Laws to Encourage Broad-Based Employee Ownership Outside the U.S.

Corey Rosen 

This article provides a snapshot of laws in countries outside the U.S. specifically designed to encourage broad-based employee ownership. It does not discuss stock options, restricted stock, stock appreciation rights, or phantom stock as these plans are rarely used outside the U.S. for broad-based employee ownership and no country has laws that specifically encourage their use for these purposes. A good resource for the laws on this subject can be found on the website of the international law firm of Baker & McKenzie, which publishes an updated 40-country matrix on the topic.

There is one exception to this rule, namely in Ireland which has an approved share option plan for broad-based participation. Also not included are the employee ownership privatization programs that were very common in the former Soviet-bloc countries during the 1980s and 1990s. Those programs are largely complete and few of the employee-owned companies that resulted remain employee-owned. China has also used employee ownership extensively for this purpose at the provincial level but, unfortunately, there are no recent or reliable sources describing the extent of these programs or their rules. The information gathered here comes from the PEPPER IV Report, a private academic 2009 on employee ownership in Europe, country employee ownership associations in the U.K. and Australia, government sources in South Africa, and the Web. We have made every effort to find the most recent information and to update the PEPPER IV Report where needed. However, we urge caution on information on plans in Continental Europe other than Germany, Austria, Spain, and France, where we were able to find more current updates. Laws in other countries may have changed, and some observers have said there are inaccuracies in the report. It might seem like a fairly straightforward task to find laws and data on this subject. For Europe, Australia, and the UK, it is, even though the data focus mostly on public companies (this is less of an issue than it would be in the U.S. because almost all employee ownership is on these companies there). Outside of these countries, however, it is very difficult. Only a handful of countries have anything like the NCEO, most notably the European Federation of Employee Shareholders, based in Brussels; the Employee Ownership Association in the UK; and the Australian Ownership Association. Academic research on the topic is scant except in the UK. The lack of strong data, of course, reflects the fact that employee ownership has simply not gained the traction in other countries it has here, albeit there is growing interest, especially in Europe, China, and Southern Africa.

General Models for Employee Ownership

Outside of privatization plans, employee ownership legislation focuses on two approaches: employee stock purchase plans and free share plans. Generally, companies can deduct the costs of contributions or discounts on stock and employees can at least defer, and sometimes avoid, taxation. The most notable contrast to the U.S. is the absence of ESOP-type arrangements aimed at the long-term holding of shares and incentives to owners of closely held companies to sell a substantial or complete stake to the trust. As a result, majority employee owned companies outside the U.S. are relatively rare and employee ownership is generally found almost entirely in listed companies with employees owning a small percentage of shares. The difficulty with the typical models that do not have some kind of share pooling mechanism, such as an ESOP trust in the U.S., is that relying on employees to purchase shares, even if they are getting a match or a discount, almost always means that:

• A majority of eligible employees will usually not participate. Studies consistently show that people tend to overvalue current income versus future rewards, and often live "paycheck to paycheck," making participation in a share purchase plan challenging.
• Among those who do participate, the amounts set aside will be skewed towards those higher paid employees with more disposable income.
• Participants will usually sell their shares when they can. While they may also buy new shares, their holdings will not aggregate over time, as they do in a trust where the shares are usually accumulated until departure. This approach gives people a much larger stake as owners.
• Employees, as a group, will always be minority owners, usually 10% or less. That creates far fewer incentives for managers to set up extensive employee ownership culture models, as would be the case where employee ownership is long-term and substantial. Yet we know that employee ownership only produces substantial performance improvements when combined with cultures that stress employee involvement in day-to-day work decisions.

Because of all this, we believe that countries that want sustained, substantial, and broad employee ownership in companies need to provide ways that the ownership is not based on employees making decisions to use current income to buy shares, but rather on company contributions with tax benefits for the companies and/or sellers to employee ownership plans doing this. The ownership plan also needs to pool ownership and allocate shares to individual employees during their tenure with the firm. One intriguing variation on stock purchase plans used by some companies in Europe (mostly France) allows employees to buy shares with a company-backed bank loan and repay the loan in a fixed number of shares. Discounts on the purchases are often offered. Lenders may hedge the loan by buying put and call options on the shares and/or the company may provide some base guarantee. The plans offer the opportunity for gains at no risk and have been very popular with employees. Although not a creature of any specific law, the model is one that countries looking to set up rules might consider encouraging. In the next sections, we summarize the approaches of major groupings of countries. That is followed by a country-by-country matrix describing the plans and their rules.

The United Kingdom, Ireland, Australia, Canada, and New Zealand

Ireland, The UK, Australia, New Zealand all have multiple laws to encourage widespread employee ownership, but Canada does not. In the UK, since 2011, leaders of all three political parties have made creating a "John Lewis" economy a major political focus, one that has received substantial press attention. John Lewis is an iconic UK retailer with about 70,000 employees that is entirely owned through a trust set up to hold shares permanently in the name of employees. The employees never actually get the shares, but do get payments of earnings from them. The company has been a stellar performer and its customer service legendary. There already are programs to encourage broad employee ownership in the UK, most notably the Save as You Earn program, a stock purchase plan that provides employees with tax savings on shares they can buy at a discount provided certain rules are met, and a Share Incentive Plan, which provides employers and employees with tax incentives for corporate donations of shares or, more commonly, share matches to employee deferrals. Ireland has very similar programs but also has a plan for broad-based stock options that offers some tax benefits to employees and a plan modeled generally after the U.S. ESOP. Australia's plans focus on tax incentives for share contributions and discounts for employees purchases. In the UK, the Cameron government has made a major push for "mutualisation," the spin-off of government services to employee, community, or jointly owned companies. Employees have the right to offer to bid for these services and may be given preferential treatment. A few such transactions have taken place since 2011. Employee ownership is common in all these countries. In the UK and Ireland, most of the large listed companies offer some kind of broad share plan, as well as many smaller companies. The plans are only used by a small percentage of companies in Australia and an even smaller one in New Zealand, however. Overall, in the UK about one million employees are in broad-based plans. We could not find recent data on Ireland, but the percentage is likely smaller. There are a number of majority employee owned companies, including some major ones, such as John Lewis, Arup (a multinational engineering company), and Tullis Russell (a large paper manufacturer). These companies each have their own idiosyncratic plan structures and ere created largely for philosophical reasons. There are also a number of smaller worker cooperatives in the UK, Ireland, Canada, and Australia.

Continental Europe

The most authoritative and comprehensive source of information about the forms and extent of employee ownership in the Pepper Report, a publication of the European Economic Commission. The most recent report, the fourth edition, was published in 2010. In what follows, we use that report as a guide to the programs on the continent that specifically were meant to encourage employee ownership, updating them as needed based on more recent information. In general, continental European countries do not have the kinds of incentives for employee ownership that can be found in the other countries reported on here. There is fairly widespread employee ownership in these countries, primarily (and sometimes almost exclusively) in public companies. Based on data gathered primarily from companies over 200 employees (and with a bias towards traded firms, although not all respondents were traded), by the late 2000's, about 5% to 15% of companies in most European countries offered some kind of employee ownership plan, with Poland, France, Denmark, Belgium, and Croatia all at the 20% or higher level (Croation employee ownership is almost entirely a function of privatization). The large majority of plans are share purchase plans, often with some kind of discount or tax incentive. Some countries, most notably France, have profit sharing plans (mandatory in France for firms over a certain size) that can be invested in company stock and that also offer some tax incentives for employers and employees. Overall, employee holdings in these plans averages about 3% to 5% of total equity. The Hollande government announced n 2012 that it would propose major new incentives for broad employee ownership. While the number of plans is large, the percentage of employees either offered the plans or, if offered choose to participate, is relatively small. In France and Croatia, over 50% are covered, but most countries are in the 10% to 20% range. Overall, about 1% to 3% of all private sector employees are in some kind of plan, with higher numbers in France. Even in the subsample of the largest firms offering broad plans, only about 15% to 35% typically participate, somewhat worse than U.S. numbers for employee stock purchase plans. In Eastern Europe, most former non-market states used broad employee ownership extensively as part of the privatization process. However, it was rare for the governments or the companies to view employee ownership as anything more than a transitional vehicle (this was also true in the former Soviet Union, where widespread employee ownership was the most common vehicle for privatization but almost never lasted beyond several years). The process almost always involved employees buying shares very cheaply and then being able to sell them some time later. Often, the goal of governments was explicitly to use employee ownership simply as a way to move assets over time into more concentrated capital ownership hands and out of the hands of state apparatchiki. The post-privatization period was economically difficult for these countries, and few of the employee ownership companies had access to adequate capital to deal with economic challenges. The privatization process highlights how unstable a form individual shareholdings is unless there are ongoing incentives for new employees to buy shares. There are no reliable data on how many companies are majority owned by a broad group of employees, but there is no reason to think the number is more than several hundred non-worker cooperative firms. There are tens of thousands of worker cooperatives, however, mostly in Spain and Italy. Spain has specific laws to encourage worker cooperatives. The European Commission has strongly endorsed the idea of moving forward on employee ownership. In the 2010 report, it noted that: "The European Parliament called on the Commission to submit studies on the issues raised in its Resolution of 5 June 2003. Among these were the feasibility of financial participation in small and medium-sized enterprises and the possibility of implementing in other EU Member States share ownership schemes based on the ESOP (Employee Stock Ownership Plan)." A budget heading was voted by the European Parliament for a pilot project for the setting up in 2013 of a Center for Employee ownership in each Member State of the EU, to function in many ways as the NCEO does in the U.S.

Korea

In 2012, there were almost 3,000 employee ownership plans in Korean covering 1.2 million workers. The plans are in both public and private companies. While the laws encouraging employee ownership are significant, the plans typically only own about 1.5% of the shares.

South Africa, Kenya, and Zimbabwe

South Africa has a program to give companies preference for sharing ownership with employees South Africa traditionally defined as black (a term that includes most non-whites of any origin), but now described as "previously disadvantaged people/populations." These can be employees or non-employees. Recent changes in the law have given companies more credit for having broad-based plans and perhaps a few dozen large companies, especially in mining, have set up these plans. They are typically employer trusts funded by the company that hold about 5% of the shares. Some companies also get financing from the government's economic development agency that is contingent on an employee ownership plan, often a leveraged trust that repays the loan from dividends (this can be problematic when they are inadequate). As of 2012, South Africa is in the early stages of considering ways to provide much more substantial encouragement to employee ownership. Kenya and Zimbabwe both have programs to encourage or, in Zimbabwe's case, require foreign companies to set up substantial employee ownership programs or face nationalization. The plans typically operate through employer funded trusts.

China

China has used employee ownership extensively in its move towards a market economy. Many provincial government have provided preference for employee ownership, although the central government has not (even tough Deng Xiaoping once called the idea "socialism with Chinese characteristics"). As best we can tell, these plans are typically trusts funded largely by employee purchases of shares, often at a discount, but there are no reliable sources on how this is being done or how often it is used. Recently, China has proposed to allow employees to buy shares through an employee association. There would be no tax advantages to doing this, and they would have to be held for three years, so it is unclear what benefit this provides. As this was being written, the proposal was being reconsidered.