Management Perspectives

In England in the 1800s, engineers were forced to sleep under the bridges they were building to encourage them to make the structure as strong as possible. Sleeping under the bridge made it clear to the engineers that their own safety was at risk if the bridge wasn’t strong. Their risks were aligned with those who would use the bridge in the future. Nassim Nicholas Taleb uses this example in his book Skin in the Game about the power of aligning incentives and risk to get the best outcomes.

If individuals see the upside and downside risks differently to the wider organisation then everyone will not pull in the same direction. Yet risks and incentives often split apart in business. Shortly after the collapse of Silicon Valley Bank in 2023, the Financial Times ran a story that said executive pay at the bank had soared on the back of a drive to boost profitability by buying riskier assets. Greg Becker, the chief executive, and Daniel Beck, the finance director, had bonus payments linked to the bank’s return on equity, which is a measure of profitability. In 2021, Becker collected a pay package of $10 million, nearly 60 per cent more than what he collected four years earlier. But just two years later Silicon Valley Bank was bust. The executives had hit short-term metrics, but the long-term future of the business was not secure.

The John Lewis Partnership is an extreme example of everyone having a stake in the success and failure of the organisation. The UK retailer owns the department store chain John Lewis and the upmarket supermarket chain Waitrose, two of the best-known brands in the UK. Its origins go back to 1864. But what makes the business particularly unique is the ownership structure—the John Lewis Partnership is owned by its employees, all 70,000-plus of them. Staff get to share the retailer’s profits through an annual bonus as well as vote on key decisions through a council. A decade ago, John Lewis and Waitrose were thriving. John Lewis appeared to have seen off the threat of Amazon and the growth of online shopping with well-located department stores and a sophisticated website of its own. Waitrose’s highquality food was popular and profitable.

The John Lewis Partnership was celebrated as a success story. This prompted Sir Nick Clegg, then the deputy prime minister of the UK and now a senior executive at Mark Zuckerberg’s Meta, to say he wanted to create a ‘John Lewis economy’. "We don't believe our problem is too much capitalism; we think it’s that too few people have capital. We need more individuals to have a real stake in their firms. More of a John Lewis economy, if you like,” Clegg said. What many people do not realise about employee ownership is that it is a hugely underused tool in unlocking growth.

I don’t value employee ownership because I believe it is somehow ‘nicer’, a more pleasant alternative to the rest of the corporate world. Those are lazy stereotypes. “Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors. In fact, they often perform better— lower absenteeism, less staff turnover, and lower production costs. In general, higher productivity and higher wages. They weathered the economic downturn better than other companies.” However, things have become more difficult since then. Sales have stalled for John Lewis and Waitrose. Covid-19 lockdowns led to the retailer doing what previously seemed unthinkable—it closed shops and cut hundreds of jobs. It looked like the John Lewis Partnership may have overexpanded and been too slow to react to changing shopping habits. Questions were raised about the employeeownership structure.

Did everyone having a stake in the business slow down decisions? According to those at the top of the business, the answer to that question is no. James Bailey, who runs Waitrose, spent more than 13 years at publicly-listed rival J Sainsbury before joining the Partnership, so he is well-placed to offer a view on the different models. “There's nothing in the partnership model that says it should be slow or overly bureaucratic or anything like that,” Bailey says. “There are plenty of people in this organisation who go back to the founding texts of John Spedan Lewis. He was a pretty ruthless retailer — he was all about performance. If the business is succeeding, then it can reward its employees and its partners. But not the other way around. He was very explicit about the demands of running a brilliant business.

To all intents and purposes, he lived that mantra as well. “There's plenty in our recent history—2000 onwards—where the partnership has taken quite big risks, been quite agile and done things that maybe public businesses wouldn't get the chance to. But without that external scrutiny and without a particularly active shareholder base or the stock market to compare the results, there is a risk that the model can become inward-looking, a little bit safe and risk-averse. You just need to make sure that you're always guarded against that.” Dame Sharon White, who stood down as chairman of the John Lewis Partnership in 2024, is even clearer on the power of the employee-ownership model. “The partnership has shown time and time again through history our boldness, our courage, our determination, but also our unity of purpose to overcome whatever obstacles have been thrown at us. There is not a time that we haven't come out stronger.”