October 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 investor ownership.

“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 privatisation.

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 consulting engineers.

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 in 1929.

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?” he says.

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 company seminar.

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,” he says.

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?