The report was presented in the plenary yesterday. At that occasion, rapporteur Phil Bennion (ALDE) explained the benefits of EFP for companies and especially SMEs as “a concrete way for companies to share success”. In the Strasbourg hemicycle, Bennion called for the EU to act, pointing out the lack of information within the EU, the lack of legislative incentives in some Member States, the different national taxation as well as the multitude of existing ESO models hampering companies that operate cross-border. To overcome these problems, Bennion proposes to share best practice examples between the Member countries, possibly leading to mutual recognition of these schemes. At this regard, Bennion refers to the current EU pilot project and the benefits that a Virtual Centre for EFP as well as an effective tax rate calculator could bring in order to augment the available information. Finally, he invited the Commission to conduct an impact assessment for a 29th regime for EFP.

– These topics will be part of our Brussels conference “Taking Action: Promotion of Employee Share Ownership” that will take place on the 30th of January 2014. –

In the following contributions, MEP Sari Essayah (EPP) pointed out the importance of the exchange of information between Member States. Shadow rapporteur Evelyn Regner (S&D) mentioned the Spanish Sociedades Laborales (click here to read more about this topic) as a well-working example for alternative EFP models. She also highlighted the voluntary character of EFP schemes which should always come on top of basis pay.

In his speech Commissioner Janez Potočnik emphasised the role of EFP as a source for long-term investment and he underlined Barnier’s support for the idea of a 29th regime. He further referred to the conference on ESO on 30 January, presenting an opportunity to get the feedback from the various stakeholders.

Introduction

Voestalpine AG—headquartered in Linz (Austria)—is mainly active in the production and treatment of steel. As a successful international corporate group with some 300 production and sales companies in more than 60 countries, it has nearly 40,000 employees (fewer than half of them in Austria). In conjunction with discussions about the full privatisation of the corporate group undertaken at the beginning of 2000, the group’s Board of Management together with the employee representatives developed and later implemented an employee participation scheme, which at that time was unprecedented in Austria. Through this, a large portion of the group’s workforce as well as a small group of ex-employees currently hold a 13.3 per cent stake (around 22 million shares) administrated by a private foundation (Voestalpine Mitarbeiterbeteiligung Privatstiftung).

The case of the Voestalpine AG

In 2000, the Austrian Government—under Chancellor Wolfgang Schüssler—enacted the so-called ÖIAG Act133 with the intention of accelerating the privatisation process among (partial) state-owned industrial companies. One of these companies administrated by the Austrian Industry-Holding Company Stock Corporation ÖIAG (Österreichische Industrieholding AG) was the Voestalpine AG. In 2000, ÖIAG administrated a state-owned stake of 38.8 per cent, which subsequently was slightly reduced in two steps to 34.7 per cent. In 2003, the Austrian Council of Ministers mandated ÖIAG to fully privatise the Voestalpine AG. Against all concerns, in the context of the so-called secret project “Minerva”, a hostile takeover by Magna was prevented, and since August 2005 the Voestalpine AG has been fully privatised (Auer, 2008, pp. 245-249).

Origin of the Voestalpine employee participation scheme

In response to the privatisation ambitions of the Austrian Government, in 2000, the Voestalpine management in co-operation with the group’s employee representatives immediately started intensive discussions about the group’s future ownership structure. In the course of these talks it became generally accepted by both parties that a substantial equity stake owned by the group’s workforce could contribute to a more stable ownership structure (strategic ownership). From the very beginning, an ambitious plan was conceived to acquire in the short and medium term an employees’ stake of not less than 10 per cent of the total number of voting rights (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, p. 20).

Schemes

Through the first of the six employee participation schemes implemented so far, the Voestalpine workforce in Austria acquired an immediate 4.9 per cent equity stake (around 1.6 million shares). Once again, based on opening clauses in relevant wage agreements, an additional wage agreement (Zusatzkollektivvertrag) was fixed between social partners (Labour Union and Economic Chamber) on 1 November 2000, which allowed the group’s management to retain parts of concluded pay increases for the purpose of attaining the employee share ownership target.

Thus, one per cent of monthly employees’ gross wages in combination with company’s savings in non-wage labour costs arising from stock transfers134 and a yearly value adjustment of employees’ own contributions135 were the basis to calculate within the complex Barwert- modell (Cash Value Model) the total advance of money used for the acquisition of the above mentioned 1.6 million shares at the stock exchange (Voestalpine Arbeitnehmer-Privatstiftung, 2006, p. 12).

An irreplaceable element of the first and all later schemes—the still extant private foundation—has been utilised and developed. The Voestalpine Mitarbeiterbeteiligung Privatstiftung is not only responsible for the administration of the acquired stock, but also concentrates all individual employees’ voting rights due to a transfer of the ownership’s civil claim, fixed within integrated trust agreements (Treuhandverträge). Thus, it is ensured that the work- force has an important vote within the General Meeting of Shareholders. On the other side, the individual right to receive a dividend remains in employees’ hands. To fully utilise tax incentives according to § 3 I Z. 15 lit. b of the Austrian Income Tax Act and savings in social security contributions according to § 49 III Z. 18 lit. c of the Social Security Act, acquired shares were just allocated to employees to a maximum limit of EUR 1,460 per year. Employees’ shares remain within the foundation for the entire period of employment. All relevant regulations—e.g., relating to the retention of employees’ pay increases or the allocation of shares to individual employees—were concluded within the internal company agreement mentioned under 2.1 (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, p. 33).

• For all employees hired after 1 November 2000, a Schichtmodell (Shift Model) was developed, which calculated the employee’s own monthly contribution in accordance with the Barwertmodell (one per cent of the employee’s monthly gross wage, the company’s savings in non-wage labour costs and a yearly value adjustment (3.5 per cent) of this contribution) (Voestalpine Arbeitnehmer-Privatstiftung, 2006, p. 12).

Strategic employees’ share ownership has been further promoted through five additional schemes (II-VI). All of these have been based on additional wage agreements to retain a percentage of employees’ pay increases . Furthermore, the financing of the monthly employees’ own contribution in all schemes is accordant with the Schichtmodell (model I). Unlike the initial scheme, the pre-financing of shares in the following schemes II, III and V was leveraged (credit-financed).

• In 2002, scheme II increased the existing employees’ stock136 by 2.5 per cent (around one million shares), and in 2003 the so called “squeeze-out-boundary” of ten per cent was overstepped for the first time by the purchase of around 1.5 million shares (3.7 per cent). Since then, the Voestalpine Mitarbeiterbeteiligung Privatstiftung on behalf of the workforce has been empowered to nominate a representative to the Supervisory Board. This achievement was only once put at risk when in 2005 the Voestalpine AG issued convertible bonds and increased the group’s share capital.
• Thus, at the end of 2005, a fourth scheme was concluded, through which the Voestalpine AG between 2007 and 2009 credit financed the purchase of about 3.2 million shares137 (two per cent) on the stock exchange and transferred them to the Voestalpine Mitarbeiterbeteiligung Stiftung (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 38-44).
• Based on an additional wage agreement—reached in the course of collective bar- gaining in the metal industry—, a fifth scheme was started in November 2007, mainly in order to integrate a large number of new Voestalpine staff—particularly from the BÖHLER-UDDEHOLM-Group—into the employee participation scheme. It was agreed to allot 0.5 per cent of their monthly gross wages for this purpose. On the other side, the monthly contribution of already participating employees was raised by 0.3 per cent of their monthly gross wages. Deviating from the procedure in previous models, shares still available within the foundation were utilised for this new allocation.
• Scheme VI—implemented as a result of a conditional capital increase—enlarged the employees’ stock within the foundation by two per cent, i.e., 3.3 million shares (Ibid., pp. 46-48). 
Today, Austrian employees spend up to 3.25 per cent138 of their monthly gross wages for the allocation of shares (Ibid., p. 48).

The Voestalpine Mitarbeiterbeteiligung Stiftung and its role 
As earlier mentioned, the Voestalpine Mitarbeiterbeteiligung Stiftung is the centrepiece of the Voestalpine employee participation scheme. In Austria, the utilisation of a private foundation for the purpose of employees’ (financial) participation legally underlies § 4 XI Z. 1 lit. c of the country’s Income Tax Act (Otto, 2011, p. 136). The work of the Voestalpine Mitarbeiterbeteiligung Stiftung mainly consists of the following three tasks (Stelzer, 2010, p. 6):

• administration of the different schemes (assisted by the Actuaria Benefits Consulting GmbH, see Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 96 f.);
• further development of the employee participation scheme;
• execution of voting rights at the General Meeting of Stakeholders.

The two main bodies of the foundation are the Management Board and the Advisory Board. The group’s Board of Management and Works Councils nominate its members equally.139 Both bodies are chaired by an employees’ representative, who—in case of a tie—casts the deciding vote (Dirimierungsrecht). The Advisory Board makes all decisions concerning employee participation schemes—e.g., their further development—and is responsible for appointing the Management Board. The chairman of the Management Board represents the voting rights of all participating employees at the General Meeting of Stakeholders. His vote at the meeting is restricted by the decisions of the Advisory Board, which are always taken on the basis of a suggestion by the Management Board and a wide opinion-building process among the group’s Works Councils. 
The Management Board is further responsible for administering the participation scheme and also foundation assets140.

Implications

As presented within the introductory remarks of this chapter, the strategic dimension has been the driving power in 2000 to apply such an ambitious employee participation scheme. The Voestalpine Mitarbeiterbeteiligung Privatstiftung on behalf of the workforce has been the most stable core shareholder for years. Today, it is the second largest shareholder (13.3 per cent141) after the Raiffeisenlandesbank Oberösterreich Invest GmbH & Co. (more than 15 per cent). The chairman of the foundation’s governing body represents 12.4 per cent of the voting rights within the General Meeting of Shareholders (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 62 f.). In addition, since 2003 the foundation has had the power to nominate a representative for the Supervisory Board.

From a financial perspective, the workforce’s capital investment has absolutely proved its value. As Figure 23 shows, each year since 2000 the Voestalpine AG has declared a dividend. In total, between 2000 and 2010 it has distributed EUR 47.3 million in dividends to participating employees.

Figure 23: Dividend payout, 2000-2010

Source: Voestalpine Mitarbeiterbeteiligung Privatstiftung (2010), p. 32.

As proof of the employees’ confidence in their capital investment, 17 per cent of them (3,576 individuals) have decided to re-invest their dividend. Furthermore, at present, 3,277 individuals—either still active within the Voestalpine AG or already separated from it— exercise their option to keep their “private shares” (around 1.6 million shares) within the Voestalpine Mitarbeiterbeteiligung Stiftung. Among them are almost two thirds of all employees, who left the group within the last three years (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 62 f.).

Best practice and transferability

The results of the previous chapters should help to answer whether the employee participation scheme of the Voestalpine AG, whose general structure resembles an ESOP, deserves to be designated as “best practice” and if it is transferable or has already been transferred to other companies.

Success of the concept

Comparing potential implications or benefits collected in chapter 2 with those from the Voestalpine example, it is evident that both the Voestalpine employees and the Voestalpine AG itself have demonstrably benefited from such an ambitious employee participation scheme. Even though not solely intended as an employee financial participation scheme, it has created an additional source of income for all participating employees. Furthermore, the objective to establish strategic ownership has been fully achieved and the workforce has been put in a position to contribute as a key stakeholder to the group’s future. Thus, to a certain extent, it seems possible for them to support their own concerns, in particular job security. From the employer perspective as well, the Voestalpine AG has strategically benefited from its courageous decision to implement strategic employee share ownership. It not only reacted flexible to the privatisation process, but also established a stable anchor shareholder under its ownership structure, present and future, i.e., its employees.

As for negative results or implications, none could be identified. It must be mentioned, however, that for several of these criteria no data is available in the Voestalpine case (e.g., if production has increased after the introduction of the employee participation scheme). Nevertheless, positive implications reported for Voestalpine employees as well as for the Voestalpine AG itself are important indicators that the Voestalpine case can undoubtedly be labelled as an example of best practice.

Transferability

Acknowledging that the Voestalpine employee participation scheme deserves the appellation of best practice, it is interesting to speculate whether it could easily be transferred to companies in or even outside of Austria. With respect to its export potential, the efforts of the Voestalpine AG to adapt certain features of the Austrian models to Voestalpine companies in other EU Member States have clearly shown the difficulties. In particular, widely differing national labour and tax regulations have made this implementation impossible. Therefore, both of the international models142 so far implemented are based on conditions different from those of the Austrian models, although oriented around general characteristics (such as concentration of the voting rights within a private foundation143) (Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp. 50-53).

At first glance, it seems possible to duplicate the Voestalpine employee participation scheme within Austria. Nevertheless, certain aspects still narrow its transferability. First, the scheme is not appropriate for small and medium-sized companies inasmuch as the integration of a private foundation as well as a large administrative workload is too expensive for them.

Furthermore, the employee participation scheme has been designed to fit certain circumstances, conditions and objectives. Thus, the question of whether it would work under (partly) different conditions is an open one.

Though according to the PEPPER IV Report, since 2001 employee financial plans have in- creased in Austria (Lowitzsch et al., 2008, p. 155), the best practice example of the Voestalpine AG has yet to be imitated. Although Voestalpine representatives have held several meetings with interested companies about its employee participation scheme, none of them has yet adopted the Voestalpine model for itself. Moreover, no other companies within Austria are using the opportunity of an additional wage agreement.144

Conclusions

In conclusion, this case has shown how the Voestalpine model—with its strong positive effects on the workforce as well as on the entire corporate group—deserves to be designated as best practice. Nevertheless, its transferability abroad is limited, above all because of the particular legal structure. Within Austria, though it is possible to duplicate the model. In practice, transfer to small and medium-sized companies will hardly be an option because of implementation and administrative costs arising from the private foundation.

Footnotes

133 The ÖIAG Act was publicly announced in the Federal Law Gazette 1 no. 24/2000.

134  According to the Social Security Act, employers in Austria are not required to pay non-wage labour costs in case of stock transfers. In the example of the Voestalpine AG it was decided to pass these savings on to employees, thereby increasing their own contribution about 25 per cent.

135  The calculation included a yearly 3.5 per cent increase in employees‘ contributions.

136  At this time, the stake already had been decreased to around four per cent in consequence of an increase in 
capital.

137  As a result of a share split in July 2006, each share had been split into four.

138  All implemented schemes increased the amount taken from the monthly gross wage: scheme I (one per cent), scheme II (0.5 per cent), scheme III (0.5 per cent), scheme IV (0.5 per cent), scheme V (0.5 per cent in case of new integrated employees and 0.3 per cent in case of already participating employees) and scheme VI (0.45 per cent). Thus, an employee involved in the employee participation scheme since the beginning spends at the moment 3.25 per cent of its monthly gross wage for the allocation of shares.

139  The Management Board consist of three members (the third member is collaboratively nominated) and the Advisory Board of 12 members.

140  Voestalpine Mitarbeiterbeteiligung Privatstiftung, 2010, pp.92-94

141 The 13.3 per cent stake mainly includes the share ownership of Austrian employees, but also in a small part of German and British employees as well as of ex-employees.

142  In 2004, the first international-oriented model was implemented for Voestalpine staff from the Netherlands. Based on these experiences early in 2007, it was started to develop a common international model. So far, this was implemented in Great Britain and Germany. In Belgium and Sweden, legal boundaries and the impacts of the economic crisis have prevented an implementation.

143  While the Dutch model concentrates all voting rights in an own private foundation, voting rights from the international model are held in the Austrian Voestalpine Mitarbeiterbeteiligung Privatstiftung.

144 Information provided by Max Stelzer, Management Board Executive Voestalpine Mitarbeiterbeteiligung Privatstiftung, to the author.

Literature:

The best way to make this capital ownership available to all employees is by means of a leveraged ESOP model. The leveraged ESOP model allows the company to take on a bank loan in order to provide employees with shares of the company, by using the trust as the vehicle of holding shares. The leveraged effect originates from the loan repayment by future earnings.

[youtube=http://www.youtube.com/watch?v=BLqN8mj17hU&w=560&h=315]

Also see our previous blog posts:

The Economist: A shirnking slice – Labours’ share of national income has fallen

197 Words intro on leveraged ESOPs

Follow us on twitter @ProEFP or connect via Facebook.com/intercentar

11.00 am – 1.15 pm Employee Financial Participation in SMEs: A strategy for labour market policy and regional business development.

At the time we assumed that all disqualifications of SLs (disappearance from the registry of SL) were due to liquidation or bankruptcy and calculated the survival rate accordingly. However, it turned out that an additional reason for their disappearance was that some SLs convert into conventional companies. They continue to exist with substantial employee ownership but do no longer qualify as SL, for example, because the employee ownership rate drops below 50%.

In fact, the reason that they disqualify is often that they become “victims of their success” (as opposed to going bankrupt). From what we know now, between 1 January 2010 and 31 December 2012 in the Basque Registrar of “Sociedades Laborales” of 110 disqualifications 51 became conventional companies, i.e., 46.36% of which only 8 have closed down.

This means that the survival rate we previously calculated for SLs in Basque Country is in fact much higher. Of the 110 former “Sociedades Laborales” which were previously reported bankrupt or liquidated 39% still exist nowadays but are conventional companies still with substantial employee ownership (but less than 50%).

————–

Employee financial particiaption (EFP) in Spain largely takes the form of Sociedades Laborales (Worker-Owned Companies). This concept is probably the only EFP scheme existing across the EU that is solely applying to small and smallest companies.

The best practice character and details of this concept are widely discussed among Spanish, Polish and German institutions within the Project Employee Financial Participation in Small and Medium Enterprises – A Strategy for Labour Market Policy and Regional Business Development.

This project of the Kelso-Professorship at Europa-Universität Viadrina Frankfurt (Oder) is supported by the Ministry of Labour, Social Affairs, Women and Family Affairs of the Land of Brandenburg with funds from the European Social Fund and the Land of Brandenburg. You are invited to join the final conference on the 4th of December, during which the project partners will present the results of their experience exchange.

Find more information on Sociedades Laborales in our blog post.

Introduction

Childbase Partnership Limited is a company with the headquarters in Newport Pagnell, UK, which operates a chain of nurseries throughout the United Kingdom, but mainly in the South of England. Originally, Sir Peter Thompson and his son Mike Thompson founded it as a small family company with four staff members and 20 children in 1989. Mike Thompson is still CEO and co-owner. As the company expanded, the owners introduced the “Childbase All Employee Share Plan” in 2001 to enable the employees to obtain company shares in order to increase employee motivation, to secure the succession, to provide additional capital resources for future expansion and, consequently, to achieve a sustainable progress of the company.

Childbase provides care for currently 4,500 pre-school children at the age from one to five years. According to the turnover in 2011, it is the largest private childcare provider in the UK.[i] It has 1,304 employees[ii] and operates 42 nurseries. The employees currently hold approximately 64 per cent of the equity capital individually or through the Employee Benefit Trust (EBT). Childbase is expanding by two to four new nurseries annually, either by opening new entities or by acquisitions (Bibby, 2009a). This expansion is at present being financed from Childbase’s own cash reserve, since the cost of credit on the financial markets has risen due to the European financial downturn (Bibby, 2009a).

In the ranking of best companies to work for in the Sunday Times, Childbase took the 23rd place in the category of mid-sized companies in 2011,[iii] and rose to the 13th place in 2012.[iv]

The case of Childbase

As the company expanded, the Thompson family as core owners, decided to enable the employees to participate in the capital of the company. The underlying idea was, in the first place, to act in line with the corporate culture “we all contribute, we all benefit” and to motivate the employees with the concept of fair participation. This idea, on which also the company image is based, makes the company also more attractive and reliable for its clients. A positive and fair working climate is of special importance in the childcare business. Additionally, the transfer of ownership to employees can solve the problem of succession, which might become relevant in a family company, and protect the company from hostile takeovers (Bibby, 2009a).

Origin of the Childbase Nurseries Employee Participation Scheme

Sir Peter Thompson, the father of the current CEO and co-owner Mike Thompson, already had experience with the ownership transfer to employees, since he was responsible for the privatization of the state-owned National Freight Corporation through an employee buyout.

The first step in the employee financial participation program of Childbase was to establish the Childbase All Employee Share Plan as an approved scheme, under which the employees could obtain one matching share for each share they buy from the Employee Benefit Trust (EBT). Later the number of matching shares was, for a certain period, increased to two in order to further motivate employees to buy shares. The core owners are committed to the goal of hundred percent employee ownership.

In order to provide EBT with its own funds, Childbase diluted its own shares and transferred them to the EBT as free shares under an approved scheme. From the established funds, the EBT first paid out the core owner Sir Peter Thompson. Afterwards, Childbase transferred matching shares to the EBT in relation two to one and occasionally also transferred free shares under the respective approved scheme.

There was a problem of legal nature, with concerns to trust establishment. It was preferable to establish the trust under the Scottish law, since the Scottish law, unlike the English law, allows establishing trusts for more than eighty years, as these trusts have no “shelf life”. Childbase founded three new trusts simultaneously under Scottish law, which was a complex legal process.

Schemes

The main scheme is the Childbase All Employees Share Plan, under which all permanent employees can buy shares and obtain the matching shares from the EBT. The employees can let the interest be paid out in cash or invest it in shares. Within the Childbase All Employees Share Plan, employees also can obtain benefits not directly related to employee ownership. Additionally, Childbase implements an approved save as you earn (SAYE) scheme.

The employees currently already hold the majority of the equity capital, so that they can influence the election of the management. The former core owner and current CEO and co-owner Mike Thompson now needs the approval of the employees to be re-elected. Such control corresponds to his idea of an employee-owned enterprise.

The employees have no direct representatives in the management of the company. However, their representatives, called councilors, are involved in decision-making, e.g. as far as remuneration and working hours are concerned. (McDonald, 2011) One councilor is elected in each of 42 nurseries to the Childbase Partnership Council. The tasks of the councilors are to promote employee ownership at company and nursery level through regular meetings with the staff, to decide on staff bonuses, reduction of hours strategy, to propose new policies, to represent staff views and to improve co-operation between the management and the staff. Additionally, the communication between the staff and the top management takes place at the regular “listening lunches”, specially organized in order to enable employees to directly address the top management.

The Employee Benefit Trust and its role

The core mechanism of the Childbase All Employees Share Plan is the EBT. On the one hand, the trust sells shares to employees and provides them with matching shares under the approved scheme. On the other hand, both employees and external investors are allowed to sell their shares only to the EBT, so that the EBT also serves as the only market place for Childbase shares. Employees are obliged to sell their shares to the EBT after leaving the company. Due to this mechanism, a pool of shares for the future one hundred percent employee ownership is created within the EBT.

Shares can be bought or sold back on two annual dealing days held in May and November each year under the Childbase All Employees Share Plan.

The company accountant is setting the share value before the trade takes place. The Child Base shares were traded at GBP 0.40 in 2000 and at GBP 1.14 in April 2011 (Employee Ownership Association, 2009). Each individual shareholder is limited to 2.5 per cent (Bibby, 2009a) to prevent individuals from gaining substantial control over the company.

The sale of the company is only possible with the approval of the Independent Board, holding the so-called Golden Share that grants the right to veto any decision concerning the company existence. The decision must be unanimous.

Implications

The share ownership plan has led to an increase of the employee share in the equity capital from zero to 64 per cent in 12 years. If the plan is implemented on the same lines in the future, the goal of one hundred per cent employee ownership could be achieved in the next ten years. Consequently, the succession in the company and the protection against hostile takeovers are secured. Profit-sharing schemes, social programs and participation in decision making flank the plan. The acceptance of the employee share ownership plan by the staff and the management is high and has already led to a substantial change of attitude.

According to the survey “Best Companies”, 80 per cent of Childbase employees like to work for the company, 85 per cent are proud of it and 71 per cent believe that they are treated fairly and that the management respects their needs. As a result, Childbase, unlike many mid-sized companies, has low personnel fluctuation and has the advantage of recruiting personnel for higher management positions from the own company.

The management also supports employee ownership and feels more responsibility towards the employees than in most companies. The CEO Mike Thompson conducted an experiment within the Partnership Council offering the managers high financial profits for the case the company is sold to a Bahamas trust. Even provided that the sale should be under the condition of employment protection, nobody voted for the sale.

According to CEO Mike Thompson, the results of the introduction of the employee ownership plan are:

• A Times 100 company—still the only one in the sector to achieve that status;
• Office for Standards in Education, Children’s Service Skills (OFSTED) results unparalleled for the sector—50 per cent for Childbase at a sector average of 12 per cent;
• Profits up by over 200 per cent in six years;
• Share take up amongst employees growing;
• Dividend yields growing;
• Annual bonuses for staff worth of GBP 650,000, i.e., EUR 775,000 per year.

Best practice and transferability

Success of the concept

Childbase qualifies as a best practice example by its structured approach towards employee participation, at the same time maintaining high performance, and by its thoughtful business approach that makes Childbase one of the leading companies in its industry. Further, Childbase managers are highly efficient in motivating the employees.

In the Sunday Times ranking of best companies to work for, Childbase moved to the 13th place in 2012. Commenting the 23rd place in 2011, Helen Bass, Child Base HR Director, said: “We take great pride in the fact that Childbase directors and employees are partners; it is the foundation on which we have built a successful, sustainable and ethical business” (Childbase, 2011).

Childbase is also active in spreading best practice throughout the UK. It is a member of the Employee Ownership Association. Recently, Childbase sponsored the report “All of Our Business: Why Britain needs more private sector employee ownership” by the Academic Director of the Centre of Mutual and Employee Owned Business at the Oxford University William Davies. (Davies, 2012) The report was launched at the House of Commons in April 2012 and enjoyed cross-party support. The Government also supported the report and promised to let political measures follow.

Transferability

The transferability of the specific scheme implemented by Childbase is limited, at least to the UK and Ireland, since the legal form of trust is possible only under common law. The specific tax incentives for the SIP scheme enabling Childbase to provide the trust with own funds and facilitating participation for employees are also limited to the UK.

Conclusions

The case of Childbase qualifies as best practice, while the legal structure is specific for the UK and in this particular way can be adopted only in common law countries.

The case is of special interest for mid-sized family enterprises throughout the EU, since it shows that succession problem can be solved and, at the same time, the productivity in- creased by introducing an employee ownership plan. This experience is of special importance to family enterprises in other EU Member States where employee ownership is considered to be a barrier for economic growth of the enterprise.

Childbase, being an enterprise where employees are majority owners, also shows that employee ownership can have a significant positive effect on performance and growth, also in the financial crisis. Among others, the case of Childbase has convinced the House of Commons and the UK Government to provide more political and legal support to employee ownership plans in order to strengthen the national economy and to overcome the financial crisis.

The best practice character and details of this concept are widely discussed among Spanish, Polish and German institutions within the Project Employee Financial Participation in Small and Medium Enterprises – A Strategy for Labour Market Policy and Regional Business Development.

This project of the Kelso-Professorship at Europa-Universität Viadrina Frankfurt (Oder) is supported by the Ministry of Labour, Social Affairs, Women and Family Affairs of the Land of Brandenburg with funds from the European Social Fund and the Land of Brandenburg. You are invited to join the final conference on the 4th of December, during which the project partners will present the results of their experience exchange.

Legal form – Prerequisites to qualify as a SL

A Sociedad Laboral (SL) is a specific form of corporation in Spain, with no exact parallel in other developed countries. It is an inexpensive form of incorporation, majority-owned by its permanent employees:

• An SL may take the form of Sociedades Anónimas Laborales or SALs (Public SL) or Sociedad Limitada Laboral or SLL (Limited Liability SL);
• Permanent workers must own more than 50 per cent of company shares;
• The minimum number of working partners is two, but no partner may own more than 33 per cent of the company’s stock (public organisations may own up to 49 per cent);
• Unlike co-operatives, it is based on share ownership and is permitted to utilise non-employee capital;

Providing stable employment for their worker-owners, who control the company’s directive bodies, they may be founded as SLs, or conventional companies may convert to this form.

Incidence of Sociedades Laborales

By the beginning of 2012, there were a total of 13,465 worker-owned companies providing 74,438 jobs and representing 3.8 per cent of Spain’s private sector companies with more than two workers.

• Clearly, the preferred legal form is the SLL (Limited Liability SL), employing an average of 4.6 workers. During the past 12 years (1999-2011), the number of workers in SLLs increased by 161 per cent.
• The general trend followed by SLs mimics that of mercantile companies since they are basically economic equals. They face the same problems as other SMEs, mainly to become sufficiently competitive.

Economic Policy: Comparison with conventional firms

Despite the lack of sound fiscal incentives, SLs have flourished over the past 15 years.

• Compared to conventional firms, SLs have grown in greater numbers, yet the net increase is negative. However, in most cases, they have converted to conventional firms (either by choice or by disqualification) becoming „victims of their success“.
• SLs have demonstrated their ability to generate stable employment and endure over time. The survival rates are slightly higher than those of conventional companies: More than 50 per cent of SLs survive the first five years.
• SL must set up a Special Reserve Fund into which 10 per cent of their annual net profits are allocated. If tax benefits are being applied for, they must allocate 25 per cent of their annual net profits to this Fund.

Labour Market Policy: Reactivating the unemployed

The key reason for the success of SLL is that since 1985, unemployed persons can capitalise their unemployment benefits as a lump sum instead of monthly payments in order to start a new SL or to recapitalise an existing SL by joining.

• If one decides to create a new co-operative or worker-owned company by capitalising unemployment compensation, a viable business plan must be presented.
• The plan is then screened by a SL development program and scrutinised by the unemployment compensation system.
• The new business continues to be monitored for three years after its founding.

Organisations such as ASLE and CONFESAL have played a key role in the support and promotion of worker-owned companies in Spain.

Invitation and Programm

About Kelso: Louis O. Kelso (1913-1991) was a political economist in the classical tradition of Smith, Marx and Keynes. He was also a corporate and financial lawyer, author, lecturer and merchant banker who is chiefly remembered today as the inventor and pioneer of the Employee Stock Ownership Plan (ESOP), the prototype of the leveraged buy-out which Kelso invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield. Source: Kelso Institute

The event will be under the auspices of the Polish Vice-Minister of Economics, Mrs Ilona Antoniszyn-Klik.

Special guests are: Patricia Kelso (Kelso Institute), John D. Menke (Menke Group), Paul Maillard (FONDACT), David Morris (Global Wealth Allocation), Daniel Dahm (United Sustainability), Herwig Roggemann (Institute for East European Studies).

The Event is jointly organized by: The Centre for Interdisciplinary Polish Studies (Prof. Dr. Dagmara Jajeśniak-Quast) and the Kelso Professorship of Comparative Law, East-European Business Law and European Legal Policy (Prof. Dr. Jens Lowitzsch) 

Time & Location: Wednesday December 4th 2013 4PM: Logensaal – Logenstr. 12,15230 Frankfurt (Oder) Germany.

The leveraged ESOP allows employees to become owners of the company by obtaining shares through the ESOP plan. The shares are bought from a loan that the company takes and not by private funds of the employees. A key point, allowing all employees to become owners of the company they work for – this was an aim of Kelso.

The advantages of the company taking the bank loan for an ESOP are clear:

• The company will get a bank loan more easily in comparison to employees because of the guarantees that the company can give.
• The loan can be paid back by future earnings (for example: dividends).
• All employees are able to participate no matter what their financial background is.
• Employee participation in general provides more employee motivation and allows for a sustainable business succession.

Though, to prevent differences between employees that join at different points in time, holding periods and other rules need to be made.

An interesting article for further reading on employee motivation by the use of ESOPs can be found under: lifehealthpro.com

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