John McDonell Wants a Workers’ Paradise

(Bloomberg Opinion) -- Britain’s opposition Labour Party wants the country’s company owners to hand over 10 percent of the equity to their employees. Gulp. 

The idea is that staff would share more in the spoils of capitalism via dividends of up to 500 pounds ($658) a year per employee. The rules would affect private sector companies with more than 250 employees. Any payouts that exceed the cap would go directly to the government (surprise!)

Shadow chancellor of the exchequer John McDonnell, a keen advocate of Karl Marx, is characterizing this as a way to motivate employees and promote longer-term thinking in business. It sounds more like state-sponsored expropriation, though. Bizarrely, some workers would end up picking their own pockets as many already hold U.K. shares via their pension plans. I’m all for increasing employee share ownership, but this isn’t the way to do it.

If Theresa May’s Brexit blunders end up triggering a general election, there’s a decent chance McDonnell will end up in charge of the U.K.’s economic policy. It would be unwise, then, for those of a pro-capitalism persuasion to simply dismiss what he’s advocating.

Indeed, despite his hard-left tendencies, he’s no fool. His policy is one of many designed by Labour to tap into widespread frustration about a growing societal divide between the haves (who own capital) and the have-nots (who don’t.)

Share prices have soared since the last recession — thanks to central banks — while wages have stagnated. Some companies have paid big bonuses to undeserving managers or prioritized dividend payments rather than filling pension deficits. It’s no wonder workers feel aggrieved and want more say in running companies. Owning a chunky voting stake would certainly help, as would gaining seats on the board (an idea May’s government toyed with but has since dropped.) McDonnell also has a point about trying new things to boost Britain’s woeful productivity growth.

Unfortunately, his policy is not only ham-fisted, it feels unworkable, too. Even if Britain dilutes existing shareholders only gradually  — taking 10 years to reach that 10 percent — investors will naturally worry about where this all ends. British businesses’ cost of capital would almost certainly rise, and its ability to compete internationally would thus be impaired. Investors aren’t exactly falling over themselves to hold British assets right now — this won’t help.

This idea couldn’t apply to the private firms that don’t pay dividends. Meanwhile, listed companies might try to circumvent the rules by buying back shares instead. Alternatively, they could just move their headquarters to another country; the policy wouldn’t affect foreign-listed companies with large U.K. workforces, according to the Financial Times.

A bigger issue, though, is that this seeming attempt to broaden shareholder capitalism isn’t anything of the sort. Labour’s plan would demand that employee shares are held collectively. Hence, individuals wouldn’t be free to sell them, should they wish to. In other words, if you thought McDonnell was promising British workers a 270 billion-pound ($355 billion) gift,think again. 

The 500-pound dividend cap equates to about one week’s wage for the average worker. That’s nice to have, but it might not be enough to turn you into an ardent believer in shareholder value. But then McDonnell and his acolytes are hardly likely to want that, are they? That sort of reinforces the critics’ point that this feels like a way for a Labour government to extract more lucre from business, rather than a big boon for workers. 

Fortunately, there is another less alarming way to do this. Britain already has several tax-saving policies designed to increase worker share ownership. Most large businesses offer company share plans, and as a result about 2 million Brits own a stake — or an option to buy one — in their employer. As I’ve written before, these plans are a decent way to give non-City types a first taste of investing in the stock market, and that’s a proven way to build wealth.  

Share plans also help foster “ownership culture,” including a greater understanding of the things that might on the face of it seem to harm workers, such as cost-cutting. At Germany’s Siemens AG, hardly a poster child for socialist utopia, some 80 percent of employees own shares.

To be clear, employee share plans are no panacea. Tying both your employment and net worth too heavily to one company isn’t a good idea. But owning a bit of company stock is a good thing. McDonnell’s wrong, but not entirely. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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