How employee ownership could save businesses in a coronavirus recession

Posted by RM2 at 08:12 on 2 Apr 2020

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Amidst ongoing anxiety unleashed by the coronavirus pandemic, concerns about the impact on the economy are increasingly driving government’s response. Is it time to start thinking about alternative business measures to help stabilise and improve the economy, and could employee ownership be part of this?


The Chancellor’s emergency measures to date – including the furloughing scheme, reduced interest rates, deferred VAT payments and business loans including the Bounce Back Loan and Coronavirus Business Interruption Loan Scheme – have been widely welcomed.


However, it seems very likely that pretty soon we could be facing the worst recession in modern times as simple measures like working from home quickly morph into delayed or cancelled contracts, cancelled investments, lower footfall, reduced revenues and bad debts. In the coming months, we could see thousands of businesses failing, not because they are poor businesses but because cashflow dries up.


In the last recession after the financial crisis of 2008, businesses proved remarkably resilient, helped partly by the willingness of many employees to work flexibly, accepting reduced hours or temporary pay cuts to keep the show on the road while government and central banks fixed what was essentially a credit crunch. How lucky employers were that their staff responded so constructively with no gain other than keeping their jobs.


This time is different. This will be a proper deep recession as demand in the economy collapses. Although severe, we all believe it will be temporary as the virus works its way through the population, but does that mean four weeks or four months or much longer?


The solidarity that kept many businesses afloat in 2008 needs to find new expression in 2020, not least in the way we respond as a society in this health emergency. Once again, drastic measures need to be contemplated, including pay cuts and reduced hours, if businesses are to stay afloat. This time these measures should be more affordable; most families will dramatically reduce their outgoings as all sorts of “discretionary” expenditure is put on hold.


But that doesn’t mean that employees should be the only ones to make the sacrifice. Business owners should be prepared to share the pain, and disproportionately as they are ultimately the beneficiaries of their employees’ largesse. Yes, owners’ pay should be slashed, and dividends should be suspended but also equity or share options should be allocated to individual employees as direct compensation for their willingness effectively to provide unsecured credit to their employer. In situations where employees can collectively agree on across-the-board concessions, possibly with the support of a union, then all-employee compensating measures should be introduced, such as Employee Ownership Trusts or Share Incentive Plans. The reward for funding a struggling business should be more than just hanging on to your job.


As with the emergency health measures we are all taking, early intervention will deliver the best results for business. Owners should start contingency planning now to save their companies from ruin. Quantify the savings that might be feasible, project them into the future, value the concessions in present day terms, and offer equity now as fair compensation. That’s proper partnership and true solidarity in our hour of need.