By Ifty Nasir is co-founder and CEO of Vestd, the Share Scheme platform.
At the Labour Party Conference their Shadow Chancellor, John McDonnell, again referred to the party’s intention to introduce the ‘Inclusive Ownership Fund’. If it comes into force, around 7,000 UK companies – those with more than 250 employees – will be forced to give workers a suggested maximum 10% ‘stake’ in the company they work for.
The Labour Party are presenting the scheme as an effective way of handing equity and power to the workers, but all it will actually do is destroy value for investors and does a great disservice to the benefits of truly sharing ownership, a powerful device that many thousands of UK companies already deploy.
What is the IOF Share Ownership Model?
Employees won’t really own anything, because shares in an IOF cannot be sold. They will not therefore benefit from the capital appreciation in ‘their’ equity, and worse, their slice of profits is capped at just £500 per employee.
This is nothing like the John Lewis model, where employees are truly partners, under IOF people would only get partial rights to dividends – a share of artificially capped profits.
If profits are higher than £500 then the government will claim the difference. This will be a significant money grab by the Government as most of the profitable FTSE 100 companies generate thousands of pounds of profits per employee.
IOF has some similarities to an employee owned trust, which many larger companies have adopted. EOTs give employees rights to shares and dividends, but only while working for the business. Once people leave, they are no longer shareholders and have no ongoing rights.
But this is very different to the true share schemes run by many companies that give employees actual shares (or options, which are the rights to shares if certain conditions are met). These schemes can continue to reward people after they have left the business. Their contribution will continue to be valued, they can continue to own the equity and any appreciation in business value they help to create, and they can be rewarded long after they have moved on.
What will be the impact?
At the maximum representation of 10%, the combined vote of all of these workers will be very much in the minority, and therefore the notion of ‘control’ suggested in the IOF proposal is non-existant under normal circumstances. However, if prefered voting rights are issued to these shares to ptovide that ‘control’,this is likely to put other people off investing in the business, due to the disproportionate power that this minority may then wield. In this scenario, the tail doesn’t wag the dog, it has the potential to actually stop the dog from walking.
We can therefore expect to see a shareholder exodus, and private companies will find their funding options greatly reduced.
In practical terms, Labour’s proposal will – over time – reduce the value of all participating companies by 10%. This is quite the opposite of what company directors and senior managers are expected to do: the legal obligations of a Board are to act legally in the best interest of the company and maximise shareholder value.
The net effect of IOFs will be to reduce shareholder value by 10% while effectively increasing Corporation Tax beyond the 26% Labour has proposed, potentially to a rate of more than 30%, if recent analysis proves to be correct.
Will the companies be forced to pay dividends? Many companies choose not to issue dividends, even after reporting sizeable profits, for some very valid business reasons, such as investing in growth.
What will be the impact for companies that are rapidly growing and about to reach the threshold of 250 employees? At that point they will be forced to implement the scheme, devaluing their business in the process. It is an unnecessary bump in the road and would clearly make companies delay growth beyond this point for as long as possible.
What is the alternative?
Sharing equity isn’t meant to restrict growth nor reduce the value of a business. Quite the opposite.
There are already more than 10 different ways of distributing actual equity to employees, from HMRC-approved EMI schemes and EOTs to growth shares and unapproved options. We help UK founders do this every day of the week, as in recent years there has been a considerable uplift in understanding and the desire to share ownership with those who do or could help a company’s success, which is a powerful force for good.
We applaud Labour for encouraging companies to progress along the path of increasing equity ownership within their teams, but the suggested scheme is unworkable, undemocratic, and ultimately unfair to the workers themselves.
We hope that Labour will consult with experts and consider the alternatives before this damaging policy is implemented (should they win the election of course!).