Here is my article from today’s Western Mail:
Rescuing and resetting the economy after Covid-19
Equity Stakes Not Loans are the Answer for Saving the Economy
Guy Major, Jonathan Preminger and Jenny Rathbone
The lockdown has worked to contain the spread of Covid-19 but how we are going to reignite the economy without triggering a second outbreak remains unclear. However the conversation about what the economy in Wales could and should look like has already started.
The involvement of former Prime Minister Gordon Brown, Paul Johnson from the Institute of Fiscal Studies and Rebecca Heaton from the UK Committee on Climate Change in a series of virtual roundtable discussions will help clarify how Wales can approach the enormous task ahead.
Whilst Government-backed loans and 80% wage subsidies have kept companies in lockdown on life support, their future survival is uncertain. Most obviously, loans have to be repaid and interest payments take no account of the financial success or difficulties of a company going forward.
To stop large numbers of firms going bust, they will need injections of capital. What the Government on behalf of the taxpayer can provide will be limited, so new ways of doing things will be required.
We argue that governments should take an equity stake in businesses, thus sharing both the risk and the success of the venture in future years. Instead of having to repay a loan, the business would have to accept Welsh Government becoming a non-voting shareholder in the business with its share capital attracting variable dividends depending on success.
Many firms may be reluctant to cede control to external holders of traditional voting shares. Alternative protection mechanisms are available. A simple-to-understand, pre-agreed value-added sharing formula (value-added = sales minus all non-labour costs) will build trust and common endeavour amongst stakeholders.
As a result of the Covid crisis, even the UK Chancellor Rishi Sunak is considering ‘convertible loan’ equity support for early stage businesses not yet turning a regular profit but with promising future prospects. However, Sunak’s £500m Future Fund has missed a critically important funding gap – equity for SMEs; they are a huge part of the UK economy. He has also missed a pivotal trick, by not applying value-added sharing which allows current owners to retain control while still protecting external equity investors
To maximise the survival of firms and jobs, workers and directors, as well as shareholders, would need to have their rewards tied to the success of their business. A pre-agreed ‘surplus-sharing’ formula could be used to split the firm’s value-added, while guaranteeing workers an agreed minimum level of pay. This risk-sharing by workers, where their pay could go down as well as up, would be in exchange for
having more say in how their firm is run, and avoiding losing their jobs. Whilst unions might find this challenge to their traditional wage bargaining role uncomfortable, something like this is already standard practice in places like Germany where worker representatives on boards are commonplace.
This social partnership model was already espoused by the Welsh Government in its Prosperity for All economic action plan adopted in March 2019. It was already explicitly part of the requirements in relation to public procurement and business support prior to Covid19.
An overtly cooperative model has already worked well for household names like the John Lewis Partnership, the anchor company that drove the success of Cardiff city centre as a regional shopping destination. John Lewis partners have their basic wages supplemented by the partners’ annual dividend, which is pegged to the trading performance of the company. In good years the bonus can be equal to 20% of partners’ wages, in gloomier times like last year, it was only 2%.
Companies as varied as Aardman (makers of Wallace and Gromit), Richer Sounds (hi-fi), Dulas (green energy, in Machynlleth), are all employee owned. Indeed employee-owned firms already contribute about £30bn (1.4%) to the UK economy. The success of this model attracts far less attention than the grotesque bonuses bosses have helped themselves to in the recent past, absolutely unrelated to the performance of their company.
In the uncertain times ahead, it will be unacceptable to keep most workers’ wages fixed at reduced levels but allow owners/directors to reward themselves additional pay and perks unrelated to the health of their business. Senior executives will need to have their remuneration pegged to performance in the same way as workers’ wages. This kind of explicit value-added sharing would also work to protect external investors’ interests.
External investors could be wary of company directors taking bad decisions, although most entrepreneurs know their own businesses and sectors far better than generalist investors. Bad-decision risk can be mitigated by giving investors ‘voice’ rights (feeding in expertise, advice and ideas), but without normal voting rights. Voting rights could, however, kick in, temporarily at least, after a period of sustained losses, to help get a firm back on track.
As long as there is a transparent and agreed formula for sharing the value-added generated by a business, that locks together the interests of owners, workers and investors, control of the firm can remain in the current owners’ and workers’ hands, yet avoid the risk of wages being raised at the expense of dividends to investors (www.opendemocracy.net/en/oureconomy/make-capital-work-us-real-world-proposal-gradual-transformation-economy/). Retaining control while gaining non-repayable risk-sharing equity investment will be attractive to many small and medium enterprises.
Given the unprecedented demand for government supported rescue packages, the Welsh Government will need to be convinced an exit strategy is there for them once companies have adjusted to the as yet untested new trading arrangements. External investors, both existing and new ones, will play an important part in enabling businesses to shed overt government involvement and grow beyond the stabilisation phase.
A great many companies will need all the help and risk-sharing they can get to have any realistic prospect of making it through this crisis. The well-documented benefits of profit sharing, employee ownership and workplace democratisation, coupled with non-controlling external equity investment, could play a major role in maximising those survival chances.
Dr Guy Major is Senior Lecturer in School of Biosciences at Cardiff University;
Dr Jonathan Preminger is Lecturer, Cardiff Business School
Jenny Rathbone is Member of the Senedd for Cardiff Central (Labour)
For more details on these proposals see: http://blogs.cardiff.ac.uk/business-school/2020/05/06/rescuing-and-resetting-the-uk-economy-after-covid-19-via-debt-to-equity-swaps/