Shares for rights is a Westminster, not real world, plan

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In his speech to the Conservative Party conference earlier this month, the Chancellor unveiled a ?100million ?employee-owner? scheme that will allow shares worth ?2,000 to ?50,000 to be exempt from tax if employees give up certain work rights, such as the right to claim unfair dismissal.

George Osborne said the measure was aimed at the tens of thousands of small and medium-sized firms and would allow businesses hiring staff to insist they forfeit employment rights in two broad areas in exchange for the shares, which would be exempt from capital-gains tax. Existing employees would have the right to refuse.

There has been some support for the proposal, including from the Director General of the IoD, but my view is that the scheme lacks cohesion. It is early days and little detail has been released so far, perhaps my concerns will be allayed, but for what they are worth, here they are.

Under the policy, employees would:

• Give up their rights under UK law on unfair dismissal, redundancy and the right to request flexible working and time off for training;
• Women would have to give twice as much notice of the date when they want to return from maternity leave. Women currently have to give eight weeks, but this would increase to 16.

This is likely to have a disproportionate effect on women. So at a time that many firms are adopting flexible working practices to enable working parents to juggle the complexities of modern life, this scheme may well limit parents? ability to work and care for their children. At the heart of this point lies the question that if businesses are moving towards more flexible working practices why do we need legislation to prevent what appears to be a popular practice?

John Timpson of shoe repair fame, says the policy is based on a misconception ?that employee shares are a magic wand?.

?It is, quite rightly, fashionable to admire the John Lewis Partnership, but their success isn?t just due to the share structure,? he says. ?Share ownership doesn?t in itself create a more committed workforce. In many small businesses, like ours, it is much better to award a significant bonus based on profits than create the complications that come with issuing equity.?

In my view the main stumbling block in the policy is the question of equity, and what it will actually mean to the employee. How many employees will have the experience to quantify their equity and the potential upsides and downsides? How easy will this be to assess particularly if they are desperate to work?

And assuming that the value of shares and apportionment can be agreed (good luck with a start-up) what happens when the employee wants to sell their shares? Has Mr Osborne ever tried to sell a minority interest in a privately held business? The policy appears to be predicated on the shares being liquid, as they are in a listed business, but this is not the case. What investor would want to purchase ?2,000 worth of shares in a privately owned business?

The policy aims to cut regulation to enable business owners to focus on trading but what happens when employers and employees get into disputes regarding the shares? value or the employees? ability to sell the shares? What happens on an employee leaving? There will be significant amounts of time and money spent on lawyers? bills, corporate finance fees and the like.

As someone who works in the corporate finance industry I would be quite happy to charge for valuations and negotiation services but to be frank, what a waste of time. The fees and management cost are going to rival / outweigh the current cost of employment disputes.

The idea of the scheme is to free up business owners to make investment decisions. But for most businesses ? and particularly services businesses ? employees are the biggest investment. How are you going to attract top talent if you cannot give them basic employment assurances?

Many employees are just that for a reason. They are not entrepreneurs. They do not want the risks associated with being an entrepreneur and favour the relative security of employment. This policy is aimed at the SME market and especially start-ups. But bear in mind that approximately one in three start-ups fail in their first three years. So any employee taking on the shares could well be left with a handful of nothing.

It could be that these questions are answered in due course when further detail is released, but for the moment it appears that the plan has been devised by people who have spent their careers in Westminster, not in the boardroom and certainly not on the shop floor.

Tom McCarthy advises on Mergers & Acquisitions for?www.odysseycf.com?and is Chairman of the Bristol Institute of Directors?www.iod.com

Source: http://www.bristol247.com/2012/10/24/shares-for-rights-is-a-westminster-not-real-world-plan-46115/

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