Co-op Study 6

John Lewis Partnership PLC

by Manfred Davidmann



CONTENTS

Introduction
The Partnership
Pay
Employees (Partners)
Directors
Allocating the Surplus
Reserves
Organisation
Central Council
Central Board
Chairman
Controlling the Style of Management
Performance
Notes <..> and References {..}

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview



INTRODUCTION

John Lewis Partnership with 23 department stores and 112 supermarkets is successful and expanding. It operates a good profit-sharing scheme combined with a form of open management. This study looks at its profitability, at the extent to which it serves its partners and at its way of managing.

The study is one of a series of eight studies of co-operatives and mutual societies which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from the mistakes of others. What is taking place is fascinating and often unexpected (See 'Relevant Current and Associated Works').

The main report 'Co-operatives: Causes of Failure, Guidelines for Success' is based on these studies. Its conclusions and recommendations are entirely relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control (See 'Relevant Current and Associated Works').


THE PARTNERSHIP

'John Lewis Partnership plc', commonly referred to as 'John Lewis'. In 1995 it had 41,100 partners, 23 department stores, 112 Waitrose supermarkets, a turnover of GBP 2.8 bill and pre-tax profits GBP 150 mill.

John Lewis is a public limited company (PLC) which apparently belongs to its employees as a group. This is collective ownership and employees are referred to as partners.

Management needs to run the enterprise in the interests of all partners 'past, present and future'. A good employer. Well looked-after employees (partners), contented and well motivated, giving helpful and friendly service. Employees receive each year a share of the profits which is paid out as a cash bonus.

Large and competitive, aiming to provide good service and value for money. In practice applying its slogan 'Never knowingly undersold' to the point where partners receive a small reward when they point out that a competitor charges less than John Lewis.

The John Lewis Partnership seems to provide good conditions of employment and reward for partners and provide its customers with quality goods at competitive prices combined with excellent service. It is successful and expanding successfully as a result.



PAY


EMPLOYEES (PARTNERS)

John Lewis' policy is to pay employees the local commercial rate plus a degree of performance salary. <1>

The annual cash bonus is the partner's profit share and makes much difference. Based on the Partnership's Report and Accounts 1996 {JOL 01}, the average wage or salary received by a partner working full-time was GBP 12,000. Partners received a bonus of 15 per cent for that year which brought the total to GBP 13,800, an increase of 6 per cent over the previous year. <2>


The rate of pay needs to be seen in the context of the UK's present employment climate of severe unemployment, widespread poverty and increasing differentials between rich and poor. Low-paid workers work more hours each week than in most other European countries and many do not earn enough to exist adequately. The government has been supplementing inadequate incomes by 'income support' benefits, in effect subsidising profits of employers who pay workers below-existence wages, instead of legislating a legally enforceable minimum wage. A kind of Victorian workhouse climate in the workplace.

So a bonus of on average GBP 1,800 makes much difference.


DIRECTORS

Pay is pay, no matter what it is called. There is no difference between pay, remuneration or emoluments as long as we include all direct and indirect pre-tax payments and services received from the employer.


The Board of Directors is headed by a Chairman whose pay is stated separately. In addition there is the Deputy Chairman and five directors appointed by the Chairman. Then there are five directors nominated annually by the Central Council. <3>


The company's published 1996 accounts, on which most of the figures given here are based, can be used to estimate some interesting figures.

The Chairman received GBP 343,500, an increase of GBP 41,200 or 14 per cent over the previous year. He received 25 times the average pay earned by the employees, up from 23 the previous year. The increase he received in this one year is the amount earned by one employee working for three years.

The top six directors are presumably the Deputy Chairman and five other directors. They received an average pay of about GBP 211,700, an increase of GBP 28,300 or 15 per cent over the previous year. They received 15 times the average pay earned by the employees, up from 14 the previous year. The increase they received in this one year is the amount earned by one employee working two years.

There is a curious discrepancy between the bottom five directors and the top six. The bottom five directors received an average pay of about GBP 62,500, an increase of GBP 4,000 or 7 per cent over the previous year. They received 4.5 times the average pay earned by the employees, just like the previous year. The increase they received in this one year is the amount earned by one employee working for four months.

One is tempted to assume that the bottom five directors who pay-wise form a separate group are those nominated by the Central Council.


The chairman reports that the Partnership does not pay directors' fees, that 'all members of the board are paid a full-time salary for their role within the business' and that salaries 'have to be in line with market rates'.

The term 'role' is open to misinterpretation. Are all directors working full-time for the partnership? I think it would be hard to justify a salary of say GBP 200,000 by market rates for professional work.

If the higher rates are based on 'market rates' for directors one has to remember that the market rate for directors is generally what the market will bear. The market rate for directors is the maximum amount shareholders will not object to or can be persuaded to pay {JOL 04}. Such a criterion would seem inappropriate in an enterprise which aims to benefit all its members.

The figures given and discussed above are listed below:

    Pay or Average Pay   Increase   Increase   Pay Ratio
    (GBP pa)   (GBP)   (Per cent)    
                 
                         
Chairman   343,500   41,200   14   25
                 
Top Six Directors (Deputy Chairman and Directors appointed by Chairman?)   211,700   28,300   15   15
                 
Bottom Five Directors (Directors nominated by Central Council?)   62,500   4,000   7   4.5
                 
Employees (Partners)   13,800   740   6   1


Consider the increases given to the Chairman and the top six directors. Given that this is a partnership which is intended to be run for the benefit of all its members, it would seem difficult to justify pay increases of 15 per cent to directors and 6 per cent to the workforce, or an increase of GBP 41,000 at what is already the top end of the scale compared with GBP 800 at the bottom end.


But you may argue that as the enterprise expands so responsibility at the top grows and that it is this which is being rewarded, while the work done by employees hardly changes, it being the number of employees which increases as the enterprise expands.

But having responsibility means being accountable for work done and the above argument assumes that success depends on top-level decision-taking. But it is what is being done at the lower levels which underlies success.

Or a bit of both. That is, teamwork and partnership.

But then the question needs to be asked whether such differentials are either reasonable or fair and why they are increasing at such a rate, why those at the top are gaining so much more compared with other partners.


ALLOCATING THE SURPLUS

It would seem that the partnership's constitution lays down investment criteria which determine how much of the surplus is reinvested in the business and how much is distributed among partners.

Retained profits show up as having been added to reserves. Partners' annual bonus is their share of the profits.

For 1995 after-tax profits were GBP 121.2 mill. GBP 64.2 million was retained in the business. Partners received GBP 57 million which meant that each partner received a bonus (profit-share) which in that year amounted to 15 per cent of annual pay. {JOL 01}

So 53 per cent of net profits was added to reserves and 47 per cent received by partners:

    GBP mill   Per cent
Allocated to Partners   57.0   47
Retained in business   64.2   53
Total after-tax profits   121.2   100


RESERVES

'Net assets' is what would be left for distributing among shareholders in a plc, that is in a public limited company, after selling all its assets and paying all its debts. The net assets employed in 1995 were GBP 952 million. <4>

And assets are increasing each year as more and more profits are retained within the business. Added to reserves were
1993 42.3 GBP mill
1994 51.1
1995 64.2

Total employees, weighted for part-timers, is 31,000 <4>. So net assets per employee are GBP 30,700.


ORGANISATION

Here we are trying to get a view of how the Partnership is organised {JOL 02} and of the relative responsibilities and accountability of its key component parts. These are
Central Council
Central Board
The Chairman of the Partnership


CENTRAL COUNCIL

Employees are known as partners and elect representatives to a local branch council and by secret ballot to the Central Council.

The Chairman of the Partnership appoints up to 20 per cent of the Central Council's members, usually from senior management.

The Central Council has about 135 members and usually meets six times a year. It debates countrywide issues.


"The Council can discuss any subject whatsoever and make to the management any recommendation it likes. The Chairman of the Partnership cannot reject a recommendation from the Central Council without consulting the Central Board." {JOL 02}

The Central Council meets only six times a year and 'recommendations' and 'consultation' are not binding. Apparently it is the Chairman who takes key decisions.


However, the Central Council safeguards the Constitution of the Partnership and can at least in theory remove the Chairman.

Also "No alteration to the Articles and Rules of the Constitution can be made without its (Central Council's) agreement." {JOL 02}

And the Central Council may remove the chairman but only if 67 per cent of its members (which could mean 84 per cent of its elected members) want him replaced.


The Council each year nominates from its members five directors (out of a total of 12 directors) to the Central Board.


CENTRAL BOARD

The Central Board of 'John Lewis Partnership plc' consists of the Chairman who is also the chief executive, the Deputy Chairman, five directors appointed by the Chairman and five directors nominated annually by the Central Council, a total of twelve directors.


It is usual for a chairman to be elected by his fellow directors from among themselves. But here the chairman is appointed by the previous chairman.

The Chairman is in a position of authority and has much power. I feel there is likely to be little disagreement with his views in the Central Board.


"Under the Constitution, the Central Council's nominees are entitled - if a minimum of three so wish - to require the Board to consult the Council in three sets of circumstances {JOL 02}:

redundancy involving more than 12 Partners,

the contraction of the business by liquidation of more than 5 per cent of its fixed assets,

or the expansion of the business by more than 5 per cent of its capital other than by accumulation of profits."


CHAIRMAN

The chairman is appointed by the previous chairman and, in turn, will appoint the next chairman of the Partnership.

He appoints five directors to the Central Board and up to 20 per cent of the Central Council members (usually from senior management). He also appoints the Partnership's senior executives.

The Central Council may remove the chairman if 67 per cent of its members (which could mean 84 per cent of its elected members) want him replaced. It is unlikely that such majorities could be mustered under any but extreme circumstances, and this may be what is intended by this provision.

As said already, the Chairman is in a position of much authority and has much power.


So what is the source of his authority?

Ownership and control of the holding company John Lewis Partnership plc, and thus of the Partnership, are held in trust by John Lewis Partnership Trust Limited. The Chairman and Deputy Chairman of the Trust Company have to be appointed to the Central Board as Chairman and as Deputy Chairman. {JOL 01}

In the Trust Company, the only person who can vote is the Chairman. In other words, the Chairman controls all voting shares, is in complete control. The only exception is if the Central Council wishes to replace him by a specified big majority. {JOL 02}


So it appears that ownership and control are vested in the single person of the Chairman as Trustee.


CONTROLLING THE STYLE OF MANAGEMENT

The group produces a national magazine (The Gazette) and local magazines (Chronicles), and states that

Anyone can write to the group's national or local magazines ... signing the letter or anonymously. All anonymous letters must be published unless publication could harm the organisation. Absolute anonymity is rigorously protected - an effective way of calling management to account. {JOL 01}

... staff are allowed by the constitution to write to and complain completely anonymously in the columns of the in-house newspaper about ... management. Anonymity is guaranteed. Letters must be replied to 'honestly'. {JOL 03}

You can have an unskilled job in a store, write the most awkward letter to the chairman, and he must reply to it honestly. {JOL 03}


It is this simple provision which has given the group's employees an effective influence and control over the style of management.

A good manager welcomes helpful criticism, no matter where it comes from. But many managers dislike being criticised. This is a characteristic failing of authoritarian managers and organisation. {JOL 05}

An important element of effective management is to inspire staff, to motivate towards working well and towards working well together in teams {JOL 06-08}. So public criticism can be seen as an indication of how inadequate a manager is in this and in other aspects of his work. Managers at all levels will carefully examine the group's magazines to see who and what is mentioned as well as the honest replies which must be given.

Public criticism of any aspect of a manager's work can affect job and promotion prospects. And so can public praise.

Criticism from within one's own group, from below, can be stifled, discredited, eliminated. Anonymous public criticism cannot be dealt with like this. An employee's right to criticise anonymously in public any aspect of management in a way which can be seen by all is most potent motivation towards good and effective management.


To me it seems that an employee's right to criticise anonymously in public any aspect of management at all levels in a way which can be seen by all, is most potent motivation towards good and effective management at all levels, underlies in good measure the Partnership's success.


PERFORMANCE

41,100 partners, 23 department stores, 112 Waitrose supermarkets, turnover GBP 2.8 bill, pre-tax profits GBP 150 mill.


1995 Profit Allocation        
    GBP mill   Per cent
Allocated to Partners   57.0   47
Retained in business   64.2   53
Total after-tax profits   121.2   100


Net assets employed at the end of 1995 were GBP 952 million.

Total employees, weighted for part-timers, were 31,000.

So net assets per employee are GBP 30,700.


Ratio        (Pre-tax profit)/Turnover  
       
    = (150 x 100)/2,815.7 = 5.33 per cent
     
Notes    
(1)   Pre-tax profit is profit before paying partnership bonus and taxation.
(2)   Turnover includes VAT.



NOTES AND REFERENCES


NOTES

<1> Much of the information here on organisation, performance and pay within
John Lewis is based on {JOL 01} and {JOL 02}.

<2> From {JOL 01}:

Full-time employees 24,800
Part-time employees 16,300
Total employees 41,100

Total employees, weighted for part-timers 31,000

Pay (before bonus) GBP 371.3 mill
Partnership bonus GBP 57.0 mill


Calculated Pay per employee
Before bonus 371.3x1,000/31 = GBP 12,000
After bonus 428.3x1,000/31 = GBP 13,800

<3> See section on 'Organisation'

<4> See {JOL 01}, p4


REFERENCES

{JOL 01} Report and Accounts 1996
John Lewis Partnership plc

{JOL 02} 'John Lewis Partnership'
Information Services
John Lewis plc, 1994

{JOL 03} Shopfloor Scribes have Guaranteed Line to Boardroom
Chris Barrie
Guardian, 28/04/95

{JOL 04} Work and Pay
http://www.solhaam.org/
Manfred Davidmann

{JOL 05} Style of Management and Leadership
http://www.solhaam.org/
Manfred Davidmann

{JOL 06} Role of Managers under Different Styles of Management
http://www.solhaam.org/
Manfred Davidmann

{JOL 07} Motivation Summary
http://www.solhaam.org/
Manfred Davidmann

{JOL 08} The Will to Work: What People Struggle to Achieve
http://www.solhaam.org/
Manfred Davidmann


Relevant Current and Associated Works

MAIN REPORT
CO-OPERATIVES: CAUSES OF FAILURE, GUIDELINES FOR SUCCESS
http://www.solhaam.org/
Manfred Davidmann

ASSOCIATED CO-OP STUDIES
http://www.solhaam.org/
Manfred Davidmann
1. The Trustee Savings Bank Give-Away
2. Credit Unions
3. Building Societies
4. Co-operative Retail Services Ltd
5. 5a. Co-operative Wholesale Society Ltd
5b. Co-operative Bank PLC
5c. Co-operative Insurance Society Limited

6. John Lewis Partnership PLC
7. Mondragon Co-operatives (Mondragon Corporacion Cooperativa)
8. Kibbutzim



Other relevant current and associated reports by Manfred Davidmann on leadership and management:

Title   Description
     
Directing and Managing Change     How to plan ahead, find best strategies, decide and implement, agree targets and objectives, monitor and control progress, evaluate performance, carry out appraisal and target-setting interviews. Describes proved, practical and effective techniques.
     
Style of Management and Leadership     Major review and analysis of the style of management and its effect on management effectiveness, decision taking and standard of living. Measures of style of management and government. Overcoming problems of size. Management effectiveness can be increased by 20-30 percent.
     
Role of Managers Under Different Styles of Management     Short summary of the role of managers under authoritarian and participative styles of management. Also covers decision making and the basic characteristics of each style.
     
Organising   Comprehensive review. Outstanding is the section on functional relationships. Shows how to improve co-ordination, teamwork and co-operation. Discusses the role and responsibilities of managers in different circumstances.
     
Work and Pay   Major review and analysis of work and pay in relation to employer, employee and community. Provides the underlying knowledge and understanding for scientific determination and prediction of rates of pay, remuneration and differentials, of National Remuneration Scales and of the National Remuneration Pattern of pay and differentials.
     
Work and Pay: Summary   Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
     
Social Responsibility, Profits and Social Accountability   Incidents, disasters and catastrophes are here put together as individual case studies and reviewed as a whole. We are facing a sequence of events which are increasing in frequency, severity and extent. There are sections about what can be done about this, on community aims and community leadership, on the world-wide struggle for social accountability.
     
Social Responsibility and Accountability: Summary   Outlines basic causes of socially irresponsible behaviour and ways of solving the problem. Statement of aims. Public demonstrations and protests as essential survival mechanisms. Whistle-blowing. Worldwide struggle to achieve social accountability.
     
Motivation Summary   Reviews and summarises past work in Motivation. Provides a clear definition of 'motivation', of the factors which motivate and of what people are striving to achieve.
     
The Will to Work: What People Struggle to Achieve   Major review, analysis and report about motivation and motivating. Covers remuneration and job satisfaction as well as the factors which motivate. Develops a clear definition of 'motivation'. Lists what people are striving and struggling to achieve, and progress made, in corporations, communities, countries.
     
What People are Struggling Against: How Society is Organised for Controlling and Exploiting People   Report of study undertaken to find out why people have to struggle throughout their adult lives, in all countries, organisations and levels, to maintain and improve their standard of living and quality of life. Reviews what people are struggling against.
     
Community and Public Ownership   This report objectively evaluates community ownership and reviews the reasons both for nationalising and for privatising. Performance, control and accountability of community-owned enterprises and industries are discussed. Points made are illustrated by a number of striking case-studies.
     
Ownership and Limited Liability   Discusses different types of enterprises and the extent to which owners are responsible for repaying the debts of their enterprise. Also discussed are disadvantages, difficulties and abuses associated with the system of Limited Liability, and their implications for customers, suppliers and employees.
     
Ownership and Deciding Policy: Companies, Shareholders, Directors and Community   A short statement which describes the system by which a company's majority shareholders decide policy and control the company.
     
Ownership: Summary   Ownership means control, means decision-taking. This short review covers where the right to ownership comes from and how it is exercised. Ownership of land, means of production, and wealth. Ownership in relation to incomes, need, and human rights.
     
The Right to Strike   Discusses and defines the right to strike, the extent to which people can strike and what this implies. Also discussed are aspects of current problems such as part-time work and home working, Works Councils, uses and misuses of linking pay to a cost-of-living index, participation in decision-taking, upward redistribution of income and wealth.
     
Using Words to Communicate Effectively   Shows how to communicate more effectively, covering aspects of thinking, writing, speaking and listening as well as formal and informal communications. Consists of guidelines found useful by university students and practising middle and senior managers.
     
Exporting and Importing of Employment and Unemployment   Discusses exporting and importing of employment and unemployment, underlying principles, effect of trade, how to reduce unemployment, social costs of unemployment, community objectives, support for enterprises, socially irresponsible enterprise behaviour.
     
Transfer Pricing and Taxation   One of the most controversial operations of multinationals, transfer pricing, is clearly described and defined. An easily-followed illustration shows how transfer pricing can be used by multinationals to maximise their profits by tax avoidance and by obtaining tax rebates. Also discussed is the effect of transfer pricing on the tax burden carried by other tax payers.
     
Inflation, Balance of Payments and Currency Exchange Rates     Reviews the relationships, how inflation affects currency exchange rates and trade, the effect of changing interest rates on share prices and pensions. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality.

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Relevant Subject Index Pages and Site Overview


The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.

To see the Site Overview page, click Overview

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Copyright    ©    1996    Manfred Davidmann
All rights reserved worldwide.

History
04/10/96 Completed
17/03/97 To Website
02/06/02 Added 'Relevant Current and Associated Works'