Bookings are now open for our upcoming Employee Ownership Explained Webinar Programme. These expert webinars, aimed at professional advisers, will explore different aspects of employee ownership, equipping the audience to support their clients in making informed decisions.

In advance of the first event, we caught up with guest speaker, Graeme Nuttall OBE, for his reflections on the Nuttall Review ten years after its publication.

Image of Graeme Nuttall

Graeme Nuttall OBE served as Government Adviser on employee ownership to the Coalition Government, is viewed as a global expert on all matters connected with employee ownership and is currently involved in Australia, Canada, Denmark and South Africa with the introduction of employee ownership trust type structures. Graeme is a Partner with the European law firm Fieldfisher.

Chancellor Hunt’s Autumn Statement 2022 did not touch on any matters directly relating to employee ownership, although the plan to review the company share option plan as announced in the “mini budget” is unchanged. And the UK’s flagship model of employee ownership, the employee ownership trust (EOT) remains in place. Since the landmark statutory recognition of the employee trust model of employee ownership in 2014, UK employee ownership has grown significantly. The Nuttall Review of 2012 set the foundations for the EOT legislation, identifying it as a solution to the key challenges impeding the wider adoption of employee ownership in private companies.

Awareness levels were low, the process was perceived to be too complicated, and advisers were ill-informed as to how to piece together employee ownership transactions. The EOT provides a simple, straightforward structure, whilst retaining significant flexibility to adapt to company circumstances, and offering tax advantages that certainly attract the attention of business owners and advisers alike.

The results have been game changing. There are now well over 1,000 employee-owned businesses operating in the UK, with 150 of these companies headquartered in Scotland. Indeed, Scotland has been leading the way here and the Scottish Government’s ambitious aim of “500 EOBs by 2030” certainly reinforces a strong commitment to growth.

10 years on from the Nuttall Review is a good time to reflect on whether any improvements to the EOT statutory provisions would be helpful and whether any additional policy initiatives are needed. In ‘Celebrating the 10th anniversary of the Nuttall Review’ I raised some ideas:

• the Nuttall Review’s recommendations covered all forms of employee ownership, and so have we succeeded too much in promoting the 100% EOT model,
• would some businesses be better with a 100% direct employee share ownership model, or with a hybrid model? Research suggests only 6% of the sector uses a hybrid model, combining trust and direct employee ownership,
• does our more flexible EOT approach achieve the same overall career long financial benefit to employees as, say, the much more rule-bound American employee stock option plan, and
• should alternatives to annual cash bonuses be considered?

There are other possible policy topics to discuss, such as the relatively low number of employee-owned businesses that operate internationally, even among the UK’s Top 50.

One area where change is advocated is in relation to ensuring EOT ownership leads to good employee engagement. As identified in the Nuttall Review, employee ownership only exists when an EOT’s shareholding underpins employee engagement. There are some improvements that may help ensure an EOT genuinely achieves the principles of employee ownership.

The EOT legislation is not intended as a complete blueprint for the trust model of employee ownership. If someone only reads the Finance Act 2014, they will not fully understand what’s needed to create an employee-owned business. There are no statutory rules, for example, around the composition of the EOT trustee board. Under an EOT structure, the EOT is likely to be the majority – or often sole – shareholder and therefore the role of the trustee is vital. There are guidelines around who should sit on the trustee board and how they should be appointed. Robert Oakeshott, founder of the UK Employee Ownership Association, proposed a “paritarian” composition where the number of trading company directors (and I would include here exiting shareholders) is in equal proportion to the number of employee representatives (read further in ‘How Robert Oakeshott made paritarian governance good practice for EOTs’).

This guidance also advocates the appointment of an independent trustee – someone who is neither an employee nor a director of the trading company- as a valuable trustee board member ensuring a neutral view and who helps maintain focus on EOT related issues.

Where regulatory change may be needed is to rule out board compositions that do not obviously help promote an EOT’s purpose of supporting long term employee ownership: such as prohibiting all or most trustee directors from being exiting shareholders or prohibiting a non-UK tax resident trustee. A former UK government Minister supported these changes, albeit in a personal capacity (Jesse Norman MP, The Robert Oakeshott Lecture 2021).

The beauty of the EOT is that the governance can be modelled around the requirements of each business; recognising, for instance, that governance when deferred consideration is owed may be different from when an EOT owns its shares debt free. Sustainability and other values are often key and having a properly constituted trustee board will uphold these values . It is this that elevates an ‘EO’ transaction from a typical commercial deal. All parties’ interests are aligned. The sellers, the buyer (the trustee), the trading company’s management and its employees all want to see a secure employee-owned company that continues to create long-term benefits for thebusiness, its employees and, often, its local community.

Guidance may be needed in relation to what’s best practice on valuations. The company valuation should be fully transparent to the sellers, trustee and trading company and undertaken by a qualified person external to the business. It is important that the seller receives a fair value, but this must be balanced with the ability of the company to make the repayments in a way that does not compromise the company’s ability to operate and grow. And the trustee must not pay too much and be in breach of its fiduciary duties. Of course, achieving all of this depends on informed and ethical advisers who will take time to understand what the desired outcomes are and how these fit with a truly sustainable employee-owned business.

Again, let us look at how Scotland is blazing a trail here. The efforts of Co-operative Development Scotland in raising awareness within the adviser community have been instrumental in adding to the growth of employee ownership in Scotland. The Nuttall Review identified lack of knowledge amongst advisers as one of the key obstacles in the wider adoption of employee ownership. On my visits to Scotland, I am impressed by not only the knowledge of Scottish lawyers, accountants, and bankers but also their enthusiasm for employee ownership. As the wider world looks to follow the UK’s lead and introduce versions of the EOT, I recommend they examine Scotland’s success and look at educating their advisers.

Graeme Nuttall OBE will be speaking at our adviser webinar on January 31st 2023.

View the full programme and book your place here.