Labour employee share scheme slammed

Investors are concerned by its impact but objections to the scheme have been labelled “weak”


At its annual conference in Liverpool on Monday, the Labour Party announced a proposal for companies with more than 250 employees to create an “inclusive ownership fund”, making workers part-owners of them.

Shadow chancellor John McDonnell said workers would be up to £500 a year better off under a plan to expand employee ownership of large companies.

He said: “Real power comes from having the right to a collective say at work. Large corporations play a huge role in our lives, yet the decisions about running them are in the hands of a tiny few.

“Employees who create the wealth have no say in the key decisions that affect their future. After decades of talking about industrial democracy, Labour in government will legislate to implement it.”

McDonnell explained that shares will be held and managed collectively by the workers. The shareholding will give workers the same rights as other shareholders to have a say over the company’s direction and dividend payments will be made directly to the workers from the fund.

“Payments could be up to £500 a year. That’s 11 million workers each with a greater say, and a greater stake, in the rewards of their labour,” he added.

One size doesn’t fit all

However, there is cause for concern among many investors.

Trevor Greetham, head of multi-asset at Royal London Asset Management, took to Twitter to express his worry.

He says: “Transferring 10% of a company’s shares to workers will cost shareholders 10% of their investment. Those shareholders are mostly ordinary consumers via their pensions schemes and savings.

“Everyone will end up worse off if the markets (rightly) fear this is only the first 10%.”

And he wasn’t alone.

CBI director-general Carolyn Fairbairn says “Labour is wrong” to assert that workers will be helped by these proposals.

She argues that while Labour raises the right questions, it has not generated the right answers.

“Their diktat on employee share ownership will only encourage investors to pack their bags and will harm those who can least afford it. If investment falls, so does productivity and pay.

“Employee ownership does work well for some businesses, but Labour can’t keep assuming that what works for one will work for all. It’s time to talk to business about what really makes a difference on the ground.”

Likewise, Adrian Lowcock, head of personal investing at Willis Owen, argues that in theory, this means 10% of the supply has effectively been taken out of the market so the price should rise, benefiting the remaining owners who are free to buy and sell their shares.

“However, the policy is going to make the UK less attractive for companies looking to invest in the UK and make British companies less attractive takeover targets, so would on balance have a more negative impact on valuations,” he says.

AJ Bell investment director Russ Mould says the Labour plan is sensible and “a welcome endorsement” of the power of the capital markets to incentivise staff.

However, he says: “The cap on the dividends that can be received by staff to £500, with the rest going to government, is disappointing.

“It limits the incentive on offer and sets up the government as the chief allocator of this extra capital – when governments’ record as asset allocators is poor and the best chief executives are the ones who prioritise scarce resources to best effect.”

To improve or not improve

Luke Hildyard, director at the High Pay Centre, argues the belief that this scheme is good for workplace productivity is “fairly uncontroversial”.

He says: “You can clearly see how it would improve employee engagement and Labour have come up with the most radical proposition with the new proposals.

“The share ownership schemes for senior executives are fiendishly complicated – they are subject to all sorts of performance measures, pay out over many years, and are worth billions of pounds, as opposed to £500.

“But, the basic essence that people who benefit when a company does well are likely to perform better is common to both schemes.”

However, Lowcock argues that the shares would belong to workers, regardless of their work ethic, and therefore there is no incentive to work harder as it doesn’t represent an acknowledgement from management for the job done.

“It’s just an exercise that has to be carried out by law. As you haven’t put your own money at risk there isn’t the attachment to the investment in the same way there would be if it was your own money,” he says.

“Finally, as they won’t benefit from the growth of the business they are not likely to be so interested in the performance of the business.”

Narrowing the gap

In his speech, McDonnell also said a third of the seats on company boards will be allocated to workers.

Lowcock says it is clear there needs to be a rebalance the system to ensure the gap between the owners of the businesses and workers narrows, but “this policy looks cumbersome”.

He explains that workers “don’t really own the shares” as they have no vote and cannot sell them, therefore, if the company doesn’t pay a dividend they won’t benefit at all.

However, Hildyard says on Twitter: “Objections to the Labour worker ownership plan are so weak – completely ignore massive existing problems with anti-social business practices and fall back on usual tired argument of investment going overseas.”

Speaking to Portfolio Adviser, he explained that the average pay for a FTSE 100 CEO was approximately £5.7m, around 200 times what the typical UK worker gets.

“An extra £500 isn’t going to put that big a dent in that,” he says. “But I think the principle that when a company does well, everyone should be rewarded, not just the guys at the top, is a sound one.

“If businesses and the economy as a whole run more along those lines, then we will get to a point where the gap between those at the top and everybody else – which is a much wider gap in the UK than just about anywhere in Europe – will narrow.”

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