Post on 24-Dec-2015
Democracy in the workplace II: employee ownership
Part two of our analysis of employee-owned firms, this
topic shows that the spectrum of employee ownership is
broad and there are key distinctions between various
models within that spectrum.
Democratic Enterprise
Learning Goals
• explain the rights of workers in an employee-
owned firm;
• understand the nature and characteristics of the
main forms of employee ownership;
• assess the current state of employee ownership
in the UK and internationally.
Key Arguments
• Employee ownership encompasses a wide variety of
organisational forms.
• In an employee-owned firm, workers have the right to
participate in ownership, governance and profit, as well as
access to information and participation in management.
• Employee-owned firms have developed a multitude of
governance structures to facilitate employee participation
in decision-making.
Introduction
• ‘Companies where employees own a significant stake in the company
they work for – sometimes termed ‘co-owned’ businesses – now
account for combined annual turnover in excess of £25 billion, more
than 2% of (UK) GDP and growing.’
• ‘Employee owned companies outperformed the FTSE All-Share in
2010 ... Employee owned companies' share prices were up 16.3%,
performing better than the FTSE All Share companies' share prices
which went up by 11.3% over the year.’
• 13.6m workers in US participate in employee ownership plans worth
around $901bn.
What is employee ownership?
The term employee ownership can refer to the entire spectrum
of worker ownership/participation in firms.
Can be a minority shareholding by a minority of employees to
100% ownership and control of a company by all employees.
Employee Ownership Association (EOA) definition:
Employee-owned businesses are companies where employees own a
controlling stake in the business, i.e. more than 50%. An employee
owned company may involve employees owning shares, but may
instead or as well involve ownership via one or more trusts.
Employee ownership
For the purposes of our study, the ideal form of
employee ownership is any company that is
majority owned by its non-managerial employees,
has some form of participation and democracy,
and where employees exercise some form of
control over the business.
Features of employee ownership
• Rationale – why choose employee
ownership?
• Ownership – different options and levels.
• Governance – democratic or share-based?
• Beneficiary – how much should employee-
owners get?
Rationale
The rationale for transferring the ownership of a business to its
employees will have a crucial impact on the success of such an
initiative. There are a variety of motivations and circumstances
that lead to a company becoming employee-owned:
• aligning employee interests with those of the firm;
• co-operation and mutuality;
• creating and sustaining meaningful jobs;
• preventing the closure of a firm; and
• ideological reasons on behalf of the current owner.
Ownership (1)
1. How much of the company is owned by the employees?
2. How many employees participate in the ownership of the company?
A company that is 100% owned by employees but only 10% of employees own shares.
A company that is 60% employee-owned but 100% of employees participate in share ownership.
Governance (1)
Pendleton and others argue that in firms which are majority
employee-owned, employees will expect a significant role in
governance and management.
Kaarsemaker, Pendleton, and Poutsma, ‘Employee Share
Ownership Plans: A Review’, p.37.
Governance can be based on shares (one share/one vote) or
democratic principles (one employee/one vote).
Governance (2)
Employee participation in governance is not guaranteed in a firm that is
employee-owned. Many companies design systems to exclude employees
from governance and management or else only offer cursory opportunities
to participate.
Rousseau and Shperling, ‘Pieces of the Action: Ownership and the Changing Employment
Relationship’, p. 558.
Once an employee ownership structure is chosen, it is then at the discretion of
the company to select an appropriate governance structure. There is an
abundance of options available, including worker representation on the
board, quality circles, participation in monthly management meetings,
partnership councils, and outright decision-making and management control.
Beneficiary
The level of participation in the surplus generated by a firm
differs depending on the form of employee ownership. In a
worker co-operative, employees are entitled to the entire
surplus generated by the business, while in other firms
employees receive a share of the profit based on salary,
while in others, the employees do not participate at all.
Employee-owners are also entitled to benefit from the net
assets of the business.
Forms of employee ownership
• Direct shares
• Employee Benefit Trusts (EBT)
• Hybrid
• Employee Stock Ownership Plans (ESOP)
Direct shares (1)
Simple concept: the majority of employees own the majority of shares.
Employees can either purchase the shares or the company can
finance it out of profits.
Registered as a company limited by shares (CLS).
Issues to consider:
• How do employees (and how many) participate in share ownership?
• What restrictions (if any) are placed on the transfer/sale of shares?
• What system of governance should be adopted?
Direct shares (2)
Benefits
• Direct participation in the growth
of the value of the company;
• Attractive model for outside
investors (raising capital);
• Flexible model that can
incorporate a variety of
ownership options (can be used
with a trust, ability to grant stock
options).
Disadvantages
• Employees mightn’t control the
company (they would need to
vote en bloc);
• If the company is successful,
difficult for new employees to
purchase shares;
• Employee ownership can be
quickly eroded as shares can be
freely traded.
Employee Benefit Trust (EBT)
A trust is ‘a legal arrangement by which one person owns assets on
behalf of somebody else.’ Similarly, EBT own shares in a company
for the benefit of current, and sometimes former, employees.
G. Nuttall and S. Anderson, Employee Benefit Trusts booklet (London:
Equity Incentives, 2001), p. 2.
The EBT that contains the shares is controlled by one or a number of
trustees, usually appointed by the company. The trustees perform
a number of important functions, such as:
• deciding how to distribute the shares in the trust;
• how many each employee should receive; and
• when the distribution is to occur.
EBT(2)
Employees do not hold shares in the company and
have no claim to the shares in the trust.
The ‘trust deed’ documents how the trust is to be
managed; it usually stipulates that the majority, if
not all, of the shares remain in the trust for the
duration of the trust (eighty years in the UK).
EBT (3)
An EBT has a number of uses in a company:
Market maker in an internal market –An EBT can facilitate the purchasing
and selling of shares amongst employees, ensuring the shares remain in
the company, thus preserving the ownership stake of the employees and
providing them with an outlet to realise the value of their shares.
Warehouse for shares – An EBT is often used to hold all or a majority of the
shares in a company for the purpose of ensuring the company remains
employee-owned.
Providing an exit – An EBT provides an opportunity for the founders or
owners of the company to exit the business, ensuring the company is not
bought by a competitor or floated on a stock market.
Nuttall and Anderson, Employee Benefit Trusts booklet, p. 2.
EBT (4)
Issues to consider:
1. Is the trust going to hold all of the shares or just
some?
2. How much control will the employees have in the
company?
3. How will the profit of the company be
distributed?
Hybrid
Involves using an EBT in conjunction with direct shares.
Combines the strengths of both models:
• EBT – stability of employee ownership
• Direct shares – liquidity and access to finance
Stability of employee ownership is ensured by placing the
majority of shares (or fifty per cent) in an EBT, while
allowing employees to participate in the growth of the value
of the company by owning shares directly.
The hybrid model does require a robust governance structure
to ensure that the employees and other stakeholders are
fairly represented in the decision-making process.
ESOP (1)
An Employee Stock Ownership Plan or ESOP is a type of
employee benefit plan that uses a trust to accumulate and
then distribute shares to employees.
Originating in the US, but used in the UK as well, it bears
many similarities to a profit sharing plan.
There are over 10,500 plans in the US covering more than 13
million employees.
ESOP(2)
How do ESOPs work?
1. Establish a trust to hold the shares.
2. The trust accumulates the shares in one of three ways:
– the company makes a contribution out of pre-tax profits to the trust,
which then uses the funds to purchase the owner’s shares;
– the company issues new shares into the trust;
– the trust secures a loan from a bank or financial service provider and
uses it to purchase the shares from the owner. The company then
repays the loan using pre-tax profits (known as a leveraged ESOP).
3. The trust transfers shares to the employees (after a suitable
‘vesting’ period).
ESOP(3)
It is at the discretion of the company how the shares are
divided amongst the employees:
• Equally
• Based on hours worked, salary etc
Employees usually only receive the full amount of their shares
in the ESOP after a vesting period of a number of years i.e.
you are entitled to 20% of your shares after one year, 40%
after two and so on.
ESOP (4)
Despite their effectiveness in spreading wealth and capital
more broadly in US companies, ESOPs are not automatically
a successful mechanism for transferring control to
employees.
That is not to say that companies do not offer some
opportunities for employees to participate in decision-
making, but the extent of input is at the discretion of the
directors of the business.
ESOP(5)
Uses
• to buy shares from a departing
owner;
• to borrow money more tax
efficiently;
• to create additional employee
benefit.
Rationale
• contributions of shares to the
ESOP are tax-deductable;
• cash contributions to the ESOP
are tax-deductable;
• contributions used to pay the
loan are tax-deductable.
• in the US, legislation allows
companies that are 100%
owned by an ESOP to avoid
paying federal income taxes.
Case studies
Science Applications International Corporation (SAIC) – direct
shares
John Lewis Partnership - EBT
Loch Fyne Oysters - hybrid
Allied Plywood – ESOP
Available on Democratic Enterprise VLE
Summary of employee ownership forms (1)
We have only covered some of the main forms of employee
ownership; similar to the co-operative model of enterprise,
employee-owned firms can take a variety of forms and can
differ in terms of their ownership, governance and
beneficiary structures.
What we have covered so far, and the content in the next
slide, represents a stylised view of employee ownership.
Summary of employee ownership forms (2)
Andrew Pendleton, The three forms of worker ownership: summary, Introduction
to employee ownership.
Minority share plans
Worker’ co-operatives
Majority employee ownership (direct, trusts and ESOPs)
Amount of equity held by employees
1–5% 100% 51–100%
Ownership Minority + unequal Majority + equal Majority + equal/unequal
Governance One share/one vote One member/one vote
Varies
Rationale Align employee interests with the firm
Co-operation and mutuality
Business succession
Protect jobs
To turn around a failing business
Industrial democracy reasons (shared capitalism)
Summary
• Employee ownership takes a variety of forms. There are differences,
for example, between the EBT model in the UK and the ESOP model in
the US, and between minority and majority ESOPs.
• In an employee-owned firm, workers have the right to participate in
ownership, governance and profit, as well as access to information
and participation in management.
• The selection of an appropriate governance structure is a crucial
aspect of employee ownership.
• The extent to which employees participate in the rights of ownership
differs for each form of employee ownership.
Resources and Support
Employee Ownership Association
http://www.employeeownership.co.uk/home/.
The Ohio Employee Ownership Center http://www.oeockent.org/.
John Lewis Partnership
http://www.johnlewispartnership.co.uk/media/webcasts-and-videos.html.
The ESOP Association http://www.esopassociation.org/.
National Centre for Employee Ownership http://www.nceo.org/.
European Federation of Employee Share Ownership http://www.efesonline.org/.
Ownership Associates
http://www.ownershipassociates.com/abt_principals.shtm.
Venture Capitalist http://www.avc.com/a_vc/stocks/.
References and Reading (1)
Employee Ownership Association (EOA). ‘About Employee
Ownership’. http://www.employeeownership.co.uk/employee-
ownership/about-employee-ownership/.
Erdal, D. Beyond the Corporation: Humanity Working. London: The
Bodley Head, 2011.
Field Fisher Waterhouse. ‘2010 saw employee owned company shares
outperform the FTSE All-Share according to Employee Ownership
Index’. http://www.ffw.com/press-releases/2011/mar/employee-
owned-company-shares.aspx.
Kaarsemaker, E., A. Pendleton, and E. Poutsma. ‘Employee Share
Ownership Plans: A Review’ Working Paper 44. The York
Management School, 2009.
References and Reading (2)
National Center for Employee Ownership (NCEO). ‘A Statistical Profile
of Employee Ownership’ updated April 2011.
http://www.nceo.org/main/article.php/id/2/, accessed 16 May 2011.
National Center for Employee Ownership (NCEO). ‘How an Employee
Stock Ownership Plan (ESOP) Works’.
http://www.nceo.org/main/article.php/id/8/.
Oakeshott, R. Jobs & Fairness: The Logic and Experience of Employee
Ownership. Norwich: Michael Russell, 2000.
Rousseau, D. and Z. Shperling. ‘Pieces of the Action: Ownership and
the Changing Employment Relationship’ Academy of Management
Review 28 (2003): 553–70.