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Insolvencies are on the rise, in tough economic times, but so, thankfully, are ideas on how to prevent them.
Administration is often a wasteful and costly process, both to employees and to the economy at large. After all, there are many companies that on economic grounds could be saved. A large number, forty-four per cent, are wound up because of poor management prior to insolvency.
Workers taking over an insolvent company to preserve their jobs and entitlements is an idea that has been taken up with enthusiasm in other countries. The new companies are run as an enterprise owned cooperatively by the employees.
This is an innovation that may solve a long running concern around insolvency - what the International Association of Restructuring, Insolvency and Bankruptcy Professionals describes as the problem of the marginalising of employees that are ‘often the lifeblood of the enterprise'.
Staff often see potential in a business not seen by investors and anchoring jobs and capital locally through a worker take-over has a significant positive impact on the social cohesion of the local economy.
From overseas, there is empirical evidence of positive productivity gains from a worker take-over. There is also evidence that the businesses that result can be more resilient to economic downturns.
Appropriate enabling legislation exists in Spain, Sociadades Laborales (SAL), and Italy, the Marcora Law. In a period of economic crisis in the 1980s, both countries enacted legislation in 1985 to support workers take over thousands of failing enterprises. Both countries based the legislation on encouraging workers to become entrepreneurs in saving their jobs by taking their entitlements, and three years projected social security payments, in a lump sum payment, and investing these in the new company. This was supported by government loans and advice, although the form of this changed after action by the European Union to bring these into line with ‘state aids' safeguards.
The Marcora Law, for example, set up the Campagnia Finanzaria Industriale (CFI), a financial institution to support workers establish a workers cooperative, to take over the failed company. CFI also provided advice, finance and has the right of a seat on the board of the co-operative.
In France, over 700 businesses on the verge of closing down have been transformed into cooperatives between 1989 and 2010, saving thousands of jobs.
Drawing on this evidence, the 2012 Nuttall Review of employee ownership recommended that the UK Government should develop a pilot to test this in a UK context. In recent days, the Department for Business, Innovation and Skills has signed up to this and will work with Co-operatives UK, the national association for co-ops and mutuals, to develop and run a pilot programme.
Not every business can be saved. The provision of support to workers in insolvency and the subsequent buyout and reconstruction requires a different process, learning and methodology to a buyout in a normal business succession. But the success of programmes overseas points to the potential to save some through worker buyouts.
The worker buyout empowers the employees to enter the inevitable bargaining model n the context of insolvency and negotiate with the vendor. The employees can, for example, then choose to trade off wage concessions and entitlements for their job, an equity stake and democratic control of the company. In this way they are no longer passive participants in the process of insolvency but co-entrepreneurs with the competence to decide on their future.
Ed Mayo is Secretary General of Co-operatives UK
Saving Business through worker co-operatives, a report by Dr. Anthony Jensen, University of Sydney is free to download on http://www.uk.coop/sites/default/files/savingbusiness.pdf
"Co-operatives represent approximately 3 to 5 percent of the world's GDP. They are present in nearly all economic sectors, from agriculture to retail to financial services. Their ownership structure and democratic governance make for organisations that are powerfully aligned on mission and strategy, with a focus on preserving long-term stability." McKinsey & Company, October 2012
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