Employee Ownership: Have we nailed it in the UK?

I am too socially considerate to embark uninvited on a conversation about employee ownership, but I find being asked what I do for a living is an irresistible prompt to start talking.

And whereas just a few years ago this would be met with a blank stare or worse – my questioner’s eyes visibly glazing over – the response now is far more likely to be one of recognition – “Oh, you mean like John Lewis?”.

We have come a long way.  Employee ownership is beginning to form part of the mainstream of UK business.  Household names such as John Lewis are leading the charge, and a growing number of smaller companies, spanning a wide range of business sectors, are also choosing to become employee owned.  When clients tell us “the result was transformational“ and “the impact has been incredible”  it looks clear that their move to employee ownership has been a good call.

If employee ownership is so positive it might be tempting to expect, viewed from our warm UK bubble, the same levels of enthusiasm in other countries.  Might it be interesting, I reasoned, to see what’s happening beyond our shores?

So it was with great enthusiasm and curiosity that I accepted an invitation from the Canada ESOP Association https://www.esopcanada.ca/  the not for profit body promoting employee ownership in that country, to their annual conference at the beginning of this month.  The plan was for me to tell delegates about what we are doing in the UK, and learn about employee ownership works in Canada.

Employee ownership advocates there feel that there is enormous untapped potential.  With a number of highly successful employee-owned companies, such as Chandos Construction and Banff Lodging Co, companies contemplating a change already have some excellent models to consider.  Introducing tax breaks similar to those we have secured in the UK may, as it has done here, speed up the adoption of employee ownership, but those who have already done it – the early adopters – feel passionate enough to have done so without such incentives.  Employee ownership exponents in Canada are now facing similar challenges to those we faced only a few years ago (and to a degree still do): how to move it beyond the early adopters and launch it into the mainstream?

Is anything different? Yes, how employee ownership is structured.  The Canadian approach very commonly involves personal share ownership, with employees typically making a personal investment to buy shares.  Avoiding “entitlement” is a key driver.  Just as we experience, employees rarely have any spare money to invest in shares, so they are commonly offered a loan to be repaid from future dividends.  Contrast this with the approach often (but by no means always) applied here in the UK, where indirect ownership through an employee ownership trust (called a perpetual trust in North America) is often favoured.  This is seen to have the advantage of simplicity and avoiding a need to find buyers when employees who have acquired shares personally wish to sell.

So, different ways successfully to achieve engaged and committed employee owners.  A great research project would be to look at whether one is better than the other.

I enjoyed a fascinating couple of days with some committed and fun people, and hope that we can continue to exchange ideas and intelligence around employee ownership.

Robert Postlethwaite  June 2018

Celebrating Employee Ownership Day 2017

We have been celebrating the diversity of products and services produced by, and the success of, Employee Owned companies all this month.

You may be surprised by some or all of those we have highlighted, to catch up on any you missed click on the links below:

No.1 Financial Times
No.2 Arup
No.3 Scott Bader Limited
No.4 Divine
No.5 Mondragon
No.6 Barnard and Westwood
No.7 Mott MacDonald
No.8 Wilkin & Sons – Tiptree
No.9 AG Parfett
No.10 Make
No.11 Vitsoe
No.12 PCE Limited
No.13 John Lewis Partnership
No.14 Unipart Group of Companies
No.15 Wise Investment
No.16 Portland Gallery
No.17 Skye Instruments
No.18 Rowlinson Knitwear
No.19 Union Industries
No.20 Toucan Computing
No.21 Gripple
No.22 Pollitt and Partners
No.23 W L Gore & Associates (UK)
No.24 West Highland Free Press
No.25 TensCare Limited

A Bank with 30% Employee Ownership: One to Watch!

Nick Ogden of Clear Bank (pic: Clear Bank)

An announcement last week heralded the arrival of the first new, purpose built clearing bank in the UK for some 250 years.  Welcome to Clear Bank.

Fintech veteran Nick Ogden has spent many millions over the last three years developing his closely guarded secret with an impressive and wide ranging team that includes Microsoft (who helped develop the technology), the Bank of England, the Payment Systems Regulator, two of the four existing clearing banks and all of the payment processing networks.

Clear Bank is a bank for banks rather than a consumer bank, meaning that it will offer payment processing services and core banking to credit unions, building societies, fintech start-ups and other challenger banks.  It has been purpose built using the latest technology (including the Microsoft Azure cloud) and has many cyber security features.

Clear Bank has two main aims, the first of which as a clearing bank is to offer payment processing services across all major schemes here in the UK such as MasterCard, Visa, Swift, CHAPS, BACS and Faster Payments.  This service is currently offered by four banks: Lloyds, Barclays, HSBC and Royal Bank of Scotland; any business that takes or makes payments has to work through these four banks one way or another.  Clear Bank does not want to compete with these four, it wants to offer an alternative to them for smaller businesses (who are often seen as less profitable clients by the banks due to their size), creating a “healthy collaboration” with the four existing clearing banks.

The second aim of Clear Bank is to offer a core banking platform to credit unions and building societies, meaning they can buy ‘off the shelf’ services with added cyber security features that they would otherwise have to spend millions developing in house.

Clear Bank claim that because they are a purpose built bank with the latest technological features, they can process payments and services for smaller businesses quicker and cheaper than the other four clearing banks.  Odgen compares his new bank to the arrival of Aldi and Lidl on the supermarket scene here in the UK in recent years, stating he feels a “disruption to the status quo” is just what the sector needs.

What caught our eye is that whilst Mr Ogden has invested a substantial amount of his own money (although he won’t say how much), and has two key backers, the management team have also invested in Clear Bank and retain a 30% stake in the business.  With a track record like Mr Ogden’s (World Pay and Voice Commerce Group being his two previous multi billion pound start-ups), who wouldn’t want to invest in the company?

As Clear Bank begin a rigorous six-month period of stress testing their network, we wait to see what response there will be from others in the sector and once up and running.

In particular, as proponents of the many good things that employee ownership can do for business, we’re wondering if Clear Bank’s ownership structure might make it stand out from the crowd in some really positive ways: businesses with significant levels of employee ownership tend to have a more informed and participative workforce and be more innovative.   The inherent alignment of employees and other stakeholders in the company’s financial success can drive greater productivity and engagement too.  We wonder also if Clear Bank might have employee representation at Board level, and whether its ownership structure might lead to a flatter pay structure than that endemic in most banks?

Interesting times ahead.  Clear Bank is a business we will be watching.

Mutual Mayor for the Midlands?

Andy Street may not be a name you are immediately familiar with, but if he gets his wish on 4th May 2017, he may find there are many more eyes on him.  In October last year, Mr Street left his position as boss at one of the most renowned of employee owned companies in the UK, John Lewis Partnership, in a bid to become the new Mayor of West Midlands.

Employee Ownership is something he has lived and breathed for the last ten years so it should come as no surprise that Mr Street would like (if elected) to bring the model or a variant of it, to local services under his umbrella of authority such as social care, transport and public services.  The Bookies favourite firmly believes that as councils come under ever increasing pressure to reduce costs, new business models must be adopted. 

We all know that one of the key drivers behind the success of John Lewis is that the partners (employees) all have a stake in the business which encourages commitment and engagement which leads to better service for customers; so how does Street see this transferring?  His proposals include spinning off existing services into new mutually owned operations or social enterprises (mutuals are fully or majority owned by their members while social enterprises work to support communities or the environment) thereby giving workers a stake in their performance and their futures, providing funding for new mutuals and social enterprises to compete for contracts and allow existing mutual, social enterprises and charities to take on public work.  Labour intensive work such as adult skills teaching, mental health and transport are specific areas where Mr Street believes that the differential effort afforded by this type of ownership and service delivery could make a substantial and lasting impact for all.

A society with more economic equality is something that has long been mooted, and it seems Mr Street is willing to put his reputation on the line to try to deliver it if he becomes mayor, saying that he will be the first mayor in the UK who will have performance related pay:

“Almost everyone has to deliver against targets in their jobs. And many people are paid on their ability to produce results. I have been used to this in John Lewis and the role of Mayor should be no different.  This role is important. It gives the West Midlands the opportunity to tackle the big issues affecting everyone, and together achieve my aim of making this region the UK’s economic powerhouse.”

It seems that his background as a business person who can deliver results rather than a career politician is finding him favour amongst his community, though any further comparisons to Trump are strongly rebutted!  Indeed, he feels that the realisation that the role of mayor is a ‘one person for a specific job’ not a party popularity contest alongside a manifesto of positive ideas has garnered him further support in recent weeks.  He has learnt from the likes of Boris Johnson, Ken Livingstone and Sadiq Khan that representing your city rather than your party is key to winning cross party support and voters.

There are interesting times ahead for the West Midlands if Mr Street wins, and potentially, a blueprint for other cities to follow suit.

Can Employee Share Schemes Bridge Pensions Shortfall?

For as long as most remember, UK employees, especially higher earners, have relied on company pensions as the primary means of accumulating long-term capital. These days are now well behind us, while the realisation of what has changed lies in the future.

Two significant developments now constrain the ability of employees to accumulate capital via pension plans. Firstly, the migration from defined benefit to defined contribution pension is giving rise to a much lower level of capital accumulation, at a time when the cost of purchasing a long-term income stream (a so called “annuity”) has increased exponentially. The much reduced scale of defined contribution capital balances compared to the capital value of defined benefit pensions is illustrated below.

Source: ONS

The second development, more relevant to higher earners, is the limit on the amount of money that can be accumulated within a pension fund. In 2009 Fred Goodwin left RBS with pension capital of £25m. He was by no means alone in being provided with a multi-million pound pension pot, whereas the Government now limits total capital accumulation in a tax favoured pension to £1m.

While the scale of Executive pension pots might seem out of reach to most, the proportional decrease in capital accumulation is shown by ONS data to be commonplace.

This raises the question of how those with higher earnings will bridge the gap in wealth accumulation between their generation and the one that preceded them. It is true most employees subject to the pension lifetime allowance or annual allowance are provided with a cash alternative, but there is little evidence suggesting this additional income is being used for capital accumulation purposes.

Can employee share schemes help bridge this gap and provide an alternative means of capital accumulation and if so, could this potentially help employees more widely? In the USA, the answer to the first part of this question has been an assured “yes” for the past 30 years, but it is only now that we are beginning to see a nod in that direction in the UK. 96% of FTSE250 companies now require Executives to hold shares for more than five years and the scale of the required shareholding has risen steadily in recent years. A median FTSE250 Chief Executive now holds shares worth 690% of salary, while Executive Directors reporting directly to the CEO hold shares with a median value of 255% of salary.

Clearly, the risk profile associated with holding shares in a single company is very different to the risk profile of capital accumulation in a pension plan. However, perhaps we have turned a corner and the trickle-down effect will be that a growing number of UK employees begin to make the connection between share plans and long-term capital accumulation?

Mark Childs

The author is a Director of the Total Reward Group and former Vice-President, Reward, of the Chartered Institute of Personnel & Development (CIPD).