Monday, 16 January 2012

We are all Shareholders

"We don't believe our problem is too much capitalism - we think it's that too few people have capital.

We need more individuals to have a real stake in their firms. More of a John Lewis economy, if you like.

And what many people don't realise about employee ownership is that it is a hugely underused tool in unlocking growth.” 

- Nick Clegg

I have a few problems with this Clegg special piece of reasoning although his idea to cut down red tape on share schemes would be helpful for everyone as its horrendously complex. As usual this is one of those emotive political points which sounds nice and cuddly but is relatively irrelevant.

Perhaps the first thing to do is compare share ownership in an SME to share ownership in a Plc. Now share ownership in a SME could spur growth as individuals have clear incentives to drive forward the business as they have visible stake in a small business. However for people working in a Plc the vast bureaucracy of modern corporations leaves people feeling very disconnected from the outcome of their labour. Its the difference between Mark Zuckerberg offering you 5% of Facebook in 2004 for programming a new platform and Tesco offering a checkout operator a share matching scheme for a microscopic proportion of the company's equity. The former is a strong incentive the later is merely a token perk of the job.

In my experience these share schemes have a minor influence on my job performance. My employer provides a matching scheme whereby you can purchase £x of shares up to a monthly limit and they match those shares with an equal contribution. The shares are held in trust for three years. This is a nice perk as effectively the matching contribution is free money unless the shares fall by more than 50%. However given that I work for a large, public, listed company the idea that this is any kind of incentivise rings false. The reason for this is simple. I know nobody at my work outside of my immediate department. If you offered me departmental equity that would be an incentive as I would have the perception that I could influence the outcome. However if you offered me departmental equity I would have a new problem; illiquidity.

This is the catch for equity stakes. Equity in an SME probably is a strong incentive but then one faces the difficulty of marketability. If you leave who can you sell the shares to? Most likely back to the company at a fire-sale price. In this way share schemes can actually limit economic growth as the 'golden handcuffs' of locked up or unmarketable shares prevent workers from moving jobs and being more economically productive due to the loss of personal wealth.

I do not think that too few people have capital. Most workers now in the private sector have a defined contribution pension scheme. Through this scheme they own funds which in turn own equities. We rely on this capital for our retirement. However in many ways this is better than owning equity in a company as effectively a large equity stake in your employer means doubling up your risk; if they go bust you lose your job and your equity. This is a real fear for most employees who are not at the executive level of management and so feel they are a prisoner to the outcome. For instance if you worked at the counter in the Halifax in 2007 it was hardly your fault the bank went bust. If you had done the sensible thing and turned away all the 100% mortgage applicants you would have been out of a job. Instead you just lost all your equity value.

The modern capital markets bear no resemblance to the 'capitalism' of the industrial age. In many ways capital has been socialised via the holdings of personal pensions and investments. If you look at most FTSE 100 companies the majority of equity is held in small pieces by hundreds of asset managers that means it is held; by us all! This means that the next time you bemoan the greedy profits of your utility supplier or your bank you would do well to remember you also want their dividends and share prices to rise to fund you pension.

It is also worth acknowledging that today wealth is arguably more unequally distributed than ever before. Much of this has to do with modern technology, the free flow of capital and networking effects. Facebook is a prime example of exponential growth and personal fortune which would have been impossible for Rockefeller to imagine. Facebook required hardly any financial capital; rather the capital of Facebook is almost entirely intangible and it is formed from the profiles of half a billion users. Capital is more accessible now than ever before in all of its forms. Any individual can open a brokerage account online with a debit card and start buying investments in 20 minutes at historically low commissions. However this would require something quite different which might really go to explain our lack of economic growth; Savings.

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