Employer Solutions Insights: Sharing the Benefits of the ‘S’ in ESG

In May this year, a report from the Social Market Foundation identified that less than 5% of working age individuals are employee shareholders and “set out the case for an expansion of employee share ownership in the UK, and for the share ownership agenda to form part of a ‘fair and strong economic recovery’ narrative as we emerge from the Coronavirus crisis.”

Some of the benefits of a ‘Stake in Success’, as the report is called, are familiar, notably the potential financial benefit to employees, and increasing corporate coherence and continuity, but the key question for potential investors is whether companies which operate share-ownership arrangements, are likely to be more profitable than those that do not. Furthermore, when viewed through an ESG lens, are such companies likely to score more highly, particularly with regard to the ‘S’ element. In short should the ‘S’ in ESG analysis be extended to include employee share ownership?

A variety of approaches

There is a wide range of share ownership structures, and given that JTC Group is trustee to more than 150 employee share trusts, and has run its own all-employee share ownership schemes for over 20 years, we believe we have encountered most possible variations.

Over recent years, one of the most widely discussed all-employee ownership arrangements, at least in the UK, is the ‘John Lewis Model’ which formed the basis of Employee Ownership Trusts (EOTs) which were introduced by the government in 2014. The purpose was to encourage wide based employee share ownership, albeit indirectly. These have since been adopted by over 700 companies and contribute £30bn to UK GDP with 77% having “making a positive contribution to society and environment” as part of their purpose, according to the Employee Ownership Association. However, indirect employee ownership is rarely used in the listed space, with most PLCs electing to created direct employee owners who hold a set number of shares delivered via one or more share plans.

“Shared Ownership” has been at the heart of JTC Group’s strategy and has shaped the company’s culture. Full employee participation in share ownership has been a key driver for JTC for over 20 years. The company operates a hybrid model where traditional share plans facilitate direct employee ownership run alongside an indirect employee ownership model where shares are held on employees’ behalf via an Employee Benefit Trust (EBT).

The EBT has similar indirect ownership features to an EOT and holds shares in a collective pool, but distributes them at the successful completion of a business plan cycle, typically every 3-5 years. This ownership approach is advantageous as it recognises the value and contribution of each employee and, as it maintains a strategic shareholding (in JTC’s case, this is 23% of issued share capital), employees will always have a strong voice at the investor table.

Whatever the structure selected, there is a wide body of evidence to suggest employees who have a stake in their employer contribute significantly to improving the performance of the business, ultimately because they have a vested interest. Over 100 studies across many countries indicate that employee ownership is generally linked to better productivity, pay, job stability and firm survival.

Driving success

What are the drivers behind this finding? We argue that a shared-ownership model is beneficial for all stakeholders. First, as mentioned, there are enhanced financial rewards for employees (beyond board directors), and these, or the expectation of these lead to higher engagement by the individual.

Shared ownership is highly likely to motivate staff, encouraging them to act on their own initiative and work collectively to improve the fortunes of the firm as a whole. The model also enhances levels of corporate governance as staff have a strong voice in the running of the company, something the UK Government aims to improve following high profile corporate collapses, such as BHS and Carillion.

Higher engagement levels amongst staff also reduce staff turnover rate (in JTC’s case 5.7% in 2020, for example, compared to sector norms of around 15%) and fosters long term direct employee share ownership.

At a client level, employee share ownership supports stability in long-term relationships, leads to more client ‘wins’ (particularly among the increasing number of firms concerned with the Social and Governance aspects of ESG), and is therefore a significant contributor to profitability.

Correlating performance

Unlike private companies where there is no ready market for shares, ensuring long term employee share ownership in public companies can be difficult as shares are freely tradable on a stock exchange. Public companies, therefore, should facilitate employees share ownership as much as they can.

The challenge we see is varying levels of engagement across different age demographics, often driven by affordability issues where lower paid employees have competing financial obligations. Ensuring widespread employee participation means the removal of such entry barriers should be a priority when implementing a new plan.

Conclusion

While a move to a JTC style universal “shared ownership” model requires effort and commitment, the outcome tends to be valuable for all concerned and the traditional barriers around employee share ownership are removed. As the Social Market Foundation report points out: “UK and US indices tracking the stock market performance of companies with a relatively high proportion of employee shareholders. These show such companies significantly outperforming broader stock market indices.”