19 December 2018 by Deb Oxley
The government, and those in opposition, agree that poor corporate governance is compounding the UK’s economic challenges
Whilst the debate about the purpose of business continues, for the majority of businesses throughout the latter stages of the last century, the purpose was to make money and deliver shareholder value. As recently as the 1980's, this remained the favoured view of most western political leaders, a view that pays little regard for the wider concerns of the impact of or involvement in business by employees, stakeholders or society.
In 2018 however, politicians and business leaders are being forced, through a combination of environmental, social and economic realities, to confront the urgent need to ensure that business is not only focused on shareholder value but also on fulfilling its wider role as a force for social, economic and environmental good.
However, some leaders refuse to face this reality and through their behaviours, are contributing to a growing lack of trust, belief and confidence in business. Reports of excess and unfairness remain; in levels of executive pay, gender pay inequality, poor corporate governance or behaviours and actions that damage the environment and society.
Whilst it is not normally the role of government to dictate what business does in terms of the services and products offered, it can and must intervene in the way in which business is governed. Through corporate governance reform and new reporting standards, UK government is now seeking to rein in excess and force directors to consider the wider impact of their activity. Many investors are also now using their voice to express their lack of support for inappropriate board room behaviours and public opinion is gradually turning against individuals and organisations that personify such excess.
As I previously wrote in this publication, there remains stubborn resistance in pockets of public and private business to such reform. This is both short sighted and irresponsible, and ultimately will risk the future of more organisations, as recent corporate failures such as BHS and Carillion testify.
A further challenge of this resistance is that such organisations are often accompanied by a lack of employee engagement and the subsequent impact on levels of productivity and talent/skills retention – two key economic issues facing the UK.
However, the growing group of UK businesses that are either wholly or partly employee owned demonstrate a model of ownership and governance which defies these risks; recent evidence illustrates how enabling all employees to have both a stake and a level of influence in the businesses in which they work delivers benefits, to individual employees, the business, the regions in which they are based and ultimately, the wider economy.
The evidence, showcased by the Employee Ownership Association (EOA) in the Ownership Dividend, makes a compelling case for the significant opportunity presented by employee ownership to contribute to the economic and social wellbeing of the UK.The employee owned sector has been growing rapidly in recent years with the introduction in 2014 of the Employee Ownership Trust (EOT).
The Ownership Dividend report reveals that many founder owners such as Guy Singh-Watson of Riverford Organics are now using the EOT to manage their succession challenge and as an alternative to a trade sale. Providing a route to ensure the legacy of the business, recognise the contribution of their employees and at the same time allowing owners to recognise full financial value from their investment, a transition to employee ownership is now a growing option for many UK SME’s and family owned businesses.
“Plus the flexibility of the model allows for solutions that include more than one type of ownership”
The EOT provides a route for all employees to have a stake in the future of the business, sharing in any financial success through tax-free bonus payments, and to have a voice and influence in the strategic direction of the business through formal involvement in its corporate governance.
Plus the flexibility of the model allows for solutions that include more than one type of ownership. For example other big brands to recently adopt the model include Aardman, which has put 75% of the business into an EOT while some of the shares staying in the hands of the founders, and Sawday’s which has become an employee owned, family owned charitable trust creating a hybrid model of both direct and indirect ownership.
However, regardless of which model of employee ownership a business chooses, the resulting involvement of employees in the corporate governance of the business is a natural and necessary feature in a business where the employees have a stake. The culture of involvement by employees is generally supported by regular sharing of business information, more transparent financial reporting and very often, the holding of account of the board to its employee owners via the EOT. Involvement is very often through the employee nomination of representatives as Trustee Directors on the EOT and/or as main Board Directors.
The Ownership Dividend reveals how this form of corporate governance and the heightened employee engagement that accompanies it leads to better decision making, innovation, eliciting more views in the decision, very often considering the long term impact and return to the business, so that the eventual implementation of the decision has greater buy in. Businesses including Mott MacDonald and PB Design reported this as part of contributing to the evidence of over 100 businesses involved in the Ownership Dividend.
In their evidence Mott MacDonald said: ‘We are driven by innovation, by having great people, great business and relationships with our clients. Our model is that we are collegiate in our thinking – so when we make decisions, we get real buy-in and ideas are easier to implement.’
While PD Design added: ‘We were going to do employee ownership for many reasons, but increased oversight of management decisions was certainly one of the positive things we felt could help us to move on in terms of management development.’
Whilst employee ownership is often the choice of business owners at the point of succession planning, it is also increasingly a route chosen by owners when considering how to engage employees in a growth strategy. As heard in the story of Cambridge Weight Plan engaging employees in meaningful ownership, where the ownership stake is accompanied by influence and a voice, can have a dramatic effect on the financial and business performance of the business.
While their reason for the business becoming employee owned was a succession plan, once they paid back the loan to the founder they entered a phase of ‘financial freedom’ in which employee owners are truly at the heart of a new growth strategy.
In their evidence they said: ‘Our employees are now more interested in the bottom line, what profits we are making, employee voice and how they can get involved in deciding what happens to profits and how we spend those. Since becoming employee owned, UK sales have gone up by 17%, export has gone up by 22% and out total sales profit has increased by 25% – a lot of that has been driven by the fact that we are all working towards a common goal.’
The Ownership Dividend reveals that employee ownership has a dramatic effect on the behaviours of individual employees, caused by both them having a stake and a voice. It is for this reason that the same returns are rarely reported in businesses that use share schemes alone, often simply to provide financial incentives to executives. Even when such share schemes are used on an all-employee basis, without a meaningful voice in the business, through formal involvement in corporate governance, the evidence shows that employees are not fully vested in the business, and hence any positive impact on their behaviour is at best short term.
Corporate governance of the UK’s 5.7 million businesses is now of interest to more than simply the owners of those businesses; it is in the UK’s economic, social and environmental interest that every business is governed with a wider view of its impact and responsibilities. Employee ownership is one model that can help deliver the responsible, sustainable business upon which the UK economy will become more reliant on as it forges a prosperous future for itself in a global economy.