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The life-changing power of employee ownership

Why would you want your employees, in Nick Clegg’s words, to own “a big chunk” of your company? The answer is simple – for many companies, employee ownership improves business performance, economic Why would you want your employees, in Nick Clegg’s words, to own “a big chunk” of your company? The answer is simple – for many companies, employee ownership improves business performance, economic resilience, employee commitment and engagement.

“Employee ownership (EO) is a distinctive business model, a different perspective. And for some companies this is life-changing.”

The following interview is reproduced from HSBC Corporate World, Spring 2014 issue:

"The re-launched UK employee ownership index looks at listed companies with 3% or more employee ownership (excluding main board directors). The total return for shareholders in companies like this rose by 53% in 2013 compared to 21% for the FTSE All-Share Index. Clearly something better is happening in companies with this level of employee share ownership.  The 10% index performed even better in 2013 than the 3% version. The total return from listed companies with 10% or more employee ownership was 65% compared to the 21% for the FTSE All-Share Index.

Employee ownership (EO) is a distinctive business model, a different perspective. And for some companies this is life-changing. EO takes a conventional company, with a board of directors chosen because of their skill-set, and changes how it is traditionally owned, so that all employees have an ownership stake in the company, not just senior executives or key individuals.

That stake must be significant and meaningful. It must underpin structures that promote employee engagement in the company. Over the last two years, there’s been tremendous support from the UK government for EO. There’s now greater awareness of the concept, more resources to support EO and it’s become easier to implement. There are guidance materials and precedent documents on government websites, and we even had the first EO Day in the UK last July. But there’s still a long way to go.

We have to move away from companies introducing EO in the UK because of serendipity or because they’ve invented it from scratch. We have to get to a position where EO is as well-known a concept as establishing a charity or franchising or a management buyout. Until the last few months, most companies with EO introduced it because a manager or owner once worked for one of the UK’s flagship employee-owned companies, such as the John Lewis Partnership or Arup, or otherwise met someone from the EO sector. 

Last year the UK government changed company law. These changes help direct employee ownership, by making it easier for a company itself to buy shares from employees who leave and cancel them, or hold them in treasury.  There’s a consultation going on over abolishing the 125-year perpetuity period for employee trusts. If a charity or a pension scheme can exist forever, why not an employee trust? There is also a consultation on new tax exemptions that support the indirect (or trust) model of EO.

The government is introducing a capital gains tax exemption to encourage EO as a succession solution and an income tax exemption for bonuses. These measures could be key to maintaining the EO momentum in the UK. My hope is that the framework for obtaining these tax reliefs will be commercially acceptable, to the point of setting a new benchmark for the design of employee trusts. In other words, companies will set up employee ownership trusts of this sort because this is what is right for them commercially, as an employee ownership solution, not because they want to get the tax breaks.”

HSBC Corporate World is the bank’s publication for UK mid-market businesses, those with turnover of £25m – £800m.

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