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How the UK is encouraging employee ownership internationally

Propelled by the employee ownership trust (EOT) UK employee ownership has grown significantly over the last 10 years. Employee ownership is now a mainstream UK business model. This achievement is encouraging other countries to do more to promote employee ownership and, in particular, to examine whether to replicate the EOT's success. The United States (US) has added the EOT to its models of employee ownership. Australia has its first Australian headquartered EOT. Other countries are reviewing what they can do, with the Canadian Government leading the way but Denmark is catching up. The next 10 years could see EOT ownership, or its equivalent, established as the standard model of employee ownership internationally for business successions.

Introduction

On 4 July 2012 Norman Lamb, the then Minister for Employment Relations, Consumer and Postal Affairs said "I want this to be the decade of wider employee ownership" and "My goal is to shift employee ownership into the mainstream of corporate Britain". This was in the Foreword to the Nuttall Review of Employee Ownership.  The Coalition Government actively promoted employee ownership as a distinct successful business model through regulatory and non-regulatory measures. In particular, because of the findings of the Nuttall Review, the Finance Act 2014 gave statutory recognition to the UK's tried and tested employee trust model of employee ownership, in the form of the EOT.  Other forms of employee ownership remain popular but it is the phenomenal take-up of the EOT, as a business succession solution, that has driven the growth of UK employee ownership over the last 10 years and propelled employee ownership into the mainstream, so realising the Coalition Government's aims.

Early international interest

The enthusiastic UK Government support for employee ownership and the example set by the Nuttall Review process attracted attention from overseas employee ownership organisations. The Irish ProShare Association (IPSA) in a 2012 article "Lessons from Nuttall" called on the Irish Government to promote employee ownership. Employee Ownership Australia (EO Australia) redoubled its lobbying efforts. A delegation from Gipuzkoa, the Basque Province, visited the UK in June 2014 to re-examine employee ownership. A 2016 article 'The UK employee ownership sector's success is celebrated around the world on EO Day' contained messages showing how the UK's efforts to promote employee ownership provided an inspirational example. The US National Center for Employee Ownership (NCEO) said "The United Kingdom has become the world's creative laboratory of employee ownership. All of us at the NCEO salute your innovation, your energy, and most importantly, your incredible success in creating more employee ownership." The Frankfurt Inter-University Centre held up the effect of the Nuttall Review and the UK Government's support for employee ownership "as an exemplar for all of Europe to follow".  

Early proof of concept

It is vital to appreciate the EOT concept pre-dates the Finance Act 2014.  The UK's legal and tax framework supported the creation of majority employee trust owned companies before 2014. Any country with trust law can likewise, in theory, establish significant or majority employee trust ownership.  Fieldfisher has produced an article 'An introduction to the EOT' for other countries interested in this model. This article explains the merits of the EOT model including its practical advantages over direct employee ownership. EOT ownership neatly side-steps the upfront and ongoing administrative complications, and communication issues, around individual employees buying and selling shares.  There was early proof of the international flexibility of the EOT model in 2016 when Wimberly Allison Tong & Goo (WATG), the leading international design consultant became the first US business to adopt the UK's EOT model.

US EOTs

WATG's use of an EOT made EOTs a talking point at the NCEO's 2016 Conference, at which WATG received an Innovation in Employee Ownership Award. Chris Michael, an employee ownership practitioner and Professor at Rutgers University, worked on creating a US version of the EOT and published articles introducing the concept in leading US peer-reviewed journals, including 'The British are coming'.  The US EOT, sometimes called the Perpetual Trust, is now fully accepted as one of the US forms of employee ownership, alongside, Employee Stock Ownership Plans (ESOPs), worker co-operatives and non-ESOP direct ownership plans. ESOPs remain massively predominant but EOTs provide an alternative which is up and running without any changes in US tax or other laws.

Australian EOTs

Another huge development is the creation of the first Australian headquartered EOT at Meld Studios. The 2021 article 'Australia’s first company to become Employee-Owned by Trust' explains how this was brought about with support from EO Australia. EO Australia has various EOT resources on its website and is working with Fieldfisher to help an increasing number of Australian companies to emulate Meld Studios. These Australian EOTs will be established without any new legislation.  Of course Government support would be welcome but there is just about enough regulatory room to make EOTs work in Australia.

Towards a Canadian EOT

One country where tax changes are needed is Canada. Social Capital Partners (SCP) identified this obstacle and campaigned successfully to bring it to the Canadian Government's attention. SCP's influential 2020 paper 'Building an employee ownership economy' highlighted the opportunity to create a public policy framework to support employee ownership. The report referred throughout to the UK's EOT policy success and concluded that employee ownership trusts (including ESOPs) "are the most successful model for business succession to employee ownership". In April 2021 the Canadian Federal budget specifically mentioned EOTs and committed to understanding the barriers that prevent Canada from achieving the level of employee ownership success in the US (with ESOPs) and the UK (with EOTs). These consultations revealed that the main barrier to the creation of EOTs (and ESOPs) in Canada was the lack of a dedicated trust vehicle under current tax legislation tailored to the requirements of these structures. Budget 2022 proposes to create a new, dedicated type of trust under the Income Tax Act to support employee ownership. The Canadian government is now engaging with stakeholders to finalize the development of rules for this trust and to assess remaining barriers to the creation of these trusts. The Canadian EOT may be both an ESOP and an EOT. It will represent another major step in promoting the employee trust model of employee ownership.

Towards a Europe-wide model of employee ownership

Organisations in other countries with trust law are exploring the EOT model such as the Southern Africa Employee Ownership Association (SAEOA). For example, in May 2022 SAEOA contributed to a Wits Business School webinar at which Cwmpas spoke about the success of EOTs in growing Welsh employee ownership and other events are planned that will promote the EOT.  However, it is Europe that will provide another large scale test of the concept.

Ireland has trust law. However, IPSA identified tax laws as an obstacle to implementing EOTs in Ireland and that it needs to engage with the Irish Government. Continental European countries do not have trust law but there are legal forms that could be adapted to fulfil a similar role. There are initiatives to explore this possibility.

The European Federation of Employee Share Ownership (EFES) is calling for the development of employee ownership in Europe. The key-point for EFES is the availability of employee ownership plans like ESOPs and EOTs. With the support of a team of British and continental lawyers, EFES is actively working on the transposition of the EOT model into European laws.

Denmark is already making good progress towards transposing the EOT into domestic law. The Nuttall Review has been a talking point in academic environments and among politicians in Denmark. The think tank Democratic Business and LB Forsikring held a conference in March 2022 for policymakers and politicians, on the theme of 'How does Denmark join Europe's business democratic wave', which included a presentation on achieving generational change through EOTs. There have been similar events including briefing a cross-party Parliamentary group on EOTs. The Copenhagen Business School provided the Danish Business Authority with a major country report on employee ownership, which included extensive information on EOTs provided by the White Rose Centre for Employee Ownership. On 21 June 2022 the Danish Government's expert working group on democratic businesses delivered its recommendations to the Minister for Industry, Business and Financial Affairs. Established a year ago the expert working group was asked by the Danish Government for concrete recommendations to remove inappropriate barriers and improve conditions for democratic companies. It has recommended a model of employee ownership very much inspired by the UK EOT, but within a Danish legal framework, with an emphasis on common ownership and democratic decision-making structures. A tax change is also recommended for transfers into Danish EOT ownership to create a level playing with existing reliefs, such as that for the transfer of a family enterprise to close relatives. During the press conference the Socialist parties, Liberal party and the Minister delivered speeches stressing the urgency and broad political agreement on delivering on the recommendations on employee ownership. Next steps should be announced later this year.

The EOT is already making a major impact on European employee ownership. By reworking and combining data available from EFES and RM2 it becomes clear that UK companies comprise over one-third (36) of Europe's 100 largest majority employee-owned companies, calculated by number of employees. This proportion is higher than for any other European country and has grown significantly through large companies adopting the EOT model of employee ownership. 15 of these 36 companies are EOT owned and this is in addition to all the large employee trust owned companies established before 2014.

The Slovenian Institute for Economic Development is advocating for a European model based on what it describes as a variation of the ESOP. The ESOP is, however, heavily dependent for its existence on a special legal framework, as is its UK equivalent, the tax advantaged share incentive plan. The experience to date, admittedly in countries with trust law, is that the EOT offers a better prospect for creating a Europe-wide model of employee ownership, one that is commercially attractive and can work without requiring a special legal or tax framework to support it. Although tax incentives can provide powerful nudges to change behaviour quickly.

Conclusions

The UK's employee ownership sector is unrecognisably bigger than that of 2012 with hundreds of new employee owned companies and thousands of new employee owners. There has been a decade of EOT ownership and employee ownership is now a mainstream UK business model. Moreover as explained in 'EO v3.0 – Employee ownership with added Gandhian purpose' the ability for EOT owned companies to support wider corporate purpose and address environmental, social and governance issues should future-proof it as a mainstream business model.

Looking beyond the UK, US and Australian companies have adopted the EOT business model, the Canadian Government plans to support it and there is interest in other countries, notably Denmark. The next 10 years could see EOT ownership, or its equivalent, established as the standard model of employee ownership internationally for business successions.  
 

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