Review of “Reinventing the firm” by William Davies (published by Demos)

This is a review of Reinventing the firm by William Davies (published by Demos). Davies suggests that it would be a pity to let a good crisis go to waste. The shock to the system caused by the credit crunch can lead us to think about new ways of organising business organisations. His is not an unrealistic call for revolution. He doesn’t call for the existing ways of organising business to be abandoned. Rather, he would like to see a richer ecology of types of business organisation. He would like to see a greater prevalence in the UK of businesses that belong to the private sector but that are imbued with a sense of public purpose. He believes that firms that espouse employee participation can achieve this. Further, he argues that the UK already has experience and models on which to draw in promoting wider use of employee participation. There is no path dependence problem but there is a need to broaden an existing pathway within the UK’s economic system.

Employees and the firm
Davies points out that it is too simplistic to think of the firm as being an asset that can be bought and sold. At the heart of any business, especially the modern ‘knowledge economy’ business, lie the knowledge, expertise and commitment of the employee and the relationships that exist within the firm. Given that slavery is no longer an option, how can we possibly think that the business can be owned by anyone? We have been conned into accepting the claim that shareholders own the business. In fact, all that they own is their shares.

Organising a business as if employees are mere cogs in a machine who will do what they are told is passé. This way of doing things isn’t compatible with unleashing the energy and initiative of the firm’s employees.

What is employee participation?
Employee participation partly concerns the idea of the ownership of the firm. Davies cites studies showing that employee ownership has a beneficial impact on productivity that cannot be fully accounted for by economic considerations. It seems that employee participation has a psychological impact on how employees relate to the firms that they work for. This positive effect is only achieved, however, where financial participation is accompanied by more participatory forms of governance.

It is important to distinguish between direct and indirect forms of employee ownership. Direct ownership involves individual employees buying, or being given, shares in their employer. Clearly, it is one way of encouraging employee participation but it is not without difficulty. It can lead to employees being poorly diversified, having both their human and their financial capital in one basket. Davies seems to favour indirect ownership. This often involves a trust or a trust-like structure where ownership of the firm is held on behalf of employees but not by employees directly. This is the approach used by the John Lewis Partnership. There is a management board so that employee participation does not impede effective decision-making. At the same time, ownership of the business is vested in trustees on behalf of employees and employee participation pervades governance at every level of the firm. The John Lewis structure achieves the difficult balance of making thorough-going employee participation compatible with strong management.

The meaning of work
There is a human dimension to Davies’ analysis. A central idea is that employee participation, properly designed, often makes economic sense at the same time as it creates a more humane working environment. A participatory firm offers greater opportunities to be creative and to take responsibility for one’s work. Davies acknowledges that not every employee will feel comfortable with a participatory workplace for participation is a two-way street; it makes demands on employees as well as bringing benefits. Employees will need to learn about governance and financial issues if they are to play their part in a participatory firm. And it will no longer be so easy to hide behind managerial shortcomings as an excuse for failure. The power that participation brings with it also entails personal responsibility.

Employee participation is good for business
Davies cites studies showing that employee participation results in greater productivity and lower staff turnover. In governance terms, managerial decisions have greater legitimacy when employees have had a say in formulating them. And employees are well placed to hold senior management to account, having both the information and the incentives that good monitors need.

Making it happen
“Reinventing the firm” takes the view that employee participation is already part of the UK experience. The UK has a history of employee participation and knows both when it can succeed and when it is likely to fail. Davies’ call is for an existing pathway in the UK economy to be further explored and developed. The final chapter is devoted to case studies of the John Lewis Partnership, Make (a firm of architects) and Parfetts cash and carry. These are three examples of businesses that have made a go of employee participation. They, and other examples, show that employee participation is a viable method for organising a business. Employee participation is an option that more businesses should be aware of.

Davies refers the reader to the work of the Employee Ownership Association and Oxford University’s Centre for Mutual and Employee-Owned Business.

Davies wants to find ways of making employee participation more widespread. It is an idea with a respectable pedigree in the UK. We know which structures will work. Employee participation is good for business and good for employees.

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