The firms turning their workers into owners
Image copyright Getty Images In the past few weeks a few employees have suddenly found they didn’t just work for their company, they owned a bit of it too.
The owner and founder of Richer Sounds, Julian Richer, used a special trust to give his 500 staff a 60% stake in the business and a £3.5m handout.
Engineering company Weir is giving all 15,000 staff £300 each in shares this year and next.
Meanwhile telecoms group BT has said it will distribute £50m of shares between staff annually starting in 2020.
All this generosity may come as a bit of a shock in our dog-eat-dog world of corporate capitalism.
But aficionados of employee ownership say it makes perfect business sense.
The Employee Ownership Association (EOA) says the employee-owned sector now accounts for more than £30bn in annual turnover.
Its 2018 report, The Ownership Dividend claims employee-owned companies have:
- Greater productivity
- Less staff turnover
- A more innovative workforce
- Longer term planning
The first partnership
It all began in the UK in the 1920s when John Lewis, or more exactly John Spedan Lewis, created a trust settlement for his father’s department store.
In 1950, he expanded it to make the business 100% employee-owned, a system he called partnership. In fact he wrote a book about it: “Partnership For All”.
Today some of the best-known examples are big global firms such as engineering and design company Arup, and consultancies PA Consulting and Mott MacDonald.
The idea has spread out to so many companies that the EOA says the sector contributes more to the UK economy than either aerospace or agriculture.
But its success often depends on the generosity of the owners who decide to sell up.
Part of the Union
Paul and Isobel Schofield bought Leeds-based door manufacturer Union Industries in 1973 but by 2014 were looking to retire.
In the end they turned down a lucrative trade sale and sold instead to an Employee Ownership Trust (EOT) for a lesser sum with a 14-year repayment plan, and even left behind £1m in working capital for the new owners.
“The Schofields are the heroes of this piece,” says Andrew Lane, the managing director of Union Industries. “Even though Mr Schofield was 80 at the time he accepted a very long repayment plan.”
EOTs are designed to pay for the owner’s shares out of the company’s profits and then hold the shares for the benefit of the employees. At Union Industries the employees have full voting rights and can vote the directors on to (and off) the board.
The business has seen record sales since the sale, something Mr Lane is convinced is down to employee ownership.
“It is absolutely to do with it,” he says. “It’s no longer a case of the owner saying ‘I want you to do this and that for me’. Now it’s about how we are going to do these things for us.”
The tax benefits
EOT’s bring with them considerable tax advantages.
The Finance Act 2014 that created EOTs allowed a Capital Gains Tax exemption when an owner sells at least half of the business to an EOT.
So under the Act Mr Richer should pay no Capital Gains Tax at all on the £9.2m he receives from the 60% of Richer Sounds that he sold to his EOT.
Considering he started the business from nothing when he was 18, and is the sole shareholder, that would have been a considerable tax bill.
However, it’s worth remembering he is also spending £3.5m of his own money to make additional cash payments to his staff.
The 2014 act also allows employees to get tax-free windfalls from bonuses made through an EOT.
Union Industries has had another good year. So all its employees have each been given a tax free sum of more than £3,000.
Sharing out ownership
Employee ownership doesn’t have to be a under an EOT.
Weir Group’s plan gives employees shares over the next two years, with a commitment to match any extra shares that employees want to buy with an equal award.
It will cost the company about £10m, but it represents a fraction of its £4bn market capitalisation,
Weir says there are no tax advantages and admits it also created an administrative nightmare for itself trying to tackle the different legal complexities in each of the 53 countries where its employees work.
But chief executive Jon Stanton says its institutional investors have welcomed the move. “They tell us – it’s the right thing to do.
“The company is a special place with special, passionate people and we wanted to underpin that by giving them a stake in their companies – so our interests are aligned”.
Coping with the bad times
Of course employees, as owners, have to take the rough with the smooth.
At John Lewis their bonuses have been cut to the lowest level in 66 years after profits slumped, and the partnership has ditched its final salary pension plan.
Aber Instruments, a supplier of advanced systems for brewing and biotech companies such as SABMiller and GlaxoSmithKline, became employee-owned in 2008.
A few years later when times grew tough the employees agreed to take a 10% pay cut while still maintaining output.
The EOA believes employee ownership is especially suited to companies where there’s a succession problem and doubts over who will take over the firm when an owner dies or retires.
Mr Lane of Union Industries agrees: “I would advise any owner of a company to sit down and write a list of what you want for yourself and what you want for your company after you have gone or moved on, and I will guarantee that list will fit the description of employee ownership.”
The EOA says full employee ownership is not necessarily for everyone.
Weir’s Mr Stanton says: “I think what a company like Richer Sounds is doing is terrific. But we are a big public company, with international investors. We’ll see how we go from here.”
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