If John Lewis is so great, why aren’t there more businesses like it?

Original

business and industry, economy, employment

Author(s):  Tim Finch
Published date:  17 Feb 2012
Source:  IPPR

The deputy prime minister used a major speech last month to call for a ‘John Lewis economy’. The retail giant, which is owned by its employees, has become the poster boy for ‘good’ capitalism – responsible, long-term in its outlook, a model employer, popular with customers and investors, and highly profitable.

John Lewis is also part of a growing trend. A report on the UK’s cooperative economy showed that there were nearly five-and-a-half thousand cooperative businesses in 2011 (up 9.2 per cent from 2006), which employed 236,000 people (40,000 more than five years ago) and had a combined turnover of £33 billion (compared with some £27 billion in 2006). Yet the big two – the Cooperative Group and, yes, John Lewis – account for around two-thirds of the whole sector (£20 billion turnover between them). The rest of the cooperative sector is made up of SMEs, with the preponderance being small rather than medium-sized.

So while the cooperative and mutual sector may be growing, it remains a tiny part of the British economy. The obvious question that follows is: why?

At a recent panel discussion organised by IPPR and now written up in the latest edition of our quarterly journal PPR the chair of John Lewis, Charlie Mayfield, and Will Davies, academic director of the Centre for Mutual and Employee-Owned Business at Oxford, addressed this question head-on.

Mayfield said one of the main problems that cooperatives face is access to finance – particularly in the start-up and early expansion phase. He pointed out that the much-cited German Mittelstand system was based on a strong long-term relationship between the German banking system and the small business sector, which helped cooperatives and mutuals to get established.

‘German banks have for a long time tended to lend against a business plan rather than against assets. Our system makes it much more difficult for smaller businesses, without established assets, to borrow money … This is a challenge if we want in the UK to have a great pluralism in ownership of businesses.’

Mayfield called on the government to take the opportunity offered by the banking crisis to get British banks to look much more positively at ‘different financing routes for different sorts of companies.’

The issue of finance, he argued, was linked to a bigger issue of negative attitudes towards cooperatives in government and other important quarters. IPPR chair James Purnell, who chaired this discussion, had already made the point that only a few years ago, when he was in government, mutuals, co-ops and employee-owned businesses were very much on the margins of economic debate, and that it was a ‘muesli’ sector, not taken very seriously by government, the city or business leaders. Despite changes, there are still real issues to tackle.

‘One of the reasons it is difficult to set up an employee-owned business,' Mayfield noted, 'is that there aren’t many lawyers or accountants who you can talk to who know much about this area. If you talk to most in those professions about this subject they look at you as if you are odd or from a different planet.’

Will Davies pointed out that similar attitudes prevail in business schools. ‘If you study an MBA, you are told that the purpose of a company is to maximise returns to its owners, which are its shareholders, and that these people have no interest in a company beyond that.’ He argued that government and others had to do more to break the ‘rigid orthodoxy about what companies are’.

Another initiative that Davies thought might help is the creation of ‘cooperative clusters’. ‘It would draw on the experience of the largest cooperative in the world, Mondragon, which is a network where there are very embedded relationships between local banks and co-op businesses, where labour is hiring capital, rather than capital hiring labour.’

Charlie Mayfield argued that an equivalent incentive to capital gains tax relief was needed to encourage cooperative entrepreneurs. ‘If you’re trying to set up an employee-owned business, the whole point is that you probably not looking to sell that business – it is more about long-term value creation … But why shouldn’t these alternative wealth creators be encouraged and rewarded with incentives, such as some sort of tax break?’

The ideas of Charlie Mayfield and Will Davies feed into a very live debate about the type of economy and business sector we need after the global crash of 2008. It is clear that for many people cooperatives and mutuals present a very attractive alternative to shareholder-owned and private businesses. The cooperative model addresses some of the main concerns about how modern capitalism operates, such as its short-term attitude to profits, the prevalence of asset stripping, a lack of sustainable and satisfying jobs for low or semi-skilled people, and gross inequalities in pay between the top and the bottom. But if the ‘John Lewis economy’ is to become more than a political slogan then there is a clear role for government in creating the conditions in which would-be cooperative entrepreneurs can get sound business advice, access funding and protect themselves from business predators. And if the sector is to grow significantly there will also need to be a cultural change reaching into areas like business schools, the financial sector and corporate law firms.

This is an edited version of a full transcript which will appear in the forthcoming issue of IPPR’s quarterly journal PPR.

 
 

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Tim Finch, Director of Communications and Associate Director for Migration