Employee ownership can make societies richer

Julian Richer, founder of the UK audio and entertainment chain Richer Sounds, has reached the age when he thinks of posterity. But 60-year-old Mr Richer has no children to take on his business and, rather than selling to an outsider, is transferring a majority stake to his 520 employees.

It is an unusual move in the UK, where entrepreneurs often sell out at retirement, but a welcome one. Mr Richer wants the spirit of his business to live on, and it could assist what Richer Sounds calls “the budding musicians and film buffs, fanatical about great sound and vision” whom it employs to keep it growing in a challenging market for retailers.

The good news is that Mr Richer is not alone. Encouraged by legislation that made it easier and more attractive to hand on family businesses to employee trusts, entrepreneurs such as the founders of Aardman Animation, the studio behind Wallace and Gromit, are doing the same. Some 250 companies are estimated to have transferred control to such trusts in five years.

Employee ownership is not a panacea, but there is evidence that, combined with wider participation in decision making, it can raise productivity as well as growth. That applies in many industries, but especially in professional services where creativity matters. It is not a coincidence that many professional and creative firms are organised as partnerships.

The UK lags behind other economies, including the US, in employee ownership and the decline of mutuality has squeezed alternatives to enterprises being run as limited companies. But as the shareholder value approach is criticised for promoting short-termism and high executive pay, handing majority control to those who work in the business has clear attractions.

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The strength of independent, long-term ownership is recognised in countries including Germany, where companies such as Bertelsmann and Robert Bosch are owned by foundations. In the US, there are 3,000 partnership-like S Corporations employing some 750,000 people, and the federal government last year passed a law encouraging employee share ownership.

Mr Richer and others have been incentivised by the UK’s new employee ownership trust (EOT) structure, which allows entrepreneurs to pass majority control to a trust without capital gains tax. He is receiving an initial £9.2m for his shares but giving £3.5m back in staff bonuses, and EOTs are permitted to pay annual bonuses of up to £3,600 per employee tax free.

It is an attractive arrangement, in contrast to Labour’s proposed policy under Jeremy Corbyn, its leader. If elected, the party wants to force all UK companies with more than 250 employees gradually to divert 10 per cent of their equity to “inclusive ownership funds” that would divide the dividends between staff and the government. Instead of a tax incentive, this would be a tax grab.

Employee involvement on a voluntary basis is a superior idea, both because it is more honest than Labour’s clumsy intervention, and because it stands a greater chance of reforming how businesses are run. No form of control is perfect, but societies and economies gain from diversity of ownership including by employees.

Even talented and hardworking baby boomers such as Mr Richer have been lucky in their generation and a wave of similar decisions looms. Many owners of Germany’s Mittelstand of family companies are close to retirement, as are the owners of an estimated half of US privately owned companies. It is a unique chance to ensure that capitalism becomes more inclusive.

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