Employee ownership could boost ‘motivation and common purpose’ in insurance sector firms

When the UK’s 50 largest employee-owned companies came out in June, Howden was the only insurance firm to make the list. 

Howden is in illustrious company. Topping the list was the John Lewis Partnership, renowned for sharing profits among its 80,000 staff.  

Employee ownership is on the rise. Businesses owned by staff have doubled from less than 500 in 2020 to around 1,030 today, according to the Employee Ownership Association (EOA), which represents firms owned or transitioning to the new status. 

Insurance might be missing out on something special.  

EOA head of communications and policy Keely Lead said: “The performance of every organisation is built upon a foundation of individual endeavour – often, individuals collaborating effectively to drive success. That is the cornerstone upon which our economy rests.  

“As such, individual motivation and common purpose are vital. 

“By aligning the interests of owners, managers and workers, employee owned businesses (EOBs) unite people behind a shared goal and ensure that employees can enjoy higher engagement, motivation and wellbeing. 

“They can top up their salaries by sharing in the capital value they create and work within transparent governance regimes that lock in benefits for the long-term.

“All of these gains cement employees’ sense of fairness and happiness at work.” 

Incentivising productivity  

To boost UK productivity, the government kickstarted the employee ownership trend in 2014.   

A huge carrot was dangled before the business world – shareholders selling to an employee ownership trust (EOT) would not pay capital gains tax.  

The process works by the equity partners selling shares to the EOT, which holds them on behalf of the staff. The trust must control at least 51% of the business for the tax exclusion to apply. 

The board of trustees – management, worker representatives and independents – oversees payments to the selling shareholders or banks. 

Profits are then used to pay off the former owners who sold their equity and any debts. The remainder gets shared between staff who are now part of the EOT.  

Owners fund the EOT deal through taking on debt or using the company’s reserves.  

Payment is made usually by deferred consideration over the years, giving the EOT breathing space to pay off the selling shareholders, invest for the future and hand profits to staff.  

Ten Insurance Services, a network for appointed representatives, converted to an EOT in 2015. 

Shares are held on behalf of staff by the trust. Staff can receive up to £3,600 in dividends annually and these are tax free.  

Ten director Paul Sykes said: “One of the theories behind that equal distribution of profits is that those people that are employed are highly-motivated people who want to increase our profitability, which is what every business wants to do.  

“So if we think about what we do, in terms of broking, it’s not just about the finances, but you would expect that someone broking on behalf of our appointed representatives would be very motivated to find a good home for every risk that is presented to them.” 

Necessary considerations 

Key to achieving a successful EOT is getting a realistic valuation of the business. If the valuation is too high, profits generated are eaten up by the debt or deferred payments. This sucks out money needed for investment, leaving the business at risk of failure. 

However, owners usually appoint an independent adviser to set a valuation, reducing the risk of failure.  

Perhaps the biggest risks to EOTs is the harsh reality of the business world.  

Employee ownership consultant Ian Hiscox said he has seen firms struggle amid the economic downturn.  

He said: “We’ve got to get people to understand that for all the upsides, it’s important to remember that employee ownership does not get a free pass when it comes to the difficulties that all businesses are experiencing at the moment.” 

If profits don’t arrive, then neither do dividend payments from the EOT to staff. That can be difficult for employees to understand. 

Sykes believes communication with staff is key, so they understand fully understand the EOT.  

He said: “It is massively, massively important. If you end up with a group of people who didn’t know they were buying something and don’t understand the consequences of buying something, it is not a great place to start.” 

Around 80% of the employee ownership sector uses the trusts, according to the EOA. 

However, as long as 25% is owned by staff, they can define themselves as employee owned, says the EOA.  

In August, Howden became a member of the EOA. 

Founder David Howden set up the firm as employee owned from the start. Around 30% of equity is owned by employees.  

Howden executive chairman of UK and Ireland Peter Blanc said he respects the EOT model, which can be good for smaller firms, but believes their model works best for them – especially in providing the capital, via its three private equity backers, to grow. 

“Once a year all staff are given the opportunity to buy shares,” explained Blanc. 

“Equally, all staff who are shareholders have that once a year opportunity to sell shares in the business. So it becomes a dynamic marketplace.

“Having those external investors, it gives us the liquidity. It gives us firepower to go and make other acquisitions and it means the shareholding can be a living breathing means through which people can achieve their personal financial ambitions.” 

Employee ownership may not have taken off yet in the insurance industry, but if Howden and Ten are anything to go by, this is one idea that owners looking to sell their business should certainly consider.