Blog | Co-operative | Employee ownership

‘The whoosh effect’: a letter to Lee Waters

Derek Walker, of the Wales Co-Operative Centre, writes an open letter to the Welsh Government’s new Deputy Minister for Economy and Transport

By Mark Smith · April 15, 2019

See this page in: Cymraeg

Dear Lee Waters.

Congratulations on your ministerial appointment.

This must be a dream job for you, taking on responsibility for areas which you are passionate about. There will be a queue of people making their way to your door. Like them I want to make the case for you to give priority to a particular subject. I am hoping this open letter will get your attention. We don’t need more money but we do need your help.

The subject is employee ownership. We want to work with you to put more Welsh businesses in the hands of their employees. 10% of the wealthiest people in the UK own almost 70% of its financial wealth. Let’s do our bit to change that in Wales and create a more equal economy.

Greater levels of employee ownership would help Welsh Government to deliver on many of its policy objectives. It is a proven route to improving the productivity of businesses – described as a ‘whoosh effect’ by our clients. What is more, employee owned businesses are far less likely to move outside Wales or be sold to large corporations.

Employee ownership is also a tried, tested but often overlooked succession route for business owners who want to retire. It is rarely an option that is presented to them when they are looking to exit the business. The Welsh economy is dependent on small businesses. In Wales we have a higher proportion of older business owners and therefore the issue of business transition failures (note – not business failures) is greater. Our research has shown that three out of four business owners in Wales have not made plans for the future transfer of their business. We have a problem here – and an opportunity.

"The employee owned sector outperforms businesses with other ownership structures in terms of productivity, financial returns and business resilience"

Derek Walker, Chief Executive, Wales Co-operative Centre

While employee ownership is not a panacea, it is a compelling solution. As the Employee Ownership Association puts it in an excellent report they published last year: ‘Employee Ownership provides a clear and attractive dividend with particular relevance to succession and growth planning for SMEs and family businesses’.

The employee owned sector outperforms businesses with other ownership structures in terms of productivity, financial returns and business resilience. These businesses make a considerable contribution to economic growth. It is common sense. If you have a stake in the business you are more likely to go the extra mile.

This is not obvious to everyone, however, and where we need your help is with raising awareness of the employee ownership option. We need to reach business owners themselves, but crucially we also need to get to those that advise them – accountants, lawyers and bankers. At the moment business owners are not made aware that they could pass the business on to their employees. And when they are, it is not done at an early enough stage to give staff the time to raise the money to buy out the business. There is not a quick fix to this, but with your help a sustained campaign to raise awareness about employee ownership amongst the business community could be make a big difference….

The other area where we need your assistance is in persuading the banks that they could and should lend to businesses where employees want to take a substantial stake and have a meaningful voice in the business. At the moment access to finance is acting as a block on more deals. Too often banks and other financial institutions view employee owned business as too risky, having a perception these firms have ‘too many cooks’, rendering decision-making difficult and, I fear, holding a view that employee ownership is all a bit ‘alternative.’ There is no evidence that shows employee owned business are more risky. The opposite is usually true when power lies in the hands of the many, not the few. Nonetheless the perception is prevalent and, with your help, we would like to change that opinion in Wales.

There are already some great employee owned businesses in Wales, but we want to see more. Aber Instruments was founded in Aberystwyth in 1988. It produces measurement equipment for use in fermentation and brewing. Originally owned by four partners it decided to widen share ownership using a tax advantaged share ownership scheme. Individual employees acquired a direct share in the business. Aber Instruments speak about the productivity gain they achieved: ‘A surge of ambition swept across the firm when staff realised they didn’t have to just do what the founders’ mission was – they can run with it now… when that happens, you get a whoosh effect.’

From 2004, a proportion of profits were paid into an Employee Benefit Trust where they were used to gradually buy out the shares of the founders. Today, the company is 100% employee owned and the company is still firmly rooted in its home town of Aberystwyth. It cannot be sold to an external buyer unless the employee owners and trustees agree to the sale.

Everyone knows about John Lewis, but usually people’s knowledge starts and ends there. But there exist many other successful and well known businesses whose employee ownership status is less well known. Wilkin and Sons (the jam makers), Arup and Riverford Organic Farmers are other examples. These businesses are ready and willing to do their bit to help raise awareness in Wales.

We are not in a terrible place. Unlike in England, we do have a centre of expertise in the small team here at the Wales Co-operative Centre that is able to provides specialist business advice. There is a lot to learn from Scotland, however. As well as making available expert business advice, they have also carried out a long term programme of awareness to promote the model, led by the Scottish Government. This is now showing dividends. An independent evaluation shows that Scotland has seen a tenfold return on investment for every £1 devoted to on-the-ground-support.

In Wales we have been justifiably driven by the need to create jobs over the last few years and we have been successful in doing so.  As you will know, the rate of unemployment in Wales now stands at 3.8% compared with an average rate of 4.1% across the UK. This gives us the opportunity to focus on other things, not just jobs. Employee buy outs don’t usually create new jobs when they happen, but they do help improve productivity and facilitate wealth distribution.

There is the potential to create a greater ‘whoosh effect’ here in Wales. Employee ownership aligns so closely to Welsh Government’s commitment to inclusive economic growth and to supporting the foundational economy, which is where many employee owned businesses can be found. There is not an easy or overnight solution. But we can certainly up our game. A joined up campaign to raise awareness, spearheaded by Welsh Government and supported by the Wales Co-operative Centre, would be a good place to start. Other bodies such as the Institute of Directors, the Federation of Small Businesses and the ACCA could all be brought on board. These bodies already see the benefit for their members and have collaborated on work in Wales in the past.

I wish you the best of luck in your new role and look forward to working with you.

Yours in co-operation,

Derek Walker

CEO, Wales Co-operative Centre

Useful links:

Rooted and Resilient; the case for employee ownership in the Welsh private sector: wales.coop/succession

The Ownership Effect Enquiry: theownershipeffect.co.uk