Employee-owned businesses are inherently more political environments than family businesses. Most have elections of employee trustee directors and a significant number have some kind of workplace forum or council. A few have a process of indirect elections where the whole workforce votes for members of the employee council and members of the council then vote for the trustee directors.
Of course, both private and public companies have their own share of political problems from time to time, but these tend to be more like the sort of court conspiracy which would have been familiar to Machiavelli. The politics in employee-owned businesses is not without such intrigue, but for the most part the politics has a more modern feel: universal, democratic and prone to manipulation. When considering the transition of a family business to an employee-owned business, getting the political structure right is essential if the business is to thrive in the long-term. Here I look at some points of weakness and discuss how well-designed structures can help limit the risk.
Occasionally, it happens that the new leader adopts the tactics of a populist politician. Signs of this are proposals to offer staff new benefits which the leadership has decided will make them more popular. They typically sound good but cost very little and are likely to benefit small minorities of staff. They often come wrapped in the language of fairness and reasonableness. In more extreme cases, one might hear the rhetoric of freedom and independence, sometimes accompanied by a grand gesture of some sort. Beware of leaders who trumpet ‘independence day’ (when the former owners are finally paid off) as if colleagues are being freed from the shackles of slavery!
The collective nature of employee ownership can also suffer from two group phenomena well known to social psychologists: the risk of ‘groupthink’ and ‘group polarisation’ including the ‘shift to risk’.
Groupthink occurs when the desire for harmony overwhelms critical thought. It is a risk in any team and by no means confined to employee-owned businesses. Fans of the work of Patrick Lencioni will know that fear of conflict is one of his five team dysfunctions and follows on from a lack of confidence and trust in fellow team members. In the early stages of employee ownership, both employees and the senior leadership team are quite naturally nervous that the new arrangements will work. That makes them especially vulnerable to groupthink because nobody wants to draw attention to problems for fear of spooking everyone else. This effect is enhanced because the change to employee ownership always involves major changes to internal communication and unwelcome news from an unfamiliar source tends to be quite disconcerting.
Group polarisation is a process whereby the decision of a group becomes more extreme during group discussion. This results in a shift away from the average position of the individuals prior to the group discussion towards a more extreme consensus. Because the language of daring is seen as desirable in our culture this can result in the group taking risky decisions which can put the business in danger. Employee-owned businesses are probably less liable to this phenomenon than other types of organisation because the extra layers of accountability tends to make them more conservative in their risk-taking behaviour. However, a populist leader can sometimes persuade employee owners to take unwarranted risks.
The best way to control these risks is a well-structured governance system. This is slightly trickier in an employee-owned business than in a conventional business due to the added layers of power and influence.
All conventional companies have a main board which makes strategic decisions. If the company is small, this group probably also make the tactical managerial decisions which keep the business ticking over. If the company is large, it is likely that there will be an executive committee meeting more frequently than the board to manage day to day decisions. Some executive committee members will be on the main board but many will be in the management layer immediately below the board. In a business owned by an employee-owned trust, there is at least one additional layer, the trust board. In larger EO companies there will also be some additional level of employee representation, usually an employee council.
An EO business is like any other in that prime responsibility lies with the main board. Not only are they responsible for developing a convincing strategy to ensure the backing of the owners, they also bear legal responsibility for the actions of the company. It is important that this team is able to fully debate issues, has shared ownership of strategic decisions and reviews its own performance regularly and on the basis of objective evidence.
In a small EO company, the board probably also executes the agreed strategy but in larger companies there is an executive committee charged with ensuring board strategy is implemented and making tactical decisions. There should be formal reporting from this committee to the board so the board can ensure its policy is being carried out and the company is complying with its legal responsibilities. The executive committee should also highlight potential issues with strategy for the main board to review. Problems can arise if the reporting process is delayed or incomplete or the main board is dysfunctional and unable to give unambiguous guidance. Executive committees are always under pressure to ensure service delivery and a dysfunctional board will often result in board level decisions being made ‘on the hoof’ in this committee simply to get the job done. However, if board level decisions are made in the executive committee, there is no proper reporting channel to the trust board and ownership rights are undermined.
In an EO company controlled by an EOT, the trust’s responsibility is to hold the board to account, ensuring a good return for the employee owners and also that the main board maintains high ethical standards. The trust board should operate at a very strategic level, considering similar issues to the main board, although ultimately with the even longer time frame and social responsibility perspective which comes with ownership. Just as its role can be undermined by management shifting strategic decisions into the executive committee to avoid uncomfortable dialogue between the main board and the trust board, so it can also be undone by allowing itself to become entangled with minor operational decisions.
It can be hard for employee owners to understand that the trust board is not there to resolve minor grievances. These have to be dealt with in the workplace through normal management, human resources and perhaps trades union channels. In companies which have a workplace representative or employee council system, such problems can also sometimes be dealt with at this level. They should only ever come before the trust board if a majority of the employee council feels that there is a pattern of problems which requires strategic intervention.
It is essential to maintain clarity and discipline in communication and decision-making between trust board, mainboard, executive committee, employee council and the wider workforce. As we have seen in the world of UK politics with the Brexit issue, when one method of decision making (a referendum) is superimposed on another (representative democracy) the result is likely to lead to disruption, conflict and institutional paralysis. All EO businesses of any size effectively use a system of representative democracy and that requires a degree of formality in decision making to operate effectively.
Dr. Paul Sawbridge is a Founder and former Chairman of Alfa Leisureplex Group, a family-owned hospitality and travel business employing 670 staff which converted to a 75% EOT in 2015.