“I thought a board would be like [TV series] Succession, all dramatic music and everybody sitting there looking really tense with shifty eyes voting each other out. But it was actually very solution-oriented with people being kind to each other. Nobody was forming secret coalitions.”
So says Katie Bruce, senior delivery manager at digital studio, Ustwo in New York, which became an employee-owned business in May 2022. Now a partner representative for the leadership board, Bruce is one of an increasing number of people working for employee-owned businesses.
Nearly 500 employee ownership trusts were set up in the 12 months to the end of September 2022 in the U.K., up from 235 established in the previous 12 months and just 56 the year before. In the U.S. there are over 6,400 employee-owned companies, and in 2019, 239 new Employee Stock Ownership Plans (ESOP) were created. It allows founders to reward staff and sell their stakes while also benefiting from a tax break.
There are a number of different employee ownership models, including partnerships, limited liability partnerships (LLPs), sole traders, co-operatives/mutuals and also limited companies. Tim Woodward, U.K. employment partner, law firm, Womble Bond Dickinson says, the most popular way is to use an employee ownership trust (EOT). “The EOT was introduced in 2014 and has been credited with the significant increase in employee-owned businesses. The crucial thing is that the EOT must acquire a controlling stake in the company and must also be for the benefit of all employees equally.”
As Stephen Attree, managing partner at U.K. law firm, MLP Law says, an EOT sees the leadership team (directors) remain in place with the shareholding trustee board forming an extra layer of governance and engagement for employees. “In some cases, this is all employees, while for others it might only be the senior team.” The setup can vary from trust to trust, making it important to seek legal and financial advice first.
The benefits are wide-ranging. On a financial level, there are big tax advantages to using an EOT. For example, in the U.K., the sale to the EOT, by the shareholders or owners, is free of capital gains tax. Additionally, an EOT can distribute bonuses to employees, income tax-free, up to £3,600 ($4,344) per person per year.
An EOT also means that employees have a real, tangible stake in the business, and feel fully engaged. “Employee-owned businesses have been shown to consult and interact much more with employees, at all levels, than traditional companies,” said Woodward.
U.K. digital marketing agency I-COM established an EOT in July 2019 when Mike Blackburn, managing director, and his partner were looking to realize value from the business. “For service businesses, where people sit at the heart of what you have to offer, this is critically important especially in an environment where skilled people are in short supply.”
Bekki Bushnell, associate director at U.K. PR agency, Whiteoaks International, which became employee-owned in October 2021, agrees that working for an employee-owned company has boosted motivation. “We see a very clear and direct link between the work that we each do as an individual and as part of our teams to company performance and then ultimately what we take home.”
For Liam Hughes, head of content marketing at I-COM, he and the team have been better off financially as profits have been shared among employees twice a year. “It definitely makes you think more about the bottom line and how we can increase our profits – from bringing in more work and improving productivity, to making sure unused electronics are being switched off every night,” he said.
This shift in mindset often translates into improved company performance. The EO Association reports that in 2022, the top 50 employee-owned businesses in the U.K. saw combined sales up 1.3% on a like-for-like basis, and a median productivity increase of 9.4% ’ like-for-like’ (double the U.K. average of 2.6%).
Woodward says increased staff retention is another potential benefit of greater employee engagement, and it can help when recruiting too. At Whiteoaks International, staff turnover has improved dramatically, from 27% in 2021 to 15% in 2022.
For many company owners, making the move to an employee-owned model is also a way for retiring business owners to safeguard the future of the business without putting it up for sale. “As the business is placed into the hands of the employees, exiting owners can leave knowing that all they have worked for is safely protected by those who care most deeply for it: the people working there,” said Attree.
This concern was part of the motivation for 233-year-old U.K. law firm, Hedges Law starting the process to become an EOT in 2021. As Lucy Morrison, managing director says, owner, Nicola Poole wanted to ensure that the company would “continue advising generations of Oxfordshire clients for years to come, without the risk of being swallowed up by a large anonymous firm.”
The case for an employee-owned business is clear, but it takes work. As Rob Haward, CEO of U.K. organic food company, Riverford Organics, which became employee-owned in 2018, said, “you need to invest in communications, sharing commercial performance, great leadership and management, actively encouraging challenge and bringing employees into the governance of the business. The real benefit lies in creating a real sense of ownership among employees.”
Staff need to shift their mindset too. As Carston Wierwille, global CEO of design agency Ustwo said, growing the business “means our people need to act as owners and as entrepreneurs; they need to be commercial.” Blackburn concurred: “The big challenge for many employees is to think like business owners rather than just employees – that change takes a little time.”
But the rewards for such change are compelling.