Media Release 19 December 2008
The AEOA “ESOP of the Year Award” 2009
The Australian Employee Ownership Association (“AEOA”), Australia’s only non-profit association supporting and promoting the development of Employee Share Ownership Plans (“ESOPs”) throughout Australia, has great pleasure in announcing the “ESOP of the Year Awards” for the year 2009.
The awards in two categories recognise the achievements of companies who have successfully introduced what is termed “broad-based employee share ownership plans” in Australia. The winners are:
- Fantastic Holdings Ltd – Best Employee Share Ownership Plan in a company with more than 200 employees.
- Gardner Smith (Holdings) Pty Ltd – Best Employee Share Ownership Plan in a company with less than 200 employees.
The awards were determined by an independent judging panel comprising:
- Mr Bill Patullo, consultant, former Human Relations Manager, BHP Ltd; and
- Mr Mike Sewell, Managing Director of Market Group Investments Pty Ltd, a company investing in SME’s.
The judging criteria was based on plans which:
(a) were broadly based, that is, open to the majority (if not all) employees of the organisation;
(b) had involved effective communication procedures (for example, handbooks, presentations, online communication); and
(c) encouraged participation of employees as owners, and maximised take-up rates for the plan.
Fantastic Holdings Limited (Fantastic Furniture) employee share plan offers shares to all employees of the company, providing eleven matching shares for every hundred shares acquired by the employee – which is equivalent to a discount of 10% to the marker value of the shares. The take up rate in this growing share plan is so far 25%, with over 1% of the issued capital of the company now owned by employees through the scheme.
Fantastic Furniture is one of Australia’s fastest growing furniture retailers; providing a large range of sofas, dining, entertainment, bedroom, occasional, storage and home office furniture. It is a consolidated company that aims to bring sustained growth and profitability to our shareholders by careful planning in store placement and prominence, consistently strong marketing, ongoing product innovation, quality service and a high level of staff development and motivation.
Gardner Smith (Holdings) Pty Ltd (Gardner Smith Group) has provided a suite of four employee share plans (2 exempt and 2 deferred plans) to cover all it’s Australian and New Zealand employees. The plans operate in both Australia and New Zealand, meeting relevant taxation and corporate law requirements in both jurisdictions. 100% of Gardner Smith’s employees with more than 12 month’s service now participate in employee share plans, with an additional 9.1% of the issued capital of the firm targeted for employee ownership.
Gardner Smith is a group of integrated businesses providing sourcing, storage, logistics and processing services to the food, energy, agriculture and personal care sectors.
Gardner Smith’s operations are strategically located with facilities throughout Australia, New Zealand and China.
Each Gardner Smith business is committed to continually improving efficiencies, quality and customer satisfaction. It utilises the resources of the group in order to provide the right solution for the customer – from a simple storage service in Bluff, New Zealand to co-ordinating various resources from across the Group to deliver a comprehensive solution.
The AEOA announced the Awards at its Annual General Meeting in Sydney on 11 December 2008. The Awards recognise the best examples of ESOPs at a time when Australian companies are experiencing rapid growth in employee share ownership.
The AEOA congratulates the boards and staff of Fantastic Furniture and Gardner Smith as worthy winners of the 2009 ESOP of the Year Awards.
Gary D. Fitton
Seminar on Understanding Employee Share Plans: Corporate Secretaries Australia
Friday, 28 November, 9:00am to 12:30pm at CSA Seminar Room, Level 10, 5 Hunter Street, Sydney.
Employee participation in share ownership can have significant benefits to both employees and their companies.
Whether the company is privately held or listed, an efficient share plan provides a viable source of low-cost equity.
For unlisted companies this might avoid the necessity and cost of going public to raise funds. It might also provide a process for achieving ownership succession without selling out to a competitor. Share incentives can play an important part in attracting and retaining good staff.
The choices available to companies will be discussed by experts at this half-day seminar, plus details of the implementation process and the results of implementing an employee share plan.
The seminar will cover, among other topics:
• benefits to companies and employees
• what plans are available?
• what are the Australian regulatory requirements?
• how to implement a plan
• case studies of listed and unlisted company share plans.
This seminar is presented in association with the Australian Employee Ownership Association.
For registration details, see: “Understanding Employee Share Plans Seminar”
Study Finds that Private Company ESOPs Help Employees, Employers and Taxpayers Big-time.
Our counterparts in the US – the National Centre for Employee Ownership – have provided details in their latest “Employee Ownership Report” for November/December, 2008 of an important new study which shows the very positive benefits that “S corporation ESOPs” (ESOPs in usually closely held private companies) provide to the US economy.
In the study “S Corp ESOP Legislation Benefits and Costs: Public Policy and Tax Analysis,” Steven Freeman and Michael Knoll of the University of Pennsylvania conclude that S corporation ESOPs provide the following benefits:
They add an annual $14 billion in additional compensation that would not have been paid absent an ESOP,
They lead to annual job stability gains worth another $3 billion, and
They provide an additional $34 billion in annual increases in account values from stock gains in the accounts held by participants.
Employers pay for this out of firm-level performance gains of $33 billion per year.
The increased performance of ESOP companies, plus the fact that foregone taxes on earnings are ultimately paid by employees when they start to take benefits out some time after termination, mean that S ESOPs are a net gain for taxpayers.
In addition, when employees do pay tax on their distributions, they pay on the basis of (generally) appreciated stock, with part of that appreciation due to the company’s ability not to pay taxes in the interim.
Given assumptions about their tax rates, the authors conclude that, on balance, the Treasury is likely to end up with more revenue this way than if the income was taxed earlier.
The authors estimate that there are about 3,690 “S ESOPs, with 3.7 million employees in the US.
The paper is published by the University of Pennsylvania Center for Organizational Dynamics and can be accessed at: http://repository.upenn.edu/od_working_papers/4/ .
In the 2008 Federal Budget, the Federal Government announced new measures aimed at reducing the potential taxation liabilities for some Employee Share Ownership Plans (ESOPs).
Management and finance commentator, Manda Trautwein of VMC Global says the new measures are expected to encourage more companies to implement ESOPs, which are an effective tool for motivating and providing incentives for staff.
Among ESOP advantages are rewards for high-performing staff; increasing employee alignment with shareholder interests; delivery of objectives; a staged succession plan; and improved recruitment and retention strategies. A recent US study found companies with employee equity have a competitive advantage in terms of productivity, and generated higher sales.
Writing in the October issue of My Business, Trautwein said that despite the benefits, statistics show that only one in ten Australian businesses have implemented ESOPs, which is in stark contrast to the take up rates in the US and Europe.
For more details on the benefits of employee ownership, see our “AEOA Policy” page.
The AEOA Tax Review submission highlighted where broad and deep employee ownership in Australian industry can contribute to the nation’s overall economic, social and environmental well being.
In view of the well documented contribution that employee share ownership can make towards increasing productivity, employee savings and human capital development, it was disappointing that the Tax Review report, Architecture of Australia’s Tax and Transfer System made no mention at all of the key section in the Income Tax Assessment Act (ITAA) which covers tax concessions/incentives for encouraging broad-based employee share ownership in Australia – that section being Division 13A of ITAA.
As the AEOA submission extensively canvassed (see link to report at heading), it would seem that the review’s terms of reference will not be achieved without some acknowledgement of the contribution that employee ownership can make to them. The submission therefore detailed where employee ownership has a role in achieving each of the four terms of reference:
4.1. Workforce participation and skill formation;
4.2. Individuals to save and provide for their future, including access to affordable housing;
4.3. Investment and the promotion of efficient resource allocation to enhance productivity and international competitiveness;
4.4. Reducing tax system complexity and compliance costs.
The AEOA submission also pointed out that there are several defects in the ITAA’s Division 13A ESOP legislation. These include:
1. A two-tiered system of share ownership; one for traditional shareholders where capital growth is taxed under CGT (including the 50% CGT concession) and who can hold their equity in perpetuity; and one for employee-owners where capital growth is taxed as income and who must pay this tax after ten years, even if they wish to hold their shares for much longer.
2. A limit on employees holding, via a qualifying Employee Share Ownership Plan (ESOP), more than 5 per cent of the voting shares in their employer’s company – which means that most small companies cannot implement succession planning arrangements where the retiring employer uses an ESOP to sell the company to his employees.
3. Restricting qualifying ESOPs to ordinary shares (including stapled securities) in the employer’s company: which means that those companies where it is not viable to issue an ordinary share – for example, a wholly-owned foreign subsidiary or a small firm whose owners do not wish to relinquish control before retirement – can do nothing to help their employees become part-owners of the business.
The AFTS Tax Review offers the perfect opportunity for the Government to start taking a fresh look at these problems.
Employee Shares in Hard Times
In the current “tough” economic times, various employee share practitioners are noticing a trend for companies to opt out of employee share option-based remuneration and replace that equity with ongoing, fixed, salary entitlements.
This trend may not be in the best interests of the company, its shareholders and its employees if the resulting drain on the company’s cash resources retards its capacity to:
• Contain cash cost outflows;
• Survive the current general economic downturn; and
• Prepare the business for the inevitable upturn in general economic conditions.
A recent article (“Employee Share Plans in Hard Times”) in Thomson Weekly Tax Bulletin by AEOA President, Gary Fitton canvasses the benefits that companies, employees and shareholders can obtain by maintaining a level of employee share option remuneration. It is argued that there are benefits for all organisational stakeholders in the proliferation of employee equity participation.
Also, recent research in the US (see the post “Study Finds Broad-Based Options in Venture Backed Companies Both Common and Effective” dated 19th August, 2008 on the “Research into Employee Ownership” AEOA discussion forum) has shown that:
• Not granting options far enough down the income ladder (through granting only to ‘key senior staff”) creates a substantial risk that an “us and them” attitude will be created and that potentially critical people will not be retained or motivated.
• Granting options to all employees poses minimal risk because lower-level employees usually get smaller grants.
The conclusion to be drawn from this is that with the approaching “hard times”, it will be better to err on the side of caution and maintain your “all employee” options plans.
For more information on share options for employees of private companies, see our “Private Company ESOPs” page. For information on employee share options specialists, see our “ESOPs Consultants” page.
Australia seriously lags in Employee Share Ownership (ESO): Findings of Policy Initiatives Seminar held in Sydney at Macquarie Bank, July 30th 2008
The Seminar was convened jointly by Australian Employee Ownership Association, Australian Fabian Society (NSW Branch) and the Australian Private Equity & Venture Capital Association Ltd (AVCAL). Represented at the seminar were listed and unlisted firms and their employee owners, trade unions, ESO consultants, academics and political activists. The meeting was chaired by Dr Geoff Gallop, President of the NSW Fabians.
The policy initiatives seminar concluded that Australia lags other leading industrialised economies in the promotion and use of Employee Share Ownership (ESO) to promote economic efficiency and equity.
Presentations were made on how both the UK and the US have special legislation to promote and facilitate ESO. As a result the percentage of employee owners in the work force in both countries is over twice that of Australia which is only around 5.5%.
This low participation rate reveals the failure of Australian government initiatives. The former Federal government adopted a policy in 2004 to double participation in ESO to 11% by 2009.
The only current Australian government involvement with employee share ownership is indirectly through a $340,000 three year research grant to the Melbourne University Law School.
The University was represented at the seminar by Professor Ann O’Connell who reported on the difficulty of identifying and obtaining information from unlisted companies who have share plans.
It is in the unlisted sector that Australia lags most from other advanced industrialised economies. In the US, around 90% of employee owners are employed in unlisted companies while in Australia with its much lower base, 90% of employee owners are employed by publicly traded companies.
However, ESO participation in unlisted companies in Australia is largely created through local units of globally competitive firms who promote ESO on a worldwide basis and have the expertise and resources to overcome the many barriers introduced by Australian regulators.
The accountants of unlisted local firms in Australia typically advise their clients that it is too complicated and expensive to work around barriers created by Australian regulators.
It is in the smaller and medium sized firms that ESO can make a unique economic contribution in attracting talent for start up firms, as was explained by Dr Katherine Woodthorpe, Chief Executive of AVCAL.
Australia has world leading researchers and innovators in bio-technology and sustainable energy that are being lured to other countries that can offer a “piece of the action” through their share plans. AVCAL were looking for serious reforms to reduce the complexity and cost of ESO.
More generally ESO provides a way to minimise the cash that needs to be raised from private “business angels” and professional venture capitalists funding new and growing firms.
Overseas, ESO is used as a way for small and medium sized firms to expand their equity at low cost to avoid the need for firms to become publicly traded.
Another important role of ESO in small and medium sized businesses is to provide ownership succession without the need to sell out to a lifelong competitor.
For the full seminar report, see “Seminar Outcomes”. The minutes of the seminar are available to AEOA members and can be seen under “August News, 2008” on the Members Page. For the the presentation made on the UK situation, see “All Employee Share Schemes in the UK”,
produced by Prof. Andrew Pendleton of York University, for the seminar.
For more information on ESOP policy, see our “AEOA Policy” and “Future Directions” pages, the discussion paper “Developing an ESOP Policy – The Major Questions” and our policy manifesto “Sharing in Growth”.
The following are some photos from the seminar.
The AEOA has initiated a seminar designed to explore future policy directions for the new Federal Government and to consider the policy failures of the Howard Government in achieving the employee equity objectives in Australian industry it set itself some years ago.
The former Coalition Government wanted 11% of the Australian workforce to be owning “a piece of the action” in their employers by 2009. This objective will not be achieved as the Coalition Government withdrew support for the Employee Share Ownership Development Unit in 2007 (for the full story on the closure of the ESOD Unit, see AEOA “May News, 2007”)
With currently only around 6% of employees sharing in business prosperity, Australia is well behind the pace being set by other countries – such as the US and the UK for example – in establishing new standards for employee share ownership. What little employee ownership that exists in Australia today is found mostly in foreign owned firms and large, local, publicly listed companies. In the US, it is in private firms in which employee ownership is widespread, with nearly 10,000 such businesses now having substantial employee ownership stakes through ESOPs, involving 11.2 million employees and $928 billion in assets (NCEO, US, June, 2008). Over 30% of the total workforce in the US hold shares in their employer in one way or another.
The focus of the AEOA seminar will be on enhancing employee ownership in small and medium sized enterprises (SMEs) in the Australian economy. Leveraged share ownership plans can avoid the need for SMEs to become listed on the stock exchange, while at the same time not requiring employees to contribute funds. Share plans can also provide the lowest cost source of equity for SMEs. Another important role for ESOPs is to provide for ownership succession. In this way, business owners can avoid the need to sell out to a lifelong competitor, while at the same time extracting fair value for the business.
The seminar will be held on 30th July, 2008 at Macquarie Bank in Sydney’s CBD. The seminar is free and is open to members of the three sponsoring organisations – the AEOA, AVCAL and The Australian Fabian Society, though there will be several invited guests. RSVPs are requested as space is limited – see details in the “Seminar Program”. If you wish to attend the seminar but are not an AEOA member, see “Join Now”
Why Employee Ownership Is Popular
There are a number of reasons for the growing popularity of employee share ownership. The use of employee share ownership plans (or ESOPs) – first envisioned by ESOP creator Louis Kelso in the 1950’s in the US in order to bring to employees the wages of capital as well as the wages of their labour – was to buy newly issued shares in a company, with the borrowed funds being used to buy new capital. The company, in effect, can finance growth in pretax dollars while these same dollars create an employee benefit plan. Over the years, ESOP legislative developments throughout the world have greatly enhanced the appeal of ESOPs as a business financing vehicle. ESOPs especially can provide a way for owners of private businesses to sell all or part of their interests to their employees. A most common current application for an ESOP is to buy the shares of a departing owner of a closely held company. About half the ESOPs in private firms in the US are used to buy out an owner; the rest are typically used as a primary employee benefit plan. ESOPs make it possible for companies to provide an employee benefit simply by contributing tax-deductible shares of their own stock and allocating them to employees. Another development has been that of employee share options programs. Broadly granted share options give growing companies a way to compensate employees with equity rather than more cash. Other forms of employee ownership – such as employee savings plans and company loan based plans – allow employees to put aside (through salary sacrifice) part of their pay-packets to buy shares, usually at a significant discount. An important impact of these developments has been the potential for productivity gains. Studies consistently show that when broad employee ownership is combined with a highly participative management style, companies perform much better than they otherwise would be expected to do. Neither ownership nor participation accomplishes these significant gains on its own. Companies want employees to “think and act like owners.” What better way to do that than to make them owners? Finally, employees are beginning to expect equity, at least in some sectors. In technology firms, for instance, it is increasingly the norm to offer ‘all employee stock options’ or other equity because companies that don’t, have a hard time attracting good people. As a result of all these developments, during the last two decades, the number of companies sharing ownership broadly with employees has continued to grow (though not as much in Australia as in other countries). While precise figures are not available, it is estimated that at least 6% of the Australian workforce is involved in employee ownership in some way. As more and more companies want to find ways to align employee and corporate interests, employee share ownership is becoming a popular application in countries around the world.
The “All Party Parliamentary Group on Employee Ownership” in the UK has completed an Inquiry into employee ownership in the UK. The Group has released a report called “Share Value: how employee ownership is changing the face of business“, May 2008. The report can be accessed at: http://www.employeeownership.co.uk/publications.asp.
The All Party Parliamentary Group (APPG) is made up of MPs from all political parties who are supporters of the co-ownership of enterprise, where employees have a substantial or majority stake in the business that employs them. The report provides background on the APPG’s Inquiry into the contribution of the co-owned business sector to the UK economy. Based on 41 written submissions and three oral hearings, the report concludes that this 25 billion pound sector ‘offers enormous potential for the UK economy’.
The report analyses how co-owned companies achieve exceptional performance and makes a wide range of policy recommendations for how Government and others can remove barriers to the sector’s growth. These barriers are:
1. A shortage of data on the extent of the sector and its performance. 2. Lack of awareness and information about the sector among business owners, advisers, financial institutions, and public sector policy makers. 3. Unnecessarily restrictive tax rules affecting the sector. 4. A relative lack of appropriate finance. 5. Inadequate Government appreciation of and support for the sector. 6. Inadequate recognition in public purchasing procedures of potential value for money advantages offerred by co-owned sector providers. In the section covering the second major barrier – ‘Lack of awareness and information about the sector among business owners, advisers, financial institutions, and public sector policy makers’ – the report makes the following statement (page 22): “All of the co-owned companies and wide array of experts responding to the Inquiry were generally scathing of the level of knowledge and specialist advice amongst the professional advisor community. The quotes that follow give a flavour of the almost universally poor experiences of co-owned firms: ‘Co-ownership is not seen as mainstream but a quirky solution that applies for only a few anomalous companies – the majority of professional advisors will not be familiar with the implications, both commercial and fiscal, of co-ownership and as a result will be reluctant to recommend or even discuss this option in their dealing with clients.’ ” This situation is quite similar to that applying in Australia. Professional advisers and their peak organisations need to getting up to speed with the developments in the employee ownership field.
Federal Budget Report, May, 2008
1. Treasurer Retains Upfront Taxing Option
After announcing that he was intending to use his first Budget to close a “loophole” in the upfront taxing of employee options, the Treasurer in his actual Budget Speech of May 13 2008 confirmed that he will retain the ability for employees to be taxed upfront on the acquisition of options.
In fact, reading Budget Paper No.2, 2008-09: “Revenue Measures Relating to Employees Share Schemes”, under the proposed new measures, employees may become capable of taking different taxing positions (i.e. either taxed upfront or tax deferral) on different acquisitions of options, during the same income tax year. It will be interesting to see the final Bill and Explanatory Memorandum in respect of these matters.
The Treasurer may have read my rather “brave” article, published in Thomson’s Weekly Tax Bulletin – ISSUE 19, of 9 May 2008, at 681, (see “Taxation of Employee Share Options”) pre-empting the Treasurer’s Budget Speech, in which I queried the existence of any so-called “loophole”. The legislation introducing the upfront taxing of employee options was introduced by the previous ALP Government in 1995 and appeared to operate as intended under the current tax provisions and relevant Court rulings.
If anything, the measures announced by the Treasurer appear to simply reinforce the current employee option taxation position.
2. Treasurer Removes Double Tax on Shares Held in Trusts
The announcement that the Government would legislate to remove the anomaly under which sale of employee shares, held in certain trust arrangements, is taxable to both the trustee and the employee will be welcomed by employers, employee plan trustees and practitioners alike.
This issue was one of the major topics for reform raised at the Treasury Employee Share Plan Liaison Committee which AEOA Management Committee members attended and contributed.
The Treasurer and the Government should be congratulated in maintaining a part of the current system which has been operating as intended and making amendments where necessary to correct obvious anomalies in the taxing of employee shares.
For the full detail of the Budget measures, see “Budget Paper no. 2 2008 – 09: Revenue Measures” under Employee Share Schemes.
AEOA “ESOP of the Year Award” Presentation to Eyecare Partners Ltd
The presentation to Eyecare Partners Limited of the AEOA’s ESOP of the Year Award for 2008 in a company with less than 200 employees was presented to its Managing Director, Ms Samantha (Sam) Andersen, by the President of the AEOA, Gary Fitton and Management Committee Member, John Day on 8th April, 2008 – see the photo below.
Eyecare Partners Limited is an Australian owned, optometrist-led, publicly listed company, which preserves the ideals and goals of full-scope professional optometry, while providing access to corporate and capital resources required to flourish as a long term business.
Eyecare Partners had provided employees with the advantage of being able to acquire shares and options in their company.
One hundered percent of Eyecare Partners employees now own shares or options in the Company, as part of the Eyecare Partners Employee Share Ownership Plan, and 35% of employees elect to take advantage of the salary sacrifice arrangements to add to their holdings.
The ESOP of the Year Award recognises the best examples of ESOP’s at a time when Australian companies are experiencing rapid growth in employee share ownership.
The AEOA congratulates the board and staff of Eyecare Partners as a worthy winner of this category of the 2008 ESOP of the Year Awards.
Gary D. Fitton
Australian Employee Ownership Association
Eyecare Partners CEO, Samantha Andersen is presented with the AEOA “ESOP of the Year Award” for the smaller company category from John Day (AEOA Committee, left) and Gary Fitton (AEOA President, right).
Why Do Employees Participate in Employee Share Plans?
The latest research report from the University of Melbourne Law School’s “ESOP Research Project” – entitled “Why Do Employees Participate in Employee Share Plans?: A Conceptual Framework” – has just been published. It provides a further valuable contribution to the development of employee share ownership in Australia. The report’s conclusions have important implications for both designing and implementing employee share plans at the company level and for public policy. The following is a quote from the “Conclusions” of the report (pages 23- 24):
“The dynamics of employee participation in broad-based employee share plans in Australia remains largely unexplored. Overseas studies have identified and tested a number of variables which may potentially influence an individual employee’s decision whether or not to participate in a plan. A key finding of the existing literature appears to be that employees approach the decision whether or not to participate in an ESOP with a primarily financial orientation: that is, whether or not taking up shares in the company would be a financially rational course of action. Following from this hypothesis, several studies have found that demographic variables – particularly age and income – are the most important determinants of participation. This finding highlights the important role played by regulatory initiatives, particularly tax concessions, which may operate to make investment in employer securities a more attractive investment than it otherwise would be. Adding further complexity to the question of why employees participate in employee share plans, however, is the potential presence of psychological and workplace variables that may influence an individual’s decision-making, such as a desire to feel like a part-owner of the company or to conform to social norms in the workplace.”
The full report may be accessed at “The ESOP Research Project”.
The ALP’s ESOP World: An ESOP Policy has yet to be prepared ….
Now that the Government has its first “100 Days” out of the way, it can settle down to the longer term work of framing policy that really can make a difference to who owns Australia. This means addressing the real problems embedded in the ESOP legislation inherited from the previous Government. It also means laying a foundation for the development of a strategically conceived policy to promote employee ownership as a central plank in the economic, social and industrial reforms required for this country.
While the new Government undoubtedly has a ‘gut instinct’ that employee ownership is a good thing, it currently lacks a clearly articulated rationale for it. It has yet to explain how employee ownership fits it’s vision for Australia.
Perhaps it is unrealistic to expect Ministers and MPs to be philosophers and visionaries as well as practitioners. We can, however, expect them to have an eye to the main chance and to know where their interests lie. How, then, would sound policies on employee ownership serve the long-term political interests of the ALP? And what kind of policies are needed?
The future of the Federal Government depends very much on how successfully it cultivates the so-called ‘aspirationals’ – the battling ‘mortgage belt’. One way for the Government to cultivate this vote is to ensure that ordinary Australians become direct stakeholders in the country’s wealth-creating activities through employee ownership.
Since the end of World War Two, the preoccupying goal of most Australians has been home ownership. However, a new ownership frontier is opening up and the fortunes of future governments will depend in good measure upon their success in freeing people to become active participants on it. Australians are now moving forward from owning their own homes to owning the companies which employ them. From now on one of the major responsibilities of political parties will be to provide the means whereby Australians can achieve this new and exciting objective.
The question is whether the means are available to enable Australians to turn themselves into employee-owners.
There are major defects in the ESOP legislative provisions. We’ve pointed these out many times before. But they’re well worth stating again:
1. A two-tiered system of share ownership; one for traditional shareholders who can hold their equity in perpetuity; and one for employee-owners who cannot hold their shares for more than 10 years.
2. A limit on employees holding, via an Employee Share Ownership Plan (ESOP), more than 5 per cent of the voting shares in their employer’s company – which means that most small companies cannot implement succession planning arrangements where the retiring employer uses an ESOP to sell the company to his employees.
3. Restricting ESOPs to ordinary shares in the employer’s company: which means that those companies which cannot issue an ordinary share – for example, a wholly-owned foreign subsidiary or a small firm whose owners do not wish to relinquish control before retirement – can do nothing to help their employees become part-owners of the business.
No election promises were made to address – let alone solve – any one of these three major problems, nor their corollary – a systematic discrimination against the small business sector and those employed in it towards accessing ESOPs.
The Bottom Line
In order to correct the anti-small business bias of the ESOP legislation, the AEOA has taken the view that the Government should amend existing ESOP law to enable small business more easily to implement employee share ownership arrangements. To achieve this, the minimum reforms required are:
- To raise, at least in the case of small companies, the limit on employees holding more than 5% of voting shares.
- To lift the prohibition against ESOP using equities other than ordinary shares and to allow for the use of other equity types useful to small business.
- To tax upfront gains as income and capital growth as CGT (upon the realisation of the shares in both cases).
The Broader Vision
Now that the ALP is in government, it needs to do more than make minimalist amendments to the legislation it inherited. Instead, it has the opportunity to set the agenda by developing an integrated strategic policy on employee ownership. To achieve this requires a grasp of where employee share ownership fits into a spectrum of policies covering taxation, industrial relations, savings, company financing and expanding Australian equity in foreign-owned companies.
For a summary of the key policies required, see “Developing an ESOP Policy: The Major Questions”.
This presentation was made by Anna Booth of Co Solve to the Annual General Meeting of the Australian Employee Ownership Association (AEOA) on 6th December, 2007.
The presentation addresses the following questions:
1. What are the contemporary forces that are favourable towards employee ownership and what are the forces that are unfavourable?
2. And in the light of these forces, what can be done by those who are keen to see employee ownership grow?
Anna is a Director of the workplace relations facilitator, Co-Solve (www.cosolve.com.au). She is an experienced facilitator, accredited mediator, mentor and trainer as well as a board member of Members Equity Bank (the banking institution of the Industry Superannuation Funds), and non-executive chair of the law firm Slater & Gordon. She has also recently joined the board of The Centre for Policy Development.
Anna is a former national secretary of the Textile, Clothing and Footwear Union of Australia and Australian Council of Trade Unions vice-president. During the nineties she was a board member of the NRMA as well as the Commonwealth Bank of Australia, and a member of the Sydney Organising Committee for the Olympic Games (SOCOG).
“There are a number of contemporary issues that suggest that we can be optimistic about the prospects of employee ownership. These include the changing structure of the workforce – workers response to outsourcing and the downsizing of the 1990’s – tells us something about what workers want. Workers are voting with their feet. They want to be liberated from ‘command and control’ systems. Many workers want to work for themselves, taking up self employment opportunities through contracting, or if they become detached from the workforce, they are buying a job for themselves through taking up franchises. In these ways, workers seem to be demanding more of the value that they are creating with their labour.….”
Workshop to Consider ESOP Regulatory Reform for SMEs
The Employee Share Ownership Project at Melbourne Law School is currently researching regulatory and other barriers to the development of employee share ownership in SME’s.
The Law School will be holding a workshop in early April, 2008 where experts will consider the topic “Employee Share Ownership in SME’s: Objectives, Current Practice and Regulatory Reform”.
SMEs in Australia are much less likely to have broad-based employee share ownership plans than their larger, listed counterparts. The low incidence of employee share ownership in the SME sector is attributable in part to the current regulatory regime in corporate and taxation law. The current ‘one-size fits all’ approach is ill-suited to serving the diverse objectives for which SMEs may seek to implement employee share ownership and, in many cases, operates to effectively deny SMEs equal access to employee share ownership plans.
This workshop will discuss the diversity of objectives for which SME owners and managers may seek to implement employee share ownership plans (ESOPs); and how the current regulatory regime in corporate and taxation law structures and constrains the use of ESOPs in this sector. The case for introducing regulatory reforms to remove identified constraints and discuss practical proposals for reform will be considered.
For more on this work, see the ESOP Research Project .
Employee Ownership and Social Inclusion
With the recent election of an ALP Federal Government, the Hon Julia Gillard MP has been appointed both Minister for Employment and Workplace Relations and Minister for Social Inclusion.
The social inclusion agenda is a new one for Australia . In other nations, it is much more advanced. Social inclusion initiatives provide major opportunities for employee ownership. The UK “Social Enterprise of the Year, 2006” was the wholly employee owned “Sunderland Home Care Associates” (a private company owned by an ESOP trust)
The employee ownership opportunity within the social inclusion agenda is highlighted within the “Foreword” by the Rt Hon. Hilary Armstrong, MP, UK Minister for Social Inclusion to the recently released report on Sunderland Home Care Associates: “Caring and Sharing: The Co-owned Route to Better Care”, by David Wheatcroft. This report was published by the Employee Ownership Association UK in October, 2007.
The following statements by the new Australian Minister for Social Inclusion, Julia Gillard – from a speech entitled “The Economics of Social Inclusion” – provide further evidence that employee ownership will have a major role to play in the Government’s developing social inclusion agenda.
“The concept of social inclusion in essence means replacing a welfarist approach to helping the underprivileged with one of investing in them and their communities to bring them into the mainstream market economy. It’s a modern and fresh approach that views everyone as a potential wealth creator and invests in their human capital.
Including everyone in the economic, wealth-creating life of the nation is today the best way for Labor to meet its twin goals of raising national prosperity and creating a fair and decent society. This is a recognized policy ambition of social democratic parties around the world today.
Fairer workplace laws that encourage enterprise bargaining and cooperation will help create a fairer and wealthier society, but on their own they are not enough. We need a new approach to social and economic policy too. And social inclusion is it “.
To further reinforce this point, the following is an extract from the Sunderland Home Care Associates report (page 5) mentioned above which clearly indicates that Australian policy makers need to be taking seriously the role that employee ownership can play in one of the major election commitments of the new Government:
“The policy implications
One week in October 2006 provided a snapshot of why Sunderland Home Care’s (SHC) success should matter to policy makers. On 18 October 2006 , the media reported disturbing findings on elderly home care by the Commission for Social Care Inspection. Its ‘Time to Care’ report heavily criticised the standards of home care experienced by hundreds of thousands of older people. “There are problems of recruiting, retaining and training good quality staff” said the CCSI’s chief inspector, Paul Snell.
Exactly one week later, SHC founder Margaret Elliott was picking up the top prize and overall award – as the UK’s outstanding social enterprise – in the Social Enterprise Coalition’s Enterprising Solutions Awards, sponsored by the DTI, NatWest and Royal Bank of Scotland.
One aim of this paper is to explain why and how SHC manages to provide a standard of care that seems to elude so much of the elder care sector. A lot of that explanation is to do with SHC’s co-owned status – staff own the company, they take decisions together and they feel more part of and proud of the enterprise than counterparts in companies where there’s no staff stake or say.”
To see more on “Private Company ESOPs”, click here.
See also the AEOA discussion forum “Social Inclusion – More Than A Job”