By Rhys Handley, Tuesday 07 May 2019
Employee ownership schemes, which take the form of trusts, share programmes and co-operative structures, are not common in the UK.
However, many believe these kinds of setups could help address two issues frequently faced by smaller businesses: staff motivation and succession planning.
Indeed, organisations with wide-ranging influence have started work to encourage their adoption. At the very top, the Department for Business, Energy & Industrial Strategy (BEIS) introduced new laws at the start of this year compelling larger companies to be more transparent about how directors take employees’ interests into account in decision making.
This cultivates an attitude of inclusivity and equality among the biggest businesses – of employees gaining a voice in their companies. This could more feasibly translate into ownership and shares at the SME level.
A BEIS spokesperson says: “Through our modern industrial strategy we are working to make the UK the best place to start and grow a business, while growing our reputation as one of the best places in the world to do business.
“Government recognises the benefits of employee ownership and it is a choice that businesses are free to make. Our tax system has a number of schemes within it that help incentivise this type of ownership.”
Under business law, when more than half of a company is sold into an employee ownership trust (EOT), the transaction is tax-free. Scottish Enterprise and its campaigning organisation Co-Operative Development Scotland (CDS) hope that this incentive is one way to speed up businesses’ transition into full employee ownership, where moves made so far have been tentative and slow.
CDS director Sarah Deas says: “The main reason businesses do not consider employee ownership is a lack of understanding. In Scotland, the rate of transitions to the model currently stands at one a month, but we hope that with our awareness campaigns and lobbying that can increase to two or three.”
As part of its mission, CDS is setting off on a roadshow around the Scottish regions throughout May and June to promote the EOT model to legal professionals and accountants – the trusted advisors of many a business owner – so that they are aware of the viability of this option when discussing business sales with owners and directors.
“We hope to raise awareness of this option,” says Deas. “It is a viable route for businesses when their owners are looking to retire and move on and is valuable to promoting inclusive practice.
“EOTs give employees a stake in the business and change how they can be rewarded – sharing the wealth of business growth more widely. It is far more prominent across the EU but has yet to take hold here, but we are here to provide specialised support and help with grants to make this a reality for businesses.”
Benefits for business owners when they sell their companies to EOTs and co-ops are prominent: increased profits from greater employee motivation, tax incentives for more lucrative sales and assurance that one’s legacy can remain intact.
Employees stand to benefit by keeping companies in the hands of those who understand them, rather than serial acquirers and asset-strippers.
Union Unite backed employee ownership with a motion at its 2018 national policy conference signalling its belief that workers should have the first option when a business goes up for sale.
National officer Louisa Bull says: “Employee ownership can mean many different things, from an employee share scheme to electing workers to boardrooms, or a full workers’ buy-out plan, whereby employees take full control of a workplace.
“Examples from the UK, US and Europe show that employee ownership brings gains to both productivity and efficiency, with some academic research showing productivity advantages of 6%-14%.
“The immediate benefit of employee ownership, much like collective bargaining more generally, is the stability that comes with workers having their own voice. More broadly, ownership means an end to short-term thinking, which is endemic when company directors are bound to run a business to maximise return for shareholders above all else.”
Cottoning on in print has been a slow process, but it is catching up – Calverts in London has been an employee-run co-operative since its inception, and the transitions are creeping in; Glasgow-based Novograf took the leap in December 2016, Mail Solutions Group in November 2017, and Direct Solutions in Clacton-on-Sea began its gradual journey at the end of last year.
Still, the practice remains uncommon and has had its share of failures: Colchester Print Group and Anton Group, both EOTs, subsequently shut down.
However, those with oversight point to lack of awareness as a key stumbling block for success, as well as ill-suited motivations.
Sidney Bobb, British Association for Print and Communication chair, says: “If a print owner is thinking of passing on their business, there are not that many buyers that would know how to handle that business as well as their employees.
“Employee ownership gives the possibility of longevity for their baby and it is an easy way to sell if you are willing to do so gradually. It is not for everyone – I think you need to have a bit of a socialistic view in terms of business.
“But it is a good opportunity that can allow employees to own a business without needing the capital to acquire it and it means they can share responsibility with their contemporaries and run a business for the good of its community.”
EOTs are able to transform attitudes and businesses
Deb Oxley, chief executive, Employee Ownership Assoication
When I talk about the why of becoming employee-owned, I like to use the analogy ‘who washes a hire car?’.
There is a mental change that happens when you own something. It drives behaviours that relate to what needs to be done rather than what you want to do. It is this shift that helps to drive success in an employee-owned business.
It is important to note that it is not a panacea or a fix-all. Employee ownership will not protect you from market pressures or put a business in trouble on the road to recovery.
However, evidence shows that in addition to providing owners with the exit they want, employee-owned businesses are proven to engage their employees in a more meaningful way, via their ownership stake.
This stake, delivered via direct shares, a trust or a hybrid, along with the accompanying influence exercised through a structure of representation, drives more individual discretional effort.
This then directly results in higher levels of financial performance, with new employee-owned businesses reporting an immediate increase in profits in the year after transition.
This is why employee ownership is one of the fastest-growing succession solutions for SMEs and family businesses in the UK. It is a sector that contributes more than £30bn a year to UK GDP.
One of our members who has embraced its employee ownership to great effect is Novograf, using its ownership structure to drive a customer-centric growth approach to business growth. We’re told by many of our members that when they focus on their people, profit follows.
The Employee Ownership Association supports businesses across the UK on their journey to employee ownership. Through our network of more than 300 businesses we offer regular opportunities to network, learn and share best practice.
What has been your experience of employee ownership?
Arthur Stitt, sales director, Calverts
“We were established as a worker’s co-operative in 1977 when the print department of an arts organisation set up alone when it was to be made redundant. The company was set up under the rule of ‘one man, one vote’ and everyone is equal. We have non-hierarchical management, and everyone is paid the same. We are all equally committed to the business and everything is very open and transparent. It gives us freedom to innovate, too. We are positive proof that the model does work.”
John Clark, chairman, Novograf
“When you are looking to exit your business there are only a few avenues open: trade sale; family succession, or an MBO, though that means the business could be sold on again down the line. Through Scottish Enterprise, I came across employee ownership and by December 2016, Novograf was 80% trust-owned and 20% employee shares. It has been a learning experience, but the benefits come from employees owning what they do. Equality and inclusiveness are prominent issues, and this is a very good option for growing businesses that recognise that.”
Allistair Hunter, managing director, Direct Solutions
“We are in our second year of moving towards an employee-ownership trust. It currently stands at 15% and will be 20% next year. Our first year was great, though a lot of cultural changes had to happen as employees’ mindsets had to change. Our profits increased last year and I made sure 50% of that went into benefiting their pay and now you can see how people don’t have to be asked to put in an extra hour, stay on late or work through lunch – there’s now that little bit of extra care to make sure everything is hunky dory.”