Workplaces where workers rule

Australian bosses have been slow to embrace the benefits of profit sharing, writes Fiona Smith.

It takes a very special sort of entrepreneur to hand over ownership - and control - of a company to the workers. That kind of selflessness is rare indeed, but it also takes a great deal of courage to let go and trust that the employees won't screw up.

Retailer John Spedan Lewis did it in the United Kingdom 78 years ago, and the John Lewis department store chain has thrived since.

Today it is the biggest and best-known example of a company owned by its employees, all 68,000 of them, but employee ownership is growing in a number of forms around the world.

Sometimes the ownership is more symbolic than actual, or it may be a percentage of shares that give them a voice, and other times it may be an exit strategy for an entrepreneur who wants to sell out over time to the workers.

It is also being used as a way to improve performance by aligning workers' interests with those of the business.

Giving employees a slice of the action can raise engagement levels (morale) and productivity.

When the workers feel like owners, they care more, put in more discretionary effort, co-operate more, become more innovative and are less likely to leave, even if there is more money available elsewhere.

It is also a lure for new hires in a tight employment market and an effective way of retaining them.

In Australia, about one-third of companies listed on the Australian Stock Exchange have employee shareholders, says Shann Turnbull, from Organisation and Management at the Australian School of Business.

However, this statistic is not as impressive as it seems. The actual percentage owned by employees is usually minuscule.

Some large companies use employee ownership schemes as an incentive for all workers, but most still keep it for their executives, or as a sop to those who complain about the generosity of the option and share schemes for the top levels of management, Turnbull says.

Despite its attractiveness as a way to raise money, the private sector has tended to steer away from employee ownership because of a combination of the unfavourable tax treatment for unlisted companies and ignorance about how to set up a viable scheme, he says.

Only 9 per cent of small and medium-sized companies have some employee ownership.
It seems Australian bosses are much more reluctant to hand over the reins than their counterparts in the UK, the United States and Spain.

When companies get serious about employee ownership, it is not enough just to hand over or sell shares. Turnbull says the "magic" only occurs when worker ownership is teamed with participation in decision-making, as well as regular education and communication about the financial results of the company.

Companies that combine these things grow 6 to 11 per cent faster than would have been expected, according to the book Equity: Why Employee Ownership is Good For Business (Harvard Business School Press).

One private company that has managed to combine these things is waste water-treatment firm Biolytix, based in the green hills of Maleny on the Queensland Sunshine Coast, and employing 55 people.

The employees of Biolytix - both in Maleny and the factory in Brisbane - own 20 per cent of the company.

The new chief executive, John Martinkovic, who took the role in July, says the practice began when the company was in start-up mode and the founder, Dean Cameron, had to find a way to make up for pay levels that were below market levels. Employees are granted units in the company on a merit basis by trustees at the end of each financial year.

Last year, 30 per cent of profits were shared out as units, which convert to shares after three years, at which time they can be paid out.

The benefit to employees averaged out to about $5000 each last year, says Martinkovic.
Employees also elect one of the four board members (presently marketing manager Tracey Heers) to represent their concerns.

Martinkovic says it is quite different to be CEO in a company where the staff are also owners.

"It does create a certain degree of democracy, but it is managed within an agreed framework," he says.

While staff don't always get what they want, they do have an opportunity to participate. "And they have an opportunity to reap the rewards, rather than just turning up for a pay packet," he says.

"The staff meetings and workshops involve everyone across the company and there are discussions on areas of strategic intentions, where the company is heading, and budget planning.

"We get direct feedback, which is healthy. It is a quality circle for the whole of the company."

The benefits are also evident in the low staff turnover. In the past four years, only one person has left. While this may be expected in the laid-back Sunshine Coast, where there is not much competition from other employers, there is a war for talent and labour in Brisbane, where the 26 factory workers are based.

Martinkovic says Australian CEOs are afraid of setting up similar schemes because they don't know how to do it and fear employees may get in the way of running the business.

At Arup Australasia, with 880 staff, there is a different structure. In 1979 in the UK, founder Ove Arup willed the entire company into a trust for the benefit of employees, who now number 9000 worldwide.

The employees become owners when they join, take part in profit sharing, but leave empty-handed when they resign so that the ownership of the firm does not become diluted.

"We say it is naked in and naked out," says the CEO, Robert Care, who is also a trustee.
About one-third of after-tax profit is distributed - depending on operational conditions - which can equate to hundreds of dollars for junior staff to thousands of dollars for those who have been there for a long time.

"But this is a lot more than just about money," Care says. "People feel that they are the owners of the company. We run a collegiate organisation."

Arup did not take the step into worker participation and has a standard management structure, but the "ownership culture" means that communication is much more open than in other firms.

"We have a very open culture. Any of the employees can give me a call and tell me something which I can take straight to the board."

Arup has participated in the prestigious Hewitt Best Employers survey and Care says its engagement levels are higher than the industry average, while the staff turnover rate is half the level of competitors' at about 10 per cent.

One of the features of employee-owned companies is that they tend to have lower salary levels, especially for the executive ranks - a fact confirmed by both Care and Martinkovic.
"We are not the highest paid of people . . . but at the end of the day, it's about satisfaction," says Care.

Employees are attracted by the values of employee-owned companies and are prepared to work for lower rates of pay.

Care says the staff at Arup are on levels of about the 75th percentile of industry rates.

He says he worked for Arup for nine years until 1986, when he left to work in government for four years, and then rejoined in 1990. The decision to return didn't take much thinking about.

"My wife said she couldn't picture life without Arup."

NUMBERS
* Co-owned firms make up 2 per cent of the UK economy (£20 billion, or $50 billion, in turnover).
* Companies that share profits with workers have a 19 per cent productivity dividend.
* Profit sharing with workers boosts share values by 9.79 per cent.
* The Employee Ownership Index in the UK has consistently outperformed the FTSE All Share.
* Co-owned companies make up 2 per cent of the UK economy.
* In the US, favourable tax treatment means that 10,000 companies have some form of employee ownership, 85 per cent of them are unlisted.
* In a UK survey of co-owned firms, 72 per cent say staff work harder, 81 per cent say staff take on more responsibility, 49 per cent see more competitiveness, and 44 per cent say profits are higher.
Source: Employee Ownership Association, UK

Published: 21 August 2007