Putting A Premium On Value Creation Over Value Extraction

Philip Dilley

Group Board Chairman of Arup

Arup’s projects include Sydney’s Opera House, Beijing’s ‘Bird’s Nest’ stadium, Paris’s Pompidou Centre, London’s Shard and Japan’s Kansai Airport

In historical terms, financial crises are fairly commonplace occurrences. History has long been punctuated by events such as Tulip Mania in the 17th Century, the 18th Century’s South Sea Bubble, the Wall Street Crash of 1929, the 1997 Asian Financial Crisis, and, more recently, the 2001 Dotcom Crash, the Global Financial Crisis of 2008 and the European Sovereign Debt Crisis of 2010.

Viewed in that context, any one of these crises could be dismissed as more or less serious ‘adjustments’ in a long-running series of events that have disparate specifics, but share common themes of greed, fear and regulatory failure.

Yet it is just possible that the most recent crash may have prompted some deeper reflection this time. Even stalwart supporters of free market economics such as the Financial Times have run thought pieces under the banner ‘Capitalism in Crisis’.

As a result, there appears to be an appetite for checking under the bonnet and looking at whether the growth engine might be modified so that it blows up less frequently. Or at least, inflict less damage when it does.

Among debates about banking reform and ways to rebalance the economy, the crisis has also prompted political and economic figures to cast around for alternative corporate models.

In part, this follows a recognition that capitalism devoid of any form of social contract serves too narrow an interest and ultimately undermines its own foundations.

If capitalism is to continue to be viewed as one of the greatest engines the world has ever seen for reducing poverty and driving innovation, it simply has to be designed to work for, and with, a broader range of social stakeholders and not just in its own self-interest.

This search for viable alternatives to the traditional corporate structure has put groups such as Arup and the John Lewis Partnership very much in the spotlight as employee-owned businesses that have a decent track record in this regard.

Evidence from the Employee Ownership Association and others suggests that employee-owned firms are not only more effective at distributing the benefits of capitalism between stakeholders, but are often also more innovative, more resilient during downturns and drive greater staff engagement.

Certainly, a short history of Arup would seem to back up this view. The firm began the transition from traditional partnership to employee ownership back in 1977, when the partners’ shares were gifted to a trust set up for the benefit of all employees, past and present.

“There appears to be an appetite for checking under the bonnet and looking at whether the growth engine might be modified so that it blows up less frequently. Or at least, inflicts less damage when it does”

Three and half decades of steady global growth later, the group today has no debt, has never posted a loss-making year and has a turnover of more than £1 billion.

More importantly, all staff members get a twice-yearly profit share determined by the group’s global profits rather than regional or local performance. For a company dependent on shared knowledge and information to deliver quality projects worldwide, this is an invaluable incentive for collaborative working.

Tellingly, the most recent staff survey in the UK shows that 88 per cent of staff members ‘feel proud to work at Arup’, whilst 85 per cent ‘would recommend it as a place to work’.

Clearly, staff engagement is high, which is a differentiating characteristic for many employee-owned groups.

At this stage, it is important to point out that, while this model has delivered for Arup, employee ownership will not be the right solution for every enterprise.

However, Arup remains one of many examples that demonstrate that alternative models can, and do, work, whether you are discussing mutuals, cooperatives, partnerships, social enterprises or employee ownership.

There are a number of reasons for this. For a start, less common corporate ownership models often free firms from the distraction of meeting short-term demands for shareholder returns.

This has broad-ranging implications for how the group is run. For example, firms owned by their employees are free to determine their own long-term strategic goals without the same pressures to cut corners or divert course for an immediate profit at the expense of a potentially more lucrative, or more purposeful, long-term goal. Arguably, this explains the greater resilience.

“Firms owned by their employees are free to determine their own long-term strategic goals without the same pressures to cut corners or divert course for an immediate profit at the expense of a potentially more lucrative, or more purposeful, long-term goal”

The engagement element is also critical. The various types of employee ownership models – and there are quite a few – typically offer a clear link between organisational performance and personal reward. So while each model may distribute the benefits in different ways, employee ownership models tend to have lower disparities between pay at the top and pay at the bottom. This sense of being ‘in it together’ typically makes it easier for management and staff to align their interests based on common goals.

Nobody is saying that any of these types of models represent a panacea for either business or society. And certainly, no-one can doubt the enduring power of the limited liability company.

Yet there is ample evidence to suggest that change is required. Relying on business models that are increasingly remote from the outcomes we would want to see as a society runs the risk of undermining the case for capitalism.

We need to support capitalism by finding new ways of putting a premium on ‘value creation’ that benefits the many rather than ‘value extraction’ that accrues to the few.

If that happens, then the 2008 crash might just leave a positive legacy in its wake.