What does the IOF mean for companies?

An election on December 12th is now scheduled. While polls have proved unreliable in predicting the outcome, it is timely to look more carefully at the policies that the Labour Party has already announced. The one that will impact on companies the most is The Inclusive Ownership Fund (IOF). If implemented as proposed, the IOF would force employers to give employees a suggested maximum 10% ‘stake’ in the company. This will affect all companies with at least 250 employees, or around 7,000 UK companies in total.

I’m passionate about the benefits of employee share ownership and have helped hundreds of companies implement schemes for the benefit of all, but this proposal doesn’t deliver those benefits to either employers or employees. Instead it is effectively a stealth tax for companies, a wealth inhibitor for employees, and a value destroyer for investors.

The IOF Model

The Labour party presents IOF as similar to the John Lewis model and a way of sharing company ownership with the workers. However, that’s not true as, under the scheme, employees won’t really own anything, because shares in an IOF cannot be sold. As such they will not benefit from the capital appreciation in ‘their’ equity.

In addition, employees’ share of the profits is capped at just £500 per employee, per year. If profits are higher, then the government will claim the difference. The most profitable FTSE 100 companies generate thousands of pounds of profits per employee, so this potentially represents a very significant tax grab.

IOF has some similarities to an employee owned trust (EOT), which many larger companies have adopted. EOTs give employees rights to shares and dividends, but only while working for the business. Once people leave, they are no longer shareholders – they leave everything and have no ongoing rights.

My summation is that IOF is very different to the true share schemes run by many companies, that give employees actual shares (or options, which are the rights to shares if certain conditions are met). These schemes can continue to reward people after they have left the business. Their contribution will continue to be valued, they can continue to own the equity and any appreciation in business value they help to create, and they can be rewarded long after they have moved on.

Voting rights

At the maximum suggested representation of 10%, the combined vote of all of these workers will be very much in the minority. Under normal circumstances a business has to secure 51% or 75% of the vote to proceed with whatever it intends to do, so 10% won’t be big enough to block anything, unless minority rights provisions are implemented as part of the scheme.

If minority rights are introduced it would deter investors, due to the disproportionate power that this minority can wield. We would therefore expect to see a shareholder exodus for public companies, and private companies will find their funding options greatly reduced.

Impact of IOF

The net effect of IOF will be to reduce shareholder value by 10% while effectively increasing Corporation Tax beyond the 26% Labour has proposed, potentially to an effective rate of more than 30%, if recent analysis proves to be correct.

Many companies choose not to issue dividends, even after reporting sizeable profits, for some valid reasons, such as investing in growth, but under the scheme it can be assumed that they will be forced to.

I’m also concerned that companies that are growing rapidly, and about to reach the threshold of 250 employees, may instead halt growth to avoid being forced to implement the scheme and effectively devalue their business. It is an unnecessary bump in the road, and potentially an inhibitor of growth.

Other options

Sharing equity isn’t meant to restrict growth nor reduce the value of a business. Quite the opposite.

There are already more than 10 different ways of distributing actual equity to employees, from HMRC-approved EMI schemes and EOTs to growth shares and unapproved options.

I’ve recently seen a huge uplift in understanding of employee share ownership by employers and I’ve seen first-hand what a powerful force for good it can be. I really hope that Labour will think again. They need to study the schemes that have been proven to support growth in companies and genuinely benefit employees.

We applaud Labour for encouraging companies to progress along the path of increasing equity ownership within their teams, but the suggested scheme is unworkable, undemocratic, and ultimately unfair to the workers themselves.

By Ifty Nasir, co-founder and CEO of Vestd, the Share Scheme platform