An End to Just-So Stories?
A review of Beyond the Corporation, Humanity Working by David Erdal, The Bodley Head, London, ISBN 978-847-92109-3
by R. Eric Swanepoel (writer and coordinator of the campaign for a Cross-Party Group on Real Prosperity and Joined-Up Thinking)
Bruce K. Alexander’s The Globalisation of Addiction, A Study in Poverty of the Spirit, a book I reviewed for the Scottish Left Review (http://www.scottishleftreview.org/reviews/reviews-64/ ), ends with the call for a ‘galvanising alternative philosophy […] together with images, ceremonies, music and metaphysics that can give it life in human hearts and minds’. Alexander states that this lies beyond the “prosaic imagination of rationalistic academics” and writes, ‘the talented people who can produce [this] will materialise, as others have in previous eras of despair’. ‘In the meantime,’ he urges ‘determined social action’.
David Erdal’s contribution to the search for an alternative to the economic status quo (inequality-generating market-worshipping capitalism) supplies and describes at least some of what Alexander desires. Both books complement Wilkinson and Pickett’s The Spirit Level: Why More Equal Societies Almost Always Do Better, and together these works constitute a triumvirate offering not only a massively evidenced critique of so-called ‘free-market’ capitalism (in reality a system deliberately stacked in favour of the already rich and powerful, as Erdal diligently explains) but also a selection of practical suggestions for demolishing and replacing this flawed system.
Drawing on his experience of the employee buy-out of his family’s Fife-based paper business (Tullis Russell), his work with the Baxi Partnership (an organisation that assists companies convert to employee-ownership), the trajectories of employee-owned businesses the world over (amongst many others, the John Lewis Partnership in the UK, the Mondragón group in Spain and the US supermarket chain, Publix), the history of the legal structures that underpin modern capitalism and his fascinating doctoral research on our evolutionary heritage (as evidenced by the cooperative nature of hunter-gatherer societies), Erdal convincingly exposes the gross errors in the conventional models economists use to describe people and businesses (which he labels ‘just-so stories’), and describes how and why employee-owned businesses are superior to publicly listed companies in every way (unless you favour the enrichment of the few at the expense of the many).
The book is an easy read, jam-packed with quotable passages. It appears to anticipate the ‘cherry-picking’ criticism from the free-market right that The Spirit Level received (and which the authors have rebutted), explicitly giving multiple examples to avoid that accusation.
The book’s introduction
The introduction starts with psychology: how reluctant we are to admit we are wrong – ‘…we become committed to our own views. We see clearly how contemptible are those who disagree with us. If possible, we ignore them; if they get attention anyway, then we dismiss their ideas as nonsense. We predict that they will fail, and explain away all their successes as aberrations.’ This is followed by the first of many entertaining broadsides on economists – Erdal’s bêtes noires – he states that such an unreasonable attitude certainly applies to them. Citing a study that demonstrated that economy students became less inclined to give to charity as their studies progressed, he explains this as the consequence of being taught that human beings are ‘monomaniacally selfish and that it is irrational to behave in any other way’. Erdal then summarises his central thesis, that people are fundamentally cooperative and that this side of their nature is brought out by employee-owned businesses in which they flourish: ‘Humanity working in the traditional corporate and financial structures is humanity undermined and betrayed; humanity working with shared ownership becomes happier and wealthier and wiser than the defenders of the current system can imagine.’
Part One (Predictions and Reality)
This section draws on the experiences of employee-owned companies the world over to demolish the predictions made by traditional economists about the supposed efficiency of the Market (a word that Erdal capitalises, echoing Alexander’s use of ‘Market God’) and the supposed flaws of employee-owned concerns. These were some of the facts I gleaned:
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Very little of the money raised by public shares is invested in strategically building businesses – most of it is used for (often destructive) acquisitions and lining the pockets of shareholders and top management.
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For companies to flourish in the long term, employees must have a real sense of ownership. No management techniques can substitute for the rights and benefits of genuine ownership, but even the managers of employee-owned concerns need to work hard to ensure workers feel involved. Communication is key: managers must make information fully and openly available, must listen, and must allow employees to make contributions to improving how things are done.
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Although employee-owners need leaders, given the same quality of leadership employee-owned businesses always outperform those owned by outsiders. The former are more productive, they survive better in bad times, they have lower employee turnover and absenteeism and they give better service (the top-rated companies for service in both the UK and the USA are employee-owned).
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Employees in employee-owned companies learn more participation skills, they are better trained, they contribute more innovative ideas, they implement change quicker, and they are wealthier, with communities in which they live benefiting from both money and skills.
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Many economists are blind to all the above, repeatedly citing old papers based on nothing but theory, and falsely claiming that such organisations will be overwhelmed by free-riders, that decision-making will be impracticably slow, and that employee-owners will forever be falling out with each other. These unevidenced views of economists place significant obstacles in the way of those hoping to set up employee-owned concerns.
Here are my favourite passages from Part One:
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‘Secure in the faith that it is the Market that has made things as they are, and that the Market is always right, traditional economists feel the need only to dream-up just-so stories to explain why things are as they are, never testing them to see if the evidence points in another direction. A truly critical economics is not possible, by definition, unless those two critical assumptions – that the Market is working as envisaged and that it is always right – are challenged.’
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‘Ironically, capitalism itself is built on the idea that owners will work more energetically and creatively, and with greater commitment, than people who are employed by others. Instead of following through [this] logic […], the owners of capital […] have built company structures in which employees have none of the participation of ownership: they have no right to influence the choice of leader or the policies set, and no right to participate in the wealth that they create together. The vast majority of people are systematically deprived of any ownership stake. It is as if they are seen as coming from a different species, insensitive to the galvanising effect of ownership.’
Part Two (Having a Job)
This section describes the horror of working for publicly traded companies subject to so-called ‘market discipline’, contrasts this with the experience of employee-owners, and shows why ‘market discipline’ is powerless to curb excessive executive pay and does nothing to promote stability and innovation. It also relates the jaw-dropping history of the employee contract (which Erdal contends violates what should be inalienable rights) and of the present economic system – rigged from the outset in the favour of the rich and powerful.
Alas, our public services seem to be increasingly at the mercy of the Market. Polly Toynbee is quoted as follows, referring to the contract she was asked to sign by an agency recruiting for an NHS subcontract: ‘The terms exposed in these tiny words explain why the NHS is using casual workers employed by agencies at pay and conditions it would never itself dare to offer in public. The Casual Work Agreement is “an agreement to provide occasional services”, in other words a zero-hours contract. One clause automatically opted me out of the 48-hour maximum working week protection. “The temporary worker hereby agrees that the working week limit shall not apply.” No sign no job.’
The exploited – and undoubtedly desperate and stressed – people working for such concerns surely cost the NHS more in the long term, yet politicians continue to tell us that private companies are more efficient! My favourite quote from this section of Erdal’s book is: ‘In Britain the illusions have not been so successfully transferred to the poor as they have been in America to the rednecks.’ Hmm, but they are certainly trying!
Erdal’s interviews with a Debenham’s employee and others working for publicly traded companies (which could not be identified for legal reasons) reveal ‘lives of frustration’ and expose the hypocrisy of chairmen who ‘swear annually in their reports to the City that their employees are their greatest asset, but […] what really drives them is their reputation in the capital market’. Depression and stress abound, with managers seldom around and little investment in training. ‘The hierarchy of power,’ says Erdal, ‘seemed to get in the way of creating a good business – rather than teamwork [and, he later adds, ‘than looking after the interests of the shareholders’], the managers often seemed to be preoccupied with their positions in the hierarchy.’
The impact of asset-stripping by private equity investors on the employees and customers of Debenham’s, as well as its suppliers, is powerfully conveyed. After all but destroying staff morale, delaying payment for suppliers, decreasing investment in new stores and the refurbishment of old ones, and making various cut-backs and redundancies, investors left the company nearly £1 billion in debt. If there is any good news in the way publicly traded companies operate, it is that because hard-pressed employees are often pressured to work longer hours than contractually obliged, simply working to rule (i.e. doing no more work than specified in their contracts) can sometimes be an effective strategy to force management to change!
Moving on to the topic of how publicly limited companies ‘supervise’ employees (in reality it seems this often amounts to spying on them with CCTV cameras), Erdal takes another swipe at economists with the words, ‘When not under the sway of greed and fear (the motivations that are supposed to keep owners doing their best), the human race is seen by mainstream economists as driven by supervision.’
What of CEO remuneration? Erdal writes that this has little to do with market forces (supply and demand). The demand for CEOs has remained constant, he says, while there are vastly more MBAs entering the workforce and therefore available to take these positions, yet their pay has rocketed. This is ‘no great mystery’ as the people who want the chief executives to have lower salaries don’t have any power and depend for their information on a company on what the chief executive provides – just as Tony Blair was able to persuade the British public of the ‘imminent danger’ posed by Saddam Hussein. Corporate governance is the responsibility of non-executive directors, but these are the CEOs of other companies with vested interests in high executive pay. Similarly, financial institutions are the major shareholders and ‘the managers of [these] are themselves very highly paid. They have a […] personal interest in seeing high pay for City and City-related jobs [and] identify with the wealthy and the educated – as do the legal and financial advisers who so often advise against employee buyouts – much more readily than they do with the pensioners whose interests they are supposed to serve.’ Erdal concludes, ‘The kids have taken over the sweetie shops, the cops have commandeered the betting shops. […] The reason why the invisible hand is invisible is that it isn’t there.’
Perhaps the most disturbing part of the book is Erdal’s exposition of the origins of today’s employment contract. He summarises the current situation as: ‘work to create wealth for your employer, or live a life of poverty; sign an employment contract giving away your rights, or have an even more miserable existence’. He takes us back to the blatant land-grabbing of indebted aristocrats who were able to use parliament to sanction their massive human rights abuses. This is illustrated, for example, by the Workmen’s Combination Bill outlawing joint trade union action.
Gradually, certain limits to the power of employees have come into being, but this has ‘created a considerable incentive for employers to get round the rules, which from the 1980s onwards they increasingly did, notably by establishing plants in non-union areas and overseas’ and Erdal states that while ’employers would never again manage to achieve quite such perfect power over their employees […] the basic skeleton of the arrangements [remain] in place […]. Even today, the company owners have all the rights.’
Various harrowing tales illustrate just how much power employers did have. Erdal tells us of the self-serving dictum that there was no need to be concerned for the welfare of labourers; it was argued that it was in employers’ interests to make sure they were fit (ignoring the fact that the enclosures had created an abundance of desperate people). He writes of the resistance to lowering children’s working hours to eleven a day, and of the use of orphanages as sources of expendable labour. Ten-year-old Mary Richards was hired out by an orphanage to work thirteen- or fourteen-hour shifts. Already weak and malnourished, she was mutilated by unguarded machinery. Miraculously surviving but henceforth on crutches, she received no compensation and had to return to work. She was worse off than if she had been a slave – Erdal writes: ‘Adam Smith pointed out that it was cheaper over the long term for an employer to hire people as workers rather than buy them as slaves because if the employer buys them, then even when they are ill he has to provide their upkeep.’
Today, Erdal writes, we have employers and trade unions ‘locked together in a perpetual embrace and at the same time in unending conflict’. This. Erdal believes, ‘has huge costs, both in economic terms and, more insidiously, in social and human terms’ and ‘the waste of human potential, the waste of lives, reaches extremes that should […] at the very least trigger outraged protest. It is easy not to identify with the poor and the powerless, particularly if they live in another country and the information is hard to find.’
Concluding his discussion of the employment contract, Erdal cites David Ellerman’s critique of it, stating that autonomy is inalienable and the contract is a fraud because it has the effect of depriving the employee of the right to participate in the product of his or her work, yet ‘if the product of the employment is a crime, then the employee is responsible for that product, that crime. […] It is only when Mr Jackal creates something valuable that we switch to the fiction that he is not a partner, that as a hired hand he has no responsibility, and so no ownership of the product he creates.’ The trouble is that nobody believes this. Erdal says: because it is normal, it is not seen as a problem!
Part Three Humanity in Partnership (How and why employee-ownership works)
This section details how employee-owned businesses function, also outlining the challenges, such as leadership succession, that need to be overcome for them to work at their best.
The John Lewis Partnership (employee-owners are described as ‘partners’), where ‘people are treated as adults, with the responsibilities of adults’, is discussed at some length. Important elements of this business’s success are the internal free press (the Gazette, which publishes all letters from partners about the business, however critical), the Registry (which gives staff a direct line to the board outside the management hierarchy) and the biennial survey of partners’ opinions. The element that I found most interesting was the fact that partners do not put themselves forward to be elected as representatives – everyone is automatically a candidate. This means that those eventually elected are ‘the most respected and trusted’, as opposed to being the most power-hungry. (Could this system of weeding out psychopaths be more widely adopted by society?) Another feature is the fact that managers’ annual reviews are 60% about their behaviour and only 40% about their business results, ‘so there is a huge emphasis on treating people with respect’.
While all employee-owned concerns are profit-sharing (and this motivates people to bring slackers into line), Make Architects take things a bit further, in that everyone can distribute some of the profit to others, a practice which is apparently hugely beneficial psychologically. Crucial to the success of all employee-owned businesses are consultation and keeping employees informed: ‘If it feels to the managers like overkill – as if they are giving out too much information – then they may be close to giving out enough’. People must also be allowed to make a difference, and increased efficiency should not result in people being sacked – they can be redeployed or given further training. Although hierarchies do exist in employee-owned concerns, their purpose is simply ‘to enable the front-line workers to be wholly effective’.
Sustaining employee ownership requires some thought: ‘The structuring of the ownership is of crucial importance in ensuring longevity. When all the shares are held by the individual employees a substantial ‘repurchase liability’ – the need eventually to find the cash to buy back the shares – builds up.’ Erdal discusses this topic in some depth, suggesting various alternatives and criticising US ESOPs (Employee Stock Ownership Plans, where shareholding trusts take the form of pension funds) as being ‘vulnerable to Wall Street types’. He champions the capital account system used by Spain’s Mondragón group, and urges tax concessions to support this.
However employee-owned businesses are structured, Erdal believes that in the end they can ‘be made effective only through the courage, energy and personal ethics of those involved’. Nonetheless, he maintains that they are certainly less vulnerable to abuse of power by CEOs than public corporations where ‘CEOs are running away with the loot’.
How do businesses move to employee-ownership? Employees can buy the company directly, or there can be a ‘leveraged all-employee buyout’. The latter (whereby the money required to purchase a business is borrowed against future profits) is, Erdal states, more powerful. After all, the ‘reason why investors buy companies is because the companies eventually pay out more than the cost of buying them’.
There can be difficulties on a social level in a previously publicly traded, conventional, top-down business, but these can be overcome: ‘A democratic firm properly structured has the best chance of being a community of equals, but only if you really understand power in organisations and the challenge of the relatively unpowerful and less educated. Many of them, when confronting their superiors and betters, will fall back on just telling the boss to fuck off. But in a democratic firm you can create a culture where the less powerful can feel unintimidated and open.’
Contrary to economists’ predictions, reinvestment is not a problem for employee-owned concerns as people generally ‘want to keep the company strong for their own sakes and they want to pass it on strong to the next generation’. As Erdal says, ‘They are much more than the money-grubbing automata of economists’ models’.
Part Four Humanity Flourishing
The last section examines what human nature really is (not what economists imagine) and how it came to be this way, discusses the wider effects of employee-ownership on society and presents ideas on the way forward.
It is in this section that Erdal talks about the essentially cooperative nature of mankind, shaped by millennia of hunter-gatherer existence during which survival depended on the sharing of scarce and valuable meat with everyone, and during which no one was allowed to get too big for his sandals – no hunter-gatherer communities have ever been found to have permanent leaders. ‘Traditional economics,’ writes Erdal, ‘has operated with the caricature of “economic man”, the belief that “human nature is driven by a psychotic focus on marginal self-interest: if we can make a few pennies by doing something we will do it, regardless of considerations of fairness, or commitment, or integrity’. It is ‘shared enterprise [that] makes us richer and happier’, a fact that Erdal believes ‘should be trumpeted from the rooftops’. ‘There is a natural fit between people and a sharing system,’ he says. ‘Sometimes, when individuals realise that they really are involved in a genuine sharing system, they go through a considerable psychological upheaval – a really positive change in their view of the world, of their place in it and their feelings about it. Enormous energy can be released: there is a transformation from suspicion to trust.’
The main obstacle to a wholesale change in the way we do business is, Erdal believes, ‘the pretence the impersonal Market, rather than the exercise of power by our leaders, is shaping the world around us. According to this, it is the Market that relieves us of the wealth that we create together, whereas actually it is a legal system shaped over centuries by the people in power, precisely to give them the right to extract that wealth.’ ‘The ideology of today,’ writes Erdal, ‘has it that the wealth of the whole human race is under threat if we point out out that the invisible hand/Market ideology has no clothes. [However, in reality, the] Market’s puppet-masters are simply people in power backed up by a legal system that they and their forebears have designed’ and ‘there is no guiding invisible hand which relieves us of our responsibility to think about the consequences of what we do, and to shape them so that we make things better rather than worse’.
The consequences of today’s ideology, ‘without any firm basis in reason or nature’, were seen, Erdal maintains, in the 2008-9 banking collapse, when ‘greed, deception, utter irresponsibility and blinkered self-centredness ended in the destruction of so many jobs, ruining the futures of so many youngsters and the livelihoods of so many people round the world’. Erdal describes Goldman Sachs’ involvement in the Greek debt crisis and the personal enrichment of bankers that has followed from the international crisis they helped cause, and he points out that the contrast between resilient employee-owned companies and private banks (dependent on government support) dramatically contradicts capital market theory. It’s funny, I don’t recall Rupert Murdoch’s tabloids taking much interest in this!
Mentioning Murdoch reminds me of the News of the World shenanigans, an affair in which integrity appears to have been entirely lacking, and which seems to have resulted in many innocent people losing their jobs. Erdal argues that ‘the conventional corporation cannot have integrity – cannot be a unified whole – because the leaders are required to manipulate the employees to perform, without treating them as partners in the enterprise’.
If by this stage you are still not persuaded of the virtues of employee-ownership, perhaps you will find Erdal’s measurement of the wider effects of employee ownership on communities in Italy convincing. Erdal compared three similar towns, differing only with regard to the proportion of their residents working for employee-owned concerns. He found that where many people worked for such businesses, residents lived a lot longer, they enjoyed larger and more supportive social networks, they perceived political authorities as being more on their side, more voted, they believed that domestic violence was less prevalent, they donated more blood, their children stayed at school longer and did better, and, ‘to a radically greater extent’, they continued being trained and educated throughout their lives. Most intriguingly, they apparently didn’t bother buying big cars to show off their wealth, despite having higher disposable incomes! Employee-ownership kills conspicuous consumption?
Readers of this review may be reminded by these findings of Wilkinson and Pickett’s The Spirit Level: Why More Equal Societies Almost Always Do Better, and, indeed, their major conclusions are summarised by Erdal, who writes, ‘One of the attractions of employee ownership is that it lowers the gap between rich and poor not by taxation […] but by a more even distribution of wealth in the course of creating it.’
Conclusion
In conclusion, I hope economists can be persuaded to abandon their solipsistic and self-serving theories by the hard evidence Erdal presents, and I pray that this book becomes prescribed reading on every MBA course. (I have my doubts on this score – a masters economics student I know was fearful that his professors would not let him quote Erdal’s work in his dissertation because it radically challenged their views of the world. If this is how our higher educational institutions operate, heaven help us!)
Erdal’s book should, of course, be read by politicians too. If the Scottish Government is to have more control over tax then I pray that they will not cut tax for large publicly traded concerns but will choose instead to favour employee-owned businesses, favouring them too when awarding public contracts, as Erdal suggests. (It is this sort of idea that the Campaign for a Cross-Party Group on Real Prosperity and Joined-Up Thinking wishes to inject into the Scottish Parliament.) In the book’s epilogue he also urges journalists and company advisers, such as corporate lawyers, accountants and business consultants to get up to speed, and ‘members of trade unions […] need to persuade the union leaders to recognise the importance of gaining the rights of ownership’. It’s not just up to these people, however: ‘the great mass of us can start to agitate’.
Yes, we can all do our bit to promote employee ownership. After reading Beyond the Corporation, Humanity Working, I needed to buy some underpants and socks. I bought them at John Lewis. I can only hope that they were not made by slave labour! (Hmm, what was that Erdal wrote about not being easy ‘to identify with the poor and the powerless, particularly if they live in another country and the information is hard to find’?)
Speaking of socks, here’s a footnote:
Some of Erdal’s thesis is prefigured in Diane Dreher’s The Tao of Inner Peace, published in 1990, in which she describes the corporate culture of Tandem Computers (not to be confused with Tandy), a company that, while not employee-owned, adopted many of the enlightened practices espoused by Erdal. It has now been subsumed into Hewlett-Packard. One wonders how much egalitarianism remains, and what would have happened if it had been employee-owned. Would Tandem have gone from strength to strength, as employee-owned companies are apparently significantly more innovative than publicly traded ones, and would there now be no stressed wage-slave iPad-assemblers hurling themselves from buildings?
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Excellent review, Excellent Philosophy, Fully back and support these ideas in our own company… just short of making it an Employee Owned Business….. Will the Owner support this change one day?? We’ll see.