In this weeks column, Julia Rampen looks at the diversity implications for the new employee shareholders policy and inclusive ownership funds, announced at the 2018 UK Labour Party Conference

In June, a row broke out at Alphabet, the parent company of Google. At a time when Silicon Valley has been criticised for its “bro culture”, and Google itself is 70 per cent male, several hundred of Alphabet’s employees had organised themselves into a pressure group demanding initiatives to improve diversity. They called for the company to address the lack of representation of women and minorities, including linking pay to diversity goals. The employees were defeated after shareholders voted down their proposals.

Employee shareholders and “Inclusive ownership funds”

Labour’s shadow chancellor John McDonnell was probably not thinking of this minor shareholder scuffle when he announced his plans at the party conference for “inclusive ownership funds”, but there could be consequences for diversity nonetheless. He outlined a plan – first proposed by the New Economics Foundation – for larger companies to transfer a portion of shares into a fund held and managed collectively by workers, who would receive dividends of up to £500 a year. “The shareholding will give workers the same rights as other shareholders to have a say over the direction of their company,” McDonnell promised. He also echoed the Labour leader Jeremy Corbyn’s proposal that workers should occupy a third of seats on company boards.

Both measures, if enacted, could have huge repercussions for the level of control employees have in the workplace. The idea of workers on boards has already been floated by none other than the Conservative Prime Minister Theresa May, who later backtracked on it. Should a Labour government revive the plan, it would have the power to increase inclusion in a single day. Less than 10 per cent of FTSE100 and 6.4 per cent of FTSE250 executive directors are women, but women make up nearly half the British workforce overall.

If workers on boards actually represented the workforce, they would by default include a gender balance. Businesses may oppose the idea of workers on boards (which was why May dropped it), but they should have few arguments against the idea of better representation of the workforce: numerous studies show that a more diverse management leads to higher profits.

The relationship between employee shareholders and diversity is more complex. Under McDonnell’s plan, employees will have considerable power – but they will also be expecting a payout. Will they actually bother to demand a more inclusive company in the process?

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Activist shareholders

At present, among companies publicly listed on the stock exchange, the shareholders most likely to force change are those known as activist investors, who buy up large chunks of shares in the belief that the best way to make a profit is to remake the organisation in their preferred image. This pressure may have the desired results as far as the investors are concerned, but it can also cause company management to fall back on tried and tested strategies. A 2017 report found that activist investor funds overall were slowing progress towards diversity. When these shareholders forced companies to appoint new board members, the companies are more likely to appoint white men. It seems many companies, when faced with a hostile shareholder, would rather not take the risk of trying something new.

If activist investors wanted to, though, they could force company boards to prioritise diversity. A month before the Alphabet vote, a shareholder in Amazon, CtW Investment Group, proposed that the board of Amazon formally considered women and minority candidates when selecting new board members. The existing board recommended voting down the proposal – and employees reacted with outrage. Days later, Amazon bowed to pressure and said it would adopt a broadly similar policy to the one that had been suggested.

As radical as John Lewis

CtW Investment Group, the shareholder that triggered the debate at Amazon, works with pension funds affiliated with a US trade union organisation representing more than 5 million workers, and describes its mission as “organizing workers’ capital into an effective voice”. As well as criticising a lack of diversity, it monitors companies for overly-generous payouts to top executives and demands investigations into suspected cover-ups. In other words, if employees were shareholders, their activist investing might look something like this.

Another indication of how employee shareholders prioritise diversity is closer to home. “If this sounds radical, then it is only as radical as John Lewis,” the New Economics Foundation declared in its initial description of Inclusive Ownership Funds. John Lewis has been employee-owned for nearly a century, and its 83,000 permanent staff are partners in the business. They share in the profits of the firm and elect peers to a council that holds the chairman to account.

John Spedan Lewis restructured his family business the same year all women in Britain got the right to vote, 1928, so it’s fair to say he probably wasn’t thinking about diverse representation or the gender pay gap. Nevertheless, of the five biggest UK retailers, John Lewis had the narrowest median pay gap (7.8 per cent), and the largest proportion of women in the top pay quartile (44 per cent). It has eight diversity and inclusion networks, a 2020 target to appoint more BME partners to management, and a commitment to employees with disabilities.

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Long-term thinking

Of course, there is more to do, but the data suggests that employees see the pursuit of profit and a more inclusive workplace as mutually compatible. This is underlined by a 2012 government study, which found employee-owned businesses were more likely to think long-term and less conservatively, be more flexible in working practices and invest in human capital – all tendencies which point towards greater opportunity for women and minorities.

The idea of widespread employee share ownership is a long way from reality. Even if Labour did win power, it might struggle to introduce such a policy in the face of business opposition – critics argue that employee shareholders will put their own short-term interests of protecting jobs ahead of necessary reforms to the company. But examples like CtW Investment Group and the John Lewis Partnership indicate that employees with a stake in their business often see profit and diversity as aligned. Perhaps it’s time other shareholders did too.

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