Key Findings from Sharing Success – the Nuttall review of Employee Ownership – 4 July 2012 - Succession Plus

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Key Findings from Sharing Success – the Nuttall review of Employee Ownership – 4 July 2012

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Key Findings from Sharing Success – the Nuttall review of Employee Ownership – 4 July 2012

By , July 11, 2012

The recent announcement by Nick Clegg of the UK Governments desire to see “employee ownership in the mainstream of the British Economy” were largely the result of the recently released Nuttall review of employee ownership which summarised the current position ( including a review of academic research into ESOP’s ) and provided a series of key recommendations to government – in a similar way to our Senate Inquiry several years ago – this report is much more positive and far more substantial in its recommendations.

The Executive summary of the report is outlined below:

The evidence

1.7. There is substantial body of evidence demonstrating the benefits of employee ownership.

1.8. Many companies already have employee share plan arrangements in place, allowing employees a financial stake in their company. This review examined the evidence for the additional benefits of employee ownership – that is when all employees own a significant and meaningful stake in their company.

1.9. The benefits are seen in terms of business performance and employee well-being. A conclusion that underpins the majority of the findings is that that these benefits are best achieved when employee share ownership is integrated with ensuring employee engagement.

1.10. The concepts of employee ownership and employee engagement are interlinked and mutually reinforcing: employee owners are more likely to be engaged with their company, whilst employee ownership can enshrine employee engagement into a company for example by providing management structures allowing the employee voice to be heard.

1.11. The economic benefit of employee ownership is significant. For example, chapter 2 summarises findings from a survey conducted by Cass Business School showing that employee owned companies were more profitable, added more staff and were more resilient during the 2008 – 2009 economic downturn.

1.12. The work of the MacLeod Review and others demonstrates the benefits of workplaces with a high standard of employee engagement: greater staff commitment, well-being and reduced staff turnover.

The barriers to employee ownership

1.13. The benefits of employee ownership go beyond academic studies – the employee owned companies we spoke to during this review emphasised how their day by day success was underpinned by their employee ownership models.

1.14. If such compelling benefits exist, why aren’t more companies in the economy employee owned? This review sought to understand what factors may hold back companies and employees from adopting employee ownership, and what other measures might promote employee ownership further in the economy.

1.15. This review took evidence from a wide range of sources, covering, in particular, employee owned companies, sector representatives, professional advisers and employer and employee groups. The broad categories of obstacles to employee ownership were soon identified, and were continually reinforced as this review proceeded. They fall into the following three categories.

1.16. Firstly, a lack of awareness of the concept of employee ownership. In many respects this underpins all other barriers to employee ownership and many of the recommendations this review makes. The concept of employee ownership is not widely known, and is undermined by misperceptions. Too often we came across a notion that employee owned companies must necessarily be social enterprises, not for profit, or that they were impossible to manage. A fundamental objective of this review is to challenge those perceptions and help build a new identify for employee ownership: based on it being a business model in its own right, with proven benefits to businesses and to individuals. The aim is to increase the interest in and demand for employee ownership.

1.17. The consequences of the lack of awareness are broad. Put simply, opportunities to adopt employee ownership are lost when employers, employees and advisers are unaware of its relevance and benefits. This review outlines particular moments in the business lifecycle when employee ownership is an attractive solution, and where awareness raising action should be focused. This review also heard long-standing concerns about the lack of awareness of employee ownership within the Government – which can undermine the sector and lead to policy development that is blind to employee ownership. A lack of awareness amongst advisers and intermediaries used by businesses was regularly cited: would-be employee owned companies and owners too frequently could not get the advice they needed to adopt employee ownership.

1.18. Secondly, a lack of resources available to support employee ownership. All businesses need information and guidance to support them. As indicated above, there is a lack of awareness of employee ownership amongst legal, tax, accountancy and other advisers, which means advice is hard to find. Respondents to this review regularly drew a contrast between the ready availability of cost-effective information and resources on conventional business models, and that which was available for employee ownership. This review concludes that the existing information and guidance available for employee ownership is insufficient – and this deficit risks increasing still further as the employee ownership sector continues its recent growth.

1.19. This review also considered the financing challenge facing employee owned companies and those seeking to adopt employee ownership. There are many examples of how employee owned companies and employee buy outs have successfully found finance. However, challenges do remain. Employee ownership is normally associated with debt finance insofar as employee owners are reluctant to have their ownership interest diluted by seeking out equity capital. Closing off equity finance limits the options available to finance employee ownership, and this review received many representations advocating specialist funds or investment products sympathetic to employee ownership.

1.20. Thirdly, the actual (or perceived) legal, tax and other regulatory complexities of employee ownership were cited as barriers to its adoption, or as burdens facing existing employee owned companies. Setting up an employee owned company necessarily raises several questions of corporate governance and structure, and has tax implications. Respondents to this review claimed the complexity of these arrangements could burden and discourage those interested in employee ownership. This complexity and the uncertainty associated with it should be minimised as far as possible if employee ownership is to be promoted further.

1.21. This review in particular considers the argument over whether a new legal entity is required to create a clearer legal model for employee ownership, and whether and how business regulation disproportionately impacts employee owned companies.

An agenda to promote employee ownership

1.22. This review provides a framework for promoting employee ownership and moving it into the mainstream of the economy.

1.23. It sets an agenda for creating the conditions in which the concept and benefits of employee ownership are much more widely understood; ultimately so that interest in and demand for employee ownership is increased. In support of those wishing to adopt employee ownership, this review sets out practical measures to ensure it is as easy as possible to do so – for example, by ensuring the right information and resources are available, and unnecessary complexity is removed.

1.24. The recommendations this review makes establish that agenda. They address each of the barriers identified.

1.25. Firstly, this review recommends that Government and others raise awareness of employee ownership (chapter 3). This review establishes that a clearer identity for employee ownership is required, one that moves on from the misperceptions that undermine the sector. It recommends that employee ownership is promoted as a business model in its own right, that the proven benefits of employee ownership and many case studies of successful businesses using employee ownership are promoted by the Government, and by the sector continuing to highlight its own success. This review heard that many successful employee owned companies today found the concept of employee ownership through chance. Greater information provision on the concept and benefits of employee ownership is vital to enable individuals and owners to make informed judgements about this underused business model.

1.26. This review recommends that the Government leads, with stakeholders in the private sector, an awareness raising programme to promote this message much more widely. It sets out particular audiences, and particular moments in the business lifecycle, to focus upon. Associated agendas, for instance the public service mutualisation programme, are embarking on similar awareness raising initiatives. This review is confident that the synergies between these agendas can be utilised to create a compelling message. This review sets Government the challenge to lead this awareness raising work, and there is more the Government can do. Creating a focus within the Government through the development of a locus of expertise on employee ownership will support the sector in the long-term. Having a means through which to be heard in Westminster, and a continuity of knowledge within Whitehall, will make a great difference to employee owned companies.

1.27. This review also considered ambitious ‘nudge’ policies to build upon these general awareness raising measures. It recommends that the Government considers how a Right to Request employee ownership can be introduced. The aim would be to encourage more discussion and information exchange between employees and employers about employee ownership. There would be no ‘right to have’ and regulatory burdens upon employers should be avoided. This review advocates the idea as a ‘nudge’ that can provide a key means of making a step-change in the profile of employee ownership in the economy.

1.28. Secondly, this review recommends measures to increase the resources available to promote employee ownership (chapter 4). If employee ownership is to enter the mainstream of the economy, and an awareness raising programme is to succeed, those interested in employee ownership need better support.

1.29. Representative bodies in the employee ownership and co-operative sectors have signalled a willingness to consider establishing a new Institute whose primary role would be the dissemination of information and guidance on employee ownership. This review recommends that such an Institute is established. It would become a future centre of expertise on employee ownership and provide vital support to help those adopting employee ownership as well as existing employee owned companies.

1.30. There is also a role for the wide range of intermediaries used by business. Legal, tax, accountancy and other advisers all play an important role in supporting companies and workforces to achieve employee ownership. In response to a clear message from respondents to this review, it is recommended that the Government leads a taskforce of key professional bodies and the employee ownership sector in identifying how employee ownership can become a more integral part of the advice provided by business advisers.

1.31. This review outlines several underused finance options that may be particularly suitable for employee owned companies. There is more to be done to identify whether there is an ‘employee ownership finance gap’ and how the Government should respond to that – this review recommends that the question is addressed. In the short-term, this review recommends that underused finance options for employee ownership are more widely promoted.

1.32. Thirdly, this review recommends measures to reduce the complexity of employee ownership (chapter 5). This review was taken by the comparison between the ready availability of ‘off the shelf’ models for conventional companies, and the lack of similar support available on employee ownership. It makes recommendations for the establishment of a similar ‘off the shelf’ model of employee ownership.

1.33. The aim is that those interested in establishing an employee owned company have access to simple toolkits to guide them through the process. These will be flexible and allow individuals to tailor the company to their objectives and circumstances. The key is to provide a starting point that removes complexity and the uncertainty that can discourage some from attempting employee ownership.

1.34. In designing an ‘off the shelf’ model, this review also advocates the particular merits of employee ownership achieved through a trust, which provides a long term structure and one suited to achieving employee engagement.

1.35. This review also examined perspectives from respondents to this review on regulatory and tax complexity associated with employee ownership. This review did not find significant problems associated with business regulation disproportionally impacting employee owned companies; but recommends that the Government remains alive to employee ownership through its policy development, and when it reviews the stock of existing regulation.

1.36. The details of tax and employee ownership are to be dealt with through HM Treasury’s review of employee ownership.

1.37. Fourthly, this review calls upon Government to ensure implementation (chapter 6). The Government should maintain its focus upon employee ownership, and translate its support into concrete changes that make a real difference to employee owned companies and those considering it. This review recommends that the Government publishes updates on progress in implementation and is held to account by the sector; and that a regular forum is held to allow the employee ownership sector to engage directly with Government Ministers.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.