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26 June 2018
The benefits of employee ownership
Whilst times of economic uncertainty create business stress and no little anxiety, they arguably also concentrate the mind on the things which help businesses succeed. It is the sort of thinking which is much needed regardless of wider commercial circumstances but sometimes only becomes an acute priority when firms are forced to contemplate how best to develop. Out of the global recession of 2008, for instance, one suggestion which has built a growing number of influential advocates is employee ownership.
Many governments and business organisations now recognise the merits of giving staff a stake in the companies with which they work, both for commercial and social reasons.
The fundamental idea behind it is that individuals who have a vested interest in how businesses perform are more committed to their success and it is something which has proven so attractive that it is now a matter of Government policy.
Back in 2012, the Employee Ownership Association (EOA) worked with the tax lawyer Graeme Nuttall on a report (‘Sharing Success: The Nuttall Review of Employee Ownership’) examining how such a practice might become a more widely-used business model.
Among the report’s many conclusions was the fact that companies and the people who worked within them performed better, even when times were tough.
That was a finding echoed in another authoritative study produced by Centre Forum [since renamed the Education Policy Institute]. It discovered that certain of the key measurements of business success, such as growth in sales and staff numbers, were better in firms which put employee share ownership principles into practice than in those which did not.
It is not difficult, therefore, to see why companies are keen to consider such initiatives and ministers are eager to foster a commercial climate in which employee ownership plays a part.
There is a distinction between firms where employees own the undertaking completely or have a significant ownership stake, and those where employees own shares but where their percentage shareholding is relatively minor. In the case of the former this can include worker co-operatives, fully employee owned companies where ownership is held collectively, eg the John Lewis Partnership, or where ownership is held individually. These will often be referred to as employee-owned businesses.
Often and perhaps understandably, the directors of smaller, start-up businesses may not want to dilute their corporate vision by surrendering overall control to their employees or colleagues. However, they may still see the benefit of providing a smaller shareholding to attract the kind of talent which they need to realise their ambitions. This type of firm would fall in to the latter category – employees may own shares or options but the ownership percentage is relatively minor.
This is where some level of employee share ownership and perhaps a Tax Advantaged Employee Share Scheme may be appropriate. Enterprise Management Incentives (“EMI”) is a very flexible and powerful tool. EMI can be offered to a small number of key individuals; they will receive options to purchase shares in the business to motivate, reward and retain them. This can be done in a way which is tax beneficial both for the company and the individual employees.
The positive response both in Westminster and elsewhere to the Nuttall review it was hoped would accelerated the uptake of employee-owned businesses, with the then Department for Business, Innovation and Skills issuing a blueprint which set out a number of steps to increase them.
Another key factor from a tax perspective was the creation of Employee Ownership Trusts (EOT), which came into being as a result of the Finance Act 2014. The legislation provides generous tax reliefs to business owners willing to sell their shares to an EOT for the benefit of all employees of a company as long as they meet certain criteria, including giving up a controlling interest in their companies.
Furthermore, myself and my colleagues have seen cases recently in which disposing of shareholdings to an EOT has proven to be a very positive way of dealing with the sensitivities of succession in family businesses, offering not just a solution to the delicacies of dividing up a company but providing the prospect of real longevity long after a founder has stepped aside.
In the coming days, the EOA is set to release the results of a major new piece of research in to Employee Ownership in the UK – The Ownership Effect Inquiry.
I will be very interested to see the results but have little doubt that the findings will reinforce my own experience that employee ownership has significant benefits as a business model and is now becoming much more part of the mainstream.
If you have any queries surrounding employee ownership trust, or employee ownership generally, then please get in touch.