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.

Guest Blog: Can Employee Share Schemes Bridge the Pension 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).



Millennials Love Employee Ownership!

Since the early 1960’s when Schultz first introduced us to the phrase ‘Human Capital’, companies have defined their workforce in economic terms. In other words, the profitability that their people bring to the company and the demonstrable return on the   investment for the Board.

And in some senses, employees themselves have underpinned that connection, historically selecting jobs based largely on the salary and benefits offered by an employer.

Times are changing though.  There’s no shortage of news items reporting the quest of Millennials (or Gen Y) for work with meaning, ideally within a purpose driven organisation, rather than seeking the role that offers the biggest return come pay day.  We’ve always felt intuitively that working for an employee-owned organisation could be the key to Millennials achieving this goal; the deeper connection that is established with a company by a person that co-owns it rather than “just” being an employee can go a long way to making work for that company meaningful.  And there are plenty of examples of employee-owned organisations being driven by purpose as well as profit.

So we were not surprised when a recent survey, carried out by the law firm Shakespeare Martineau, concluded that employee-ownership is a key driver in the career decisions of many graduates.  However, the fact that a whopping eight out of ten of the 150 graduates surveyed by the firm responded that the employee-ownership of a potential employer would positively influence their decision to join an organisation surprised even us! When compared to other influencing factors including a good reputation (34%) and specialist expertise (36%), employee-ownership is a clear differentiator.

We are working with more and more businesses as they transition to employee-ownership. A good proportion of the early adopters of this business model have been graduate-heavy professional services firms (including architects, consultant engineers, accountants and even lawyers like ourselves!).  It’s heartening to think that the ownership structure of these companies stands out in the ever-present battle for talent.

One more reason to consider employee-ownership for your company.

If you would like to discuss possible approaches to employee ownership in confidence, please do get in touch with us.

Guest Blog: Big Data, Big Problem?

This month our guest blogger, Gabbi Stopp of ProShare, gives us her view on Big Data and cyber security.

Big Data, Big Problem?

Amid the hue and cry of 2016’s ‘black swan’ events, Brexit and Trump, it would have been easy to overlook the approval of the General Data Protection Regulation by the EU Parliament, especially after four years of what was probably rather dry debate. The EU General Data Protection Regulation was designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens’ data privacy and to reshape the way organisations across the region approach data privacy. Approved on 14 April 2016, it will come into force on 25 May 2018. Any organisations in non-compliance at or after that date will face heavy fines – for serious breaches, this could amount to 4% of annual global turnover or E20m, whichever is the greater. (Further details on the GDPR may be found here )

For those of us in the UK, who earlier this week listened to our PM finally set out her vision of what Brexit will actually mean (nearly seven months after the Referendum…), the GDPR still remains relevant and applicable to us for two reasons. One, we will still be EU members at that enforcement date in 2018, given that the two-year negotiating period ‘clock’ does not start ticking until Article 50 is triggered. Two, the GDPR has extra-territorial applicability, so will apply to the processing of personal data of EU citizens regardless of where the controller or data processor is established, within or without the EU. 91% of the FTSE100 offer tax-approved plans to their UK employees and many extend these in one form or another across their European workforces (and beyond), in any case. So there is no escaping the GDPR.

According to Bernard Marr (Forbes contributor & writer on big data, analytics & enterprise performance) by the year 2020 about 1.7 megabytes of new information will be created every second for every human being on the planet. By then our accumulated digital universe of data will grow from 4.4 zettabytes today to around 44 zettabytes, or 44 trillion gigabytes. If, like me, you struggle with ‘whatever’-byte measures, it is estimated that by 2020 there could be four times more digital data than all the grains of sand on Earth.

‘Torture the data, and it will confess to anything’ – Ronald Coase, winner of the Nobel Prize in Economics

So, we have a data-drenched future to swim towards – but how much of it is actually of any use? We’ve all heard the resident office sceptic voice the old adage ‘junk in, junk out’ when it comes to new systems and other data-reliant tools. IDC calculated that in 2013 approximately 22% of data could be useful if it was tagged and analysed i.e. converted into metadata. In 2020, they estimate that the volume of useful data will rise to 37%. (IDC’s estimate was based on data generated by more than forty types of device, from RFID tags and sensors to supercomputers and supercolliders, from PCs and servers to cars and planes.) So without being aware of it, we are moving from Big Data to Rich Data, a transition which will pose both big problems and big opportunities for all of us, from the lone individual to the global corporation and indeed, national governments.

In this brave new world of ‘fake news’ (or propaganda, by it’s correct name), it is eerily prescient that one of the new provisions in the GDPR is that European citizens will have the ‘right to be forgotten’ and have erroneous information wiped from the internet. Dare we say that, in bringing in the GDPR now, the EU is ahead of the curve with this one? (I hope I won’t be sent to the Tower for that suggestion.)

Just three points (from Bernard Marr) to hammer home the motivating factors for businesses to engage with Big/Rich Data and turn it to their advantage:

–          For a typical Fortune 1000 company, just a 10% increase in data accessibility will result in more than $65m additional net income;

–          Retailers who leverage the full power of big data could increase their operating margins by as much as 60%; and

–          73% of organisations invested or planned to invest in big data in 2016.

With only 0.5% of useful data analysed, mined and put to work currently, it is clear that companies are at the beginning of their journey in harnessing the power of Big Data. The frontrunners, especially in the online retail sphere, are outpacing their less engaged competitors already.

‘Without data you’re just another person with an opinion’ – W. Edwards Deming

With this progress though, comes risk, especially in the form of cyber crime. The ONS estimated that there were 2.46 million cyber incidents (e.g. phishing, identity theft, hacking, malware etc) and 2.11 million victims of cyber crime in the UK in 2015, the first year for which they collected data on cyber crime. An excellent recent report by Detica and the UK Government’s Cabinet Office estimated the cost of cyber crime in the UK to be a whopping £27 billion. That figure includes the £9.2 billion cost to businesses of IP theft.  You can read more here

In a speech to the Billington Cyber Security Summit in September last year, the new head of the UK Government’s  National Cyber Security Centre, Ciaran Martin, told delegates that the UK “has the highest percentage of individual internet usage of any G7 economy. Digital is a big and growing employer and these are good jobs: the average advertised salary is 36% higher than the national average.” So the stakes could not be higher. (Some helpful and plain English guidance on cyber security can be found on the NCSC’S website)

The world of share plans will not go untouched by developments in Big Data (or indeed, the GDPR). At our Awards last December I was delighted to see two exceptionally strong joint winners in the category for Best Use of Technology, namely DS Smith and Rio Tinto. DS Smith won for their use of Augmented Reality in their share plan communications, a technology which in this context uses data to accurately pinpoint the AR app user’s location in order to deliver jurisdiction-specific tax information alongside inspiringly designed share plan communications, amongst other things. Rio Tinto won for their integrated system of global tax calculation, withholding and simultaneous payment via hundreds of local payrolls, driven by thousands of accurate and timely pieces of data on all plan participants, their tax status and their vesting awards.

The practical and profitable leaps forward that may be achieved through savvy use of data and technology will inevitably be tempered by the need for individuals’ rights to data privacy and informed positive consent, and the need for businesses to protect their digital assets and those of their customers – at all costs.  Cyber security and data protection will need to work hand in hand to form the essential bulwark needed against the fast-rising tide of cyber criminality.

Celebrating Excellence: if this blog on Big Data and its influence on share plans has whetted your appetite, come along to Celebrating Excellence at Baker McKenzie’s London offices on 21 February to find out more on DS Smith and Rio Tinto’s award-winning plans, and all our other winners. It is a stellar line-up and ProShare plan issuer members get to attend for free. We promise that it will be time well spent!  Book your place here

Gabbi Stopp

Head of Employee Share Ownership