Should employees provide financing to their employers?

John Lewis recently made the headlines by raising £50m from offering savings bonds to their own staff and the general public. In exchange for investments of between £1k and £10k, bondholders will receive 4.5% p.a. cash interest, and 2.0% p.a. in shopping vouchers.

There is a clear rationale for borrowing from customers. Last year I wrote a post applauding Hotel Chocolat’s financial innovation when they raised capital using ‘chocolate bonds.’ The razor blade manufacturer King of Shaves employed a similar method to raise finance, offering bondholders free shipments of razors in addition to interest payments. As long as customers realise that these are (somewhat) speculative investments with a high return on capital, they bring benefits to both parties.

The John Lewis bond is a good opportunity for regular customers to get extra value out of their savings. However I am less sure of the wisdom of raising capital from your own staff. The very first topics I chose to write about when I started this blog last year was the collapse of Enron, which was brought down by widespread accounting fraud. A large number of Enron employees had invested their life savings in Enron shares (encouraged by its CEO Jeff Skilling) and when it went bust they were left with nothing: no income and no savings.

For senior executives, tying up large amounts of their savings in company shares is the norm, as it gives other investors confidence that they are incentivised to maximise the value of the company. If the business fails, they lose a lot, but they will typically have a some of their (high) net worth in cash, and will reasonably be able to ‘start over.’ For regular employees, this is not necessarily the case. The link between their personal performance and the company’s performance is weak-to-non-existent, so the ‘incentive’ effect of investing does not hold. If the business fails, they have everything to lose. My last post on the retail sector explains just how easy it is for some companies to run into financial difficulties.

One of the first rules of investing is to diversify your holdings to spread the risk. An employee is already heavily exposed to their employer’s growth or decline. Perhaps investing their savings as well just puts too much risk in one place?