Employee stakeholding

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The Idea

The idea that a successful company has stakeholders with which a company works to improve the business has been fashionable for several years. One of the stakeholders are the employees of a company. Other stakeholders include shareholders, customers and suppliers. The purpose of a company identifying its stakeholders is to acknowledge that a successful company needs to work with its stakeholders over a long time to ensure business success.

So far as the employees of a business is concerned a stakeholding relationship can involve:-

A commitment by the employer to continued training of employees to enable them to be capable of work in the company, and to have saleable skills if the company has a downturn.

An ongoing dialogue with the employees as to how improvements can be made in the way the company works to produce better products and services to customers accompanied by reward mechanisms for the employees’ ideas.

The incentivisation of employees through shareholdings in the company, often known as an ESOP or employee share ownership plan.

Many of these relationships are organised through trade unions on behalf of employees.

Research suggests that companies in which the employees own shares are more profitable than companies where employees do not own shares.

Employees as shareholders

Why should employees be interested in becoming shareholders in the company in which they work?

Sometimes companies will offer the shares to employees for free through what is called a profit sharing scheme. The shares can become an asset for employees which they can sell at a later date. This is the most usual route for employees to become shareholders.

Companies which are moving to a listing on the Stock Exchange often issue shares to employees on a listing or make them available for employees to buy at a discounted price.

Occasionally opportunities arise for employees moving from the public to the private sector to obtain a stake in their company. This happened particularly with the bus industry where local authority companies became private companies. Trade unions in this industry organised themselves so as to ensure that their members benefited from privatisation. Many bus companies still have employee shareholders, and some have employee directors even though the employees no longer hold a majority of shares.

Exceptionally employees may be asked to take salary cuts or other benefits, or take a wage freeze, in order to ensure the survival of a firm. This should not be done lightly or for free. Obtaining a shareholding in the company is a way of trading one’s loss of benefits for the possibility of a gain in the future. Examples of this have not occurred in the U.K. but have occurred in the United Sates among some airline and steel companies.

Risks

In assessing stakeholding opportunities employees need to consider whether the company is a private company or a public company whose shares are listed on the Stock Exchange. If the company is a public company whose shares are listed on the Stock Exchange there is a ready market for shares to be bought and sold. This is not the case in a private company. In a private company there may be an ESOP which provides a mechanism for an employee to sell shares. If not employees should always enquire what mechanism does the company have to sell shares.

Rewards

Since employees are to be expected to move more from one company to another building up shareholdings in a company may be a way to have a cushion against unemployment or the times between jobs, as well as being a nest egg for retirement. However, employees should always realise that the value of shares can go down as well as up.

Future Developments

It is not unusual in companies where a shareholder owns more than 15% of the shares for the shareholder to have a seat on the board of directors. With few exceptions employee shareholders are often not sufficiently organised so as to ensure that they use their shares as a block vote. It is expected that this is the type of development which trade unions will take up in the next century.