When Dame Sharon White, Chair of John Lewis and Partners, announced an anticipated loss of £230m last week, she also apologised to the employees – known as partners – for not paying the annual profit-sharing bonus. This will only be the second time in seventy years that the profit share, paid to all partners – who jointly own the business – has not been distributed. Now news that John Lewis is considering an end to its 100% employee ownership, diluting the employee-owned structure it’s had for over a hundred years, realises the longstanding fear of those of us in the EO sector that the nation’s favourite retailer would eventually succumb to the need for external investment. Unsurprisingly the challenges of the pandemic, inflation and the rising cost of living crisis appear to have brought matters to a head. Ideas are reportedly being explored to make changes to the employee-owned structure in order to bring in between £1bn and £2bn investment.
But the traditional routes to raising finance – via private equity investment or a listing on the Stock Exchange – would not only dilute the partnership’s 100% employee ownership, with reverberations for its associated profit sharing scheme and democratic corporate governance, but also threaten to overturn it completely. Investors – of whatever hue – will expect a dividend on return to profitability, reducing the available cash for partners. And eventually they too will want to leave the store and cash in their investment. For them, unlike customers, the rewards of the Partnership Card will not suffice.
Employee-owned businesses constitute one of the most rapidly growing sectors of the UK economy. They include many well known household names in addition to John Lewis, such as Ove Arup, Richer Sounds and Riverford Organics. Various studies over the years have shown that they’re frequently more productive and profitable than their competitors, with a more engaged workforce and happier and healthier employees. Crucially in the current economic climate, they put down strong roots in the local economy, protecting jobs and helping to keep suppliers and customers in business. Many are also B corps. Ownership at Work and the Employee Ownership Association have recently launched the Knowledge Programme, a fully funded research project which will report later this year on a new baseline for the economic, social and environmental impact of employee-owned businesses. But as the John Lewis case shows, it isn’t easy to raise investment for growth and development whilst protecting and preserving the employee-owned status. And this is not just a problem for EO businesses. Co-operatives and mutuals face the same challenges when seeking external finance. Whilst there are ethical social-impact led investors such as Bridges Ventures, Big Society Capital and Big Issue Invest who have the appetite for long term debt, the scale of investment will be limited by their own structures, the regulatory framework and the size of their funds. Options are limited.
But as Mutuo points out, it doesn’t have to be this way. Building societies have been able to raise finance through core capital deferred shares since 2013. In Australia new legislation introduced Mutual Capital Investment Instruments which provide sustainable investment for all companies with a mutual constitution. Yet in the UK we’ve been waiting since 2015 for the Mutuals Deferred Shares Act to be put into effect. In December 2021 the members of mutual insurer LV rejected a sale to US private equity firm Bain Capital for £530m which would have resulted in demutualisation of the 178 year old insurer owned by its members. We now need an urgent and radical review of the options available in the UK to provide sustainable long term financial investment for employee-owned, co-operative and mutual businesses before it’s too late. John Lewis & Partners is the retail jewel in the UK’s economy. We need to make sure it continues to shine.
Ann Tyler is a lawyer and consultant with 40 years’ experience of creating, supporting and advising employee-owned businesses. A former Executive Director of the Employee Ownership Association, she is currently Chair of Ownership at Work, the think tank for the employee-owned sector, and an associate of Mutuo