Do politicians really think through the ideas they float? Do they have any idea of the realities of business and especially the entrepreneur? Come to think of it, do they have any idea of the complexities of business?
As a retired businessman who ran, bought, created and sold businesses, large and small in over a dozen industries, I have a reasonable knowledge of the problems facing business owners and the people who work in them. I also spent many years in the layers below the top to have a fair understanding of the issues that face employees, what concerns them and what doesn’t. Let’s start with the problem that Osborne is purporting to solve, the great employee rights and employment law burden.
Before the current edifice of employment law was created and forced onto business the policies that determined how employees were recruited, trained, paid, promoted, cared for, pensioned and fired were largely at the whim of the employer. What this meant was that all of these factors were points of differentiation that clearly separated good employers from their bad competitors. Working for Unilever in the 1960’s I enjoyed benefits and practices that would still be regarded as outstanding even today. Has the welter of employment law really made things better for the average employee in the average company?
Consider first that small and medium businesses (SME) account for 99.9% of all enterprises and 58.8% of private sector employment. To the vast majority of these businesses employment law brings little benefit over and above that which enlightened owners and managers strive to achieve without the aid of the law. But it also brings huge compliance costs and the threat of many disgruntled employees running off to employment tribunals. Today a malicious ex-employee can wreak havoc upon a good employer. Maternity leave can also create a nightmare for small companies. There will always be bad employers just as there will always be bad employees. We must ask ourselves what we have really gained by forcing policies borrowed from some of the country’s (and the world’s) largest companies onto our SMEs. And that is before we should ask ourselves what role corporation tax and employers national insurance contributions do for employments levels.
So, if Osborne is recognising at least part of the problems facing employers here in the UK with his equity for rights proposal, shouldn’t we be applauding his scheme? Sadly, I don’t think we should. I believe that it is another dose of borrowing concepts of best practice from the largest corporation that will do nothing for the 58.8% of private sector employees who work within the SME sector. And nothing for the company owners of these businesses. Let me explain why.
There are already employee share ownership schemes that are used by large companies. Usually these shares encourage employees to save and should they leave or require the cash then there is a very liquid market waiting to buy their shares. The risk, of course, is that the value of the equity falls (remember Northern Rock). Overall these schemes do not represent more than a fraction of the total equity of the company and do not carry voting rights or eligibility for dividends. Are they effective in engendering concepts of ownership amongst participating employees? Or are they just a savings scheme? Would such a scheme encourage employees of these large companies to give up their rights? And would having two tiers of employees be of real benefit to the company? You decide.
However, when we turn our attention to the SME sector the problems become significant. In privately owned companies equity is usually guarded closely by owners or can be very limited in number (£100 companies are quite common). The reason for this is quite simple. For those owners who wish ultimately to sell the business to achieve a return, then they wish to retain the largest percentage of equity they can. For those businesses that are run as family concerns then there is little intention to sell and equity is often held in a web of different generations of family members and trusts.
There could be attractions for an SME to set up such a scheme as a means of opting out of employment legislation. Any benefit for the employee could be completely illusory. Why? The issued value of any shares provided in such a scheme is likely to be low and any return only available when (and if) the company is sold. Given that there is no market in equity held in privately owned shares, any departing employee (for good or bad reasons) would be at the mercy of the company in deciding a price for buying them back. The cost of setting up such a scheme would be quite high. Would it raise meaningful sums for a startup or early growth business? Not a chance.
Of course there are already businesses run as cooperatives but these are tiny in number. There are also those businesses who run employee share ownership schemes, these usually being very large companies with differentiated cultures and attitudes towards employees.
In my view if Osborne really wishes to help both private employers and employees he should scrap swathes of employment legislation (as it frequently strangles employment opportunities in 99.9% of private enterprises). He should also reduce or eliminate corporation tax and employers national insurance contributions both of which act as a tax on employment.
Time to scrap the idea, George. conference season is over for another year. Just go and talk to a few SMEs before the budget.
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