[A-List] UK economy: productivity again

["Michael Keaney" <michael.keaney@xxxxxx>]

Inside the productivity gap

Government schemes to boost performance through employee share ownership
won't work because they discourage collective participation

Jonathan Michie
Tuesday December 3, 2002
The Guardian

Gordon Brown's pre-Budget report last week was greeted with a blizzard of
critical commentary, questioning the extra borrowing which comes with
economic slowdown and consequent lower tax revenues. But the real question
is not whether increased borrowing is prudent - it would certainly be
imprudent to cut spending when the economy is already faltering - but what
can be done about the slowdown. How can economic growth - and hence tax
revenues - be restored?

For the chancellor, the answer lies in Britain's productivity gap with other
leading industrialised countries. Closing this gap has become the
government's key economic goal. The Labour government has not done too badly
since 1997 in keeping the economy growing, allowing employment to rise and
unemployment figures to fall. But Britain's relative productivity
performance has not improved at all. The government has commissioned
consultancy reports on the productivity gap and the funding councils have
promised research programmes on the state of British management, yet none of
this has as yet produced any advice worth acting upon.

But the chancellor has, over successive Budgets, taken a series of measures
to try to boost productivity, including to encourage employee share
ownership. His latest pre-Budget statement unveiled an additional tax break
for companies introducing such schemes. Brown's rationale has been to
increase employee commitment to the company and motivation at work, with the
expectation that this will lead to improved productivity. Recent academic
research suggests that he is on the right track. Management practices that
succeed in creating a sense of commitment do indeed appear to improve
performance. But will the government's employee share ownership policies
deliver the necessary motivational effects? Do the tax breaks to companies
represent good value for money?

The latest research suggests that public money may be being wasted and that
the opportunity to mobilise employee commitment at work is being squandered.
A report this week by the Work Foundation and Birkbeck, University of
London, suggests that employee share ownership schemes are being introduced,
with tax subsidies, that will do little or nothing to enhance commitment or
boost productivity.

My colleagues and I surveyed companies that had introduced such schemes,
taking advantage of the current tax breaks, interviewing both managers and
employees. The message was consistent. Ownership by itself makes little
difference. The theory may be that as a shareholder, an employee may work
harder to make the company more profitable and so enjoy increased dividends.
But the effort of any one employee can hardly be expected to alter corporate
profitability. The effort needs to be collective.

The good news for the chancellor is that where the employee share ownership
was seen to represent a collective voice, so that the employees thought they
really did have a say, and where that ownership was combined with
consultation and participation, then employees and employers reported both
improved motivation and productivity. Yet this "collective voice" is not
encouraged by the Inland Revenue, which administers the schemes. Nor does it
attempt to combine employee share ownership with a participatory management
style.

Under the approved schemes, employee shares are initially held in trust. So
should it not be the job of the trustees to ensure that this collective
holding is used to promote participatory practices within the company, if
necessary by voting at the company AGM? Indeed, such employee shareholder
activism would not only improve motivation, it could also help help tackle
Britain's longstanding problems of corporate governance, that most
shareholders literally take no interest in the company. Unlike in other coun
tries, in Britain most shares are not even voted at AGMs.

The problem is that while under the employee share ownership schemes
introduced by the Thatcher governments, employees elected half the trustees,
under New Labour's legislation the employees elect none. The trustees are
nominated by management. The chances of them pressing management to
introduce more participatory practices, if necessary by asking awkward
questions at the company AGM, are limited by the fact that the Inland
Revenue approves schemes which allow management to remove these trustees "at
any time" and "for any reason". The Inland Revenue even gives tax breaks to
schemes where the employee shares are deemed to be non-voting - making the
employees entirely voiceless.

All this suggests that if the chancellor wants his tax-subsidised employee
share scheme to deliver employee motivation and commitment, and hence
improved productivity, reform is needed. Responsibility for approving these
schemes could be taken out of the hands of the Inland Revenue, for example.
A dedicated unit that understands the links between participation,
motivation and productivity could instead be charged with the responsibility
of approving and administering schemes in a way that could deliver real
benefits. Such reform would cost peanuts. The productivity rewards could be
huge.

· Employee ownership, motivation and productivity: A research report for
Employees Direct from Birkbeck and The Work Foundation, by Jonathan Michie,
Christine Oughton and Yvonne Bennion is published this week. Jonathan Michie
is the Sainsbury Professor of Management, Birkbeck, University of London.