The best stake is rather rare

There are better and simpler inducements than share options, writes David Bowen
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The Independent Online
GORDON BROWN, the shadow Chancellor, was telling us last week how Labour was pitching for yet more of the poor old Tories' wardrobe. It would, he said, encourage employees to own shares in their companies far more effectively than the Conservatives had. This is, of course, part of the stakeholder idea - buying shares in your company is the most literal way you can take a stake in it.

But to me, this seems more like a Labour attempt to cosy up with the City of London than a real effort to make the British economy more effective. The last thing Mr Brown should be doing is to encourage a system that has acted as a ball and chain to our industry for so many years.

In a company's early days, there is indeed a link between its real success and its share price; and it makes sense for an owner-manager to give or sell shares to employees. But once a company is established and has several million shares on the stock market, the link becomes almost indiscernible. Encouraging employee share ownership then is at best pointless, at worst folly.

The great bulk of shares is owned by financial institutions, mainly pension and life insurance funds. Their fate is controlled by professional managers whose raison d'etre is to deal. Too often they buy and sell great blocks of shares on the whiff of a rumour and as a result share prices yo-yo for no sound reason.

In the longer term, other factors make sure reality is kept at a safe distance from the stock-market price. The image of the company among investors is crucial. Take GEC, which grew enormously by merger in the late Sixties under the guidance of the dynamic young Arnold Weinstock. GEC's share price rose splendidly until the early Eighties. Then the City fell out of love with Weinstock and, ever since, GEC has, in the argot, underperformed the market. But it has hardly changed its behaviour at all - what has altered is investors' perception of it.

The ebb and flow of the stock market, the cycle, is an even greater source of distortion. The "Black Monday" plunge of 1987 convinced the City (and the Chancellor) that economic Armageddon had arrived; industry however could see nothing but sunshine and continued to do so for at least a year. Conversely, in early 1991, a well-known investment fund manager declared that the reason stock prices were going up when everyone else thought there was a deep recession was because the market was so wise. The recession, as it turned out, had yet to reach its nadir. It is entertaining to look at an average-share-price graph against one showing economic growth - there is hardly any correlation.

All these factors mean that, except in young companies, there is little link between the share price and real performance. If politicians are really interested in improving the performance of the economy - which is, after all, dependent largely on the performance of companies within it - they should not be trying to confuse workers by telling them to buy shares. Employees who do will quickly observe that the share price has little to do with reality. They will then, if they are sensible, play the market in the same short-term way as everyone else - and sell when there is a good takeover rumour in the air. They will not, unless they are notably daft, say to themselves: "I am now a stakeholder in this company so I am going to redouble my efforts and seek efficiency wherever I can."

Does this then mean that there is no way of increasing the employees' involvement in a company? On the contrary.

If a company wants to link its employees' economic welfare with its own, almost any system is better than giving them shares. It could offer profit- sharing - though profit is also a crude way of measuring success. Because the financial impact of a management action usually takes months to make itself apparent, running a company by watching profits is like steering a car by looking in the rear-view mirror. In addition, it is all too easy to fiddle figures.

Forward-thinking companies keep an eye on more immediately relevant figures. The best manufacturers will, for example, watch quality levels and response times more closely than they will financial results. Rank Xerox takes this policy further, linking part of its managers' pay to customer satisfaction, which is regularly assessed by questionnaire.

It would be perfectly possible to link all employees' pay to the measures over which they have control - a lathe operator's wage might go up whenever the number of defective parts he produces goes down. But this is not only Big Brotherish, it is also unnecessary. There is a much simpler - if under- used - technique for getting an employee to work efficiently and to feel he has a stake in the company. It is called good management.

A good manager is someone who understands the business, and also understands how to get employees to want the company to succeed. That may sound simple but it is not, because it requires that most rare commodity, common sense. Employees know if their boss is a fool, and no amount of plush carpeting or plausible management-speak will increase their productivity.

When the management is professional, the work-force will feel that everyone is rolling along in the same happy and successful boat. To put it another way, they will feel that their interests are the same as the management's; that they have a stake in the company.