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10.41 am

Mr. Edward Davey (Kingston and Surbiton): I congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) not just on the Bill but on the way

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in which, having done so well in the ballot, he made his choice and formed the proposals. He consulted widely inside and outside the House, which is a model approach to producing proposals for hon. Members who want to ensure that their legislation achieves a consensus. He deserves congratulations from hon. Members on both sides of the House.

The hon. Gentleman and the hon. Member for West Bromwich, West (Mr. Bailey) talked about the history of industrial relations and some of the obstacles that have prevented employee share ownership becoming more widespread in Britain in the past, and about some of the past battles between unions and management. It is good to see that, in many respects, those days are behind us. Proposals such as this have helped to bridge the gap between what used to be seen as the two sides of industry.

As the hon. Member for Edinburgh, North and Leith said in his short historical analysis of the development of employee share ownership, in the '60s and '70s, the Liberals were great advocates of employee share ownership schemes and, in the Lib-Lab pact in the late '70s, they were extremely successful in persuading the then Labour Government to implement in their Finance Acts some of the first schemes in that area. That set the ball rolling and was important in ensuring that Britain went down that route.

In recent decades under the previous Conservative Administration, we saw some developments, which in many respects were welcome but which in general tended to suffer from two particular problems. First, not enough of the schemes were all-employee schemes. I well remember that, in my back room days when I was advising my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) when he was the Liberal spokesman in Committees considering Conservative Government Finance Bills, we tabled amendments to try to persuade the then Government to make more of their employee share ownership schemes all-employee schemes, but there was a lot of opposition to that from the Conservative Government. That was one of their major failings in this area and one reason why we did not make the progress that could have been made from the arrangements in the late '70s.

That is why I start my remarks by praising the Government. In their consultation in the previous Parliament and their proposals for what have turned out to be share-incentive plans, the Government have ensured that all-employee involvement in tax-favoured schemes is a bedrock principle, which we should keep to, maintain and develop. The Government are to be congratulated on dealing with that huge omission from the proposals of previous Conservative Governments.

Mr. Love: I agree strongly about the principle of all-employee share ownership, but is it not also a practicality in that the research shows that when all employees are part of a scheme it delivers the benefits of performance and productivity?

Mr. Davey: The hon. Gentleman is exactly right and he slightly anticipates my next remark. The nature of all-employee schemes is that they provide the benefits that have been suggested today: namely, improved productivity.

The good thing about the Bill, and why it is less modest than the hon. Member for Edinburgh, North and Leith suggested and is a radical step forward, is that it deals

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with the second problem that the previous Conservative Administration never dealt with: namely, the fact that employee share ownership schemes work best when they involve and encourage employee participation.

Far too often, employee share ownership schemes are about a new form of remuneration. That is important to employees because remuneration is one reason why people go to work, but, as the hon. Member for Edinburgh, North and Leith said in quoting some of the research, if we are to benefit fully we must move from just a remuneration relationship between employee and employer to a co-ownership of the future of the company, so that the employees or their elected representatives participate in thinking, strategy setting and decision making. If employee share ownership schemes are developed in such a way, we shall see some of the long heralded but yet to be fully achieved benefits of employee share ownership.

I hope that the Government will not only support the Bill, as I and my Liberal Democrat colleagues will do today, but will listen to the reasons why so many hon. Members support the measure. It is not just about the old forms of employee share ownership; it is about something more. It is about trying to get employees more involved, and giving companies incentives to involve employees more in real control and participation.

The economic benefits have long been heralded, as I know from my studies of labour market economics at university, about which I read rather too much because I was studying the mid-1980s when there was a flurry of economic articles and books promoting employee share ownership. In particular, I well remember "The Share Economy" by Martin Weitzman, which was one of the seminal works in the early to mid-1980s. He drew on the experience of the Japanese economy and tried to argue that profit-related pay, which may in some cases take the form of employee share ownership, was the answer to stagflation and the reason why the Japanese economy had not suffered from the problems of the British economy.

Judging from the smiles on hon. Members' faces, they share my scepticism about such claims by Mr. Weitzman and others. It is important that we understand why some of the claims for such schemes are wrong while others are right. People such as Mr. Weitzman argued that moving towards profit-related pay was a way out of the wage inflexibility problem; the fact that nominal and sometimes even real wages are downwardly inflexible, so the labour market fails to clear and there is unemployment when there are demand shocks. They tried to suggest that to get out of that, risks should be transferred from the owners of the company to the workers. That model assumed that people were prepared to take quite a sizeable risk as part of their remuneration. Of course, in reality, that is not so. While employees will take some risk, they will not take the amount required to make practical or real the theoretical models advocated by some. The problem with those models is that they took a top-down view of the benefits of such schemes. They looked at a macro-economy and asked how we could try to get rid of inflation and unemployment; they proposed trying to change the whole labour market macro-economically.

The real benefits come from a bottom-up or bubbling-up approach, which looks at enterprise at a shop-floor level. If one looks at the relationships between employees and managers—the ways in which they work best and how they can be improved—we see that they are

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not about risk sharing or risk transfer from the owners to the workers. They are more about a shared vision of where the company is going. It is through a shared vision that one gets productivity improvements; genuine incentives; shared or pooled ideas of how to do things better and improve processes in a company to make sure that the output, whether a service or a good, is produced at a lower unit cost; and improved relationships and morale. It is also the way to achieve better communication, which is one of the genuine benefits of proper all-employee share ownerships schemes that involve extra participation. If one is going to make such schemes a reality, one inevitably gets better communication and, through that, greater understanding, which often ensures that difficulties faced daily or weekly by companies can be tackled by everyone involved in the company.

Those shop-floor business-based advantages are the theoretical underpinning of the benefits claimed for that type of scheme. They might not reduce stagflation, as Mr. Weitzman suggested some schemes might, but over time they will significantly increase productivity. The Government rightly regard the schemes as being crucial to what they claim is their top economic objective in this Parliament of improving the productivity of the British economy. They should therefore pay particular attention to the Bill introduced by the hon. Member for Edinburgh, North and Leith to see whether they can harness those productivity benefits even more. It is through active ownership that we will secure those benefits.

The Government are looking at other benefits of share incentive plans. They have tried to suggest that when companies take up SIPs they have the option of introducing performance-related share schemes. Indeed, they have set out proposals with conditions on forfeiture if staff leave early and so on, and particular rules on holding periods for shares. They may have two other objectives in introducing those conditions. The evidence that performance-related pay improves productivity is much less than the evidence for employee participation. That is worth looking at, but the complexity of the arrangements proposed by the Government suggests that some of the benefits may not be as easily obtained as some people have argued.

The points on forfeiture and holding periods in the Government's SIP schemes are interesting because they may address some companies' problems with staff turnover. For example, sometimes staff leave their company far too quickly, and it loses the benefits of training and building up relationships. Some people may say that the forfeiture and holding period conditions are rigid, but they may be key to the benefits that we are trying to get from the Bill and the Government's proposals. If one wants improved productivity, it is common sense to retain staff a little longer to get the benefits of the training and investment that the company puts into them. I certainly recognise that in paying staff in my own office. I try to encourage them to stay a bit longer by paying them a little bit better, as I believe that that is the way to get more out of one's staff; it is a productivity gain as it reduces staff turnover. Some of the additional objectives in the Government's approach to SIPs are therefore to be welcomed.

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I now turn to the detail of the Bill. As the hon. Member for Aylesbury (Mr. Lidington) said, it tries to widen the application of available tax reliefs, which is to be welcomed. Figures obtained by the hon. Member for Edmonton (Mr. Love) in a parliamentary question to the Treasury show that, in the first instance, more than 100,000 employees might be eligible as a direct result of the Bill's implementation. Over time, eligibility could further increase. Creating the incentive for companies to adopt the model favoured by the hon. Member for Edinburgh, North and Leith would enable us to experience its key benefits.

In discussing that part of the Bill, the hon. Member for Aylesbury and some of his colleagues made points also made by John Lewis Partnership. They wonder whether the Bill will achieve its intentions because of problems involving part-time employees and possible liquidity in organisations' internal share markets. The House and the Committee considering the Bill should try to explore those valid concerns with John Lewis Partnership, the Government and others. It is not beyond the wit of Members to deal with those problems.

It is important to put on record the fact that John Lewis Partnership is one of the organisations that really values its part-time employees. There are two large John Lewis Partnership stores in my constituency—the John Lewis store in Kingston and Waitrose in Surbiton—and I know some of the people who work in them. Indeed, they have written to me, as I shall explain later. They extol the way in which John Lewis Partnership implements its principles and core values to make sure that all employees are valued, whether they are full-time or part-time. Indeed, up to 30 per cent. of John Lewis Partnership employees are part-time and are integral to the company's strategy. It should be noted on the record that it treats them well.

It is possible to get round the two problems mentioned by the hon. Member for Aylesbury. The partnership could undertake innovative work on liquidity to see whether it is possible to introduce a new concept of an internal capital market, and we should look at that. It is possible that in the past we did not spend enough time looking at how to improve the performance of mutuals and not-for-profit organisations. It is for Members of Parliament, given the public service reform ideas that are knocking around, which would involve greater use of the not-for-profit and mutual sector, to try to see how we can ensure that staff involved in such organisations can share in their prosperity and control.

We may look to the external capital markets to see whether shares held by employees in such organisations can realise their value. External capital providers may be prepared to lend against the value of such shares. Clearly, they would have to take risk issues into account, but it may be possible to get round the problems that have been identified. We should certainly look at that in Committee.

On the involvement of part-time employees, the hon. Member for Aylesbury expressed concern about the five-year period. We must remember that the Bill's key micro-economic purpose is to raise productivity. As such organisations will often value part-time employees and regard them as part of their longer-term strategy, we should not get rid of the five-year period. The productivity of part-time employees is just as important as the

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productivity of full-time employees. We must remember that the Bill is not about giving a quick profit to employees or their making a fast buck; that is not the objective of tax relief. The objective of the Bill is to make sure that the interests and the vision of employees and employers come together, for the future benefit of the company and therefore of the economy.

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