Election Announced - HR Impact
Vestd Response to Labour
By Ifty Nasir, co-founder and CEO of Vestd, the Share Scheme platform
November 6 2019 - After months of speculation we now know that the election will be held on 12th December. Many believe it is the most difficult election to predict in recent history, so it is worth looking in detail at the policies of all the parties. One that is particularly relevant to companies is Labour's 'Inclusive Ownership Fund' (IOF), which they've presented as a way to increase workers' rights. Of course, it has many other implications.
In summary IOF would force companies with more than 250 employees to 'give' up to 10% of their shares to their employees. This impacts on around 7,000 UK companies and amounts to £300bn worth of company shares.
The idea is that this scheme will allow workers to benefit from sharing in the ownership of a business. However, employees won't really own anything, because shares in an IOF cannot be sold. As such they will not benefit from the capital appreciation in 'their' equity, and their slice of profits is capped at just £500 per employee. If profits are higher than £500 per employee, then the government will claim the difference.
IOF has some similarities to the John Lewis model, in that the shares are not owned by the employee, and the Labour Party are presenting it as such. However, the difference in the profit sharing makes it fundamentally very different. At John Lewis, where employees are all known as partners, they share on a pro rata basis a percentage of the profits (while they are employed by them). Under IOF workers only get partial rights to dividends, or a share of artificially capped profits.
IOF can also be compared to an employee owned trust, which many larger companies have adopted. EOTs give employees rights to shares and dividends, but only while working for the business. Once people leave, they are no longer shareholders - they leave everything and have no ongoing rights.
But this is very different to the true share schemes run by many companies that give employees actual shares (or options, which are the rights to shares if certain conditions are met). These schemes can continue to reward people after they have left the business. Their contribution will continue to be valued, they can continue to own the equity and any appreciation in business value they help to create, and they can be rewarded long after they have moved on.
It is not yet known if these employees will have voting right. At the maximum representation of 10%, the combined vote of all of these workers will be very much in the minority. Under normal circumstances a business usually has to secure 51% or 75% of the vote to proceed with whatever it intends to do, so 10% won't be big enough to block anything, unless minority rights provisions are implemented as part of the scheme.
If minority rights are introduced it will impact on investment as many people wouldn't want to invest in a business where disproportionate power is given to a minority. There is a danger that we will see a shareholder exodus and companies will find their funding options restricted.
Of course, the devil will be in the detail, which is not yet clear. However, given that most FTSE 100 companies generate thousands of pounds of profits per employee, the cap of £500 on profits shared with employees, with the rest claimed by the Government, would amount to a considerable increase in corporation tax, beyond the 26% Labour has proposed, potentially to a rate of more than 30%, if recent analysis proves to be correct.
How will companies be affected?
Many companies choose not to issue dividends, even after reporting sizeable profits, for a mixture of very valid reasons, such as investing for growth. It is not clear if, under IOF, they will be forced to.
Employees who only have a limited share in profits for a limited time, are unlikely to want to pass on their £500 dividend for the longer-term benefit of the company. Even if dividends aren't compulsory, companies may feel compelled to award them or risk employee issues.
IOF may also harm growth. What will be the impact for companies that are rapidly growing and about to reach the threshold of 250 employees? At that point they will be forced to implement the scheme, devaluing their business in the process. It is an unnecessary bump in the road, and potentially an inhibitor of growth.
Sharing equity isn't meant to restrict growth, nor reduce the value of a business. Quite the opposite.
Time for a rethink
There are already more than 10 different ways of distributing actual equity to employees, from HMRC-approved EMI schemes and EOTs to growth shares and unapproved options. We help UK founders do this every day of the week, as in recent years there has been a considerable uplift in understanding and the desire to share ownership, which is a powerful force for good.
Maybe these schemes can be deemed appropriate alternatives to the ones proposed by Labour?