September 24, 2018 / 11:48 AM / a year ago

Breakingviews - UK shares-for-workers plan is appealing but flawed

Britain's Labour Party shadow Chancellor of the Exchequer, John McDonnell speaks during a fringe meeting during his party's annual conference, in Liverpool, Britain, September 23, 2018

LONDON (Reuters Breakingviews) - Britain’s Labour party has come up with a superficially appealing plan to transfer wealth from companies to the people, but really to the government. The opposition party on Monday spelled out proposals to force firms to hand a tenth of their shares to workers. It sounds like a benign form of socialism. Really, it’s a tax hike in disguise.

Free-market advocates have long endorsed the idea that employees should own a chunk of the companies they work for. It motivates workers to improve the firm’s value, potentially boosting their productivity. In Britain, the governing Conservative party has promoted wider share ownership for decades. Many companies hand out equity-based incentives, or allow employees to buy stock at a discount to the market price.

At first blush, Labour’s plan looks like another step in that direction. It would require companies to transfer 1 percent of their equity to an “Inclusive Ownership Fund” each year until it reached 10 percent. The fund would distribute dividends it received to employees, though these would be capped at 500 pounds per year. The idea, spelt out on Monday by John McDonnell, Labour’s finance spokesman, is part of a broader push to give staff a greater say in how companies are run. Labour also wants to reserve a third of board seats for workers.

As a means of spreading wealth, however, the idea is flawed. To see why, consider a large UK-based company like Lloyds Banking Group. The lender is expected to pay out dividends worth about 2.3 billion pounds to investors this year, according to forecasts compiled by Thomson Reuters I/B/E/S. Under Labour’s plan a tenth of that – around 230 million pounds – would go to the worker-owned fund.

However, limiting dividends to 500 pounds per person means the bank’s 67,900 employees would receive just 34 million pounds of that. The surplus of close to 200 million pounds would be channelled into a national fund to be used for what Labour calls “risk-sharing and redistribution”. That’s equivalent to about 11 percent of what Lloyds paid in corporate taxes last year.

Giving workers a greater share in the wealth that companies produce is an idea that both capitalists and socialists can endorse. But Labour’s cosmetically appealing approach isn’t the right way to make that happen.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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