Labour pledges employee ownership boost ahead of general election

Out-Law Analysis | 11 Dec 2019 | 10:58 am | 4 min. read

Companies with over 250 employees would be required to give their workforce "a stake in the companies they work for" under plans put forward by the Labour Party in its general election manifesto.

Under proposals to create "inclusive ownership funds" (IOFs), affected companies would be required to transfer 1% of their shares into the IOF each year over a 10 year period. Dividends paid on the shares would be "distributed equally among all, capped at £500 a year", with excess dividend payments above the £500 cap to be paid to a new 'Climate Apprenticeship Fund' which would also be set up by a Labour government.

The manifesto does not specify if the requirement would apply to private, unlisted companies as well as listed ones. However, shadow chancellor John McDonnell has indicated that private companies would be required to offer equivalent benefits. In a speech given a couple of days before the manifesto was issued, McDonnell noted that while private companies "may not issue dividends...as an alternative, Labour will ensure that these companies introduce a profit sharing scheme that would achieve equivalent benefits".

Jacobs Lynette

Lynette Jacobs

Partner

Executive remuneration and corporate governance continue to be a focus for media and political party attention.

In his speech McDonnell referred to "independent assessments" which "have estimated that the IOF policy could raise £2 billion for workers after five years with an average annual pay out per worker of £181". However, this may be a large price to pay taking account of the consequences of this proposed diversion of 10% of companies' dividends.

Attention has been drawn, for example, to the negative effect it would have on other shareholders in companies, particularly pension funds. While pensioners would be disadvantaged by IOFs, the related benefit for those in work would be capped at a maximum of £500 per year and only for so long as the individual remains employed by the relevant company. In addition, employees would never actually own the shares, so would never be able to sell them and benefit from any growth in value of the shares.

Corporate governance proposals

With continuing cases of large company failures, most recently Thomas Cook, executive remuneration and corporate governance continue to be a focus for media and political party attention.

While the Conservative Party manifesto concentrates on its Brexit message, it refers to the Thomas Cook insolvency. There are no details of further proposals for reform, but the manifesto notes that the Conservatives are "strengthening the UK's corporate governance regime ... so that customers and suppliers – and UK taxpayers – are better protected when firms like Thomas Cook go into administration".

The Conservative Party also pledges to "carefully study the results" of the ongoing investigation into the Thomas Cook collapse, and to "improve incentives to attack the problem of excessive executive pay and rewards for failure".

The Liberal Democrats note that while businesses "can be a force for good in our economy", the system is "not working as it should" so that "even when businesses fail, those at the top often receive huge rewards whilst staff lose their jobs". Among the party's proposals to remedy the situation is giving "staff in listed companies with more than 250 employees a right to request shares, to be held in trust for the benefit of employees" - a right applicable only to employees of listed companies, recognising perhaps that employee share ownership in private companies brings different challenges from in listed companies.

The Liberal Democrats' manifesto also proposes strengthening "worker participation in decision-making, including staff representation on remuneration committees", and requiring both UK listed companies of all sizes and private companies with more than 250 employees to have at least one employee representative on their boards, with the same legal duties and responsibilities as other directors. This follows an idea first mooted by Theresa May in her July 2016 campaign speech to become leader of the Conservatives, as subsequently qualified in the July 2018 update to the Corporate Governance Code.

Changes to give "workers" and other stakeholders more control over companies appear in the Labour manifesto, including a requirement for boards to be one third made up of "elected worker directors". McDonnell, in his speech, also proposed giving "larger" companies the choice to adopt either a unitary or two-tier board structure; with the unitary board including "stakeholder representation" and the two-tier board consisting of an executive board, responsible for day to day operations, plus a supervisory board made up of "stakeholders such as customers, employees and long-term investors". The supervisory board would have "overall power to steer the direction of the company".

Currently, companies that would be affected by these proposals tend to meet the 'employee voice' requirement in the Corporate Governance Code by designating a non-executive director for employee liaison or through the use of employee forums, rather than the election of an employee director to the board. Labour's proposal that one-third of the board is composed of "elected worker directors" may concern companies, as well as employees who may not wish to take on the responsibilities of a director. Similarly, how practical would it be for large companies to select "customers" to sit on their boards?

McDonnell also referred in his speech to a proposed new "annual binding vote" on executive remuneration packages, to be voted on by stakeholders "including shareholders, employees and consumers". The pragmatism of obtaining the views of all the customers of some of Britain's largest companies on the remuneration of their directors does not appear to have been considered.

It is also worth noting the response of Edwin Morgan, director of policy at the Institute of Directors, to McDonnell's speech: "It's good to see Labour grappling with the mechanisms behind how British companies are overseen. However, listening to McDonnell's speech, you could be forgiven for not realising that the UK's corporate governance framework is admired across the world, and is an important source of competitive advantage".

There is limited time for companies to take pre-emptive action before tomorrow's election. However, some of the more radical options companies may contemplate could include potentially delisting, reducing the number of employees to fewer than 250 or moving their listing outside of the UK. Whether on balance such options are really commercially feasible is a significant question.

Lynette Jacobs is an employee incentives and executive remuneration expert at Pinsent Masons, the law firm behind Out-Law.