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Nick Clegg’s employee share ownership ideas are half-baked

The call for more John Lewis-style companies is fair enough – but how would a right to request shares work in private firms and how healthy is it for staff to invest heavily in their employers?

“We don’t believe our problem is too much capitalism: we think it’s that too few people have capital. We need more individuals to have a real stake in their firms,” said Nick Clegg on Monday. The deputy prime minister called his vision “more of a John Lewis economy, if you like”. Fair enough: the cause of diversity in the corporate jungle would be enhanced greatly if there were more democratically run, 100% employee-owned businesses like John Lewis. So, yes, it’s reasonable to try to find ways to encourage the creation of more.

Unfortunately, Clegg didn’t stop at that one good thought. Other parts of his speech – notably when he argued for a “decade of employee share ownership” – raised more questions than answers. Take the idea of giving employees a “new, universal ‘right to request’ shares”. As Clegg put it: “Imagine: an automatic opportunity for every employee to seek to enter into a share scheme, enjoying the tax benefits that come with it, taking what for many people might seem out of their reach, and turning it into a routine decision.”

But how would this automatic right work? Would the owner of a private business – say, an entrepreneur with 20 staff – be obliged to allow his employees to buy a few shares from him or her every year? If so, what would be the pricing mechanism in such a sale? When there’s no public market in the shares, would an external auditor be brought in to offer an opinion? What if the entrepreneur doesn’t want to dilute his holding? Would he or she be obliged to sell? If so, what percentage would have to be released? Entrepreneurs, one suspects, would smell a disincentive to start a business in the first place.

It might be argued that it would be easier to impose a right-to-buy on quoted companies, where there is at least a transparent pricing mechanism called the stock market. That’s true, and established schemes such as Save As You Earn, giving an option to buy shares, provide a model. But let’s not get carried away and think, as Clegg seemed to, that greater share ownership by employees would act as a brake on “crony capitalism” and egregious boardroom pay. It would be a tall order, even with lavish tax breaks, for staff to save enough to assemble a collective 5% stake in most multibillion FTSE 100 companies. Boardroom directors will not quake at that prospect. If you really wanted to shake things up, stick an employee on the pay committee.

Then there’s also the question of how much it is healthy for staff to invest in their employers. Stories of shop-floor workers getting rich as their companies succeed are uplifting. But ask the many thousands of staff at, say, HBOS, Lloyds TSB and Royal Bank of Scotland how they feel about the savings they invested in those supposedly solid banks: there are many, many stories of substantial savings pots evaporating with the share prices. Clegg ended his passage about the “right to request” shares by saying “clearly the details of that kind of policy need to be properly thought through”. You bet: as it stands, it’s a half-baked idea. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds