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Share for rights: Is there any interest from business?

The Government’s shares-for-rights initiative has so far failed to attract any interest. But is it any surprise when there are many other less punitive arrangements available? We explore the pros and cons of the controversial scheme and ask why it has proven to be unpopular

As Government initiatives go, the employer shareholder status scheme is one of the more controversial. The concept was first outlined at the Conservative Party conference in 2012, and, despite being rejected by the House of Lords twice, came into effect this September. With its central tenet that workers give up some employment rights in exchange for shares that could be worth as little as £2,000, the move received an initially hostile reaction from business groups and trade unions. To date there is no sign of any company actively signing up. But will this continue to be the case?

‘Shares for rights’ could in fact offer advantages for some employers. Rebecca Lynch, a partner in the employment team at law firm Davenport Lyons, says the potential to gain relief from unfair dismissal claims – one of the most common causes of tribunals – while being able to incentivise employees through the possibility of benefiting financially from the company’s success could be attractive for businesses.

“The most likely arena where this arrangement might be used is for senior executives where you might be giving them shares anyway, so you might as well also get a waiver of rights if you can,” she says. “If you’re a company that is being built with a view to floating or selling, often at the point you sell senior executives exit the business and have a technical unfair dismissal right, and either the buyer or seller will pay for some kind of negotiated exit. If they didn’t have that right it would make that process a lot easier.”

Businesses most likely to consider using the scheme will be smaller firms, suggests Jacqueline McCluskey, a partner in the employment team at HBJ Gateley, in the hope of being able to attract people who may otherwise not have contemplated working for such an operation. “It’s perhaps another tool in the box,” she says. “Senior and high-earning employees are maybe not that interested in employment rights, so it may not be a particularly big concession for them to give up.”

However, many are still waiting to see how the scheme will work in practice. Malcolm Hurlston, chairman of the Employee Share Ownership (ESOP) Centre, broadly welcomes any new ideas but is still – a year on – waiting to see the scheme’s finer practical detail. He does, though, point out that there is a precedent for this quid-pro-quo arrangement of shares for rights, in the iconic Mondragon Corporation in Spain. At the world’s largest co-operative, members have few employment rights. “It’s perhaps not as off-the-wall as it first appeared,” Hurlston says. “It is a curious idea which shouldn’t be discounted. There is a handful of businesses which I understand have asked for a valuation but, because a lot of it is still unclear, it’s very difficult for people to be recommending it yet.”

Others, though, are rather more cynical. Charles Cotton, performance and reward adviser at the CIPD, warns it could make it harder for employers to attract talent. “People may be put off from joining the organisation if they have fewer employment rights,” he says. “It will be people who feel relatively secure and confident in their marketability who will look at this, perhaps as a way of boosting their stake in the success of the organisation.” Companies in fast-growth sectors such as IT, internet or new technology are most likely to be interested, he says, and he also thinks it’s more likely to appeal to senior employees.

John Collison, head of employee share ownership at Ifs ProShare, the membership body for the employee share ownership industry, says the scheme doesn’t appeal to its members, which tend to be the larger organisations. “At our conference last October, Justin King, chief executive of Sainsbury’s, asked why he would want to give up all the hard-fought rights of his employees to introduce another share plan that is, relatively, a small amount compared with its existing one,” Collison says. “It’s very hard to get past that. The only area where we’ve seen a little bit of interest is from lawyers and advisers who think there might be a niche for very small start-up businesses. But probably 98% of people think it’s a non-starter.”

In setting up such a scheme, employers would have to contend with myriad practical issues too. Amanda Trewhella, a solicitor at Fisher Meredith, says the contracts would be costly and time-consuming, and could lead to disputes further down the line. “For the contract to be effective, the employer must provide to the employee a statement explaining the rights that they are giving up and details of the shares on offer,” she says.

“They must then pay for the employee to take independent legal advice and allow them a seven-day cooling-off period. If these steps are not properly followed, the employee could claim that they are still an ordinary employee and have not relinquished any of the rights enjoyed by other employees.”

Lynch, meanwhile, points out the potential for disagreements over how to value any shares in the company and the type of shares that individuals will receive. Add to that the fact that new employees now need to have worked for two years before they become entitled to claim unfair dismissal anyway, and employers may not be gaining all that much.

“If employees stay with you beyond two years you would hope that you would have to have a fairly serious reason for dismissal, and if it is a redundancy or reorganisation the costs of that are likely to be far less than implementing the shareholder scheme in the first place,” she says.

Lynch also points out that other employment rights – such as discrimination or whistleblower protection – are not given up, and that organisations could find themselves in difficulties if they are unsure as to exactly what rights shareholders do and do not have.

Some organisations have considered the scheme, and decided against it. Guy Mucklow is chief executive of website Postcode Anywhere, and is in the process of rolling out an enterprise management incentives (EMI) scheme, under which employees will be given options to purchase shares – up to as much as 10% of the business – at a certain price if and when the firm is floated. This is a benefit, he hopes, that can make a significant contribution towards his employees paying off their mortgages. “It’s a major frustration of any owner or founder that other people don’t necessarily share the same passion that they do,” he says.

“One of the answers to that is to try to give all of our employees a share in the business to tie it in with their appraisals.”

Against this background, though, he believes taking away employments rights is counterproductive. “If I was holding a gun to their head by saying they can have this but I want to be able to get rid of them and not pay them any redundancy, I’m doing it for all the wrong reasons,” he says. “Personally, I don’t think it sends out the right message.”

Ken Smith is commercial director at managed hosting and dedicated server provider Memset, which employs 36 people. He, too, is in the process of rolling out an EMI scheme, which he hopes will engage, retain and ultimately reward staff, and also feels the shareholder status arrangement would not sit comfortably with that aim. “We did consider the new scheme but giving up some redundancy and other rights is a principle we don’t agree with,” he says.

“We see our company as a family environment; our staff are everything to the business, so we have to look after them. To tell them they’re going to get some shares but they have to sign away various employment rights just didn’t seem appropriate. We didn’t spend an awful lot of time thinking about it to be honest.”

The EMI is only open to organisations with fewer than 250 staff and assets of less than £30 million, but there are other options for businesses looking to introduce share ownership schemes.

The two main ones are the Save As You Earn scheme and the Share Incentive Plan, while Hurlston is a strong advocate of the all-employee Company Share Option Plan, which allows employees to purchase shares at a fixed point and price in the future.
Other businesses have moved more into employee ownership territory. This is a predominantly separate concept based on giving employees a significant chunk of the business, but one that can have similar aspirations to those of Mucklow and Smith, certainly for smaller firms.

Sheffield-based Associated Chemists (Wicker) set up an employee benefit trust in 2012 that owns 10% of the company, paying staff a regular dividend along a similar model to John Lewis.

“The Government scheme is almost the opposite to what we believe in,” says Martin Bennett, managing director. “We were trying to make things better for the employees, not to restrict their rights.”

It is this aspect more than anything else that sets apart the Government’s initiative. “With all the schemes that currently exist you don’t get any kind of waiver of rights,” says Lynch. “It is very different. On the face of it, it’s more beneficial to the employer than those other schemes because up to now it’s been unlawful to try to contract out of employment claims.” Whether employers – and employees – choose to vote with their equity shares, however, remains to be seen.