Democratic Enterprise
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.
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 employeeowners 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 employeeowned, 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
•
Employees mightn’t control the
of the value of the company;
company (they would need to vote
Attractive model for outside
en bloc);
investors (raising capital);
•
Disadvantages
•
If the company is successful,
Flexible model that can
difficult for new employees to
incorporate a variety of ownership
purchase shares;
options (can be used with a trust,
ability to grant stock options).
•
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
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
Rationale
•
owner;
•
to borrow money more tax
contributions of shares to the ESOP
are tax-deductable;
•
cash contributions to the ESOP are
efficiently;
•
tax-deductable;
to create additional employee
benefit.
•
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)
Worker’ coMinority share plans
operatives
Amount of equity
held by employees
Ownership
1–5%
100%
Minority + unequal
Majority + equal
Governance
One share/one vote
Rationale
Align employee
interests with the firm
One member/one
vote
Co-operation and
mutuality
Majority employee
ownership (direct,
trusts and ESOPs)
51–100%
Majority +
equal/unequal
Varies
Business succession
Protect jobs
To turn around a
failing business
Industrial democracy
reasons (shared
capitalism)
Andrew Pendleton, The three forms of worker ownership: summary, Introduction to employee
ownership.
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
National Centre for Employee Ownership
http://www.esopassociation.org/.
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/aboutemployee-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-companyshares.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.