Delivering "good" employee ownership (EO)

Some of you will remember that scene in the film Jerry McGuire, when Jerry stands up and announces his new manifesto. 

This was Jerry's epiphany: when he decided to take a fresh approach and do things differently, vowing to fight against the exploitation and cynicism of the sports agency business.  Like Jerry's speech, what we say below is our manifesto. However, we are not preaching revolution - rather a restatement of existing values and principles – and common sense.

The message we want to give is simple. It is that we feel there are some fundamental aspects of EO that we should stand up for; there are certain principles on which "good" EO should be constructed. This should now be at the forefront of EO planning more than ever - against the back drop of exponential growth of the EO sector since the introduction of "EOTs" in 2014, current and prospective employee-owned businesses and their advisers must not lose sight of what it really means to be employee-owned.

What we are describing is "good EO". We are promoting a model which delivers all of the benefits of employee engagement and better working practices, but with all of the financial advantages that are available from using this model as a succession strategy.  It is possible to have it all, but this requires work, planning and constant monitoring.

So what is "good EO" and how can it be encapsulated in a few words?  In our view, we are talking about a business model which displays all or a majority of the following characteristics:

1. At its heart, there should be "purpose" – the EO model should be aimed at changing for the good, improving how a business works and enhancing how the employees interact with it.  It is not just a process – it is something that needs to sustainable and stand the test of time.  Within these parameters, it should aim to promote "good work" and consider the wider impact of the business, including its customers and community. This is why we welcome the decision of many EO businesses to become "B Corps". This marries the benefits of employee ownership with the B corp ethos of good citizenship and caring about the environment.
2. EO must work for all levels of the business. We were struck by a recent article in a trade journal, which questioned whether EO had benefited staff in a business. Here the business had recently transitioned to EO, and some members of staff claimed not to have noticed any difference and questioned what it meant for them.  This should not be happening.

We approach this dilemma as the "EO sandwich". This sandwich has three parts:

1. founders;
2. management; and
3. employees.

All of these stakeholders must gain from the process.Planning for EO tends to focus on the founders and the employees – it is called "employee ownership" for a reason. But management (the bit in the middle) tends to get ignored. This could be counterproductive as management are the people most needed to bring about the transformation. Founders often stay on in the business, but at the same time they are often seeking to exit within a manageable time frame. Whatever this timeframe is, a sensitive and incentivised management team is vital to embed and develop the benefits that EO can bring, well beyond the initial transition to EO.

3. EO should deliver engagement.  This links in with other points, but the structures which flow from EO should encourage employees to have a voice. They should feel valued and part of something.  If EO does not lead to better engagement and communication, then some of the benefits are being missed.
4. EO should be collaborative.  The manner in which EO is delivered is equally important. EO delivers engagement and fair treatment for all. This is achieved best if all stakeholders participate and have a say in the design. There are examples of employees who have not been told of the EO transaction, months after it is introduced. There are examples of minority shareholders threatened with a forced sale, or told that if they do not sell then they won't receive dividends once the EOT becomes the majority owner. Approaching EO in this way will not ensure that the potential benefits are maximised.
5. EO is a long term business model.  It is about much more than tax relief. This is certainly an important factor to consider, but there are many other compelling reasons to adopt an EO business structure. Tax efficiency is just one of these, albeit an important one, and we are not disputing that EO is an excellent way for founders to exit their businesses in a tax efficient way. However, business owners should look at all the benefits and the disadvantages of EO before embarking on this journey. History has shown that structures adopted purely for their tax advantages ultimately don't stay the course.
6. People are different. No two transactions are alike. There are quirks and nuances which are unique to different companies. Some companies have well-developed engagement structures. Many are still developing these. Other companies are very open with their communications, and equally some are not.  When preparing the ground for EO and eventually structuring a deal, it is important to listen to the needs of the business and design something which is tailored to the situation. We must resist the desire to commoditise the process. Okay we use precedents, but these are just a start and they are adapted for each set of circumstances.
7. EO might not be the right structure.  The business needs to be ready. It must have the right structures and champions to help deliver EO. A founder cannot transition to an EO structure with a view to retiring, if there isn't a strong management team in place to take the business forward.  Equally, EO is also probably not the answer for a business in financial difficulty. Typically EOT buy-outs are funded predominantly from future business profits, so the business must be able to generate the cash flow to pay back the former shareholders.
8. Creating the EO structure is just the beginning of the process.  EO does not stop at "completion" of the transaction. In many ways that is just the start. Advisers will provide a platform to enable change and for improvements to be made. The company should accept the challenge and strive to deliver the long term benefits of EO.
9. A grand exit. EO should not be a stepping-stone to a follow on sale or an initial public offering. Although we accept that circumstances change and sometimes it is the right thing to do for the trustee to sell if it feels it is in the interests of the employees, the founders should never enter into this sort of structure with an eye on an exit.
10. The bigger picture. When we sat down with a blank sheet of paper to map out all the things that were relevant to an EO transaction, we were astounded by how much activity was outside the narrow process of implementing EO from a legal perspective. Putting it simply, there is a complex interlocking set of factors which make up the" EO Universe".  Our message is to look at the process holistically, and recognise that the process is more complicated than simply putting the nuts and bolts in place; "good" EO demands sufficient thinking and clarity at the outset to deliver the best results. This is also a warning against commoditisation – it is not always possible to shoe horn transactions into the standard template and that wider issues often come into play; these require time and patience to navigate a way through.

Final thoughts

We hope that what is said above is not seen as restrictive or "preachy", but rather a set of principles that allow the benefits of EO to be embraced whilst also delivering EO based on certain core values. Ultimately how EO is delivered is a matter for the founders and the other stakeholders, but all should be motivated to deliver the very best EO.