Niall Kavanagh and Cormac Brown consider the remit of the UK Nuttall Review ‘to identify barriers to employee ownership and find solutions to knock them down’ from Ireland’s perspective.
The July 2012 release of ‘Sharing Success: The Nuttall Review of Employee Ownership’ (the Nuttall Review) and its 28 recommendations, provide plenty of food for thought and a new framework to further discuss employee ownership with the Irish Government and the business community as a whole.
As a starting point, employee ownership is a great thing; people tend to care more for the things they own. The available academic literature is clear; improved business performance and increased economic resilience are direct consequences of employee ownership. There is also evidence that employee ownership has a role in driving innovation – enhanced performance, resilience and innovative thinking would be beneficial to any economy. However, with the loss of over 300,000 jobs since 2007, for Ireland these are vital.
Company secretaries play an instrumental role in developing employee ownership. Positioned at the centre of the decision-making apparatus, the company secretary is ideally suited to bring the evidence of the benefits of employee ownership to the board. With their deep understanding of company law and corporate governance, company secretaries have the knowledge and insight to gather and lead the multi-disciplinary teams required to launch these initiatives.
Ireland is not the UK
In late 2010, the Greek Finance minister stated that, ‘Greece is not Ireland’. Around the same time, his Spanish counterpart said that, ‘Spain is neither Ireland nor Portugal’. While some have presented these statements as evidence of a better understanding of geography over finance, it must be stressed that when it comes to employee share ownership, Ireland is not the UK.
This might seem like common sense, but the impact of high personal taxes, the need to foster more indigenous start-ups and the pervasive private company culture would have to be addressed if there was ever to be an ‘Irish Nuttall Review’.
Ireland does not have a ‘PLC monoculture’
Most Irish companies are private companies. At the end of 2010 over 86% of Irish companies were private. Notwithstanding the close link between ownership and management in these companies, many are not succeeding. Companies collapsed at a rate of more than 160 a month in the first 11 months of 2011. From January to November some 1,930 Irish companies failed. To add insult to injury, these failed companies left almost €1.2 billion in unpaid debts.
The central question that would need to be addressed by an ‘Irish Nuttall Review’ would be whether these companies are simply victims of circumstance or is something else missing? If it is the latter, could an increase in employee ownership help address this?
There is limited research on the benefits of employee ownership among Irish companies. HRM Recruit recently published, ‘Showing a lot of Promise – What matters in your Employee Value Proposition’, which reviewed the impact of various reward measures on Irish workers across multiple sectors of the economy and at various functional levels. Unfortunately, share-based remuneration measures were not well ranked, scoring a mediocre 2.99 out of five when compared to other benefits.
With all the available evidence, why is there such a lack of uptake? Like Graeme Nuttall, the Irish Proshare Association (IPSA) has received reports that there is a perception among employers that such schemes are difficult and costly, that there are also concerns among employees of the risk associated with the ownership of illiquid shares, in addition to there being a general lack of awareness among Irish employers and employees on the topic.
IPSA will continue its work with HRM to better understand the role employee ownership can play in the modern Irish economy and how best employers can use share-based remuneration to influence employee engagement and retention. The results from this collaboration will flow directly into IPSA’s engagement with the Irish Government.
Small open economy and the start-up company
There is a general acceptance that given the small open nature of the Irish economy any sustainable recovery will be driven by export-led companies. It is also widely acknowledged that this will be achieved by a dramatic increase in the number of indigenous start-ups with the potential and ambition to grow into innovative, export focused international enterprises. The 2010 Innovation Task Force report, the 2012 Action Plan for Jobs and the continued work by IDA Ireland and Enterprise Ireland have made good progress on this front. During 2011, Enterprise Ireland supported 93 high-potential start-ups, approving €20.4 million in funding and their client companies achieved a total export figure of €15.2 billion. While these achievements should not be underrated, for the Irish economy to recover and grow, more needs to be done.
The evidence that employee ownership leads to enhanced business performance and fosters a culture of internal innovation and organic growth in the companies that use it, is readily available. There is also emerging evidence that demonstrates that these enhancements are most effective in companies with less than 75 employees. Based on this, start-up enterprises are ideally suited to take advantage of the benefits of employee ownership and exploit it to the fullest potential, especially when coupled with the difficulty of raising finance to pay staff costs. Indeed, the specific recommendations in the Nuttall Review on the role of employee ownership for start-ups and expanding companies are very welcome. However, given the requirements of the Irish economy, any ‘Irish Nuttall Review’ equivalent would have to go further.
IPSA has already recognised the potential offered by employee ownership for high-potential start-ups and has, since early 2011, been in contact with various universities and incubator units across Ireland to increase awareness of the potential benefits of employee ownership. IPSA has also been in contact with, and has received positive reactions from, the Irish Department of Jobs, Enterprise and Innovation. Similar contacts with Enterprise Ireland have also proved fruitful.
The 2010 Innovation Task Force report contained a number of recommendations around share-based remuneration that could help to increase the number of start-up companies and address many of the specific challenges they face. These recommendations include:
- the introduction of a ‘founder share option’, which would be eligible to more favourable tax treatment than options granted in established companies;
- a reduced rate of capital gains tax where the proceeds from a sale of one innovative company are reinvested in another innovative company; and
- the introduction of an ‘Entrepreneurial Tax Credit’, that could be granted to founders in certain circumstances.
Unfortunately, these recommendations have not been implemented and have been gathering dust, despite IPSA efforts to highlight them.
Start-ups and their founders need all the help they can get. Company founders often have to take on personal debt while they struggle to ensure returns for the providers of capital. This can lead to new companies being sold too early and for too little, rather than being floated as public companies, for example, that might eventually have a better impact on the economy. IPSA firmly believes that tax efficient employee ownership measures could address these problems and enhance the entire Irish economy.
Attracting top talent to Ireland
While there have been improvements in exports, it is vital that other sectors of the economy are not forgotten. The Irish Business and Employers’ Confederation recently launched its ‘Action Plan for Recovery: 50 Ideas to Drive Growth’. Contained in this was a warning on Ireland’s high marginal tax rate and the impact this could have on attracting top talent to Ireland. Speaking to the Economist Intelligence Unit in 2011, John Herlihy, Vice-President of Google’s Global Advertising Operations, also highlighted this danger; ‘junior talent joins a company to learn and leave; senior talent comes to build and stay’.
Without the presence of C-Suite personnel, there will always be a ceiling on growth potential. At IPSA we believe that targeted use of share-based measures can be used to offset the severity of the high personal tax and help to encourage sustained enterprise to flourish.
IPSA welcomes the findings of Graeme Nuttall and his team and believes that many of the recommendations are just as relevant in Ireland as in the UK. Namely, the Irish Government should promote employee ownership, engage in awareness raising and conduct consultations to gain a full understanding of the current position and future direction of employee ownership. However, due to the differences that exist between Dublin and London any ‘Irish Nuttall Review’ would have to address the issues surrounding private companies, enhanced start-up activity and attracting top level talent if it is to succeed in aiding the Irish recovery.
It is understandable for the Irish Government to maximise the generation of tax revenue in times of recession, but this should not be done at the expense of the wider recovery. IPSA would call on the Irish Government to engage with the organisation to fast-track the recommendations of the aforementioned Innovation Taskforce report, address the issues raised by Google’s John Herlihy and review the applicable recommendations from the Nuttall Review. It remains IPSA’s aim to keep the spotlight on encouraging employees to become involved in the financial health of their organisation and to continue to work with the Irish Government to identify opportunities for revenue generation and economic growth. Finally, it is IPSA’s ambition to foster deeper links with company secretaries to ensure that the positive message around employee ownership reaches the Irish business community.
This article first appeared in the online edition of Governance & Compliance Magazine