2005 – the growth of employee ownership
A new report from Job Ownership
Ltd, the association of employee-owned businesses,
is seeking to secure tax breaks for shareholders
of companies placed in employee trusts.
While tax incentives are available
for employees obtaining shares in Share Incentive
Plans and save-as-you-earn option schemes, various
tax breaks that existed in the past for those
establishing trust-based employee-owned companies
have disappeared in recent years, closed off in
efforts to prevent the use of offshore trusts
in tax avoidance schemes.
Gordon Brown, the chancellor,
who addressed this week’s report launch
in London, is known to be sympathetic to the expansion
of employee ownership schemes and JOL is hopeful
that discussions with HM Revenue and Customs will
lead to favourable tax treatment in future for
shares in employee ownership trusts.
“It would need to be a
specific type of employee benefit trust with particular
characteristics that would include UK tax residency,”
says Graeme Nuttall, a partner at Field Fisher
and Waterhouse and a co-author of the report.
The report, Shared Company,
How Employee Ownership Works, is part of a concerted
drive by JOL to present employee ownership as
an effective alternative to management and other
“Ten years ago the employee
ownership sector tended to be considered as a
few trust owned businesses such as the John Lewis
Partnership and Scott Bader in addition to various
small worker co-operatives,” says Patrick
Burns, JOL’s executive director.
“But the sector has expanded
significantly in the past decade to include a
diverse spread of co-ownership arrangements that
we estimate to have an annual turnover that must
now be upwards of £20bn to £25 billion.”
The Treasury’s interest
in employee ownership has grown since JOL produced
an earlier report suggesting employee trust ownership
as a way of structuring a privatised Royal Mail.
Trade union reaction, however, remains one of
the biggest hurdles for any such move because
of continued union opposition to public sector
Trade union scepticism has clouded
employee ownership ventures in the past. When
the first Thatcher government allowed a management-led
employee buyout of the National Freight Consortium
in the early 1980s, a hostile response from the
Transport and General Workers Union limited the
spread of shares among employees.
As the National Freight Corporation
it gradually abandoned the usual consultative
characteristics of employee share ownership and
reduced employee profit sharing. Share selling
by employees and a rights issue diluted the employee
stake further to the stage that it had fallen
from 82.5 per cent at the time of the buy out
to less than 10 per cent at the end of 1995.
The NFC experience is sometimes
raised by those sceptical of employee share ownership,
one reason, why JOL has sought to promote trust
ownership of shares as a sustainable business
model. The trust ownership structure has been
adopted successfully by companies such as the
John Lewis Partnership and Ove Arup, the international
One curious aspect of employee
ownership is that it should be growing in popularity
today when it was all but ignored by other corporate
owners when Spedan Lewis established a mechanism
for selling family ownership to an employee trust
Mr Burns believes that part
of the reason is that successive chancellors have
created various incentives for the introduction
of employee shareholdings. Beyond the Treasury
the Department for Trade and Industry has also
begun to take an interest. One of its reports,
Passing the Baton, suggested employee ownership
as a viable option in succession planning among
small and family businesses.
“I think more companies
are becoming aware of this option today than used
to be the case,” says Mr Burns. “more
than this, however, I think there has been a sea
change in business where companies are expecting
employees to be innovative and prepared to take
on more responsibility for the way they work.
Employee-owned businesses are very successful
at creating this environment.”
The point is emphasised by Hugh
Facey, designer of an innovative system for joining
and tensioning wire. Mr Facey is chairman of Gripple,
the Sheffield-based company he established to
manufacture the system that is used in all kinds
of applications from fencing and load suspension
to garden supports.
When he sold his first business,
Estate Wire, he gave pat of the proceeds to the
staff. “Those people had worked to build
the business in the same way as I had. Why shouldn’t
they share in the capital gain and dividends?”
In 1994 when the Gripple business
began to take off he sold shares to staff based
on the net asset value divided by the number of
shares, creating an employee stake in the business
of about 38 per cent. The staff shares, however,
were non-voting shares.
“This will mean that I
can put the voting control of the company into
a trust fund at some point in the future,”
he says. Staff have been debating this corporate
structure, over the past few days in an annual
Unlike the John Lewis model,
employees with shareholdings in Gripple are able
to sell their shares when they leave the company,
an option that has led to some staff enjoying
capital gains of tens of thousands of pounds.
One common concern relating
to employee shareholding is the impact of a downturn.
This happened to Gripple a few years ago when
orders dried up at its biggest customer, a company
in the US that had run in to financial problems.
Employees and directors took salary cuts as a
result. “Because we are all shareowners
everyone could see what was happening and why
such action was necessary. It worked like glue,
pulling everyone together,” says Mr Facey.
The company now values its shares
differently and pays a third of post tax profits
as dividend. Shares are currently valued at 30
times the dividend. More recently another company,
Loadhog, manufacturing a revolutionary way of
wrapping and securing pallet loads - a product
that emerged from discussions in the company’s
ideas and innovation unit - has been spun out
of Gripple. Two Loadhog shares were issued for
every five shares owned in Gripple and staff bought
further shares. Today employees own nearly 49
per cent of Loadhog.
Mr Facey believes that employee
shareholdings have ensured high degrees of commitment
and innovation among employees who tend to regulate
their own working practices and the relative performance
of fellow employees. “If someone turns out
be a wrong penny they weed them out themselves.
We don’t have any trouble there,”
The JOL report seeks to remove
a few myths about employee ownership, particularly
that they are slow to make decisions, are all
co-operatives, do not seek to make a profit and
never make redundancies, none of which is true.
But they do tend to think more broadly across
the employee base about the nature of their business.
The report claims with some justification that
these companies are setting the pace in what is
emerging as one of the most important measures
of competitiveness: the ability to harness the
creativity and commitment of employees.
Employee ownership is consistent
with the principles of human capital that stress
the merits of investing in employees. In an employee
owned-company like Gripple, people are investing
their skills, their ideas and their money, investing
jointly, in short, in their future. What better
way can there be to align the forces of enterprise?