Risk & Economy » Regulation » The start of the employee ownership decade

AT THE END OF OCTOBER, BIS announced a blueprint for more British businesses to become employee-owned. If the government’s plans bear fruit, many private company owners will be looking to create employee share ownership.

In his January 2012 Mansion House speech to City grandees, the deputy prime minister announced government plans to increase significantly the number of employees holding shares in the company they work for. This new policy has two goals: stronger and better performing businesses, and wider ownership of capital.

Citing research that employee share ownership tends to boost business performance and foster resilience when conditions are challenging (the most recent evidence comes from the Cass Business School), the government’s goal is to create a virtuous circle central to our economic resurgence, in which employee-owned companies are more productive and profitable, better equipped to thrive in a global marketplace, and in which the resulting wealth is shared by all who have helped to create it.

This is an ambitious plan, but represents the logical next stage of a journey that we’ve been on over the past three decades. Starting with the privatisations and introduction of tax advantaged option schemes in the 1980s, a growing number of listed companies began to set up share schemes for both executives and all employees.

The vast majority of FTSE 100 companies now have a pool of shares – normally up to 10% – reserved for employee share ownership. The last ten years have also seen a growth in employee share ownership in private companies, mainly in the form of equity for key people, such as EMI options. Additionally, some private companies have been quietly, but often very successfully, pioneering ownership for all their employees.

It is this last approach that the government wants to see grow significantly, with many more companies becoming either employee-owned or with employees having some degree of ownership stake, in each case involving all or most employees. If this ownership change is to happen, it will be mainly, perhaps entirely, through private and SME companies.

Soon after the Nick Clegg’s speech, BIS commissioned a review into the barriers to employee ownership, and potential solutions. This review, by Graeme Nuttall, from the law firm Field Fisher Waterhouse, was published on 4 July 2012, and identified three main barriers.

First, the concept of employee ownership is little understood, not only by company owners and directors but also by their advisers. Many do not realise that employee ownership is a business model in its own right; it is different from a social enterprise, and employee-owned companies can be extremely successful. A number of very high-performing businesses are employee-owned, for example John Lewis and Arup.

Second, there is a lack of resources available to support employee ownership. Low awareness among professional advisers means that advice is hard to find. Third, actual (or perceived) legal and tax problems were also cited as obstacles.

On 30 October, BIS responded to the Nuttall recommendations, committing to:

• Considering setting up an independent institute to provide and disseminate knowhow on employee ownership

• Working with bodies such as the Law Society and ICAEW to develop simple off-the-shelf employee ownership toolkits

• Raising awareness of employee ownership through a Ministerial programme of regional activity

• Examining of barriers to funding for employee-owned companies

A strong thread running through the Nuttall Review is that awareness and knowledge amongst professional advisers needs to grow. The person most companies will be likely to approach first if they want to find out more about employee ownership will be their accountant or finance director. How can they ensure they are equipped to provide practical and positive help?

The BIS response is a start, although it is very light on substance. Clearly, if there is to be a more detailed policy-making stage we haven’t reached it yet it is hard to create a specific to-do list.

However, two immediately obvious areas where there will be a real need and opportunity for advisers to add value are where a company owner wishes to retire by selling to employees and where a company wishes to establish a share ownership plan in which all employees have the right to participate. Companies may need advice on taxation and valuation, and in major changes of ownership may also need help with finance and transaction structuring. Effective models exist and general knowhow is already available through organisations such as the Employee Ownership Association. The ICAEW is working on its own guidance for its members and the range of knowhow is likely to increase.

Robert Postlethwaite is managing partner of Postlethwaite, Employee Ownership Lawyers