SPREADING OWNERSHIP AND WEALTH TO MILLIONS

Equity for all

Employee ownership in its various forms has the potential to transform our economy…. because it is concerned with the distribution of future wealth rather than the distribution of present wealth; because it provides incentives both to capital and to labour through its effect on efficiency, productivity and motivation generally; and because those incentives are directed to ordinary and well understood concerns for security of employment and a fairer share of wealth.

James Cornford
Chair EOA (1999-2002)

 

Two things surprised me about the reaction when I announced my decision to transfer control of the company I founded in 1978 to a Trust on behalf of the people who work for it.

The first shock was the amount of media coverage; I’d expected barely a whisper. The second was my surprise that other people were surprised at my decision. To me the decision to pass the company to my colleagues was, I felt, obvious and a sensible thing to do.

A lot of company founders and owners leave thinking about business succession too late. The result tends to be less than ideal, to put it politely – for the owner, the business and the employees. My father died at 60 and – although I still wanted to be around as Richer Sounds moves to a new chapter and a new generation – I felt this was a great way to secure an orderly succession and perpetuate our company’s history.

Why not sell to the highest bidder – the conventional option? Because it probably would have ended the unique culture we’ve created together. No one knows my business better than the people already in it, so why hand its future to someone who doesn’t know it and whose main concern may be to just run it for cash or prepare it for resale?

I welcome Nigel Mason’s paper because it tells other owners, and their advisers, about the kind of trust we used to transfer ownership of Richer Sounds to the employees. The fact that use of these trusts is growing fast is evidence that employee ownership can be a terrific solution for a swathe of business owners.

I’m delighted the company I founded is joining a thriving network of co-owned enterprises that now stretches across the whole UK economy. We’re proud too to have become members of the Employee Ownership Association.

This paper is exciting because it also talks about using the new trusts to deliberately spread ownership and wealth to many more people – potentially millions… which must be a good thing.

Julian Richer
Founder, Richer Sounds

 

Executive summary of the report

Employee Ownership Trusts (EOTs) were introduced by the Government in 2014. This paper studies their strengths and weaknesses and suggests how the EOT could create wealth for millions of workers.

The EOT offers incentives to business owners and employees. For owners there is an exemption from capital gains tax; for employees there are income tax free bonuses.

There are now around 240 EOTs in the UK covering around 23,000 employees and their number is increasing at the rate of 30 per cent per annum. Around nine out of ten companies that have adopted EOTs say they would recommend them to others.

The value of an EOT shareholding could become substantial over time. Presently there is no straightforward way of giving employees access to that. There is a strong case for allowing some of that capital value to be allocated to employees in a sustainable way.

With capital wealth in the UK becoming increasingly concentrated in fewer hands, EOTs are a way to spread wealth more widely.

Employee ownership is more common in the USA than in the UK but differs in two ways: the US stake is allocated to individual workers, not held in a collective pool; and the US stake is a recognised retirement savings vehicle, eligible for the same favourable tax treatment as traditional pension plans. The UK could learn from this model.

The number of EOTs, and the spread of wealth to employees, would increase if owner vendors could receive a higher proportion of the sale proceeds in cash, instead of relying on repayment over several years from the company’s profits. This would make an employee buyout more competitive with the typical cash offer from a trade buyer or private equity buyer.

Accelerating cash payments to vendor owners could happen if contributions from a business to its EOT were tax deductible.

Another helpful reform would be to exempt vendor loans to EOTs – the amount the owner effectively lends the business on exit – from inheritance tax, so they are not losing an important tax relief.

The EOT structure should also be made more attractive to external investors. This would not only extend EOTs into more capital intensive sectors but also provide the funds to make cash repayments to the vendors.

Current EOT rules mean employees cannot easily acquire their share of the EOT’s stake; ownership is exclusively collective. This could lead to unintended pressure to sell the business as a way for employees to unlock the value of their collective stake. A survey by one consultancy shows the equity value per employee could be as high as £175,000 once vendor loans have been repaid.

We recommend that EOTs should have the flexibility to allocate shares to individual employees, as with the current Share Incentive Plan (SIP). Combining the functions of the SIP and the EOT would allow beneficiaries to build a significant personal stake in the business; and could be extended to private equity backed companies, in which employee ownership is largely absent.

With auto-enrolment failing to solve the UK’s pension problem – saving levels still aren’t high enough to avoid a forecast rise in pensioner poverty – the level of pension contribution should rise from eight to fifteen per cent by 2030. But employers should be allowed to fund this by crediting company shares to employees’ pensions accounts, as in the US employee share ownership plan (ESOP). This new type of pension contribution should be allowed tax exemption if paid into this new version of the EOT.

Combining employee ownership with pension saving in this way would lift saving rates while widening employee ownership. Just doubling the current growth rate of EOTs by 2030 would create more than 9,000 employee owned companies and over 1.5 million employee owners.

 

Read the full report at https://employeeownership.co.uk/wp-content/uploads/equity-for-all-16pp-online.pdf

 

 

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