How private companies can improve their governance and their performance through employee ownership
In a recent article, Ewan McGaughey, a Lecturer in Private Law at King’s College London, and Research Associate at the Centre for Business Research, University of Cambridge, considered what he described as the emerging consensus that giving employees a voice in the running of their employing companies is likely to promote good corporate governance. He refers to the fact that, with this in mind, the Financial Reporting Council will be drafting new rules in the forthcoming UK Corporate Governance Code which will be on a “comply or explain” basis. Listed companies will be expected to consider how best to ensure that the views of employees will be heard, whether by designating existing non-executive directors to ensure that their views are heard at board level, or creating stakeholder advisory panels or appointing individual stakeholder representatives to company boards.
Similar requirements are likely to be extended to non-listed companies of a significant size, although these are unlikely to apply to the vast majority of SMEs which are less likely to have non-executive directors or advisory panels. In their case, good corporate governance can be built on a platform of a meaningful ownership stake for employees. In many SME’s there will be a genuine opportunity to involve employees in significant equity ownership at a relatively low cost. This might be by means of a tax-advantaged share scheme such as the enterprise management incentive scheme (EMI options), whereby employees can be rewarded through shares with no, or limited income tax.
Perhaps an even more attractive opportunity is available where the aim is for the business to become entirely, or almost entirely, employee-owned. As long as the detailed conditions set out in Finance Act 2014 are satisfied, a sale of a controlling interest in a company to an employee ownership trust will be entirely free from capital gains tax. Furthermore, bonuses awarded by such employee-owned companies can be paid free of income tax up to a level of £3,600 per employee per year.
Where the employees themselves own the whole, or substantially the whole, of the business, they will necessarily have a voice in the running of the company and in its governance. This model is likely to enjoy greater popularity if Ewan McGaughey is correct in his assertion that there is a consensus that employees need a stronger voice in the running of their employing companies. Combining an employee voice with employee ownership can be a very powerful route to improved performance, as much research shows.
Ewan McGaughey’s article can be found by clicking on the following link