My career: 30 years in employee ownership

Posted by Jennifer at 10:00 on 9 Mar 2017


This month, April 2017, marks my thirtieth year in the world of employee ownership. Back in the mid-1980s, I was climbing the greasy pole of a big City bank. This was financially rewarding but otherwise devoid of purpose. I latched on to employee ownership as an obviously better way of doing business. In my role at RM2, I count myself hugely lucky to be able to meet far-sighted business owners and entrepreneurs practically every day of the week and see thousands of employees share in wealth creation.

What’s changed in 30 years?

A lot has changed in the last thirty years, some for the better and some for the worse. Employee ownership has become much more prevalent in private companies (“the better”), whereas executive share ownership in big public companies has become over-complex, over-generous and largely ineffective (“the worse”), a contributor to the popular uprising against metropolitan elites, in my view.

Employee Ownership in the late 80’s

Back in 1987, we only had a few building blocks to work with. In private companies, we had profit sharing schemes (like free shares in today’s Share Incentive Plan) and Employee Benefit Trusts (“EBTs”). Put together, these building blocks enabled us to recreate some of the features of the much admired American ESOP, which a few of us promoted enthusiastically as a good outcome for privatisations of municipal services that were all the rage in Margaret Thatcher’s governments. At one time in the early 1990s, most of the country’s bus network was employee-owned in this way. The trade unions fought hard against privatisation but wisely turned the other way when an employee buyout team took the initiative to control their own destiny.

From QUEST to EOTs

It helped that companies could contribute funds to EBTs out of pre-tax profits, effectively subsidising the cost of creating new ownership for employees. This is what is needed today to radically alter the distribution of wealth in this country, not by punitive taxation, but by positive incentive to create new capital for those who don’t have it. This tax deductibility of company contributions was even put on a statutory footing in what became known as the QUEST (Qualifying Employee Share Trust). Sadly, the big accounting firms found loopholes to exploit this in ways that weren’t intended, the QUEST was abolished and changes to accounting rules all but killed off EBTs in employee ownership transactions, that is until the Employee Ownership Trust (“EOT”) was introduced in 2014. We now have an excellent and, I hope, lasting framework for creating stable employee ownership in private companies. The key has been to appeal to business owners by giving them full tax relief on a sale to EOTs.

Introducing the Enterprise Management Incentive

The other great development of the last thirty years was the introduction of Enterprise Management Incentive (“EMI”) share options and the Share Incentive Plan in 2000. I was fortunate to be invited to be a member of the advisory group that helped HMRC design these schemes. That collaborative approach is one reason these schemes have proved so durable. I am particularly proud of EMI. We argued that small companies needed lots of flexibility, that it was unnecessary for government to saddle EMI with restrictions and rules because tax relief will only cost taxpayers money in successful outcomes, from which HMRC will have collected far more in employment taxes, sales taxes and corporation taxes. There are now 10,000 EMI companies. EMI is one of the defining features of Britain’s far-sighted support for entrepreneurs.

The mess in public companies

In public company world, on the other hand, things have got completely out of control. Employee share ownership in public companies is far less universal than hoped. Meanwhile, bigger and bigger share-based awards with more and more elaborate performance conditions have been given to undeserving CEOs, some of whom don’t have an entrepreneurial bone in their body. Like the spurious credit ratings afforded to Collateralised Loan Obligations in the years leading up to the financial crisis of 2008, performance conditions in executive awards are calibrated to ensure that all company’s CEOs are “above average”, for which self-respecting nominations committee would knowingly appoint a “below average” CEO? It’s a brave company that peels off from the crowd and goes it alone with reformist changes, and institutional investors don’t have the economic incentive to engage enough in corporate governance, so there will have to be some regulatory intervention that forces companies to pay far less in shares, requires them to be held for far longer and with fewer counter-productive performance conditions. That’s one thing I’ve learnt in the last thirty years: performance conditions on share awards, though well intentioned, are nearly always regretted, on the downside or the upside. Life is too uncertain, change happens unexpectedly, and the consequences are nearly always unintended.

My predictions for Employee Ownership

So I hesitate to predict what the next thirty years will bring. If forced to, I would say that the distinction between private companies and public companies will blur as private company shares become as trade-able as stock market shares, my profession will largely be replaced by software, there will be much greater transparency about ownership so that good and bad practices can be exposed and employee ownership will broaden and deepen as it becomes easier to create. At the same time, the definition of employment will be much broader as traditional notions of careers and jobs become obsolete. I do worry about the polarisation of society, and I hope that we give our politicians more time to craft long-term policies that bind us together more and share wealth more. I have no plans to retire (another obsolete concept), so I’ll bash away at these problems for as long as I’m allowed.