Only two decades ago the public company with dispersed share ownership was widely seen as the only sustainable form of business organisation. State control was anathema, other structures anachronistic. Organisations as varied as Goldman Sachs, the Automobile Association and water suppliers became public companies.
But the pendulum has swung back. The British retailer John Lewis, owned by an employee trust, has long been a favourite of metropolitan women. It has become a favourite of their politician husbands. Britain’s coalition government is enthusiastic about mutuals and employee ownership. Some such structure has been proposed for Royal Mail. A recent report of the Ownership Commission, chaired by Will Hutton, advocates greater pluralism in business models. Civil servants are anxiously searching for public services that could be mutualised.
The appeal of the public limited company model derives from its ability to solve simultaneously two problems of large-scale commercial organisation. Such an enterprise needs permanent risk capital to allow it to weather the fortunes of competition and the business cycle. But whose capital? Lenders will accept little risk; customers and employees can usually walk away when things get tough. If equity is provided by specialist investors, and shares are tradeable, the capital of the company can be maintained even if individual shareholders depart.
The provision of risk capital can be handled in other ways, but not easily. It may simply be donated. A generous and imaginative man, John Spedan Lewis, gave the John Lewis business away. If Royal Mail becomes a mutual, the government will hand state assets to a new and formally independent organisation. Retained profits are another principal source of capital. The Halifax Building Society accumulated reserves over 150 years and became the UK’s largest mortgage lender.
In capable hands, such structures can be powerful business models, as Halifax was and John Lewis is. But largesse is unusual, and the process of organic growth slow. The need for risk capital can be eased if the business confines itself to familiar and low-risk activities. Golf clubs and private schools endure for generations by this means.
A second basic problem for a large business is the achievement of some degree of accountability for the employees who are in charge. In the public company this is in the first instance to shareholders. The public company does not handle managerial accountability particularly well but the alternatives are often worse. Mutuals are ostensibly controlled by customers. But the vast majority of them want only to be customers. The minority who seek to participate in governance are rarely representative of the whole; frequently, they are cranks or busybodies with agendas of their own. So the reality of most mutuals has been that there is no external check on management.
Employee-controlled businesses are rarely well run, and often show little concern for the interests of stakeholders other than employees. When government establishes an unconventional business structure it is reluctant to relinquish state control altogether: there is always a Treasury official in the background.
Yet the instinct that we need more pluralism in business structures is sound. The variety diminished in the 1980s and 1990s but not because the enterprises faltered. A cultural shift, helped by regulatory changes, legitimised a process by which the customers, partners or employees could help themselves to the assets their predecessors had accumulated. This quickly led to the demise of mutuals and partnerships – and often of the businesses themselves.
The reserves Halifax had built up in 150 years were dissipated in 10: investment banks with limited liability took risks that led to corporate failures. John Lewis retained its idiosyncratic structure only because the shrewd Spedan Lewis had made asset realisation difficult. We need his ingenuity now to find robust capital and governance structures that permit a wider range of forms of commercial activity.