legislative process subsequently continued by New Labour which eventually resulted in the UK's Limited Liability Partnerships (2000) Act which came into effect on 6 April 2001.
The outcome is an economic entity or 'Enterprise' which is both novel and supremely simple but, confusingly, is specifically not a partnership but is instead a Corporate body.
For the first time anywhere (unbelievably) it is possible to form a corporate body (ie an entity with a legal existence independent of its individual Members) which has:
(a) collective limited liability (not to be confused with the pre-existing form of UK Limited Partnership or the US form of LLP, both of which have one or more Members with unlimited liability and others with individually limited liability);
(b) the mutually beneficial collaborative and co-operative characteristics of Partnership.
THE OPEN CORPORATE
It is possible for all stakeholders, whether staff, management, investors, suppliers, service providers or customers to subscribe to a suitably drafted Member Agreement, rather than to complete adversarially negotiated Contracts of Employment, Supply Agreements and the like.
Thereby putting the 'Open' in the proposed 'Open Corporate'.
OPEN CAPITAL
It is now possible - through suitable provision in the Member Agreement - to create a new form of 'Open' Capital in the form of proportional shares /partnership interests (eg one half, five tenths, 500 thousandths - as opposed to fixed shares of say £1.00 'Nominal' or 'Par' value).
This model has already been (albeit unwittingly) demonstrated by the Hilton Group in its recent sale for £350m of 10 hotels to an LLP in which it is the 40% owner and 'Occupying' Member (or Capital User), while another LLP - itself with three Members including Bank of Scotland - owns the balance of 60% and is the 'Financing' Member (or Capital Provider).
Hilton pays to the financiers each year for the 27 year term £3m plus 28.8% of the hotels' gross revenue, subject to a 'floor' of £17.5m pa.
There is no debt, and no mortgage: equally there is no Freehold/Leasehold 'sale and leaseback' either of which would have given rise to a fixed overhead to the Hilton group and therefore to a divergence of interest between the provider of Capital and the User.
The outcome is that sharing of risk and reward characteristic of a true partnership: if Hilton has a good year the financiers do too.
One interesting consequence of the model is of a method of financing property purchases which is Islamically sound, being outside the debt/interest paradigm.
CONSEQUENCES
Any Enterprise or economic entity: from a co-habiting couple to a government sponsored PPP or PFI; from a football club to a software firm; may be constituted using one or more Open Corporates.
An Open Corporate is an optimal Enterprise model in the way that it allows all stakeholders to work together co-operatively and collaboratively to maximise the Value created by the enterprise: as opposed to the current model, where one constituency of stakeholder competitively attempts to extract value from the others.
Due to its optimal nature, commercial enterprises which adopt the model will in due course be able to undercut those enterprises who do not - the 'Co-operative Advantage' referred to by the co-operative movement. There is no 'Profit' and 'Loss' in an Open Corporate: these concepts give way to the mutual creation and exchange of economic value created by individuals collaboratively and co-operatively working together.
The outcome will be a web of networked and non-hierarchical partnerships with a new capital and monetary market infrastructure based upon an open and transparent architecture.
Moreover, existing political thinking becomes obsolete as the economic assumptions underpinning existing political analyses break down in the face of a new phenomenon.
Redistribution through extracting Value from one constituency of stakeholder (however undeserving) and allocation to another becomes irrelevant. The alternative is now pre-distribution whereby the Value generated by "Open" Capital is more equitably distributed through revenue sharing agreements giving rise to a new balance between Equity and Equality.
" In five years time we'll all look back and say how simple and obvious it all was... " - David King
Open Capitalism is an 'emergent' phenomenon which will supplant the existing form of Capitalism (which was itself an unplanned, emergent process) and it is emerging in the same manner that a 19 year old single-handedly destroyed the business model of the global music business through his invention of the 'Napster' music file-sharing mechanism. Or the same way that the small community of global oil traders commenced trading oil and oil products in Yahoo instant messaging 'chat rooms' without their management even being aware of the fact.
Capital is and always has been 'broken' by the conflict within it between 'Permanent' Capital (eg Freehold property or Equity in the form of shares in a limited liability company ) and 'Temporary' Capital (eg Leasehold property or Debt finance).
Open Capital - a proportionate share in an enterprise held for an indeterminate period of time - is a concept so simple that, as JK Galbraith said of the creation of Money by private Banks, " ...the mind is repelled ".
Open Capital resolves the conflict between the financiers and the financed, to the mutual benefit of both, and thereby opens the way to a truly collaborative and open society.
Chris's website is at http://www.opencapital.net
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