Dismantling barriers to employee ownership
This article first appeared in Practical Law Company: Share Schemes & Incentives, 6 March 2012.
Graeme Nuttall, partner at Fieldfisher, has recently been appointed the government's independent adviser on employee ownership. In this article, Mr Nuttall explains his role and the purpose of the informal consultation he is heading. He is seeking interested parties' views on a range of issues relating to employee ownership, and can be contacted at firstname.lastname@example.org
Graeme Nuttall, Fieldfisher
Drive to increase employee ownership
I am the government's recently appointed independent adviser on employee ownership. I am heading an informal consultation on increasing the number of employee-owned companies, and will report to the Department of Business, Innovation and Skills (BIS) minister Norman Lamb in the summer of 2012 with my findings. This appointment follows the Deputy Prime Minister's announcement of a government drive to introduce employee ownership into the mainstream British economy.
The idea of employee ownership is not new (the first form of profit sharing was introduced at John Lewis in 1929, and the business became wholly employee-owned in 1950) but it has never become mainstream, possibly because of the number of practical, legal and financial hurdles in the way.
There has been a surge in interest in employee ownership in recent years, both in the media and the political arena, with John Lewis often held out as an example of how well the idea works (see, for example, Weekly news round-up to 17 January 2012: Nick Clegg hints at BIS pay reforms and aims to encourage employee share ownership (www.practicallaw.com/4-517-2701)). Since 2010 the focus has been on mutualisation, on how entrepreneurial public sector staff can take control of the services they run (see PLC Public Sector, Practice note, Mutualising public services (www.practicallaw.com/7-507-2663)). The time is now right to look again at employee ownership in the private sector. There is genuine political momentum to increase the number of employee-owned companies and I believe my recommendations to BIS will result in practical action to achieve this goal.
I have worked (and continue to work) with clients on a variety of employee ownership structures. I have experience of employee ownership in many business sectors, from start ups through to succession planning and working with longstanding employee-owned companies, but I want to hear the views of others.
My review covers the full range of employee ownership arrangements, although the focus is on creating companies that are either employee-owned or co-owned. By co-owned, I mean companies in which all employees, either through an employee benefit trust (www.practicallaw.com/6-205-8072) (EBT) or direct share ownership, own, say, more than 25% of the company's shares. More information on what employee ownership means is available from organisations such as the Employee Ownership Association and ifs ProShare.
The key questions are: what are the barriers to creating and maintaining such arrangements and how may these be overcome?
What are the barriers to employee ownership?
I would welcome your views on what the main legal, financial and practical barriers are that stand in the way of companies becoming employee-owned.
The All Party Parliamentary Group on Employee Ownership identified the lack of awareness of the concept as a fundamental obstacle (see Weekly news round-up to 28 May 2008: All party parliamentary group on employee ownership publishes report (www.practicallaw.com/8-381-7778)). Do you agree?
In addition to a lack of awareness:
- Are there any specific legal provisions (eg in company law, employment law or trust law etc) which get in the way and should be relaxed or removed?
- Are there any other practical, financial or other problems which put companies off becoming employee-owned? Is a lack of finance, for example, for employee buyouts (www.practicallaw.com/8-206-2068) a fundamental problem?
What are the solutions?
If lack of awareness is the main obstacle, then how may awareness be raised? Is it sufficient to publish articles like this and for politicians to publicise their support for the concept or does something more need to be done? As part of raising awareness, is there a best model for employee ownership that could be promoted?
Is raising awareness enough or are actual changes needed, for example:
- Are there changes that HMRC and BIS could make in how they operate which would encourage more employee ownership?
- Are incentives needed to increase the number of employee-owned companies? Employee ownership is a neat succession solution. Should there be a tax incentive for owners selling a controlling stake to, say, an EBT? Are there other incentives that might be more appropriate, such as relaxations in other areas of law or regulation?
- Is something novel needed, such as giving employees a new, universal “right to request” shares?
Get in touch with your views
Please send your views to me, preferably by early April 2012. You should e-mail comments to my dedicated mailbox for this project: email@example.com. Your comments may be made either on an individual basis or on behalf of an organisation.