Reflections on the British Isles Share Schemes Symposium

Posted by RM2 at 15:41 on 19 Mar 2019

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The symposium is an annual opportunity for share scheme experts to share ideas, celebrate employee share schemes and (in the friendliest way) occasionally butt heads.

I was fascinated to see three themes emerge from this years’ talks:

  • Are employee share schemes a mere financial incentive or a different form of business governance?
  • Can they be a global force to reduce inequality?
  • Are they a cost-efficient incentive for employees or too full of traps for the unwary?

A mere financial incentive or a different form of business governance?

Colin Kendon of Bird & Bird provided a deft overview of the various share schemes, making it clear that (from a financial perspective) not all share schemes are created equal. Even between the typical alternatives to Enterprise Management Incentive schemes (“EMI”) which have similar net outcomes for participants (nil paid shares, jointly owned shares and growth shares) the downsides of administrative costs and commercial risk for participants means that growth shares are (from a financial perspective alone) are the front runner.

Given that William Franklin of Pett Franklin is a leading figure on valuation and tax issues, I expected his talk on employee ownership trusts (“EOT”) to have a similar skew. Not so. William chose to focus on how an EOT can benefit the governance of a business, and two insights stood out for me:

  • Patient Capital. This is a trendy term following the 2008 financial crisis and is intended to capture the idea of long term investors not taking the sort of risks that led to that crisis. William pointed out that when EOTs buy the firm from a founder, the payment is often structured as a loan paid back to the founder over a number of years. This motivates a founder to avoid building up short, medium and even long-term risks, to ensure they receive their loan repayments.
  • An EOT board as a supervisory board. Two-tier management of companies is required in some European and Asian countries, with a supervisory board distinct from the executive board responsible for day-to-day business. The idea is to avoid the concentration of power and conflicts evident in some UK and US companies that only have a single board. The insight here is that when an EOT buys a company, the company board is left in place to manage the day to day business, but the EOT trustee will also have a board capable of supervising the company board. This has at least superficial similarities to the two-tier system, and it will be interesting to see if there is some cross fertilisation of ideas.

Elaine Graham of Zedra highlighted that offshore financial centres such as Guernsey and Jersey have become centres of deep expertise and excellence in independent management and trusteeship of assets. Elaine reviewed historic examples of how non-professional trustees struggle (often quite innocently) with how to protect and manage assets held for the benefit of others (particularly when those beneficiaries are employees), and how enormous litigation costs and unnecessary hardship for employees could have been avoided by professional and independent trustees.

Employee share schemes and the 2030 Agenda for Sustainable Development

Malcolm Hurlston of the ESOP Centre reminded us of goal 10 of the UN’s 2030 Agenda for Sustainable Development: “reduce inequality within and among countries”. The resolution adopted by the General Assembly on 25 September 2015 included this passage:

“Sustained, inclusive and sustainable economic growth is essential for prosperity. This will only be possible if wealth is shared and income inequality is addressed. We will work to build dynamic, sustainable, innovative and people-centred economies, promoting youth employment and women’s economic empowerment, in particular, and decent work for all.”

There is growing recognition that employee ownership of shares (in its many forms) may have an important role to play in this.

Elissavet Grout and Kevin Donegan of Travers Smith delivered some good news on this front. In their review of how to implement employee share schemes worldwide, they reported that the regulators of some countries that in the past have provided headaches are increasingly professional and knowledgeable about employee share schemes. China is a typical example of this. Perhaps companies who have previously not even attempted to extend share schemes to these countries could reconsider.

Are share schemes a cost-efficient incentive or a trap for the unwary?

Sue Wilson of PwC highlighted some of the highs and lows of EMI plans. EMI plans are aimed at small and medium sized businesses. The highs include flexibility and very favourable tax relief. The lows include traps for the unwary, where fines can be incurred, or even significant tax reliefs lost for innocent breaches of complicated tax legislation.

There was some debate as to the extent to which there was any political or economic justification for punishing these breaches at all, or as harshly as they are currently.

This was an enjoyable event, and I’m excited to see that employee share schemes and employee ownership is continuing to develop, with lots of ideas, innovation and passionate debate.

If you would like to discuss your own employee ownership or share scheme arrangements with one of our professional advisors please contact us on 0208 949 5522 or email enquiries@rm2.co.uk