David Kuo talks to Robert Postlethwaite.
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David:
This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and have you ever wondered whether it would be a good idea to own shares in the company that you work for? Nick Clegg, the Deputy Prime Minister, is someone who wants to see employees take a greater interest and stake in the companies they work for. It has been dubbed "the John Lewis society", but will it work? Here to help me look at employee share ownership schemes is Robert Postlethwaite, from Postlethwaite. So welcome to The Motley Fool, Robert.
Robert:
Thank you very much, David.
David:
Okay, now before we get into the nitty-gritty of what Nick Clegg said about the John Lewis society, what does your company do? What does Postlethwaite do?
Robert:
We are a law firm that specialise in helping companies set up employee share ownership schemes.
David:
And that is it?
Robert:
That is it, yes.
David:
You're a one-trick pony?
Robert:
Yes, they come to us and they say, we want to involve some and often all of our employees in becoming shareholders in our company -- how do we do it? Are there any tax benefits? What do we do if somebody leaves? How can we make it as straightforward a process as possible, that they will understand? And we go off, and make it all happen for them.
David:
Okay, so that leads us very nicely onto employee share ownership schemes. What exactly are they?
Robert:
It describes any arrangement under which any group of employees in a company, or all the employees, can become shareholders, so that might mean they have an opportunity to buy shares, or they may be given shares, or I'm sure a lot of people will be familiar with the idea of share options, which means an employee is given the right to buy some shares in their company at a fixed price, and that fixed price is normally linked to the value of the share at the date they're granted the option. So the idea is that, if the company then prospers, and the value of its shares increases, it then becomes worthwhile the employee taking up that right to buy the shares, because in the future they can buy the shares paying today's price, which is much lower than the future price.
David:
So when Nick Clegg came along and said he wanted to have this big John Lewis-type society, where employees owned a part of the company that they worked for, were you salivating at that time? Were you really excited at the prospect of even more business for Postlethwaite?
Robert:
Yes, I do think it's potentially very exciting. I've been interested in this field for a very long time. I've always believed it's good for companies to have employee share ownership. I've also believed that it will be great if many more companies in the UK went down that route, so yes -- when he made the announcement , I thought, that sounds very interesting. However ...
David:
Oh, there is a however!
Robert:
There is a however -- it's a subject that has been popular among politicians with cross-party support probably going back 15 or 20 years. There have been one or two false dawns in the past.
David:
What does that mean, then?
Robert:
Well, what that means is that there have been plans announced by the government to extend employee share ownership in the past, which have had some success, but it's been quite limited, so I am managing my expectations.
David:
Okay, so how exactly do they work? If I came along, or somebody came along to you and said, I run a small business -- how do I get an employee share ownership scheme going in my business?
Robert:
Yeah, okay, well, I think there are two elements. There's the mechanism of becoming an employee shareholder, and then for any company, there's how to actually make it work, how do you make your employees feel like they're part-owners of the business? So if we look at the mechanism first, there are a number of ways of employees becoming shareholders, and in the UK there are a number of tax advantages which are designed to encourage employee share ownership.
So, to take one example, if a company sets up an employee share scheme that's available to all employees, then employees can buy shares and be given tax relief for the money they spend on buying shares in their company, or they can be given free shares and not have to pay any tax on the value of those shares. So those are two quite attractive ways in which employees could be given the chance to buy shares in their company.
David:
Until such time as they sell? I mean, if I was given shares by a company that I worked for, and then I subsequently sold it, would I not be liable to some kind of capital gains tax?
Robert:
No, any growth in the value of the shares would also be completely free of capital gains tax, no matter how much they've grown in value, up to the point when they're sold.
David:
Okay, now then, I suppose some people will be listening to this and saying, let's say, for instance, I work for a company such as Tesco, and I don't take part in the employee share ownership scheme, but I just go out and buy shares in Tesco myself. How is that different to an employee share ownership scheme?
Robert:
It's different, because if you just ring up a stockbroker and buy some shares yourself, which you're perfectly able to do, you won't be able to claim any tax relief in relation to your purchase of shares. However, if you do it through your company scheme, and if it's a scheme which does offer tax relief, which typically in a company like Tesco or any listed company, it almost certainly will be, then it's through doing it that way that you'll be able to enjoy the tax benefits.
David:
So what's in it for the company, then?
Robert:
I think what's in it for the company is, they believe that, by having employees who hold shares, those employees will be motivated; they'll have the prospect of a reward, which is linked to the performance of the company and its profits; companies do it because they think it will make them become more profitable, and help their share price grow.
David:
But is the tax man not losing out on this? Because if I was a company, and I wanted to remunerate some of my employees in a certain way, I could just simply give them shares, they would get it tax-free, and they could actually sell it at some point in time and make that gain, and the taxman would not be able to touch them for it?
Robert:
It depends how you look at it. Yes, on the immediate face of it, the taxman is losing out. However, there is a very definite government policy behind this, which is to encourage companies to operate employee share schemes, because it is believed that having a scheme of that kind will make any company more successful, and in particular more productive, and it's the increase in productivity that was the original reason for providing these tax reliefs.
David:
So how does an employee share ownership scheme differ from, say, a partnership -- the most famous, of course, being the John Lewis partnership?
Robert:
The principal difference is that John Lewis doesn't actually have anybody owning shares directly in the company. All the shares are owned on behalf of employees in something called an employee trust. What that means is that employees don't have the opportunity to make a profit out of any growth in value of shares in the company. They may get a share in profits through a bonus, but they don't own shares directly, therefore they can't buy them at one price and then hope to sell them at a higher price, if the company's done well.
David:
So given the two different models, the employee share ownership scheme model and the John Lewis partnership model, which one is actually the better model out of the two?
Robert:
I don't think there's a simple answer to that question. On the company, it depends on its type of business, it probably depends on its employees, and each company has to find the solution which works best for it. Some companies are very strongly of the view that the only way is to have individual employee share ownership, so those companies that really like the idea of what they call employee capitalism would go for individual share ownership. Other companies take the view that it makes a lot more sense to have the actual ownership of shares locked up in a trust. What that means is that the benefits of the company's success is enjoyed by whoever's working in the company at any particular time, but that nobody has the opportunity to make money personally out of any growth in value of that company's shares.
David:
Okay, so going back to the employee share ownership scheme, what evidence do we have that it is a good idea?
Robert:
This is a subject that has fascinated business schools for a long time.
David:
And me!
Robert:
And it's been studied very heavily in many parts of the world, but in particular in the US and in the UK. There is a lot of evidence that suggests a number of benefits tend to arise from operating an employee share ownership scheme. To take a couple of examples, the UK HM Revenue and Customs carried out its own research in 2008, because it wanted to find an answer to the question, was it worth giving tax benefits for employees? Were these generating the benefits for UK companies that these tax benefits were intended to? So the research they carried out looked in particular at two kinds of employee share scheme: one is the one we've been talking about, which allows employees to acquire shares with tax relief; and the other is an all-employee share option scheme called save-as-you-earn share options. In the first of those schemes, the one that allows tax relieved share purchase, the finding was that around about half of the companies the Revenue surveyed felt that there had been a productivity improvement. In the second, which looked at the save-as-you-earn share option schemes, they found that the majority of companies felt that there had been a productivity improvement. So taking those two pieces of research overall, you can definitely say that the majority of companies that operated a scheme felt that it had improved their performance.
That's one piece of research. There are plenty of others -- I'll mention one more, if you like, which has been organised by a business school called the Cass Business School. What they found was very interesting. In particular, they found that employee-owned companies tended to create jobs more quickly than those which weren't employee-owned. They also found, because this research was carried out during the recession, which began in 2008, that employee-owned companies were more resilient than others, and what they found in particular was that the employee-owned companies they looked at enjoyed sales growth during that period of 11% compared with 0.6% for non-employee-owned companies. They also found that smaller employee-owned companies tended to have significantly better profitability compared with those which weren't employee owned.
David:
I'm trying to sort of figure out this idea of share ownership schemes. Weren't these in some ways vilified, because a lot of the directors were given share options, and asked to come on board a company, only to find that these share options were in some ways just feathering the nests of these directors? And so therefore people were saying that share option schemes are not really that great?
Robert:
I think we're talking about something very different. What we're looking at is arrangements that allow all employees in a company to become shareholders, or certainly most employees, rather than the very common arrangements which are prevalent in most listed companies and a number of private companies ...
David:
Primarily banks, yes.
Robert:
... which are aimed at senior executives and directors, and I think there is a role, a very important role, for those kind of arrangements, but I would also agree that they have got massively over-used and out of hand, and the amounts of reward that people have derived from them have been unjustified.
David:
Okay, so going back to employee share ownership schemes, now a shining example of one of these schemes is Tescos. Every year we probably see in one of the tabloid newspapers how much the cashier has actually made, as a result of joining the share ownership scheme. Then on the other hand, we have the Royal Bank of Scotland and Halifax, as two examples of companies where the employees had joined the share ownership scheme, and virtually lost all their money. If I was an employee of a company, how can I easily decide whether or not I'm joining a good scheme, or a bad scheme?
Robert:
The honest answer to that has to be that it's actually quite difficult. I don't think an employee can easily decide whether it's a good idea to participate in a scheme or not. That may change over time, as employees become more understanding of financial issues, and what makes companies perform well, and not so well, but I wouldn't expect it's going to change really significantly. So my answer to your question would be that I think it makes sense to try and arrange employee share ownership schemes in a way which reduce the risk attached to becoming a shareholder, and which also try to ensure that nobody who is an employee of a company invests anything more than a modest amount of their own money in becoming a shareholder in their company.
David:
So what you're actually saying is that, if I was an employee of a company, I wouldn't be betting my pension on my employer by joining the employee share ownership scheme?
Robert:
That's exactly right, yes. Your pension should continue to be widely invested, diversified. It's great if you get the opportunity to have an investment in the company you work for, but that's definitely going to be the icing on the cake, rather than the cake itself.
David:
Okay. So now onto my second question, which is, an employer who looks around the register, and says, now why isn't Mary, who's working on the tills, joining the employee share ownership scheme? Does she actually get a black mark put next to her name, because she is not like the rest of her colleagues, joining the share ownership scheme, and has decided to opt out of it?
Robert:
No, absolutely not. There should be no compulsion on any employee to participate in an employee share scheme, if they don't wish to.
David:
Okay -- as simple as that?
Robert:
As simple as that.
David:
Okay. Now, onto Nick Clegg's masterplan -- he wants to enact some kind of legislation, so that employees can demand shares in the companies they work for. What is your opinion about this, where a group of workers suddenly say, I demand to actually own shares in the company that I work for, even though those shares are not freely available just yet?
Robert:
Yeah, my personal opinion is that I think that's probably going way too far. I would welcome anything which encouraged companies to look at this possibility seriously, but I think a carrot rather than a stick approach is going to be much better. Some companies are very well suited to employee ownership, but not necessarily all, so I don't think it's right to compel companies to go down this route. I think a better approach is to perhaps increase the number of incentives that are available for companies to introduce an employee share scheme, and also to raise awareness of the benefit that it can potentially bring. If any company thinks that that looks like the right solution for them, then they should feel willing to go down that route, but they shouldn't be compelled to do it.
David:
So if I was an operator of a small business, with say 40 or 50 workers, and they want to have some kind of employee share ownership scheme, and I, as the owner/manager of the business, I'm actually quite amenable to this, and I think it would be a great idea -- how does this actually come about? Because when these members of my team, the staff that actually work for me, are shareholders in the company, how are those shares freely traded on a daily, weekly or monthly basis? It's all very well saying, I own shares in this business, but if you can't get rid of them easily, then it becomes almost an albatross, doesn't it?
Robert:
Yes, absolutely. If employees do own shares individually in their company, then eventually you have to have a means of them being able to sell those shares, and what any company with that kind of arrangement in place would tend to do would be to have a market in the shares; very unlikely it would be one that was operated as regularly as daily or weekly, or even monthly, but perhaps once every six months or once a year, there's an opportunity for people to say they want to sell their shares, and an opportunity for those who want to buy, to say they want to buy, and then you aim to match buyers with sellers. Now, sometimes that works very well. If a company's performing well, is profitable, is growing in value, then you will often get a situation where employees want to increase their shareholding, so there will be plenty of buyers out there for people who wish to sell.
But it's not always quite as simple as that, especially in a relatively small company with a small number of shareholders. The market may not be very liquid. So what you may need to think about is, a pool of money being set aside by the company which helps to support that market. It may arrange for shares to be bought from those wishing to sell, parked somewhere, not bought back by the company necessarily, and then those shares are available to sell onto employees, as and when employees want to buy more shares.
David:
But there will be businesspeople listening to what Nick Clegg had to say, and some of these businesspeople would be saying, 'I just want to run a business. I don't actually want to become some kind of broker operating a sideline business which is buying and selling shares, as well as running my business at the same time.'
Robert:
Yes, well you can keep it a relatively simple process, especially if you limit the operation of the market to half-yearly or yearly, and I think that can make a real difference. But there's no doubt that it does create an additional job for the management. They have to think that the benefits justify taking on that extra bit of administration.
David:
Now the other side of it is, if Nick Clegg does get his way, and there is legislation that says that, if a certain percentage of the workforce say they want to have some kind of employee share ownership scheme, and the management says, I don't really like this at all. I am the owner/manager of the business. I don't really want anybody joining the scheme. Do they have that option to say, I don't want to take part in this?
Robert:
Do the employees have the option?
David:
The employer.
Robert:
The employer, well, I think it would be an extraordinary piece of legislation if employers didn't have that right. So I'm not exactly sure what the government has in mind, but I would be very surprised if it was made something that was compulsory.
David:
So this would lead me very nicely to my final question, Robert, and that is, do you see this happening? Or is Nick Clegg's idea just pie in the sky, and designed to be some kind of vote winner, but it will never actually become law?
Robert:
Yes, I do see it happening, for two reasons: one is that there is going to be a very big change in the way public sector services are delivered. There are currently around six million people working in the public sector. The government want to change the way public sector services are provided, or many of them, and the change they want to make is that employees working in a particular part of local government, or the National Health Service, or their own company, which the government are using the term "employee-led mutual" to describe, that company is owned by the employees, and takes on responsibility for delivering a particular public service. Now, the idea behind that is to increase efficiency, it's a cost-saving measure, but also to increase the quality of service, because employees have an incentive to go the extra mile in providing the service to its users. I think we will see a very significant growth of employee ownership in the public sector
I also think its time has come in the private sector as well I think there's been, over the last 15 or 20 years, a steadily growing awareness among company owners that having some form of employee ownership does actually make their company perform better, and I think a large number of company owners, when they understand the benefits, will think now is the time to extend this process to more of our employees.
David:
Now the thing is, I am thinking about this from a corporate strategist's point of view, and what I see happening in about say 20, or maybe 25 years' time, is that these owner trusts that are formed will start to form bigger trusts. Eventually, they will be demutualised in some way, listed on the stock market, and all the people who are part-owners of these trusts will just make lots of money out of it, very much like the building societies and the rest of those.
Robert:
Yes, well, in a free country, if people want to create an ownership structure that allows that to happen, then I don't think you can rule it out. There are ownership arrangements, and John Lewis is an example, that make that impossible, so the shares that are held in a trust, they cannot be unlocked. John Lewis, for at least the foreseeable future, and very possibly for longer, is one company that will continue to be independently owned by an employee trust. But if people want to do something different, then that's up to them.
David:
So can I ask you to have a look at your crystal ball, and give me some kind of timeframe as to when you will see this Nick Clegg plan coming together, and becoming a reality?
Robert:
Well, it's already started in the public sector, but has made a slow start. I think it will pick up momentum over the next 12 months. In the private sector, my guess would be, within two to three years we will begin to see some noticeable changes.
David:
Wow, that's wonderful! Exciting times for a lot of people working in private companies, I suppose?
Robert:
Very exciting times.
David:
Okay, right, well thank you very much for coming in today, Robert. I have just one more thing to do before we end, and that is to sum up today's podcast with a suitable quotation. It comes from Benjamin Franklin, who said: "We must all hang together, or most assuredly we will hang separately." Does that sum up today's podcast?
Robert:
Wonderful!
David:
Right, this has been Money Talk, I have been David Kuo, and my guest has been Robert Postlethwaite from Postlethwaite. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast. If you have a suggestion for future shows, please email me at moneytalk@fool.co.uk. Until next week, have a great week!
