Features
2 Mar 2016 11:12am

How to make employee ownership work

In the right hands, employee ownership provides better business outcomes and increased productivity alongside a happier workforce. Rachel Willcox finds out how to make it work

Despite government pledges to place employee ownership in the mainstream of the British economy, awareness of it is mostly down to serendipity.

The last three decades have seen increasing willingness among company founders to involve key employees as shareholders. However, employee ownership, which takes this to a new level by involving everyone in the ownership of a significant part of the business, is a long way from being in the everyday business lexicon, despite the huge PR boost offered by employee ownership poster child John Lewis Partnership.

The resilience shown by many employee-owned companies during the recession was one of the catalysts for government action to promote the concept. Research subsequently conducted by Cass Business School found that employee-owned companies were more profitable and added more staff than their traditional counterparts during the 2008/09 economic downturn.

Graeme Nuttall, a partner at law firm Fieldfisher, was charged with undertaking an independent review into employee ownership in an attempt to identify the obstacles to promoting the model. In July 2012 the Nuttall Review was published and put forward a set of 28 recommendations to remove barriers to adoption. Since then, the “John Lewis model” has become the fastest growing (albeit from a small starting point) form of business ownership in the UK.

The sector is growing annually at a rate of 10% by volume of newly formed employee-owned businesses, according to figures from the Employee Ownership Association (EOA). Employee ownership contributes approximately 4% of GDP annually to the UK economy – representing £30bn per annum – and the UK’s top 50 employee-owned companies now contribute over £20bn annually to the economy and employ more than 150,000 people. That’s more than the aerospace sector.

“Employee ownership is an antidote to the economic malaise in the UK and in particular the lack of a long-term view and investment and the irresponsibility we see today,” the association’s chief executive Deb Oxley says. The EOA says there is clear evidence to demonstrate that employee-owned businesses perform better compared to traditional companies – not just financially but also in terms of job security, job satisfaction and productivity. “When people have a stake in the place they work, the commitment to it and investment in it is much higher,” Oxley says.

With the output per hour from UK workers in 2014 20 percentage points below the average of other leading industrialised nations, according to the Office for National Statistics, it’s no wonder that the employee ownership concept has been hijacked by Whitehall as a means to boost the UK’s lacklustre productivity. Financial indicators add clout to the EOA’s argument. £100 invested in the Esop index (FTSE-calculated UK Employee Ownership Index) on 1 January 2003 would now be worth £749, compared to £277 if invested in the FTSE All-Share.

There are several employee ownership models; employees can become owners directly by personally holding shares in their company, or indirectly through an employee trust, or a combination of the two. But being an owner does not make every employee a manager.

Andy Davies is a director of Sheffield-based wire joiner and fastener manufacturer Gripple, which operates a direct employee ownership model. He is also chairman of GLIDE, the in-house company representing all employees. Employees must buy £1,000-worth of shares (or £50-worth for those working in the company’s Indian subsidiary) to become a GLIDE shareholder. Today there are 700 shareholders, each with one vote, including Gripple’s founder and executive company chairman Hugh Facey.

“There’s a myth that if you’re employee owned, that’s it,” Davies says. “But the whole point of employee ownership is having a vision for the business. Our vision is having everyone contribute to the business and creating an environment of total inclusion. It doesn’t mean you take away the decision-making powers from the commercial board, but you do put more pressure on them to make sure they’re good decisions.”

It’s a strategy that is paying dividends for Gripple, which last year was named Employee Owned Business of the Year by the EOA following its best ever performing year; pre-tax profits rose 157% and 13 new products were launched.

Davies’s view that the model engenders a positive culture and committed employees is supported by research from Edinburgh Napier University, which found 80% of staff of employee-owned companies would recommend them as places to work. However, employee ownership is no soft option when it comes to working environments.

“There’s nothing Namby Pamby about employee ownership,” Davies says. “We take hard decisions and put a lot of responsibility on people. Our commercial model is all about innovation to make sure we never get pulled into commodities. We must generate 25% of annual turnover from products that are less than four years old and that have been patented.

The basic philosophy is, if things are bad we tell people, if we’re going well they all get a pat on the back.”

Wilkin & Sons has been making Tiptree preserves in the Essex village of the same name since 1885. The company has been in transition to employee ownership since 1989. Today its employee benefit trust holds around 48% of the votes. The company also operates a share incentive plan; qualifying employees receive an allocation of free shares linked to the salary or wage band they fall within.

Walter Scott, joint managing director of Wilkin & Sons, says the desire to remain independent was the driving force behind the family business’s decision to embrace employee ownership. He argues the positive working practices that employee ownership encourages – notably listening to staff and looking after them – are simply good business practice. “There’s a clear separation between the way you run your company and the mechanics of employee ownership, which is trying to protect you from a takeover or from a few people making a lot of money out of a sale.”

Succession planning – business disposal but also business growth – should be clear drivers for discussions about employee ownership. With much growth in the sector among SMEs, the EOA’s strategy for 2016 is to target the intermediary market, in recognition of the privileged business advisory role accountants in particular play. “I’d like it to be their professional obligation to talk about employee ownership in the same way as MBOs and trade sales,” Oxley says.

Our vision is having everyone contribute. It doesnt mean you take the decision-making powers from the commercial board, but you do put more pressure on them to make sure they are good decisions

One top 10 accountancy firm embracing employee ownership is Grant Thornton, which last May voted to become a shared enterprise firm. The move will see all 4,500 of its people have a say and a stake in the firm based on a percentage of earnings, and marks a radical departure from the traditional partner-owned and run structure that dominates professional services. There’s nothing altruistic about the move, which is firmly entrenched in the belief that a more inclusive form of ownership will be attractive to both its employees and clients, and ultimately benefit the bottom line. The shared enterprise model is pivotal to the firm’s stated plan to double profitability by 2020.

“We operate in an increasingly volatile market and innovation is the thing that differentiates our firm from others,” explains Norman Pickavance, GT partner and head of brand and culture at the firm. “We also think that people want to work in the kind of environment where they feel that what they do is valuable and valued.”

Pickavance accepts the move represents a huge cultural and organisational shift for Grant Thornton. “To make sure it sticks and is deeply entrenched is a process that’s going to take a long time and we’re moving carefully. For some people, particularly those in leadership roles, there’s a feeling they’re giving up control. You have to make them realise they’ll get something back.”

Dame Steve Shirley, the charismatic founder of computer services company FI group (which became Xansa and is now part of the Sopra Steria Group), is equally enthusiastic about the need for more employee-owned businesses. A gradual ramping up of employee ownership within her business was driven by the desire to do the right thing by her employees, whose hard graft had got the business through the recession of the 1970s. “I realised it wasn’t enough to give people a bonus,” Shirley tells economia. “They needed to be co-owners.”

But it’s not an easy task, she warns, and the importance of two- way communication with staff cannot be underestimated. “They need to know this won’t give them any short-term gain – it’s for long-term fulfilment.”

It’s one way to possibly save a struggling iconic brand, says Hari Man, visiting fellow at City University’s CASS Business School, who ponders whether Woolworths could have survived if it had gone to an employee-owned structure. Man’s research into the model of the John Lewis scheme found that its success at a strategic level is intrinsically linked to its employee ownership. “If you tried to float it on the stock market, it probably wouldn’t be so successful.”

Despite its fantastic brand clout, Oxley admits the scale of John Lewis makes it difficult for smaller businesses to identify with. Nonetheless, group finance director Patrick Lewis isn’t quite ready to pass the baton when it comes to evangelising: “We’re very keen to talk more about it because we fundamentally believe it is a great way for businesses to set themselves up. It gives us huge competitive advantage on all sorts of fronts. Waitrose and John Lewis operate in very competitive industries. I don’t think it’s a coincidence that they are consistently at the top of brand and customer service polls.”

The retailer operates an indirect employee ownership model, whereby 100% of shares are held collectively on behalf of current employees through an employee benefit trust. “It means that while we’re working here we have a real interest in the success of the business,” Lewis says. Dividends to staff over the last 15 years have ranged from 9% of salary to 20%.

Creating an environment where people feel more fulfilled is a very valuable outcome. And that is driven by the culture of the business rather than employees having a share certificate, Lewis says. “Don’t expect the benefits in year one. You have to put a lot of effort in to get the benefits out. For it to really fly, everyone has to think about what they want to do and how they want to do it and focus on making teams work well together.”

More widespread use of employee ownership across the UK will depend on a sustained campaign to raise awareness across all parts of the business world, Nuttall warns. “Employee ownership provides better business outcomes, increased productivity and long-term business decisions alongside a happier workforce. That combination provides for professionally-managed, successful trading enterprises – we need more like that in the UK economy.”

Meanwhile, Nuttall is muted in his enthusiasm for the progress made in the three and half years since his review was published. Despite momentum, employee ownership is far from mainstream.

“There are government ministers who support employee ownership but there appears no interest in a proactive approach to promoting it. I think government feels it is a job done,” Nuttall says. “The reality is, it’s only partly done.”

The tax factor

There are tax considerations for any business considering a move to employee ownership but they certainly shouldn’t be the driving force behind any decision. Two new tax reliefs were introduced in 2014 in an attempt to encourage more companies to consider the merits of employee ownership and level the playing field with other business ownership models.

The first, aimed at existing company owners, grants them full exemption from capital gains tax (CGT) if they sell a controlling interest to an employee trust. One condition is that the trust must operate for the benefit of all the company’s employees on the “same terms”, so cannot skew the benefits of ownership to particular people.

A second tax relief allows bonuses paid to employees of a company controlled by an employee trust exemption from income tax, up to an annual limit of £3,600 per employee. National Insurance will, however, still be payable. The key requirements for this new relief are very similar to those applying to the CGT relief.

Tax partner at Fieldfisher Graeme Nuttall says some specific technical issues continue to trip firms up and he is calling on the FRC to provide clear guidance on accounting for employee-owned companies: “Existing guidance on employee trusts is irrelevant because they are owned by a board of directors. Employee ownership trusts are completely different and should have their own accounting treatment.”

Rachel Willcox

 

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