In The Black: Share and share alike

When workers own shares in their companies they are motivated and loyal. So why are Australian companies failing to catch on? From In The Black November 2005

Power to the people. Get them to buy shares. Even better, give them shares in the company for which they work. The staff are no longer revolting. They’re quite nice now, work harder and everybody is richer. That’s how it works in the UK and the US, where employees are raking it in.

But in Australia we’ve had a chequered history of employee share ownership (ESO). For more than 50 years successive federal governments have been making all the right noises. But the incentives for companies to give staff shares are stacked in favour of public companies and the top brass that benefit from share option schemes.

The Howard government wants to change this. But its own workplace reforms, the unions and ASIC are in the way.

Despite being a nation of shareholders, few Aussies own shares in their own employer. In 1989 about one in 42 out of 7.9 million workers were members of an employee share ownership plan (ESOP). In 2004, out of 9.8 million workers about one in 17 were members of an ESOP. As in Australia, in the UK, penetration of share schemes is mainly focused on top management and the government has been trying to encourage greater ownership among the workers. Nevertheless in the late 1990s one in seven were members of a scheme. In the US about one in ten of the workforce are involved in share schemes.

Australia has a buoyant economy and business is facing a skills shortage. Those companies that can offer the most attractive economic incentives to employees are the ones who will win in the recruitment and staff retention stakes.

BIS Schrapnel’s chief economist Frank Gelber recently said that Australian companies are now stalling in the productivity stakes. In the late 1990s, cost cutting provided a golden age of productivity growth, he explained. But now with little or no fat left to cut, many companies are seeing negative productivity growth.

The government says it recognises that ESOPs motivate workers, increase loyalty and boost productivity. This is unassailable and the government has its heart in the right place.

Research by Harvard economics professor Richard Freeman found companies that have all-employee share schemes were more productive, performed better financially and had stronger share prices. He found that in the UK, these companies outperformed the FTSE All Share index by up to 40 per cent.

So what’s wrong with Australia?

Klaas Woldring, a retired academic and secretary of the Australian Employee Ownership Association (AEOA) says company bosses just don’t seem very interested in the issue. ‘The culture is ingrained in business. The culture has to change,’ he says.

That goes for the unions, too. The Australian Council of Trade Unions only supports share ownership as long as they don’t have to pay for any shares.

The federal government says it wants to align the interests of employees and employers. But academics and supporters of ESO see an inconsistency between current workplace reform, productivity improvements and employee share ownership.

Paul Gollan is an associate fellow in the department of industrial relations at the London School of Economics and fellow at the Labour-Management Studies Foundation at the Macquarie Graduate School of Management. ‘One of the problems with the Howard government is that it’s got mixed messages,’ he says. ‘One minute it’s talking about productivity [and then about] making sure there is enhancement of prosperity of the individuals as well as the organisation.

Gollan says it’s all about is finding a flexible, fair system that motivates individuals to make their companies profitable and themselves, as a community, prosperous. But he says the trade union movement is entrenched in outdated ideas.

He says: [There is] … a reluctance with some trade unions and some executive members of the ACTU to embrace new forms of employee roles and participation in the workplace at an organisational level.’

Gollan believes the government’s workplace reforms are jeopardising job security, by abolishing unfair dismissal laws within companies with fewer than 100 employees. At the same time the government says it especially wants to increase the take-up of ESO in private small and medium companies and by regular staff. These are the areas where employee share ownership is lowest.

‘Think about it,’ Gollan says. ‘Why would you have a financial stake in an organisation if you don’t actually have the democratic means to be able to voice your concerns or voice anything really, or have an input into the decision-making process?’

Employees buying shares in such a company would be exposing themselves to a great financial risk. As Gollan says: ‘All your investment is in that organisation.’

In 1999 then minister for employment, workplace relations and small business Brendan Nelson asked the House of Representatives standing committee on employment, education and workplace to review the issue. The 295 pages that are now known as the Nelson report (Shared Endeavours: An Inquiry into Employee Share Ownership in Australia) went public in September 2000 featuring 45 recommendations to increase employee share ownership.

The idealistic vision to ‘the encouragement and introduction of profit sharing schemes wherever practicable’ spoken by Robert Menzies in 1949 was reawakened. In 2000 Nelson noted that half a century later employee share ownership ‘is yet to take root in the everyday Australian workplace’. At the time the minister of workplace relations Tony Abbott supported the concept, and shortly afterwards launched the Employee Shareholder Ownership Unit.

In 2005 there have been few steps forward. To date virtually none of Nelson’s 45 recommendations have been implemented, apart from a recent PR campaign encouraging ESO take up.

The government says it believes that existing tax treatments provide an appropriate platform to encourage ESO take-up. Michael Addison, a corporate adviser who is trying to put together an employee-owned privatisation deal, agrees. He reckons the tax climate for ESOPs in Australia is favourable.

Three years ago Addison attempted to pull together a private equity fund specialising in employee buyouts.

He thought the industry funds would welcome such a scheme that > would support their members. ‘But I guess they found it all too hard,’ Addison says. ‘As a form of private equity they felt it was untested in Australia and there wasn’t a lot of evidence for it. What I was trying to achieve was what the tax laws were intended for.’

The problem is corporations law. ‘There is one huge impediment under section 708 of the Corporations Act,’ Addison says. ‘For any offer to be made in excess of 20 people or for over $2m, a prospectus has to be issued. You are talking about a 100 grand plus, maybe going up to 250. Private companies, unless they are significant, wouldn’t get into that.’

Once again there is a bias against the small private company and the humble worker. ASIC doesn’t require listed companies to produce a prospectus because they have continuous disclosure and transparency as part of their financial reporting obligations.

Unlisted companies can offer shares to senior management without a prospectus. But unlisted companies must issue a prospectus for employee offers.

Gary Scarrabelotti from the Employee Ownership Group says that unlisted companies cannot in practice make use of employee share plans because of these disclosure requirements. He says: ‘It is the disclosure requirements above all else that prevent unlisted companies making effective practical use of employee share plans.’

There are ways around this. In New Zealand, the Securities Commission last month gazetted the ‘Employee Share Purchase Schemes – Unlisted Companies Exemption Notice’. In plain Kiwi, it means that private companies won’t have to produce full-blown prospectuses to support ESOPs. The idea is that employees could be supplied with a company’s annual financial statements and the sort or additional information usually given in an annual report, plus a few extras.

In Australia in May a PR campaign on the issue was launched by the current minister watching over ESO, Kevin Andrews, .

A raft of initiatives included a major research study, a press campaign, information kits, case studies, seminars, awards – the usual stuff. Significant resources are behind the project, but the message was as bland as it was familiar: ‘The Howard government is committed to the goal of increasing organisational participation in employee share plans and these kits play a valuable role in achieving this aim.

‘We believe employee share ownership is an important key to improving workplace relations as it benefits employers and employees and can result in an improvement in the productive performance of enterprises.’

The Australian Taxation Office (ATO), the department of the treasury and ASIC were roped in. The idea was that the ATO would streamline processes to help employers obtain tax class rulings for employees who received shares under approved schemes.

To date, the ESO Unit has distributed more than 940 kits, predominantly to start-up companies and generalist business and financial advisers. A series of seminars for professional advisers was slated for last month.

The EOG’s Scarrabelotti lauds the government for its efforts. He says the kit is thorough, but more useful for consultants than companies because of its size. ‘It is so large,’ he says, ‘that it demonstrates how complicated it is to implement a share plan.’ Scarrabelotti doesn’t want to be too critical of the government’s efforts, as it is promoting ESO. ‘But the penny hasn’t dropped, with all due respect to the government and its advisers, that the current laws themselves are the biggest hurdle to employee share ownership.’

AEOA chairman Tim Mitchell says the future is bright for ESO. ‘You only have to look at international usage of employee share ownership to see people are backing it,’ he says. His consultancy reports increasing interest from private companies. ‘You could argue the shrinkage of the labour market may be causing owners to think, ‘There are tax concessions here if I can get a bit more retention power’.’

But there is the proverbial political fly in the ointment. As Mitchell says: ‘Here in Australia we have champions that come and go. And that’s part of our problem. Tony Abbott was a champion. Mark Latham was a champion. But you wouldn’t say that John Howard is a champion. He probably thinks it’s a good thing but it’s not probably top of his agenda.’

Ownership in action
It was Karl Marx who suggested workers should own the means of production. More than a 100 years later, in a bastion of capitalism, ad agency Clemenger Communication Limited’s 1,212 staff are the means of production and most of them own the shop – 53.33 per cent of it at least.

Robert Gardner CPA, Clemenger’s group accountant, says: ‘Our company is a factory floor of people, we don’t have any machinery. And if we can attract the best people, then obviously we are going to be able to produce the best work and pass that onto our clients.’

The US-based global advertising group BBDO, which first bought a 35 per cent stake in the company in 1972, owns the remainder.

In the fickle world of advertising, staff turnover is high and agencies fight to retain the star talent. The Clemenger scheme is designed to reward all staff equally.

Now that Australia has a buoyant economy, an ageing population and a skills squeeze, it’s important for all companies to recruit and retain the best while increasing productivity.

BlueScope Steel, spun off from BHP in 2002, acknowledges a direct correlation with productivity improvements, although it is difficult to quantify precisely.

The company is typical in that most employee share schemes are within ASX-listed companies. Almost all 17,000 staff own shares in the company thanks to a plan that gifted staff shares to employees under Div 13A of the ATO’s employee share acquisition scheme. The scheme allows companies to give $1,000 of shares tax free to employees each year.

In 2003 BlueScope gave employees the option to receive 200 shares at a share price of $5.00. In 2004 staff had the option to receive 150 shares at a share price of $7.86. This means that with capital growth and dividends, each employee has received $3,300 from the company. This year, BlueScope is inviting employees to buy $100 to $500 worth of shares, which it will boost by offering two shares for every one bought.

At Clemenger, the plan doesn’t give freebies. Gardner says its a way to reward and motivate staff and to help build their wealth. ‘And it also brings a lot of stability,’ he says.

Full-time or part-time staff can own the shares, including those at minority-owned companies, such as Hardie Grant Magazines, the publisher of INTHEBLACK for CPA Australia. Under the constitution the maximum staff shareholding is 5 per cent. The company’s 04/05 annual report states that 441 staff own shares. Its share price has increased by 11 per cent to $2.47 and its dividend increased by 32 per cent to 36 cents.

The share valuation formula is spelt out in the constitution.

‘The share price is purely based on the net assets and financial performance of the group and that’s ratified by the auditors Ernst & Young every year,’ Gardner says.

Usually about half the company’s profits are paid as a dividend. That leaves the other half to be invested back into the company. If someone leaves the company, they must sell their share after the trade date of 1 December. ‘The logic is that you should only benefit, if you contribute to the company,’ Gardner says.

Clemenger has talked to many companies interested in replicating the scheme. ‘We’ve had enquiries over time from funeral parlours to car dealers up in Griffith,’ Gardner says. ‘It’s not the mechanics of the scheme that’s the important part. The important part is to be able to retain good quality staff long term.’

Other companies that have ESOPs:

Consulting engineers Ove Arup is owned by one Australian and two UK trusts. In 1968 the first trusts were established to gradually transfer ownership from the senior partners to the staff. This was completed in 1979.
Shepparton-based metal fabricators J. Furphy & Sons introduced an ESOP in 1997 as a way of involving the staff. Each year, 10 per cent of the company’s after-tax profit is distributed. All employees who have been with the company for more than 18 months receive their bonus in tax-free non-voting shares.
Earlier this year DMC Outsourcing, a supply chain management operation, offered shares to anyone who had been with the company for more than a year.
Five employee share and option plans
According to Gerry Bean, tax partner with lawyers Phillips Fox, there are five main types of employee share and option plans.

Employee option plan

Usually bosses are granted options to buy shares at the current price either three to five years in the future. These schemes are usually linked to performance. Companies such as Telstra, Macquarie Bank, Woolworth’s and Unilever use this. Options are also popular with start-ups where the demand for talent in high, but cash is tight. Think
dotcom or biotech.

Performance rights plan

For bosses. Similar to an option plan but the lucky blighter doesn’t have to pay for the options. Companies such as OPSM, BHP Billiton and Lion Nathan use such schemes.

$1,000 tax exempt share plan

For the workers. As long as at least 75 per cent of employees are offered it, staff can receive $1,000 worth of shares tax free. They can’t sell for three years. BlueScope (see case studies), Seven Network and NAB use such a plan.

Salary sacrifice plan

For loyal staff only. Workers can sacrifice salary for shares but can’t sell for a fixed period, say, five years. Most people defer paying tax on these shares. AMP, Telstra and Woolworth’s are examples.

Loan share plan

An interest-free loan helps you buy shares. Dividends pay off the loan. Simple. Telstra, NAB and BHP-Billiton offer it.

When employee share schemes go wrong
It seemed like a brilliant idea: link up the old enemies England and France with a tunnel and send a high-speed train through it.

Thus Eurotunnel was born. But it’s been a rocky train track. The company has faced ruin many times in its short history.

To motivate staff, Eurotunnel introduced an employee share ownership plan with the backing of its works council.

Immediately absenteeism lessened and productivity increased. The company and the works council held this up as the future, and academic Paul Gollan sat in on some of the meetings.

What Eurotunnel did was to increase expectations of employees that they were going to get greater rewards. ‘That’s how you sell it,’ Gollan says.

But faced with overestimated passenger numbers, competition, cost overruns, and strikes, Eurotunnel’s share price hit the rocks.

Gollan says the very scheme that was designed to motivate staff was now demotivating them.

‘One of the problems they had is that they [employees] actually got a reasonable return in the first year,’ he says. ‘It would have seemed to caused a worse situation from Eurotunnel’s point of view. The demotivational effect can be quite dramatic.

‘The moral of that particular story is that you need to be very careful when you introduce these things. You are increasing people’s expectations and if you’re not going to match the actual outcomes with those expectations you might be in a very tricky situation.’

ESOP by the numbers
The most recent research available shows that of all employee share ownership plans, 52 per cent are likely to be in public companies. Private companies accounted for a meagre 8 per cent of plans.

In 2004, 5.9 per cent of 481,300 of those surveyed by the Australian Bureau of Statistics participated in employee share plans. This was a 3.5 point increase in participation over the 15 years since 1989. But it is only a 0.4 point increase on the 1999 figures.

And more than twice as many managers and administrators participate in these schemes (12.57 per cent) than regular workers (5.15 per cent), according to 1999 figures available from The Australian Bureau of Statistics.

A 1998 survey by KPMG found that only 3 per cent of private companies had an employee share ownership plan.

Reference: November 2005, volume 75:10, p. 28-34

Comments are closed.