Sir Charlie Mayfield has led the John Lewis Partnership for eight years. As the chairman of the UK’s largest employee-owned business, with a headcount of 90,000, he plans to expand store numbers while also advocating the model for SMEs as a way to create jobs and an alternative for entrepreneurs selling up
Visit a John Lewis or Waitrose store next month and you may find staff with more of a spring in their step than usual. March is the time when every employee – or partner as they are known – in the business receives their famed bonus, which last year amounted to 15 per cent of their annual salary, equivalent to almost eight weeks’ pay.
John Lewis Partnership (JLP) has had another good year, with Waitrose raising its market share to 5.1 per cent and John Lewis pressing ahead with plans to open further new stores, which will take its numbers from 43 to 65. The partnership, which encompasses both brands, is often described as the UK’s largest employee-owned organisation with 90,000 staff, although in practice it is owned by four trustees who hold shares on behalf of current and future employees and have to act in their interests.
“We combine an ownership model which is very collective with a very simple legal structure which is very effective and avoids complications,” says Sir Charlie Mayfield, who joined the business in 2000 and became the partnership’s fifth chairman seven years later.
The ownership structure aids long-term planning, offers a competitive advantage over rivals and a customer service benefit, he adds. Partners can’t sell their shares. With staff turnover at 16 to 17 per cent – high for many businesses but lower than the retail norm, says Mayfield – the ownership structure avoids the complications that might arise from, say, issuing every new starter a share certificate and discussing its value when they leave. In March 2014, the group saw its annual pre-tax profits fall by four per cent to £329.1m.
The model allows JLP to take a longer-term approach. “We are not in business to make the maximum profit every single year. We are in business to make a sufficient profit, a good profit, over a long period of time. We look at how the market is developing around us and we’ll take decisions to invest in new developments, not just on an annual basis but over a prolonged period of time,” he says, pointing to the decision to move into online sales 14 years ago.
“We lost several million pounds in the first few years online but we accepted that. We believed it was a good thing to do in the long run and so it has proved. A lot of businesses find that hard, and if they then compound that with senior management targets geared towards nearer-term returns, then of course you add a whole behavioural level [at odds] with your ability to pursue a long-term strategy.”
The John Lewis arm saw online purchases up 19 per cent in the five weeks to 27 December while shop sales were flat. As the John Lewis Partnership can never be sold, the onus is on management to continually improve the business and that includes building strong, innovative relationships with suppliers.
“We are not in business to extract the very last pound from every single supplier. We want great suppliers who have great businesses that endure for the long term. What we want is a partnership that allows us to develop the success of both our businesses through the partnership.”
Ownership matters at John Lewis
The John Lewis Partnership has been active in lobbying for further awareness and appreciation of different forms of ownership, this month sponsoring the Employee Ownership Association’s Inspire EO conference in Solihull. Mayfield believes greater plurality of ownership would benefit the economy.
“The plc model has probably been the single most successful form of company ownership in the last 200 years. It will probably continue to be, but we have ended up with a rather narrow view: that it is the destination that everybody should aspire to,” he says.
“My view is that if we had a greater plurality of ownership in the UK it would be very good for the economy, partly because some of the alternative ownership forms, such as ours or family-owned businesses, actually exhibit characteristics like the ones I have described – long-termism, developing people, relationships with suppliers – all of which are really at the heart of creating sustainable growth and long-term prosperity in the economy.”
Figures from the EOA suggest the number of employee-owned companies is growing by almost 10 per cent a year and contributes £30bn annually to the economy – around three to four per cent of GDP.
“The kinds of companies most suited to employee ownership are SMEs that are knowledge-intensive with groups of smart people where the value of the company is not in having huge factories or big capital equipment, it’s in their heads.”
John Lewis transitioned to employee ownership in 1929 when it had around 500 staff. It would be more difficult these days (with almost 200 times that number) admits Mayfield, especially if there were lots of external shareholders with different interests. However, with the majority of UK employment in SMEs and the figure expected to grow, Mayfield says there is a crossover between the area of greatest employment growth and the kinds of company most suited to employee ownership.
“Employee ownership has been shown to be more effective than other forms of ownership at creating jobs, at sustaining them, at investing in people and developing their talents. There’s a real crossover between where people are expecting employment growth to come from and those companies being exactly the kind best suited to becoming employee-owned.”
The move into employee ownership could also suit entrepreneurs who have built their businesses over decades. Far from the media perception of entrepreneurs “making a gazillion pounds from selling”, says Mayfield, most have made a personal commitment to the business “for the best part of their lives” and built a community of people, many of who will be friends and business partners.
“Although the entrepreneur can sell the business – and sometimes when they do, they sell at the highest price – most entrepreneurs I know have a degree of regret at that point: they know that while financially they are extracting a lot of value, they are also letting go of something really valuable, which is the people they’ve worked with,” says Mayfield.
“There are models of employee ownership that allow entrepreneurs to extract some value, but leave behind a business which reflects their legacy and enables the people who have created the business to carry on developing it in the future. And that’s clearly a very attractive prospect.”
Before changes introduced by the Finance Act 2014, which came into effect last October, it was genuinely difficult to become employee-owned, he says. “If an entrepreneur wanted to sell shares to their employees, the tax treatment of that transaction was far worse than the tax treatment should they sell it to you or me, where they would get entrepreneurial tax relief on the transaction. The playing field has been levelled. You get entrepreneurial tax relief either way.
“It was [also] extremely hard to find a lawyer or an accountant who had any idea about this as an alternative form of ownership. There was no product for it to sell [because] there was no tax relief. If anything, they probably could be accused of being negligent by advising one of their clients to take a path which was tax disadvantageous. The new legislation means there is now an active reason for professional service firms to understand and create that network effect to help entrepreneurs when they talk about succession options.”
Dealing with an employee-owned business can be advantageous to other kinds of businesses, explains Mayfield, by removing the event risk that a change of ownership brings. “The people you’ve been dealing with, the ethos of the company, the strategic intents might suddenly shift, and that could have pretty material consequences for your business.”
Unlike a plc, the John Lewis Partnership doesn’t have a chief executive; Mayfield serves as an executive chairman with Mark Price, managing director of Waitrose, and Andy Street, managing director of John Lewis, reporting to him. He in turn is directly accountable to partners.
“We have a management structure that doesn’t look so different to many other companies, but on the other hand we have a democratic side to the partnership. It sort of mirrors the management structure all the way through the organisation, and at the top of that there’s a partnership council, which is an elected group of about 70 partners. Their number-one job is to hold me to account,” he says.
Twice a year, at John Lewis Partnership’s interim and full-year results, Mayfield goes formally to the council to report on the performance of the business and gauge reaction to its decisions.
“They ask me questions for two hours in open forum, which is streamed to the rest of the organisation. At the end they vote on whether they continue to support my leadership. I’ve never lost a vote as such, but it’s a very tangible demonstration of the accountability management has to partners, and of course it then has a direct bearing on how we manage our business. We don’t manage by committee. I’m in power to make lots and lots of decisions – a huge amount of power, some people say – but that power is exercised in the knowledge that I’m accountable to partners. They will hold me to account for the decisions we take on their behalf.”
Comparisons could be made to a plc annual general meeting voting on a board, but Mayfield believes that most plc shareholders remain quite distant from the company. “Our shareholders know exactly what’s going on. We had a major discussion in 2014 around some changes we’ve been making over a number of years, all of which had ended up putting more pressure on line managers. There was a real unhappiness at the council, and it’s visceral and communicated very directly to me in a very meaningful way. I don’t think you’d ever get that kind of conversation taking place within a plc.
“It’s very effective and as a consequence of that we said, ‘There’s good reasons we’ve done all the things we’ve done, we’re not apologising for the fact that we’ve done them, but there are clearly consequences which are worrying and so we need to take action to address those consequences’. Which we are now doing and we will get sorted out. There’s strong accountability, but it’s also very effective as an organisation because big organisations have to do difficult things. You need a release valve for some of the pressure to be blown off and also for some of the issues that have been happening to be communicated really effectively. And that’s what our structure does.”
But it’s not just twice a year that partners are kept up to date. The partnership has a constitutional commitment to sharing knowledge on how the business is performing, with every partner able to see which departments have done better or worse the day before. The system also takes into account online sales, including sales in geographical areas that may have come as a result of a customer visiting a store first. That partners aren’t paid on commission is advantageous in an omni-channel world, says Mayfield. “People who work in shops are still very attached to sales. There’s nothing like taking money through the till… [But] partners know the business benefits enormously from the fact that we are going to get your sale whether it comes online or in the shop.
“I think a lot of the incentive schemes that exist are created with the belief that they will encourage better performance and avoid the risk of rewarding people for poor performance. But there’s a real danger that you create the wrong incentives in a fast-changing world and you create barriers within an organisation that can actually hamper its effectiveness.”
Mayfield compares this to the method by which the partnership bonus – “it is really a dividend,” he says – is achieved. “The board decides at the end of each year how much of our profits we can afford to distribute as a dividend and it simply divides that number by the pay sheet. Then everybody from the chairman to the person who has most recently joined Waitrose gets the same percentage of pay.” In 2013, Mayfield’s total pay rose to £1.5m with a 9.6 per cent rise in basic pay despite a slip in annual partnership bonus. He says the way in which the partnership distributes the profit sends a very strong signal.
“We are into collective effort for collective reward and we are fundamentally an organisation that is built off a principle of fairness. It’s not equality, it’s not about you getting the same as I get, but it’s about us both getting 15 per cent (or whatever the figure is) of our pay. Pay is how the company values your contribution, so it is proportionate to the value you are contributing. It’s very simple and it’s very effective.” This time next month, John Lewis’s 90,000 partners will be hoping their contribution is even more valued.