How John Lewis governs itself

Over the last decade I have built up a wide variety of resources relating to the organisation and governance of business. In the coming months I will be sharing the best of these on this site.

In this post, I share the notes from a conversation I had in 2012 with Stephen May. He was on the board of the Employee Ownership Association and for 15 years was head of personnel at John Lewis Partnership. I was really fascinated by his inside knowledge about how this unusual organisation was governed. 

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PA: First can you tell me a bit about the Employee Ownership Association (“EOA”).

John lewisStephen May: It was started 30 years ago by Robert Oakshott. Joe Grimond (Liberal leader) was his first chairman. Up to 8 years ago it was about campaigning, advice and lobbying. They did some work in the former Soviet Union – Slovenia, Hungary, Romania, Bulgaria, Macedonia and others when they privatised state owned assets in the 1990s.   EOA was party to writing legislation, making employee ownership one of the privatisation options of these new states. It became big in those countries in the short term – people would used certificates issued free by the government as part of the privatisation process to acquire shares, particularly in their own company. I did a review in 1998 of work done there by the EOA with DfID money (the Know-how Fund). More than ½ the companies in Slovenia (mainly SMEs) were then employee-owned. Rumania was briefly probably the biggest shareholder owned democracy in the world. With a population of 23 m people, 17m owned shares. That’s changed. There are still examples throughout Europe. In Hungary, there’s a porcelain company Herend, with a trust, that has embedded employee ownership every bit as much as John Lewis.

8 years on, the EOA has over 100 members. It is claimed that the share of economy that is employee-owned is bigger than farming. John Lewis is the biggest and the earliest formed.

PA: What was your role in John Lewis?

SM: All my working life I worked for John Lewis, joining from Oxford. I went through various jobs. My first significant role was assistant director of development – developing new department stores. I went to run one I had developed in Edinburgh. Did that for 2 years, then ran Peter Jones for a few years then went on the main board and was Group Director of Personnel for 15 years and then General Inspector – a sort of full-time, permanent non-executive director. Looking over shoulder of management, a sort of Inspector of schools. This is not the same as an ombudsman (we had a separate ombudsman). Similar to internal management audit or management consultant. I was one of the last. The general inspector used to have a monopoly on some of the information, in the pre-computer age. Not any more.

These days non-executive directors elsewhere are expected to guard shareholders’ interest, but too often they don’t have the information to do it. The General Inspector could do that – full-time. If the relationship was right, the non-executives welcomed the General Inspector, who helped them do their job better. I never understood why Michael Howard and Jack Straw got upset with the Inspector of Prisons, when he spoke out.

As General Inspector, I would choose what I wanted to investigate, or the Chair would tell me or, best of all, a director would come to me and say “Help.”. I was appointed directly by the Chair.

PA: You said in a recent e-mail that what’s critical to the John Lewis model is how it affects the middle or lower managers and the team. Can you talk about this?

SM: Let’s start with the Foundation and Spedan Lewis, whose father in 1864 set up the shop. In the early part of the 20th century Spedan realised that his family (him, his father and his brother) were taking from the business more than the 300 employees put together. He persuaded his father to let him run Peter Jones. He first shared profits in 1920. He also set up councils and communication channels. In about 1912 the weekly magazine The Gazette started – it has been published ever since. He established traditions that made it impossible for people within the business not to be heard. Anyone can write to Gazette and it must be published unless the Chair objects – something he does very rarely. And the responsible director must respond. The letters are considered by many the most interesting part of the magazine.

So Spedan Lewis set up a whole framework. He did something else – he put into each Dept store a Registrar, almost always a spinster then (not now!), representing central management. They made a weekly report to the Chief Registrar. I sat down with the Registrar when I started in my store in Edinburgh as store manager and we got an understanding of what to expect from each other. And, intelligently, she showed me her first report to senior management.

It isn’t just a matter of employees owning the business but a whole series of committees. Some things didn’t work as well as we thought. I found this out when I wrote a report for Tomorrow’s Company on the Partnership, which I called Tomorrow’s Partnership. I interviewed people at every level in the business. And we found some things weren’t being dealt with as well as we assumed. So I made a series of recommendations and they are now being implemented (such as attitude surveys of staff).

If you have a trust (Employee Benefit Trust), employee ownership is sustained.

The potentially big move in this area is now out of the public sector. The task force set up by the government has the ambition to have a million people out of the public sector in next 3 or 4 years. But this is not so easy; you need start-up funds, there are problems with pensions etc. The Big Society has a rotten name and bad timing, but is a good idea.

P.A. What really worked at John Lewis? What are key learnings? How are the board accountable to the partners.

SM: I think John Lewis has some built-in advantages. Retailing is good for employee ownership – it’s a people business, and people work in teams. People tend to be outgoing. Employee ownership tends to attract similar minded people (certainly at management level).

You need integrity to work for John Lewis. If you don’t have it you stand out. I have seen chaps with eyes fixed firmly on their career, or perhaps it was that integrity wasn’t burned into their DNA and those people don’t stay. You get like-minded people. You never had any sense (with one or two exceptions I mentioned) that anyone was trying to stab you in the back, no-one challenging your integrity. You see that in the board and in the Partnership Council.

Also very important was that John Lewis has a strong culture. It has been said by some members of the public that if they felt the world was about to come to an end they would go into Peter Jones, since they felt safe there!

PA: A stronger cuture than, say, M&S?

SM: In its time, M&S was a marvellous business. Perhaps the main difference is that the M&S culture was imposed more top down. The JL culture was required from the bottom up. I admire the business (M&S) and it has integrity.

Natural make-up of a department store is a very shallow management structure. When I ran Peter Jones, it was only 3 deep. I had a team of about 7 who worked with me, (no 2, accountant, personnel etc)– then about 40 middle managers (department managers) who all reported directly to me, then teams working for them of 15 to 30 people. I met the 40 managers formally once a week. I believed the management of a department team became increasingly difficult above 30 people. If you can do it, that kind of structure is great.

There’s a humorous story I like to tell. The boss of a company wanted to impress a visitor with the effectiveness of his internal communications. He said “I have a message I want to get out. The business will be closing for bank holiday early.” After two hours he took the visitor for a walk round the factory. He stopped someone and asked them “Did you get a message about the bank holiday?” The man said yes, and repeated the message. But he then asked a question of the boss “Who the hell are you?”.

I would expect to be around my shop at least twice per day. See and be seen. Everyone knew who I was. That’s what one did.

Managers of departments were the key figures, both in terms of happiness of staff and success of business. If manager wasn’t looking after staff it wouldn’t be tolerated – his happiness not to be bought at the expense of the team.

PA: How did you know the staff weren’t happy?

SM: They probably would have mentioned it to the Registrar. She would come to me and say “I can’t say who told me but I have had three different people from such and such department complain to me in the last week. ” I wouldn’t ask who had spoken to her. There’s got to be trust. The employees in that situation could write to the Gazette but very little would necessarily flow from it. The Registrar must be a good appointment. They must totally trust the Registrar.

There has to be trust – Registrar would come to me and say I can’t help you resolve this without telling you who told me. But you must keep it in confidence. See how trust flows through all of this. That starts with Spedan Lewis who was a great pioneer who thought it through . JL has built a feeling of trust and a requirement for trust.

PA: How does it maintain that? It has obviously adapted through the years.

SM: Aformer colleague of mine Peter Cox wrote a history of the Partnership (Spedan’s Partnership). In contrast with the present perception of the strength of the Partnership, he brings out what economic difficulties the Partnership has been through. For example Waitrose got into bad state 30 years ago, through mis-judgement of market. Kept shops small. We were failing to compete in buying and were losing market share. Another time we lost a lot of department stores that were bombed in war. Not been a smooth passage at all.

The strength of the structure is that it can fasten on the long term. Hasn’t got to satisfy shareholders in short term. If you join the board you have a duty to leave the place better and stronger than you arrived.

People (in other businesses) get driven off the long-term to keep shareholders happy, or to boost their own share options. I think JL, and M&S, are long-term businesses. JL decided to invest in on-line shopping for department stores in particular. Did it early, big investment but it is now paying off. It is one of the best sites around – on-line is about 20% of business.

You would think that the partners would push for a short-term view – saying give us a bigger bonus. But they don’t.

Not every member wakes up every morning and says: “Thank God I am a member of the partnership.” Perhaps about a third do get involved in the democracy. Another third don’t get involved but think JL is a decent place to work. The remaining third are transient.

The Board in my time comprised the Chair, his deputy plus 5 senior executives appointed by the Chairman plus five elected by Partnership council (12 total). Since then they have introduced 2 non-execs, appointed by the Board.

The Board is mainly a financial board, it agrees the business plan (5-7 years looking forward). There is something else called the Chair’s executive committee board, comprising a range of senior directors, that meets once a month to review strategy.

The Partnership Council has been reduced in number in recent years, and the department stores and Waitrose now have their own councils.

The Chairman reports twice a year to Partnership Council. All Chairs tackle it very seriously. He gives a statement then is questioned for an hour or so. Very important part of his relationship with the business.

The Partnership Council is the final arbiter of the important ways in which money is spent on them. For example, they decide future of the pension scheme. It still has a final salary pension scheme, non-contributory (all paid for by the business). At one stage they were asked would you have more bonus and have a less generous pension scheme – they chose to keep the generous pension.

Such a proposal (for the pension) will flow from the management, or in fact a sub-committee of the council and will probably have two readings at the council. After the first reading there’ll be an opportunity for adjustments and at the second reading, there’ll be a vote.

PA: The Chair is a key figure it seems.

SM: Very powerful. The outgoing chairman appoints the Chair. This is not a bad solution – he is disinterested and knows what is required for the job. But it has been seen progressively as difficult to carry. These days the Chair wouldn’t move on his successor without checking with senior colleagues. I think now final responsibility has been passed to the Board.

Our chairman lasts a very long time – there have only been 6 or 7 since 1864 (John Lewis retired at 93!). Spedan Lewis retired in 1955. There’s a new rule since my time– no chairman can expect to do more than 10 years. Maybe they’ll lose Charlie Mayfield just as he is settling into the job! You tend to look for someone younger (Charlie Mayfield was 42), because they may go on for a long time.

They have always been internal appointments – very difficult to bring someone in from outside, too risky. The constitution says the Chair can be turfed out. He is Chair and CEO, in theory at least, although de facto, a lot of executive authority delegated to the two managing directors of the two divisions.

Still the Chair is powerful. Not least, of only 100 voting shares in the holding company, the Chair speaks for 60 shares ex officio. 3 people elected annually as Trustees of the Constitution jointly hold other 40. But the Partnership Council can at any time vote the Chair out of office. Must have 2/3 vote and 30 day cooling off period. Never been exercised (in a sense it is the nuclear deterrent). If Chair was tempted to abuse his powers, it could happen.

There are two theoretical disadvantages with the structure. First you can’t have a rights issue and raise more money. But the business could, tomorrow, borrow £300m or more in the City (probably a lot more – I am out of touch). But it doesn’t want to be the biggest, it wants to be the best. We once had a chance to buy another department store group, all of us were asked whether it was possible. I said I think we could manage it but not at all sure what it would do to the culture if we tried to swallow an entire new department store group. I don’t think therefore the money is a problem. I am not sure it isn’t actually a hidden advantage.

Other theoretical disadvantage is that without shareholders, management could get tired and there’d be no institutional shareholders calling for their heads. But there are inside observers. The checks and balances are very strong – therefore the business is doing very well. All good things strengthened.

One of the key things is this word accountability, you can’t run a business by an elected committee. You may have read about Tony Benn’s experiments with employee ownership in the 1970s. He took 3 companies, rescued them with government money and gave them to employees. But it didn’t work. The Partnership Council can decide pensions, holidays, when shops will close at Christmas etc. and can debate with management anything they choose, but the actual commercial running must be in the hands of management just like any company. Management are, however, in a very real sense, accountable to those who work in the business. The partners work for the management, the management are accountable to the partners.

P.A. People forget there’s a loop.

S.M. It helps that sense of community. Formerly the Registrar, not personnel, kept personnel files and made sure they were fair to the partner. JL are now reviewing the role of the Registrar. I noted that we had one per store but in Waitrose, one for every 15 or so stores. Not enough representation for Waitrose.

The best laid plans don’t always work. When I did my report [PA note: for Tomorrow’s Company, mentioned above] there appeared one clear area of dissatisfaction, and the Registrars hadn’t exposed it and it was very unsatisfactory that the Registrars hadn’t exposed it. It related to one of my senior colleagues and I think the Registrars were scared of mentioning it. My conversations were anonymous so the problem came out loud and clear.

JL used to have a Chief Registrar and Partners Councillor (now combined). The latter is the ombudsman, a senior director charged with looking after partners’ interest. You might say the executives are trying to get as much out of the partners for the business, and the Partner’s Councillor is trying to get as much as possible out of the business for the partners (although that is a rather simplistic vision).

Anyone can come to him. In my day 40,000 people (now some 76,000) and anyone could see the Partners’ Councillor. He was a residue of the structure established when Spedan Lewis set up the business: he had an executive side and a critical idea and just about everyone had a critic against an executive. The Chief Accountant had the internal auditor, the MD had chief registrar, there was the GI, the Partners’ Councillor. It has gradually changed. Spedan Lewis had all critical directors on main board. Execs were not on the board and had to present their proposals to the (critical) main board. Now the execs are on the board.

The joy of employee ownership is that it is democratic. If you take our democracy here in the UK, people can throw the government out, newspapers (when they work) are guardians against corruption and bad faith. The opposition is there. Having said that, the Government can get on and manage day to day. Just as we have press, etc, there is a sub-structure in employee ownership holding management to account.

The Chair can get thrown out. We never had a bad Chairman. Chairman must be prepared to weed out unsatisfactory people. Usually it is done in a different way from other companies, rather than throw cash for them to go away, I have seen colleagues asked to take one step down and run a dept store. The Partnership wouldn’t get excited at that.

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