Employee Ownership: A positive new business model for a struggling economy?

Employee Ownership: A positive new business model for a struggling economy?

Published:

Author: Nina Smith

On 4 July 2012, BIS published the final report on the Nuttall Review of Employee Ownership (the Nuttall Report).

The report was commissioned by the government to explore how to promote employee ownership in the private sector and spread the benefits into the wider economy.

Benefits

Supported by a study by the Cass Business School on The Employee Ownership Advantage, the Nuttall Report highlights compelling benefits of directly engaging employees in their employing organisations, including:

  • stronger long-term focus
  • increased business performance
  • more resilience in recessions
  • more positive media image

The Nuttall Report also evidences an Employee Ownership Index (listed companies which are at least 10% owned by employees) outperforming the FTSE All Share Index by an average of 10% annually since 1992.

Potential business models

The idea of incentivising employees via option schemes is not a new one, and the 'John Lewis' partnership model provides a well-established route for employee engagement. However, other options include:

  • direct share ownership
  • indirect share ownership (utilising employee benefit trusts (EBT) to hold shares on behalf of employees)
  • a combination of direct and indirect share ownership

The business model could be geared around a typical private limited company share structure, incorporating elements already used in existing businesses such as shareholder consultation on specified matters (potentially via an employees' committee or council), a precise share valuation methodology and mandatory transfer provisions.

Recommendations

The Nuttall Report examines potential obstacles to a new model, including possible (or perceived) legal and tax complexities, and identifies a number of recommendations to promote the concept and remove some of the obstacles, which include:

  • raising awareness of employee ownership, appointing a minister responsible for promoting the concept within government and disseminating information at key points in a business lifecycle
  • "Right to Request" employee ownership - encouraging employer and employee groups (including trade unions) to develop a code of practice for requesting and agreeing employee ownership in a company
  • increasing resources available to support employee ownership
  • ensuring employee ownership and employee buy outs are well known business concepts
  • reducing the complexity of employee ownership, using "off the shelf" templates, exempting EBTs from the 125 year perpetuity period and improving the operation of internal share markets including holding private company shares in treasury and facilitating share buy backs

A copy of the Nuttall Report is available from the BIS website (click here)

Government Response

Following the report deputy Prime Minister, Nick Clegg, announced:

  • an independent expert Institute for Employee Ownership will be established to provide information and advice to business leaders, employees, advisers and others
  • a call for evidence on how a Right to Request employee ownership could work. This was published on the BIS website and views are sought by 7 September 2012
  • new off-the-shelf DIY packs to be introduced to help companies adopt the new business models quickly and easily

Further updates are due this autumn.

Comment

In a difficult economic climate, when employees may feel they are an expendable commodity rather than an integral part of the business function, proposals to further incentivise employees to encourage a collaborative ethos and improve business strength may well prove to be an increasingly popular business model.