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Responsible Capitalism – is there such a thing?

‘Responsible Capitalism’ is the new buzz phrase, with moves are being made to try and capture this concept with much publicised announcements from politicians who are calling for the right for employee share ownership - with each political party claiming they thought of it first!

Amanda Brockwell a Corporate Partner at south coast law firm, Coffin Mew Solicitors, gives an insight into some of the benefits - and pitfalls - which companies need to take into account if they are thinking of going down this route:

At first sight, the idea of a company’s staff having a right to be part of the ownership of the Company within which they work is an attractive one, particularly in these days of enlightened corporate responsibility and wider accountability. But as always, any headline proposals need to come with careful thought as to how this really will work in practice.

Prior to introducing any right to request shares, however, companies will need to have a formal written agreement in place to adequately deal with the allocation and subsequent disposal of shares by its staff. This might be pretty easy if you are a quoted company with a ready-made market, but in the case of an unlisted company any scheme would need to include the creation of an internal market to enable shares to be sold – perhaps via an employee benefit trust. This is not so straightforward.

The costs associated with both the creation and administration of such a scheme with the likely proliferation of relatively small individual share holdings could be considerable, particularly to smaller companies.

Companies would need to think about potential shareholder disputes over difficulties associated with share valuations in this context. Extra care will be required to manage employee expectations, not least because of the unpleasant truth that share values can go up as well as down – a point that many current employee shareholders have found to their costs over recent years.

Of itself this issue may bring into sharp relief the fact that employees do need to pay for their shares when they buy them – and this may well put many employees off. Indeed, experience has shown that when it comes to parting with their own cash the utopia of share ownership for employees fades somewhat!

If a company decides that they will not be paid for the shares but ‘gives’ them to their employees, it may be that the employing company will be permitted to require the employees to accept a lower salary in return for receiving shares.  This may be rather less motivational to already hard-pressed employees than hard cash!

Companies will also need to define who qualifies for share ownership – perhaps by reference to categories of staff. What happens to those shares when people leave the company - either as good leavers or as bad leavers? What happens if someone wants to buy the whole company? The majority shareholders need to be sure that the employee shareholders have to sell their shares to that buyer at the same time and with a minimum of fuss.

Smaller employers and indeed current shareholders and investors may fear the dilution of share ownership and what they perceive to be the resultant loss of control over key business decisions.  Even employment claims relating to dismissal may become more complex as this additional benefit will need to be added to the list of potential heads of loss when calculating damages.

And finally, historically certain share schemes attract considerable tax advantages for companies if they are approved by HMRC.  It is not yet clear the extent to which these tax benefits will apply to any new style schemes.  In the current time of austerity it seems that any further drop in tax revenues is not likely to be welcomed elsewhere in Government irrespective of the much trumpeted but largely incalculable longer term economic and social benefits of wider employee share ownership.

There is bound to be further commentary and consultations over this – we’ll keep you posted as more details emerge. 

Contact: amandabrockwell@coffinmew.co.uk