Mutuals: balancing the benefits of employee ownership and innovation with the risks and rewards

By David Bicknell

The excellent King’s Fund report released yesterday on social enterprise in healthcare made some interesting points on employee ownership and risk in social enterprises and mutuals.

It said: “Evidence from other sectors (the commercial industry, and other public services to a lesser extent) largely focuses on the employee ownership model. In the UK, there is considerable evidence based on the John Lewis Partnership, a major retailer and the UK’s largest employee-owned organisation. However, much of the literature in this field is from the United States, where a significant proportion of the workforce (more than one-fifth) is financially involved in their organisation.

“Literature from the private sector is predominantly supportive of employee ownership, and suggests that there is a positive link between employee ownership and productivity, innovation and job satisfaction. This literature is based on the argument that, by giving employees a stake in their organisation, they will be more engaged and potentially more productive.

“However, Ellins and Ham report evidence that suggests that employee ownership may slow down decision-making and generate a risk-averse culture. A review of the literature by Matrix Evidence also suggests that any productivity gains are not immediate, but become stronger over time.

“The relationship between employee ownership and staff engagement is quite complex. It has been suggested that employee ownership does not automatically lead to greater staff participation, but that staff participation is necessary for the development of a successfuland productive employee- organisation. The literature suggests that the main benefit of employee ownership is greater staff involvement in decision-making, which is associated with a stronger tendency for organisational innovation. However, the direct link between ownership and staff satisfaction is much less clear.

“In commercial industries, employee-owned firms tend to have a lower risk of failure. They are able to create jobs quickly, and are at least as profitable when compared to conventionally structured businesses. Further, a survey by the Social Enterprise Coalition found that social enterprises were twice as confident of future growth compared with small- and medium-sized enterprises (SMEs) (48 per cent as opposed to 24 per cent of SMEs). Additionally, since the recession began, 56 per cent of social enterprises have increased their turnover from the previous year (compared with 28 per cent of SMEs).”

The other week when David Cameron launched the Open Public Services White Paper, he suggested that the Civil Service (and perhaps other
enterprises too) would need to adopt a risk-taking culture.

“The biggest challenge for the Civil Service is to try and adapt to this new culture and also a very difficult thing to do, and an easy thing to say, is that actually civil servants will have to take some risks. We all know that in business it is very easy to award the contract to Price Waterhouse. They’ve done it before, they’re an enormous organisation, they won’t fail. I think there’s a similar tendency within the Civil Service. It’s safe to keep it in house and deal with one of the big providers.

“If we really want to see diversity, choice and competition, we have to take some risks and recognise that sometimes there will be a new dynamic social enterprise that has a great way of tackling poverty or drug abuse or helping prisoners go straight, and we do need to take some risks with those organisations and understand that rather like in business, when you have a failure, that that doesn’t mean that the Civil Service has done a disastrous job.

“In business, we try new things in order to do better, and when they don’t work, we sit back and think, ‘How do we do that better next time?’ We do need a sense of creativity and enterprise in our Civil Service which is clearly there….a change of culture, perhaps a different attitude towards innovation and risk and a sense that that will be a good way of driving performance.”

Interesting then that a blog post in the Harvard Business Review site discusses risk and argues that taking a risk is not immoral – as some might argue – and that “the world is full of people who sit on their high horses disparaging risk and risk takers. They counsel caution in order to gain moral stature, all the while making use of a thousand innovations made possible by the very people and practices they shun.”

It’s not the people who shun risks who are the saints, the author, Dan Pallotta, says. It’s the ones who dare to take them. Good piece – worth a read.

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