Collectively owned businesses need solid structures for decision-making and consultation, as well as individual financial incentives
The Treasury is currently consulting on ways of encouraging employee ownership. The government believes this business model can deliver resilience during the financial downturn, faster job creation and higher levels of staff commitment. It proposes giving capital gains tax relief on the sale of a business to its employees and providing some income tax and National Insurance exemptions for those working in collectively owned businesses.
Changing a company’s legal structure from ownership by individual shareholders to collective ownership will not make any difference to the way it behaves or performs. To gain the advantages identified, companies need to think through how to make employee ownership work in practice.
Decision-making
Employee ownership only succeeds if employees feel like owners. Employment terms and conditions can be changed to give direct financial incentives, and business success can be reflected in the share structure when people leave. However, businesses also need to rethink decision-making processes and the level of responsibility given to staff, individually and collectively. In the simplest worker co-operatives, all decisions (including recruitment, dismissal and pay reviews) are made in staff meetings and there is no line management structure. In larger enterprises, employee owners often start with the expectation they will have the right to decide what they get paid and will be able to stop unfair dismissals. This can create a level of defensiveness in those with management responsibilities.
Framework
Usually, following consultation, larger enterprises devise a framework which allows all members to approve the business strategy and the annual accounts, and to vote on structural decisions such as changes to the constitution. An elected body, for example, an employee council, is often put in place to represent the interests of members in operational decisions, such as the appointment of directors and the approval of the business plan, and for consultation on key staff issues, such as changes to terms and conditions, or major company acquisitions and disposals. This body may also have to decide on performance management and disciplinary issues.
Balance
The reality is there has to be a balance between staff involvement, streamlined and effective decision making, and management. If there is a proper system of communication, and employees feel they have a voice in designing the new structure, issues regarding employee’s expectations and concerns can be resolved in a positive way. If the process is well handled, employees will recognise that everyone has a shared interest in business performance and in taking responsibility for doing their own jobs well. Performance management can actually be easier in an employee owned business, if employees really feel like owners.
Transition
HR professionals have a key role in any transition to employee ownership. They need to identify the most important issues and put in place structures for consultation and communication. They have to facilitate discussions about what new rights staff will have to share in the business’ financial success, how their participation in decision-making - either directly or through an employee council - will operate and how this will impact on management in the future. Post-transfer to collective ownership, they will have to show that new ways of working are in place and make sure that any agreed changes to terms and conditions are implemented.
People power
In an employee owned business, HR professionals and other managers are no longer dealing with staff on behalf of the parent company or the shareholders; they are working on behalf of all staff, trying to ensure the business delivers what it is supposed to. Employees continue to have duties to the business, including fiduciary duties and duties of good faith, and the rights and responsibilities for making sure employees act as they are supposed to exist in all the staff collectively. This is a powerful and liberating business model but it only works if the people parts of it are properly designed and operated.
Kevin Jaquiss is a partner at law firm DWF
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