McDonnell, May and Employee Ownership

Posted by RM2 at 16:55 on 27 Sep 2018

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What does the Labour Party’s announcement on “inclusive ownership funds” mean for employee ownership?

At the moment, there’s not a huge amount of detail about Labour’s recently announced policy for 10% of shares in larger companies to be awarded to employees, with additional employee representation on boards.

Political parties don’t always go big on detail on such matters (especially at party conferences) but this can come back to bite them. For example, George Osborne’s “rights for shares” share plan, announced and rapidly implemented in 2013 was roundly ridiculed by pretty much everybody in the share plans world. It ran for a few years before being withdrawn in 2016. It’s fair to say that it didn’t add much to employee share schemes or the concept of employee ownership.

Both Labour and Conservatives have made noises previously about employee representation at board level but so far there have been no concrete developments.

We’re not confident that McDonnell’s idea will go any further in its current form (apart from the fact that Labour are not in power) but here are some thoughts on the initial proposals:

  • The annual £500 limit on dividends paid to employees compares unfavourably with the £3,600 worth of free shares that can be awarded under a Share Incentive Plan (SIP)
  • Many companies – particularly larger listed companies – already have significant employee share plans in place (albeit not necessarily up to 10%); how will an enforced 10% stake for employees impact on existing plans?
  • What about discretionary awards? Presumably this will be in addition to the 10% in the ownership fund – but awarding more than 10% of equity under share plans is outside current best practice according to the Investment Association Principles of Remuneration.
  • If a company’s shares are unlisted, how will the employee shares be valued? – One major issue with the “rights for shares” scheme was how to get around the fact that employees receiving shares with value would be taxed on receipt, and how to ascertain the value.
  • McDonnell has suggested there will be no individual share entitlement – presumably this means some kind of trust will need to be established to hold shares. How will this operate (and who will pay for it)?
  • What about the significant numbers of non-UK employees of multi-national companies listed in the UK? Will they be included? If not surely this will make London an unattractive listing venue for non-UK companies?

As ever, the devil will be in the detail and so far there is very little of that. Overall, we see a real risk that enforced 10% employee ownership will undermine the existing share plan arrangements that are used to good effect by thousands of companies, private and listed, throughout the UK.