Extracted from newspad May 2017
What could and should the new government do to encourage the spread of all-employee share ownership? This key question is foremost in the minds of employee share scheme practitioners and issuers in the long run-up to the general election called by PM Theresa May on June 8.
Although the statistics are hard to come by, there is a sneaking suspicion that employee share ownership in the UK is stuck on a plateau and no longer on the up every year. Despite the runaway success of niche tax-advantaged schemes, such as the share options based Enterprise Management Incentive (EMI), overall levels of employee participation in SAYE-Sharesave and in the Share Incentive Plan (SIP) seem either almost static or, in some cases, even falling.
Furthermore, the average level of Eso among all employees in company plans remains stubbornly between only 23–35 percent – though there are heartening exceptions. Participation in employee share ownership schemes is voluntary and employees cannot be frog-marched into participation. In the manufacturing sector participation is lower still than in the service sector, where it is at its highest in the financial services industry.
Accordingly, Centre chairman Malcolm Hurlston CBE, has written to Chancellor Philip Hammond, setting out the Centre’s priorities for action, applicable to whichever government is elected on June 8.
In his letter, the Centre chairman told the Chancellor, “For millions employee shareholding offers the best route towards equality. Let us see massive encouragement of option schemes and free shares which can reach all employees. Shareholders have largely taken over from the state in encouraging management to have skin in the game; tax breaks are better deployed down the line and where the market does not reach.
Secondly the government can nudge. Let there be full disclosure in annual reporting of all employee share schemes. The current miasma serves nobody.
Thirdly the government can ensure that employee shareholders have democratic as well as economic rights: companies must arrange for unimpeded access to voting at agms”.
Mr Hurlston identified the following newspad proposals as worthy of immediate action by the incoming government:
*The Centre seeks to work with the Treasury/HMRC in order to recast some of the tax incentives offered by qualifying schemes, notably the Share Incentive Plan (SIP), in which participants have to wait five years before they can gain the full tax exemptions should they wish to sell part or all their holding. The Centre is concerned that the productivity elements inserted into the SIP at its birth are hardly being used by SIP promoters.
*The Centre seeks a Treasury grant of £600,000 in order to promote all-employee share ownership nationwide, including eight basic nuts and bolts Eso conferences in 2018-9 in: London, Birmingham, Bristol, Cardiff, Edinburgh, Leeds, Manchester and Newcastle upon Tyne. The Centre would ask practitioner members to help it organise these events through their local offices, HMRC would be invited to participate and speak at each event, to reassure local businesses that bureaucracy would be minimised when launching their first all-employee share ownership schemes. A minister would be invited to open each event. Kits would be developed from each event for wider distribution among privately-held companies and smaller quoted companies.
*The Centre plans to ask the incoming government to promote and support more online courses about employee share ownership.
*The Centre wants HMRC to stress the advantages for companies who adopt the Company Share Option Plan (CSOP), which targets lower-paid employees in commerce (particularly retail) and industry.
The chairman has written similar letters to Labour leader Jeremy Corbyn and Lib Dem leader Tim Farron presenting the Centre’s proposals for the further development of Eso in the UK. Gordon Brown was the outstanding exception who introduced both the Share Incentive Plan and the Enterprise Management Incentive, while he was Chancellor of the Exchequer in 2000-2001 and Sir Vince Cable (himself an employee shareholder at Shell) can take much credit for EOT under the Coalition. Centre stalwarts like Nigel Mason and David Pett played key roles in helping to bring these schemes to fruition.
The Centre knows that employee share ownership is not a universal panacea. Sadly, occasionally, a company with a share ownership culture goes bust and the jobs are lost. Bad decision-making is not restricted to the board of directors. However, in both the USA and Europe statistical evidence has built up steadily to suggest that on average companies which have a significant level of employee ownership (above three percent in listed companies and above ten percent in privately-held companies) are more likely to achieve consistent productivity increases than companies which either do not offer financial participation to their workforce, or which – worse still – pretend to adopt employee financial participation, but in reality offer employees only cosmetic employee equity, instead targeting senior executives and middle managers for performance-linked equity awards, leaving many other employees out in the cold.
If HMG is serious about wanting increased productivity in UK workplaces, it should remind enterprises that Eso is worth trying, if not already in place, because the evidence is there that productivity can be lifted significantly, over the medium and long-term, given intelligent and responsive management techniques.
*Using the ‘nudge’ principle, HMG could seek ways to encourage member states and companies to popularise the award of an equal number of both free shares and share options to all qualified employees in listed companies in order to build a more widespread share schemes culture. Listed companies should be encouraged to consider making more all-employee share option awards when they are planning to increase (every year) the equity incentive packages offered to senior executives? That would be one way Eso could confront growing inequality.
*The Centre suspects that of tens of thousands more UK employees may want to participate in Eso plans, but cannot afford to do so. HMG can nudge towards help for the lower-paid. The solution is to offer employees free shares or share options, which do not require employees to put any money up front in order to participate. Options in particular are inexpensive to administer and give companies the same cultural and communications opportunities as shares.
*HMG should liaise more with multi-national companies about how best greater employee financial participation can be encouraged among their workforce. Competing for talent large domestic companies are generally influenced by what multinationals do. Multinationals already make heavy use of Eso and should be encouraged to spread its use throughout the workforce.
*The Office of Tax Simplification (OTS) has done sterling work in simplifying qualification for, and operation of, employee share schemes in the UK. Even so, HMG should ask itself – through its various ministries – whether there are more directives and other regulations which could be simplified, in order to remove obstacles to the further spread of all-employee share ownership. For example, have the recent changes to the Prospectus Directive gone far enough to simplify the ability of non EU based multinationals to install and/or expand their Eso offerings to employees?
*If HMG is serious about giving employees more say in how they and their employers should operate, it should consider using the revised EU Shareholders Rights Directive, which is likely to apply even after Brexit, as part of a blueprint for employee shareholders’ rights – thus furthering the concept of using more widespread Eso as a tool in the fight for more inclusiveness at work. This is now a highly relevant issue owing to mounting concerns over: protection of employees’ rights, complaints about excessive remuneration awarded to some senior corporate directors, the need to ensure transparency in the dissemination of corporate information, including the identification of shareholders and whether companies are dispersing too much capital, rather than in investing for the future.
*HMG should consider that all qualifying employees should be offered the chance to participate in share plans in a meaningful way when state owned business are privatised – not just through cosmetic offers of a few shares each in the newly privatised business. At the UK’s Royal Mail, almost 150,000 postal employees were offered free shares, now worth around £3,500 per head, and as a result, the employees now own 12 percent of the entire privatised company. A few segments in the NHS – notably local nursing and therapy services – are, post privatisation – 100 percent owned by local trusts, often similar in structure to co-operatives. Some previously municipal or regional health trust owned child nurseries have been privatised through worker buy-outs.
*HMG should consider whether a rider or condition should be included in public sector tendering documents to the effect that companies seeking such contracts should be able to demonstrate that they not only accept employee rights, but in addition show that they support Eso for their workforce and have installed such plans for all employees.
*In the SME sector, HMG should consider wider promotion of legislative tools like the Employee Ownership Trust (EOT), which enable owners of smaller companies to sell them to employees at a fair price. In this way, thousands of local jobs within the UK are saved annually from the scrapheap. Trade buyers of companies whose owners want an exit often ‘cherry-pick’ the best units from their perspective and close down the rest, sacking their workers. HMG could therefore liaise with the Esop Centre and others to reproduce Eso funding mechanisms which can be used by employees who want to buy out their employer company, when the opportunity arises.