The rise of the employee-owned business
We explore the pros and cons for both parties of becoming partly or fully employee-owned
Inspiration can strike in the strangest of places. Just ask Dick Philbrick. He experienced his eureka moment at a kibbutz (collective community) in Israel, during a vacation.
“Everybody seemed to be working very hard and they were all really keen,” he recalls. “There were very vigorously contested elections for factory manager and fish pond manager and so on and I realised that if work was organised in different ways you got different results.”
The experience was a far cry from the Merseyside shipyard where he worked at the time. At the shipyard he detected a lack of commitment and co-operation between employees, but the kibbutz opened his eyes to how a workplace could look if you engaged people.
In 2003 Philbrick tried to introduce what he saw during his trip to Israel at East Kilbride-based Clansman Dynamics. He co-founded the business, which makes robots for heavy industry, in 1994 with three business partners. Philbrick’s big idea was to offer employees a vested interest in the business through an employee ownership scheme.
However, the other partners didn’t agree with his plans so the idea was put on the back burner until 2009 when, having bought out the remaining shareholder, he offered the company’s employees the chance to buy a stake in the business. Since making the switch Clansman Dynamics hasn’t looked back. Staff retention is high and productivity and profit levels have soared.
Clansman Dynamics is just one of a growing number of businesses that recognise the value in being employee-owned. The number of employee-owned businesses in the UK is currently growing at an annual rate of 10%, according to the Employee Ownership Association.
So what are the benefits of embracing employee ownership and what can HR directors working in conventionally-owned businesses learn about dealing with staff, based on the employee-owned model?
The concept of giving employees greater voice has not been far from the headlines over the last year. Among the government’s proposed reforms for corporate governance, published in late August, were plans to publish the pay ratios between bosses and workers but also new measures to ensure the voice of employees is heard in the boardroom, either through the appointment of a non-executive director to represent employees, the creation of an employee advisory council or a nominated director from the workforce. So it would seem there’s plenty to be learned from the employee-owned business model, even if organisations don’t want to go the whole hog.
To get to the bottom of the benefits it is first important to establish what this sort of business looks like. Robert Postlethwaite, managing director of law firm Postlethwaite, which specialises in helping companies move to employee-owned status, says that technically speaking there is no hard and fast definition. But in his opinion a “substantial amount of shares” should be owned by the employees or on behalf of the employees.
“It probably depends on the circumstances, but if you’ve got at least 15% to 20% you could say you have a degree of employee ownership,” says Postlethwaite, who is currently in the process of diluting his own ownership of the business so that it will ultimately become employee-owned. “If you want to be a purist about it you would say a company is only really properly and fully employee-owned if a majority of the shares are owned by employees on a widespread basis.”
While there may not be a unanimously agreed, fully fleshed-out definition, what isn’t in doubt are the numerous benefits the employee-owned model offers. The most attractive aspect is the generous tax relief.
In 2014 the government introduced two new tax reliefs to promote employee-owned businesses. The first allowed company owners to sell a controlling interest in their firm to an employee trust without having to pay any capital gains tax. The second relief was targeted at employees who worked for companies controlled by an employee trust and could benefit from an income tax-free bonus each year of up to £3,600. These changes, coupled with a noticeable cultural change in the attitude of business owners towards the model, saw a flurry of owners explore the option of switching, says Postlethwaite.
“If you tried to persuade a company owner 25 to 30 years ago that it might be a good idea to make even a small number of employees part-owners of the business they wouldn’t take you seriously,” he explains. “However, since that period it has become much more mainstream and company owners have recognised there is a benefit for them in at least allowing their key people to become part owners alongside them.”
But it’s not just about improving profitability. It’s also about the wide range of benefits that companies enjoy when they promote a positive workplace culture that truly engages with employees. These are manyfold, according to Deb Oxley, chief executive of the Employee Ownership Association.
Oxley says that employee-owned businesses have higher levels of employee engagement and create more trusting environments that enable employees to work more effectively, responding and adapting to their customers’ and clients’ needs.
“This culture differentiates these businesses as attractive employers for future staff, helps retain the best talent, and directly supports better wellbeing,” says Oxley. “This in turn unlocks the discretional effort from employees that leads to higher levels of productivity.”
Just ask Jemima Arnold, recruitment systems and projects manager at management, engineering and development consultancy Mott MacDonald Group, which moved to an employee-owned model in the mid-1980s.
“It [employee ownership] attracts and retains people who want to work for an organisation where they are stakeholders; as they have a role in its direction and profits are returned to its people,” says Arnold. “It creates a unique and collegiate culture where management teams make strategic decisions collectively, through consensus. Employees have a vested interest in achieving the best possible outcomes in their work, are more involved with the communities they operate in, and are more committed to the company’s future.”
Another business that made the switch to employee-owned, and has enjoyed multiple benefits as a result, is London-based printer and bookbinder Barnard & Westwood. Historically it was a private company, but in 2015 the four shareholders sold the business to an employee trust company. According to company director Alasdair Abrines, the move has improved morale and there is better communication, greater engagement and greater productivity, as well as positive year-on-year growth. While the company may have experienced a radical shift in terms of its ownership it hasn’t necessarily had a major impact on Barnard & Westwood’s HR function. The changes that have occurred have been incredibly positive, says Abrines.
“HR still works in a very similar way to how it did before [we became] employee-owned as there are still set hierarchies and systems in place to deal with any internal or external issues,” he explains. “However, the move has encouraged even more open communication and transparency, which has helped to bring issues to light quicker so they can be dealt with in a more efficient and timely manner.”
Getting employees involved in decisions around HR policies has proved fruitful at Clansman Dynamics. “This may sound a little bit Dickensian, but we didn’t have a proper sickness policy until about six years ago when we asked our commercial director to produce one for us,” recalls Philbrick. “He came back to our monthly meeting with his thoughts on what should happen in terms of pay, and people didn’t think it was a very good proposal.
“So we got three volunteers to go away and produce an idea – a fitter, a finance manager and a designer. Their suggestion was that for the first two days of any sickness there would be no pay, which I thought was pretty harsh, but the policy was put before employees and accepted. Would that happen in a conventional company? I doubt it.”
Nor would many conventional businesses produce the results that Philbrick’s has over the last few years. He says that from 2009 – when the company became employee-owned – to 2015 it saw profits more than double, turnover increase by just shy of 100%, and sales per employee grow by around 23%.
“My old business pals said to me ‘if you go down this path it will just be about democracy – nobody will get on with things and nothing will ever be decided’,” says Philbrick. “But whichever way you choose to measure it becoming an employee-owned business has been a tremendous success.”
Again, however, a climate of giving staff more voice without the organisation necessarily being fully employee-owned suggests there are benefits for all. It’s a realisation more are coming round to, says Postlethwaite.
He says: “More company owners are willing to entertain the idea of all their employees having an ownership stake, and are recognising that in modern companies a lot of the contribution to value comes from the employees and from the people who are actually doing the work.”
Employee ownership models
Direct employee ownership – using one or more tax-advantaged share plans, employees become registered individual shareholders of a majority of the shares in their company.
Indirect employee ownership – shares are held collectively on behalf of employees, normally through an employee trust.
Combined direct and indirect ownership – a combination of individual and collective share ownership.