Budget 2022 proposes new type of trust, with proponents citing improved employee retention, productivity
“There’s going to be hundreds of companies that are going to do this, over the next five to 10 years, [with] thousands of employees creating millions of dollars of wealth. So we’re really excited.”
So says Jon Shell, managing director and partner at Social Capital Partners in Toronto.
He’s talking about the likely prospect that Canada will introduce Employee Ownership Trusts in the near future, judging by recent announcements from the federal government.
These trusts encourage employee ownership of a business, and facilitate the transition of privately owned businesses to employees. The main barrier in Canada? The lack of a dedicated trust vehicle under current tax legislation tailored to the requirements of these structures. So Budget 2022 proposes to create a new, dedicated type of trust under the Income Tax Act to support employee ownership.
Unlike stock options or share purchases plans, these trusts allow all workers to participate — though their amounts vary depending on their seniority and levels of compensation.
“We're really excited because unless we follow a completely different path than everyone else has, this will create real wealth and it we'll do it quickly and it's exciting. We're on the edge of our seat waiting for it to happen,” says Shell, whose company published the discussion paper Building an Employee Ownership Economy.
U.S. and U.K. examples
When Shell talks about “everyone else,” he’s largely referring to the U.S. and U.K., which offer different versions of employee ownership.
“They've been super successful in both those countries. And I think you are starting to see more countries around the world start to talk about it. And in Canada, because of the focus on inclusive growth and trying to create an economy that works for more people, there's just a real interest in ideas to do that,” he says.
In the U.S., the focus is more about long-term alignment, while the U.K. version involves annual payments and mimics profit sharing, says Shell.
“We think there are ways to both get all the benefits of a share-based, long-term alignment with having some payments that benefit workers on an ongoing basis,” he says.
“It's wonderful for us that the U.S. and the U.K. took different approaches, so we can contrast them and pick what's good and what we don't like. And I have no doubt that whatever is brought to Canada will be better than both of those.”
One of the biggest reasons Canada lacks broad-based employee ownership is we lack the right legal structure, says Simon Pek, assistant professor of sustainability and organization theory at the University of Victoria.
“It's possible to do it in Canada, but it's challenging and there's not a streamline ‘off-the-shelf’ process. And it's, most importantly, not incentivized. So in the U.S., for example, there are specific tax incentives for a company to transition to an employee stock ownership plan, and that currently doesn't exist in Canada,” he says.
“Assuming the government does fulfill its commitment and designs it right, and has consulted with all the stakeholders and experts in this space, it could, in theory, be a very well-incentivized, easy, clear, off-the-shelf solution that any business owner could consider and implement relatively easily.”
The growing conversation around employee ownership is “super exciting,” says Pek. “It's one of those things that, when one sits down to think about it, is almost a no brainer.”
Case study: EllisDon
Geoffrey Smith, CEO, president and director of EllisDon, would seem to agree. In a recent LinkedIn video, he touted the merits of employee ownership.
“For me, it's fairly simple. An employee ownership trust structure helps put more of the prosperity generated by a company into the hands of the people who generated it. And it helps in a global economy, obviously, keep those companies in Canada for the longer term,” he says.
“And all the academic studies show that employee-owned companies grow faster, are more profitable, stay in their communities longer and provide a path to prosperity for people who would not otherwise have had it. It's time for Canada to get on board. It's clearly the right fiscal policy, and it's the right thing to do.”
About 20 years ago, the Smith family froze all the equity in EllisDon, issued all new common shares, and gave 45 per cent of the company to the employees.
“That's when things really took off for us,” he says. “I can tell you, without any question, the Smith family has done far better owning half of the company than we ever would have done if we'd kept 100 per cent ownership.”
As a result, EllisDon has now decided to sell the other half of the company so it will be 100-per-cent employee owned in a few years, he says.
“For me, it's the right thing to do anyway — the employees generate all of the profits that we make.”
Last summer, an arbitrator ruled that EllisDon’s introduction of a COVID-19 rapid-testing policy was a reasonable exercise of its management rights, an arbitrator has ruled.
Benefits to employee ownership
For business owners, this is a great way to maintain the legacy of your business, says Shell.
“There's always a concern, when you're an owner looking to sell a company, ‘What's going to happen after I'm gone?’ In the case of an employee ownership trust, you often will stay involved for a period of time and your company will stay where it is… and then it's actually a pretty good result for you financially, as long as the company continues to do well.”
For workers, there's obviously a financial benefit, says Pek.
“You just access much more capital through this process, whether it comes as a retirement benefit or is even paid out periodically… and some people say that that's really important to tackle inequality in society.”
There's also heightened job security and increased job satisfaction with this ownership approach, he says.
“From an HR perspective, if you couple it with practices to empower employees, give more information, enable them to influence decision-making — which is really, really important from the research — you align interests quite well as well, so [employees] get a larger return over time, and they might then be incentivized to be more productive and come up with better ideas to increase that.”
Employee-owned companies often grow faster and experience fewer layoffs or bankruptcies in economic downturns. The reason for that is twofold, says Shell.
“One, the people who hold the debt tend to be the former owner, so their interest in putting pressure on the company is very, very low. They have confidence in the company, they know that once the challenge is over, they'll get back on their feet, and it will all be fine. Whereas a bank or some other shareholder who doesn't have that same connection with a company will have a different point of view,” he says.
“And the other [reason] is employees know that if they make it through, the benefit all goes to them. So there's more of an interest in ensuring that a company can get through tough times, and employees, management all are aligned around making sure that happens.”
Employee ownership has also been associated with greater job satisfaction, motivation and workplace participation. In providing long-term wealth building, it can also help attract and retain employees, and boost corporate culture as employees are move involved in the success of the business.
“For employees, in the American system, they're allocated shares over time. And every year, they get a report on what their shares are worth. And so they start to begin to understand how the company is doing, ad they begin to understand how there are benefits for the success of the company to them. And then when they leave, the company buys back their shares,” says Shell.
It's the one mechanism where employees get their shares for free, so it’s accessible to all workers.
“The best stories out of the U.S. are some of the grocers and some electrical distributors were people who have more frontline jobs, but are there for decades, retire with a million of dollars in their accounts. And that's the type of windfall that just isn't available to middle class folks that is available through this program,” he says.
“The retention benefit has begun to take more and more prominence. With all of the talk of the great risk of resignation, employee-owned companies tend to retain employees a lot more, with much lower turnover. And that's been proven over decades.”
More than two in five (43 per cent) of employees globally are set to quit their job within the next 12 months, according to a report from EY. Why? Money is the top priority amid record inflation, with 35 per cent looking for a salary increase.
Best practices for employee ownership
There are, of course, different approaches to employee ownership, but best practices should include a “thoughtful engagement program” along with financial literacy training “so that employees not only are able to engage more in their company, but that they understand the value of being an owner of the company,” says Shell.
And it’s also important to have rules on how employees are impacted. In the U.S., for example, a company that transitions to employee ownership is not allowed to change any of the benefits, he says.
“This is not allowed to replace a pension, it's not allowed to replace pay, it's not allowed to be used as a way to reduce labour costs in any way... that's a super important aspect.”
Read more: Offering workers a strong retirement solution is not only a nice thing to do for the workforce, there is a strong bottom-line argument involved, according to a recent panel.
It’s also better if there’s enough flexibility in terms of how much involvement or control is given to employees, he says.
In general, more participation has been suggested to be beneficial to activate many of these benefits, says Pek.
“But there's nuanced findings around the different types of participation in different types of organizations,” he says.
“Maybe you don't want to have a policy saying you want employee representatives on the board per se, but maybe… at a minimum, you could encourage more on-the-job involvement in practices or even consultation, like an employee panel of some sort to advise the trustee or the board.”
You don't want to scare off a potential owner who wants to recoup their investment, and might not end up transitioning to employee ownership if they feel it's too risky or too unknown, says Pek.
“From what I understand from the U.S. model, there's not really a lot of input from employees that is needed. And so some people have pushed for at least a right of information or consultation, for example; and some have gone further to say there should be employee reps involved in the process… But that's another kind of thing that should be considered as we embark on this journey in Canada just to weigh the trade-offs and see what would make the most sense.”
It’s also important to consider ways to avoid too much inequality, where some employees receive significantly larger payouts than others, says Pek.
But employee ownership is not the only route available, he says, citing as an example worker co-operatives.
“Hopefully this conversation can galvanize not only a development of a new trust, but potentially a broader conversation about the nature of work or voice in our economy and just other forms, other ways of doing things and what we kind of have the Canada… Let's build off this to layer on potentially other really exciting things that could reshape the nature of work for the better in the future as well.”