Making It Mutual: Seizing the decade for employee ownership

27^th March 2013

It is now time to focus on implementation, says Graeme Nuttall, the Government's Independent Adviser on Employee Ownership

Employee ownership has to overcome fundamental obstacles in order to become part of the mainstream UK economy. In 2012, Westminster and Whitehall acknowledged these obstacles and committed to working with the employee ownership sector and others to help dismantle them. All of the recommendations in the Nuttall Review were supported, partly accepted or for the most part completely accepted by the Government. [1] There is a tremendous opportunity to make the employee ownership business model widespread, and to make this the decade of employee ownership.

All those interested in this aim now have to concentrate on implementation: they need to recognise just how well ideas coalesced in 2012, understand what was achieved and build on this, rather than go back over old ground.

Employee ownership is Government policy

There is obviously no need to spend time trying to attract the attention of the Government.

There has long been all party support for employee ownership. This is reflected in the work of the All Party Parliamentary Group on Employee Ownership. In its first report in May 2008, the Group identified inadequate Government appreciation of the sector as a possible barrier to the development of the employee ownership sector. This is no longer a concern.

The first breakthrough was in relation to public service delivery. The previous Labour administration backed NHS employee ownership pathfinders. The Coalition Government extended this policy area. The Minister for the Cabinet Office, Francis Maude, is in charge of the public sector mutualisation programme.

On 16 January 2012 the Deputy Prime Minister, Nick Clegg, launched a Government drive to introduce the concept of employee ownership into the mainstream British economy. On 8 February 2012, Business Minister Norman Lamb was appointed to lead the cross-Whitehall work on how the Government can support this growing business model. The momentum continued throughout the year. Jo Swinson, the Minister for Employment Relations and Consumer Protection, became the ‘Minister for Private Sector Employee Ownership’, and the Autumn Statement confirmed support for employee ownership. Chief Secretary to the Treasury, Danny Alexander, said at the time: “The Government supports employee ownership as a business model that offers benefits to employers and the wider economy”.

There is clearly unprecedented support in Government for employee ownership extending beyond public service mutuals. The focus must now be on “making the most of the purchase that Government has in convening action and ensuring things happen”.

Terms are defined

Definitions are now clearer. There was a lack of clarity over definitions when the Government launched its drive to promote employee ownership. It was helpful that Nick Clegg returned to the theme of employee ownership on 15 March 2012 and confirmed that “we are talking about a big chunk of a company belonging to a significant number of staff”.

Employee ownership is not focussed on executive incentives or using shares as a tax effective means of paying staff, even if all staff benefit in this way. Employee ownership means a significant and meaningful stake in a business for all its employees. What is meaningful and significant goes beyond only financial participation. The employee’s stake must underpin organisational structures that promote employee engagement in the company. In this way, employee ownership can be seen as a business model in its own right. There are no boundaries as to what percentage of issued share capital is substantial. If the significant and meaningful stake amounts to a controlling stake then the company can call itself employee-owned. What is important is that clarity over definitions is maintained.

Employee ownership embraces diverse forms

The basic forms of employee ownership are understood as follows:

• Direct employee ownership, using one or more tax advantaged and other share plans; employees become individual owners of shares in their company;
• Indirect employee ownership – where shares are held collectively on behalf of employees, normally through an employee benefit trust; and
• Combined direct and indirect ownership – where there is a combination of individual and collective share ownership.

The Nuttall Review’s recommendations cover all these forms of employee ownership and look further afield, to the broader mutual and employee ownership sector. Businesses in this sector have much in common. On international definitions, many of the UK’s companies which are majority owned by employees would be classified as co-operative. As implementation work proceeds it is important to maintain this inclusive approach as to the forms employee ownership can take.

A plurality of business models is needed

Employee ownership must be seen as a business model in its own right, something that should be as familiar as a charity, a franchise or a management buy-out. There are employee-owned companies of varying sizes, in diverse business sectors and spread across the country. This is not to say that employee ownership is for everyone. Employee ownership is obviously only one of a number of business models. What is important is that each business has the right business model. A plurality of models should be readily available for the reasons set out in the Ownership Commission report: Plurality, Stewardship and Engagement. The UK must get away from the plc monoculture as described in that report. The promotion of employee ownership must continue to be in the context of encouraging a plurality of business models.

The obstacles are agreed

The obstacles to promoting employee ownership are clear:

• There is a lack of awareness of the concept of employee ownership. Employee ownership does not come about because the concept is common knowledge; no-one is taught about employee ownership on any professional course.
• The resources are not there, whether in financial institutions or among professionals, to help someone who wants to go down this route.
• The actual or perceived complexities of employee ownership must be reduced. Even if an enthusiastic individual gets his professional team and bank on side he will be told there are complications and that it is not worth the time and expense of trying to overcome them.

Those working to promote employee ownership must obviously address these obstacles. They also have to recognise that the same obstacles also impact on how best to go about implementing change. The Nuttall Review’s informal consultation illustrated the dilemma of implementation. The lack of awareness meant that a proactive approach to consultation was essential. No-one will publicise a consultation they don’t realise is relevant to them, no-one will comment on an unknown concept; no-one will feedback their experience of something they haven’t experienced.

The press are better informed

The announcement of the Nuttall Review was misunderstood by many. It was assumed that the resulting report would deal with tax effective pay mechanisms, executive share plans or tax planning through employee trusts. In the course of 2012, attitudes changed. The concept of employee ownership became more of a given in published works, as demonstrated by the references to employee ownership in the reports of the Office of Tax Simplification on tax advantaged employee share schemes and unapproved share schemes. There is still a long way to go but there is now improved media coverage.

The controversy over ‘employee shareholder status’ was helpful in getting more commentators to understand what employee ownership is about. The Chancellor of the Exchequer announced a headline grabbing idea for a new employment status on 8 October 2012 at the Conservative Party Conference: an employee shareholder can agree to have fewer employment rights in return for fully paid up shares, the gains which can be exempt from capital gains tax. This controversial measure provided an important push to consolidate the increased understanding of employee ownership. In the House of Lords debates on the measure, Lord Adonis and Baroness Brinton readily stated their support for wider share ownership among employees and the proposals in the Nuttall Review, in contrast to the Chancellor’s proposal. The Employee Ownership Association generated publicity from its clear view that “[t]here is no need to dilute the rights of workers in order to grow employee ownership”.

Tax is not a primary barrier

In 2012, the employee ownership debate moved away from an historical focus on tax. The Nuttall Review’s 28 recommendations were all non-tax recommendations. HM Treasury examined the role of employee ownership in supporting growth and options to remove barriers, including tax barriers, to its wider take-up. The Autumn Statement reported on the key outcomes. One of which was that the majority of businesses who met with HM Treasury did not identify the tax system as a primary barrier to greater uptake of the model. This is helpful. It is harder to make a business model mainstream if it is tied to tax breaks for its success.

Tax does nevertheless have a key role in overcoming the obstacles to promoting employee ownership. As seen with the Chancellor’s proposal on employee shareholder status, tax is an excellent way to raise awareness. A targeted tax relief could achieve all aims: raise awareness, increase resources and simplify employee ownership.

Employee engagement is not a separate agenda

Employee-owned companies provide really good examples of employee engagement. The Macleod Review acknowledged that “[e]mployee ownership was a profound and distinctive enabler of high engagement”. [2] Employee engagement is much harder to dismiss as a management mechanism when it is underpinned by actual employee ownership.

The employee ownership sector has started to build stronger links with the employee engagement agenda. It is easier to focus on this given the strides made in explaining the legal forms of employee ownership and in understanding employee ownership’s relationship with tax. There is now room to promote the good employee engagement practices of employee-owned companies.

It is safe to build on the existing research

The benefits of employee ownership are so strong that they can seem too good to be true. The Mutuals Taskforce, like others before it, carried out its own literature review, as if to check that the advantages really are as good as research suggests. The Nuttall Review also gave in to this prerequisite. Together with Department for Business Innovation and Skills (BIS) it reviewed the literature and identified key outcomes as:

• improved business performance;
• increased economic resilience;
• greater employee engagement and commitment;
• driving innovation;
• enhanced employee wellbeing; and
• reduced absenteeism.

In other words, there is a winning combination of better business outcomes and happier staff.

There should be more research, but there is no need to wait for this: the Government and others can safely promote employee ownership by relying on the bedrock of existing research. No client has ever said “show me the research and I will introduce employee ownership”. The benefits of employee ownership are best demonstrated by the many and increasing number of successful employee-owned companies.

The broader business community is interested

The employee ownership sector is a sizeable sector, but is seen as niche and irrelevant to the broader UK economy. 2012 drew out a wide range of support for employee ownership, from beyond its heartland of enthusiasts. The Ownership Commission’s report showed how a diverse group of Commissioners could support employee ownership. The launch of the Nuttall Review at the ICAEW, in the City of London, with over 200 present, included many from outside the employee ownership sector. This was proof that attitudes are changing. Members of the broader business community do support employee ownership. Jo Swinson is chairing an implementation group to try to ensure that all stakeholders get behind the Nuttall Review recommendations and other initiatives. These initiatives will, however, only succeed through a combination of the Government, the mutuals and employee ownership sector and the wider business sector getting behind them.

In conclusion, employee ownership in private companies has moved from a lobbying topic into Government policy. This means old priorities and concerns can be forgotten. Instead, a new mindset is needed, one aimed at effective and timely implementation.
This article was originally published in ResPublica’s Making it Mutual: The ownership revolution that Britain needs, a collection of essays covering all areas of policy – energy, financial services, education, infrastructure, welfare, public services, competition – proposing entrepreneurial and innovative policy proposals for structural reform.

An interview with Graeme Nuttall, talking about the The Nuttall Review, is available here.