Neat: Employee Ownership Trusts As The Perfect Succession Solution

Too many owner managers have overlooked employee ownership as a business succession solution. New tax exemptions should ensure that the indirect employee ownership business model achieves the recognition it deserves: one that provides a neat exit that is good for a business; good for employees and good for the UK economy.

Employee ownership (EO) is a great idea

EO is a great idea. EO delivers a significant and meaningful stake in a business to all employees. Employee-owned businesses are conventionally managed, successful businesses in which employees enjoy working and which deliver wider benefits. The lifespan of companies with EO is impressive. EO is an adaptable concept and whatever the business or the stage a business has reached EO can work well. It works particularly well as a succession solution.

Unfortunately, many professional advisers have not yet grasped the potential of EO. Advisers know how to implement employees' share schemes including establishing employee benefit trusts (EBTs), (typically offshore) as warehouses or market makers. But there has been an emphasis on delivering equity incentives to a select few executives and, even if an all employee plan is implemented, this has been more about delivering tax-efficient pay rather than improving employee engagement. Employee share ownership arrangements can work very well but tend to be add-ons to the standard corporate business model: not business models in their own right. It may be that an executive share plan or an all employee share incentive plan (SIP) is all that is needed by a particular business. But for an increasing number of private companies in the UK, something else is needed and that something else is EO.

Politicians leading the way

Politicians are often accused of being reactive. In relation to EO they are leading the way. UK governments have previously supported EO in transforming public services. Minister for the Cabinet Office and Paymaster General Francis Maude has championed EO as a driver of higher productivity, effort and innovation for public services by encouraging public sector workers to form employee-owned businesses. Deputy Prime Minister Nick Clegg decided to take that message to the whole UK economy. He announced in January 2012 that he wanted EO in the bloodstream of the economy.

The essence of EO is that those employed in a business can genuinely say, as a group, 'we have a stake in this business' or as Nick Clegg put it: 'we are talking about a big chunk of the company belonging to a significant number of staff'. The employees' stake can vary but the flagship UK companies that embrace EO are all 100% employee owned companies: John Lewis Partnership PLC; Arup Group Ltd; the Scott Bader Commonwealth and Swann Morton and many other companies across many sectors.

Economic benefits

Sharing Success: The Nuttall Review of EO (BIS, 2012) summarised research on employee share ownership and EO. It is easy to see why politicians are prepared to support EO. There are better business outcomes with EO:

better business performance; increased economic resilience; greater employee commitment and engagement; improved innovation; and what is particularly important is that these better business outcomes can be achieved alongside promoting happier staff through:

enhancing employee wellbeing; and reducing absenteeism. Types of EO

The Nuttall Review contains a definition of EO:

... employee ownership means a significant and meaningful stake in a business for all its employees... what is 'meaningful' goes beyond financial participation. The employee's stake must underpin organisational structures that promote employee engagement in the company...

The employees' stake could be held individually by employees or held, on their behalf, through a trust. In some cases a hybrid model is used in which, say, a controlling stake is held by a trust with an internal share market operating so that employees may also benefit from direct share ownership.

Instead of incentivising a select few through equity incentives, all employees are incentivised. Instead of offering incentives over only a small proportion of shares, as often happens through traditional employee share schemes, the employees together have a significant and possibly a controlling stake and that stake underpins employee engagement.

Employee engagement

Employee engagement has its usual meaning. Engaging for success (BIS, 2009) summarised the key drivers of employee engagement as:

leadership which ensures a strong, transparent and explicit...