Bernie Sanders Wants Companies to Give Employees Ownership—a Trend Thats Already Growing in the U.K.

http://fortune.com/2019/06/20/bernie-sanders-employee-ownership-uk/

Bernie Sanders, one of the leading Democratic candidates for the presidency in 2020, recently revived his push to give American workers more ownership of the businesses they work for. The Vermont senator told the Washington Post late last month that businesses should be required to put some of their stocks into employee-controlled funds, so workers get dividends.

Two other Democratic presidential candidates, Sens. Elizabeth Warren and Kirsten Gillibrand, have also joined Sanders in sponsoring legislation to make it easier for people to set up employee-owned businesses.

There’s a big debate to be had about whether companies should be forced to go down the employee-ownership route. Warren and Gillibrand have not suggested that, for instance. But the basic idea being floated in the U.S. is very similar to what an increasing number of company owners are doing voluntarily in the U.K.—handing over their pride and joy to the people who work for them.

Around 350 businesses in the U.K. are now employee-owned, with their bosses having made the decision to gradually transfer their shares into an employee ownership trust. Whoever is working for the company at the time gets to pocket dividends from the shares, though they don’t get to benefit once they’re gone. That’s different from the most common equivalent U.S. system, the employee stock ownership plan (ESOP), which sees employees retain their shares after they leave a firm.

The model is clearly gaining popularity in the U.K., with around 250 of those British businesses having adopted it in the last five years or so. According to the employee-owned John Lewis Partnership, the operator of the John Lewis department store and Waitrose supermarket chains, such businesses now account for 4% of British GDP. But why would a business owner take this step?

The feel-good factor

The employee-ownership model is not exactly new—the John Lewis Partnership has been using it since the 1950s and the engineering giant Arup since the 1970s. However, more and more examples have been hitting the headlines recently.

Last month, Julian Richer, the founder of home electronics retail chain Richer Sounds, announced he was selling 60% of his company stock to a trust for his workers. And Petra Wetzel, the founder of a Glasgow-based brewery called West, put a tenth of the company’s shares into a similar fund, with the promise of more to follow.

Julian Richer, who founded Richer Sounds in 1978, announced he is handing over control of his business to employees in an employee-owned trust.

Julian Richer, who founded Richer Sounds in 1978, announced he is handing over control of his business to employees in an employee-owned trust.

(Photo by Peter Summers—Getty Images)

“As a business owner, this means that I own less of the company that I created and will continue to own less of it each year,” Wetzel told Fortune. “On a personal level, it makes me feel good about myself as I am not being a selfish prat. I live a nice life, drive a nice car, own a nice house and go on nice holidays. I don’t need more.”

Julian Richer’s stated motivation was one of mortality. He recently turned 60, the age at which his father died, and he said he wanted to ensure a smooth transition for the company while he was still alive.

According to Deb Oxley, the CEO of the Employee Ownership Association, a group that promotes the model, the trend is largely driven by succession concerns. “If you sell a business, it doesn’t guarantee the future of those employees, or the company ethos, the supply chain, the money going into that regional economy,” she said.

If a founder or owner suddenly dies, “everybody gets nervous—suppliers, banks, creditors, insurers, colleagues,” said Richer Sounds chairman David Robinson, who formulated the company’s transition plan together with its founder. “At least this way, we’ve now avoided that.”

Meanwhile, continued independence was the motivating factor for Aardman Animations, the stop-motion outfit behind Wallace & Gromit and Chicken Run, when it adopted the model last year. “This approach…is the best solution we have found for keeping Aardman doing what it does best, keeping the teams in place and providing continuity for our highly creative culture,” said founder Peter Lord and David Sproxton at the time.

Monetary motivation

There’s yet another consideration in making this move: money.

The U.K. government has promoted the employee-ownership model in recent years with financial incentives. Seeking to expand the diversity of business models in the British economy, it decided five years ago that a worker can get up to £3,600 ($4,600) in shares from the scheme each year without having to pay income tax on it, and owners who sell a controlling interest in their business to an employee ownership fund don’t have to pay capital gains tax on the sale.

John Lewis Partnership has been using the employee-owned model since the 1950s.

John Lewis Partnership has been using the employee-owned model since the 1950s.

Photo by Sean Dempsey—PA Images via Getty Images)

In the case of Richer Sounds, Julian Richer got £9.2 million for the shares he sold to the trust, and didn’t have to pay capital gains tax on the sale. The relevant tax rate in the U.K. would otherwise have been 20%.

However, he then gifted £3.5 million of the proceeds directly back to his 530 workers, each of whom got £1,000 for each year they’d worked at the company. Some had been with the firm for over 20 years.

“The reaction has been phenomenal,” said Robinson. “It’s been humbling to see the emails from colleagues saying what it means to them… People saying now they can replace the windows in their homes, pay off some debts, pay for a son or daughter’s wedding. That’s heartwarming.”

Sharing is caring?

Fans of the model point out that employee ownership is a great way to ensure workers are fully behind the company, and making the firm a desirable place to work.

“It’s certainly the case that employee engagement and involvement is something every business should be considering now,” said Robinson. “It’s something that graduates coming into the workplace are really looking for in a business. It’s not just about [whether it’s] a company that pays a fair salary. It’s also about how it treats its employees.”

According to Tamsin Nicholds, a senior associate at law firm FieldFisher in London, the British model of employee ownership has an edge over the American ESOP approach because of the way it incentivizes workers.

“If you work in an employee-owned business and increase the profits of that business, you share more directly in those profits,” she said. “In the U.S. model, you might have a capital asset you can sell out at retirement.”

“You might say the U.S. model gives employees a more direct connection with shares, but the U.K. model can be partnered with individual share incentive schemes,” added Neil Palmer, a partner at the same office. “The U.K. model…is not just about money. It’s also about engagement and feeling you’re participating in something.”

That’s not to say the British model is for everyone, though.

Trade-offs

While going the employee-ownership route means avoiding capital gains tax, it may also mean settling for a lower sale price—after all, there’s no bidding involved. The purchase price is also usually paid out on a deferred basis, over five years or so.

“A certain amount of patience is needed, which also requires a good long-term view of the business and confidence in the business and its ability to generate revenues for the short-to-medium-term future,” said Palmer. “You have to be willing to stay involved to ensure you get a good, sustainable platform left in place.”

On the other hand, founders also need to be willing to let go. They can’t just sell their controlling interest to the employee trust and then expect to maintain control over the business indefinitely—certainly in the U.K., the authorities check to make sure that isn’t happening, said Nicholds.

The shift also isn’t something that can be toyed with, especially if there might be a need for future investment from venture capitalists or private equity outfits.

“You can’t have a crack at it and then say, let’s change our mind and do something else,” said Palmer. “If you suddenly decide you need an injection of new capital, it’s more difficult to attract third-party investors because the majority of shares has to be held by a trust, and there’s a limit to the additional rights you can give to investors.”

A pressing question in conversations about the model is whether it’s good for business. The evidence suggests it is.

According to figures from the Employee Ownership Association, productivity at employee-owned firm went up by 7.3% from the first quarter of 2017 to Q1 of 2018, while general U.K. productivity fell by 0.1%. Other studies have also found employee ownership may improve productivity, pay, job stability and the ability of companies to survive.

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