The Ownership Effect is an independent inquiry into the advantages to UK businesses of having employee shareholders. The inquiry recently issued a Call for Evidence to try and substantiate the positive impact of employee ownership by capturing information from existing employee owned businesses and professional advisers. These responses will be incorporated into The Ownership Effect’s report on the development and support of employee ownership in the UK. In light of this inquiry, is employee ownership a vital benefit to UK companies or an unwelcome share dilution?
Benefits of employee ownership to UK companies:
There are various benefits to the relevant company, including:
- Due to the benefits to the employee (see below), the employing company will potentially attract better candidates, offering a unique benefit that cannot be matched by its competitors. That model will then also help retain these candidates, resulting in a reduction in staff turnover, and a growth in longer serving employees.
- By giving employees a “slice of the cake”, ownership makes employees invested in the company’s progression, harmonising the interests of employees and existing shareholders, as well as resulting in high motivation levels and increasing productivity. The Nuttall Review of Employee Ownership reported that these businesses are more resilient to harder economic climates, which is likely to be due to this inclusive culture.
- As employees will be recipients of shareholder announcements, communication between the employees and management will be improved, facilitating cooperation between them. The disgruntled feelings of employees being closed out of shareholder discussions will arguably reduce, creating a better partnership between management and their employees.
- Depending on how companies incentivise their staff, this structure may also have cash flow benefits. For example, salary increases and bonuses may be substituted with share incentives.
Employee ownership may also be attractive to employees as it allows them to feel part of the company’s success and can bring related financial incentives, such as savings plans.
Drawback of employee ownership to UK companies:
However, if it sounds too good to be true, it often is, and employee ownership has its disadvantages too. From an employee perspective, there is a real risk that, if the company’s future performance declines, then (although being privy to shareholder communications), it is likely decisions in respect of the company will not require employee input, resulting in employees being tied to a sinking ship that they cannot control. Drawbacks can also be identified for the employing company itself, including:
- If employees feel they are tied to a failing business, staff retention, productivity and morale will decrease, adversely impacting the company further.
- Whilst potentially relieving pressure on cash flows in the future, there will be costs to adopt and maintain an employee ownership scheme. Whilst financially achievable for businesses like John Lewis, a smaller company may fall at the first hurdle.
- By giving a “slice of the cake” to employees, existing shareholders will have to be diluted. This will be a particularly bitter pill to swallow where an employee leaves but retains their shares (assuming employee ownership takes the form of employees directly holding shares rather than holding shares indirectly through an employee benefit trust), resulting in the company having an increasing base of shareholders who are not connected to it. However, in these circumstances, the company may be able to buy back the shares of the leaving employee.
The outcome of the responses to The Ownership Effect’s inquiry will be eagerly awaited to see if existing employee owned businesses are satisfied with making the leap to such a structure, or if this is something they wish that they could unravel.
This post was written by associate Sarah Souter. For further information, please contact:
Sophie Brookes, partner, Corporate
T: 0161 836 7823