Responding to Nuttall – three immediate steps

First appeared in Company Secretary's Review, 1 Aug 2012

Tolley's Practical Business Fortnightly For Companies

Responding to Nuttall – three immediate steps

Employee ownership

On 4 July 2012 'Sharing Success: The Nuttall Review of Employee Ownership' was launched at the Deputy Prime Minister's Summit on Employee Ownership.  In this article Graeme Nuttall explains the Government's immediate response to his independent review.

Introduction

'Sharing Success: The Nuttall Review of Employee Ownership' (July 2012) (the "Nuttall Review") sets out a framework to promote employee ownership in the UK.  It was launched on 4 July 2012 at the Deputy Prime Minister's Summit on Employee Ownership. 

The employee ownership business model has significant benefits, as shown by research and success stories.  But it is an under-used and under-appreciated business model.  The Nuttall Review was commissioned by the Deputy Prime Minister as an independent appraisal of why this is and what can be done about it.  There is more information on the background to the Nuttall Review and a copy of it at: http://www.bis.gov.uk/policies/business-law/employee-ownership.

The Nuttall Review sets out 28 recommendations and the Government responded immediately to support three key measures.  In his key note speech at the Summit, 'Responding to Nuttall – next steps to a John Lewis economy', the Deputy Prime Minister, Nick Clegg summed up these measures as:

• a new Institute to fly the flag;
  
  
• empowering staff to get employee ownership into the mainstream; and
  
  
• off the shelf templates to make it easy.
  
  

Each of these will impact on business professionals, including company secretaries, as well as owners of private companies and employees.

Unprecedented political support

The Government's current support for employee ownership is unprecedented.  The Deputy Prime Minister called the above measures "Three extremely important next steps to help get employee ownership into the bloodstream of the British economy".  The Summit on Employee Ownership was chaired by Business Minister, Norman Lamb.  He explained in the Foreword to the Nuttall Review that he strongly supports employee ownership to "encourage more responsible and more diverse ways of running a business in Britain today" in order "to create sustainable growth in the economy".  Norman Lamb wants this "to be the decade of employee ownership".  Francis Maude, Minister for the Cabinet Office, is leading the Government's work to create public sector mutuals.  He also spoke at the Summit and welcomed the Nuttall Review, saying " The Government is serious about building a fair and responsible economy. We all want competitive, resilient, high growth business that shares the benefits fairly".

What is employee ownership?

One of the obstacles to the wider take-up of employee ownership is a lack of awareness of the concept.  Employee ownership means a significant and meaningful stake in a business for all its employees, not just a few executives.  If this is achieved then a company has employee ownership: it has employee owners.  Employee ownership should be appreciated as a business model in its own right, as distinctive as franchising or running a business as a charity.

A ‘meaningful’ stake for employees goes beyond financial participation.  This concept is not simply about delivering extra pay in a tax efficient way.  The employees’ stake must underpin organisational structures that promote employee engagement in the company.  If this is achieved, as the Macleod Review explained, "employees are committed to their organisation’s goals and values, motivated to contribute to organisational success, and are able at the same time to enhance their own sense of well-being" ('Engaging for Success: enhancing performance through employee engagement' (2009)).

The Nuttall Review has a particular emphasis on the employees’ stake being a substantial or controlling stake. This is why the Deputy Prime Minister referred in his speech to the "John Lewis economy".  There is no set rule as to what percentage of issued share capital is a substantial stake.  The employees' shareholding stake can be less than 100%.  Over 25% is obviously substantial from a company law perspective.  A company that is majority or wholly owned by its employees is an "employee owned company".

The employees' shares may be held directly or through an employee benefit trust or a combination of the two.  There is more about the mechanics of employee ownership in Employee Share Plans 29 CSR 24, 190 (22 March 2006) and on the web site of the Employee Ownership Association (http://www.employeeownership.co.uk/).

What are its benefits?

The three Government Ministers at the Summit explained why the Government supports employee ownership.  There is also academic support for employee ownership.  The beneficial effects of employee ownership are diverse, but several strong themes emerge in the literature around:

• improved business performance;
• increased economic resilience;
• greater employee engagement and commitment;
• driving innovation;
• enhanced employee well-being; and
• reduced absenteeism.
  
  

There is a significant body of research (as referred to in the Nuttall Review) on these benefits.  Although, in practice, what most influences company owners to introduce employee ownership are the success stories around the UK involving companies of all sizes and in all business sectors.  There are case studies on the Employee Ownership Association's web site and on the web sites of other sector bodies. Companies including Arup and Swann-Morton have benefitted from decades of successful employee ownership, and others such as Wilkin & Sons and public sector mutuals have more recently introduced the model and are reaping the rewards.  The Nuttall Review is a call for the wider business community to appreciate what employee ownership can do for business and the growth of the UK economy. 

An independent and expert Institute for Employee Ownership

The evidence heard when preparing the Nuttall Review showed how a lack of awareness and other factors means employee ownership is under supported, particularly in the information and guidance available on setting up and operating an employee owned company.  Someone interested in introducing employee ownership is currently unlikely to get the support he or she needs from professionals, because of their own lack of familiarity with the concept.  Extra resources are needed. There is a well-established model for the development of professional knowledge and dissemination of advice and guidance.  Typically, an independent Institute is established. The Nuttall Review established that the employee owned and co-operative sectors would welcome a new Institute whose primary role would be the dissemination of knowledge in relation to employee ownership.

The Government has confirmed its support for this new sector led Institute, to provide information and advice to: managers and employees; lawyers and accountants; business schools, researchers and Government Ministers. This will be a professional body, offering accreditation to its members.  It will not be a quango.  As Norman Lamb has explained "We have already had a remarkable response from the professional bodies and representative organisations, pledging their commitment to this programme and to developing a new Institute for employee ownership".

Achieving wider employee share ownership, particularly when shares are held directly by employees, requires company secretarial skills, and it is expected that company secretaries will be among those seeking accreditation by the new Institute.

A call for evidence on measures to raise awareness of employee ownership

There is a statutory ‘right to request’ to enable an employee to discuss flexible working with their employer and also to discuss time off for study or training.  The Nuttall Review proposes a new statutory right, for a group of employees to develop an employee ownership proposal and discuss it with their employer.  The initiative to introduce employee ownership does not have to come from a company's owner; it can come from staff. There will be no "right to have shares". A new right to request would create a powerful "nudge", in law, to ensure the benefits of employee ownership get considered. 

Employee ownership works well as a business succession solution and another proposal is for owners to encourage employee buy outs when a change in control is up for consideration.  The Nuttall Review also asks the Department for Business, Innovation and Skills to work with ACAS, to develop a voluntary Code of Practice setting out best practice on requesting and agreeing employee ownership in a company. 

The Government has issued a call for evidence on all these awareness raising measures (see http://www.bis.gov.uk/policies/business-law/employee-ownership). 

If this new right to request is introduced, company secretarial input will be valuable when choosing between the various models of employee ownership.

New off-the-shelf ‘DIY packs’

The actual, or perceived, legal and tax complexities of employee ownership present another obstacle to achieving wider employee ownership.  There were frequent calls during the work on the Nuttall Review for assistance with model constitutions for companies with employee ownership.  A strong case was demonstrated for a unified set of model documents with official endorsement.  This is part of the reason why community interest companies have been successful. There is a suite of model constitutions and accompanying guidance available from the Community Interest Company regulator's website.

In response to this recommendation, the Government has agreed to introduce new off-the shelf DIY packs covering legal, tax and other regulatory considerations, to help companies adopt employee owned business models quickly and easily.  This will help combat the perception that employee ownership is too difficult, time-consuming and expensive compared to more traditional routes.

These DIY packs will involve, for example, precedent articles of association and employee benefit trust deeds, and supporting documents, which will obviously be of interest to company secretaries.

Formal response

The Government will respond in full in Autumn 2012 to the Nuttall Review.  Other recommendations in the Nuttall Review cover, for example, changes in company law to make it easier to operate internal share markets, including holding private company shares in treasury and in relation to share buy backs.  The evidence collected in relation to the proposed new right to request and other awareness raising measures will be considered as a part of developing the formal Government response to the Nuttall Review.  Anyone wishing to provide evidence should email employeeownership@bis.gsi.gov.uk by 7 September 2012.

Graeme Nuttall, Partner at Field Fisher Waterhouse LLP