Can employee-owned businesses be truly co-operative?

Finance

David Alcock at Anthony Collins explores employee ownership and co-operative trusts, and offers his insights on the value that these models can bring

For companies looking to embed employee involvement in their business, there are several options, including a worker co-operative and an employee ownership trust (EOT). However, there could soon be a further option that is rooted in an understanding of the benefits of both co-operative and EO-owned structures – a best practice model for what employee ownership could become in the future.

The number of businesses in the UK choosing to operate as an EOT has grown exponentially since 2014, when the structure became linked to various tax advantages for employers. This means that even though the concept of employee ownership has been around for about 150 years, it’s only relatively recently – in the last 10 or 15 years – that EOT structures have evolved significantly.

EOTs have also attracted some suspicion from those in the co-op movement and indeed outside, mainly due to concerns about how much employees are actually involved in ‘ownership’. Since 2014, some EOTs have been exposed where workers have not had any more say, and have no involvement at all in the day-to-day running of the business. In some situations, the decision to transition to an EOT structure may have been motivated by tax advantages, rather than any underlying commitment to empower employees.

The degree to which employees should expect to benefit from working for an employee-owned business is variable. Much depends on the scale of the organisation – for example, a small business with fewer than ten employees might opt for an informal structure that doesn’t extend workers a formal right to get involved, but does give them a say in operational decisions. An SME with a larger number of employees might choose a more formal, consultative model, such as an employee council, where the degree of transparency and decision-making responsibilities are clearly defined and allocated.

John Lewis is a high-profile example of an employee-owned business in the UK, but in some ways it is atypical. Despite being a corporate trust, the retailer’s business model is unique as it predates the EOT structure introduced in 2014. It is a striking example of positive engagement, as employees are involved in matters of governance through the Partnership Council, and whilst they don’t own a stake in the business, they do earn a share of its profits and have a say in decision making.

Co-operatives are generally less well known, and their popularity has tended to go in and out of fashion. Founded as a collective self-help response in the Victorian era, they went out of fashion in the individualistic 1980s. Today, there is a resurgence of interest in co-operatives, partly due to their common ownership approach to business and partly because of the enthusiasm of the Labour Government, who have promised to double the size of the co-operative and mutual sector.

Creating a new structure that combines co-operative principles and the tax advantages that come from EOT status could make employee ownership even more popular in the future. With this in mind, specialist lawyers at Anthony Collins are developing a new kind of EOT with a corporate trustee that is registered as a mutual society, with employees appointed as members, so that ownership is genuinely inclusive and co-operative in nature.

Whilst it’s an early-stage model, it is already attracting considerable interest from stakeholders, particularly as it could give a genuine alternative to the governance issues that have arisen in some EOTs. Work is currently underway to develop a new constitution for the proposed Co-operative EOT model, which will be submitted for early assessment by the Financial Conduct Authority (FCA) Registrar in the near future.

The timing is right for a new Co-operative EOT for a number of reasons. At last year’s Budget, new requirements were introduced for EOTs, which are intended to discourage potential misuse. Among them, corporate trustees of an EOT must be registered in the UK, not overseas. Trustees must now take reasonable steps to avoid overpaying for shares during acquisitions and ensure the purchase price reflects fair market value. Exiting shareholders who sell their stake must also stay on hand for up to 4 years to resolve any post-transactional issues.

Even though the new requirements for corporate trustees have been in force for six months, some of the finer detail still needs to be resolved. For example, what constitutes ‘reasonable steps’ to ensure fair market value? The new requirements have reinvigorated debate about employee ownership, which is positive, and this could help to define what best practice looks like. New Co-operative EOTs could therefore be coming at just the right time, offering users a different take on employee ownership going forward.

Whilst there is still much work needed to shape the new Co-operative EOT structure, the opportunity to create new possibilities in employee ownership has been welcomed and could bring further benefits for employers and employees alike. It is the right time to bring together the best aspects of worker ownership in one model, helping companies and employees to thrive by embracing a truly co-operative employee-owned business model that is fair for all.

David Alcock is a partner and heads up the social business team at Anthony Collins. He has specialist knowledge of supporting organisations in transitioning to employee-owned and cooperative business models.

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