An AT round-table discussion, supported by The Rooflight Company, shared experience of employee ownership among architects and their advisers
The number of employee-owned businesses is increasing by about 10 per cent per year in the UK, with more than half in the professional, scientific, technical and other service sectors. For architectural practices in particular, transitioning to an employee-ownership structure can offer a number of advantages, some supported by tax incentives, not least in terms of employee engagement and succession arrangements.
Employee ownership can be direct – in which employees become individual shareholders – or indirect, in which shares are held collectively on their behalf, usually by an Employee Ownership Trust (EOT), or a hybrid of the two.
The Finance Act 2014 introduced incentives to encourage wider employee ownership. Individuals disposing of their shares to an EOT that leads to it holding a controlling interest (more than 50 per cent), can be exempt from Capital Gains Tax and inheritance tax charges on any proceeds from the disposal. Additionally, employees of an EOT-controlled company can be exempt from income tax on the first £3600 of any bonus.
In terms of business structure, the key change is that the board of directors of the company becomes answerable to the trustee board. This usually also results in greater transparency and employee involvement, with all staff working towards collective benefit. Many architectural practices have found that commitment, decision-making and profitability are also enhanced.
EOTs are administered by trustees, usually representatives of the employees, the directors of the business and often an independent chair, and they hold assets in the EOT for the benefit of the employees. The EOT has its constitution outlined in a Trust Deed, and this can be drawn up to help define the future of the business and potentially ensure its longevity.
Key questions that arise at the outset, according to the Employee Ownership Association, include: what time period is envisaged? What proportion of shares will the EOT hold? Should the Trust Deed make special provisions for protecting the company? How will the business fund any purchase of shares from the owners? Will employees feel a sense of real ownership? And how significant are tax considerations for both the company and employees?
Round-table chair Jeremy Gadd is founder of J Gadd Associates which supports organisations transition into employee ownership. He is a trustee director of Aardman Animations and round-table sponsor The Rooflight Company. Gadd spent more than 30 years at the John Lewis Partnership, working in Waitrose and John Lewis, in both operational and strategic roles, and in an independent role within the senior leadership team. He was an elected management representative within the branch council.
Experience with a variety of clients in the built environment sector leads Gadd to believe that employee ownership seems a natural choice for them. “There’s a natural alignment with those driven to make a better world through architecture, and wanting this legacy to continue through employee ownership”, he suggested.
Gadd stressed that transitioning a company to an EOT required passion, above all else. There is an underlying need to ensure that employees feel that their participation in the ownership is real, especially among younger staff, he felt, and key challenges are undoubtedly in finding ways to share and engage with employees throughout the whole process. He suggested that training and support were vital, a point with which all the participants agreed. Prompting the panel with questions, Gadd asked: how can employee ownership be made meaningful to new employees, and not just those who were involved at the outset? Does an EOT structure encourage innovation and new ideas, does it speed up things such as decision-making? And can an EOT be regarded as a force for good in its own right?
Having co-founded Assael 25 years ago, since when the practice has grown to employ 100 people, Russell Pedley and John Assael were prompted to look into employee ownership after they were identified as a potential acquisition by a large US-based company. The ensuing discussions led to a shared belief that the company’s future shouldn’t be as part of a large global business, and in January 2019 Assael joined the growing number of leading architectural practices to become an EOT.
The Assael EOT is configured such that two trustees are elected from among the employees, and they are joined by an external independent chair as well as Assael and Pedley. The transition coincided with the appointment as managing director of Pete Ladhams, who joined the practice as a student in 2001. The trust owns 75 per cent of Assael and the management team retains the remainder.
The process of getting to this point wasn’t straightforward, however. Pedley described how an initial presentation faced a wall of silence, but since then, over a two-year period, it has been achieved through a careful strategy of engagement in which focus groups of six to ten staff were tasked with missions, such as looking at zero-carbon. Some employees were sent on EOT courses, but there was an equal need for internal support. Some staff, he reflected, have still not fully adjusted to the new ownership, but the vast majority have.
Pedley sees the trust as a trigger for engagement. The staff trustees were elected by a hustings system – and they had been pleasantly surprised when ten individuals put themselves forward. These trustees remain in post for just two years, so he believes it should instill a dynamic management that brings in fresh ideas. In time, Pedley says a successor to the current founding directors will emerge, but the intention is for the practice name to endure.
One of two equity partners in the 70-year-old practice of Purcell (formerly Purcell Miller Tritton), chief executive Mark Goldspink has overseen its recent transition from LLP to limited company as a precursor to becoming an EOT. Currently employing 250 staff in the UK, Hong Kong and Australia, Purcell will thus “implement a more permanent structure to safeguard its ownership and independence in perpetuity”.
Goldspink admitted that the partners had struggled with a succession plan, but that the need to retain the culture of the practice was paramount. Harnessing the “collective ambition”, however, is still a challenge, but the EOT is set to be implemented in May 2020, when it will take ownership of 70 per cent of the shareholding.
Goldspink described how ‘Purcell Voice’ was set up at grass roots level a year ago, comprising a cross-section of employees tasked to listen to views and suggestions and work with the directors to influence desicion-making. The group is also now looking at innovation and work opportunities.
The transitional process has needed two years, said Goldspink, with many workshops and forums. “No one will put in money so everything comes from profits… and we found that the people who we felt were best equipped to take the company forward didn’t necessarily have the financial resources to invest in it, so a trust was a logical route.”
An associate director at Bennetts Associates, a practice set up in 1987 by Rab and Denise Bennetts and currently with 70 employees in London, Edinburgh and Manchester, Alison Darvill is also a trustee of the EOT that came into being in September 2016.
In 2003, Bennetts opted initially for an Enterprise Management Incentive scheme, with 22 per cent of shares distributed to four directors, paid by specific bonuses. The 2008 economic downturn raised issues that led to a reassessment, however, and an EOT owning 100 per cent of the equity was set up. Workshops were held in January and May 2016 and in September the EOT came into being.
While the timescale seemed fairly tight, Darvill said it has taken time and effort to focus minds and generate a general level of understanding among staff, and this was not helped by a significant turnover of trustees for various external reasons. However, as both a trustee of the EOT and a member of the practice’s management board, Darvill was in a position to see tangible progress.
A corporate lawyer with Field Fisher, Neil Palmer has 10 years experience in employee ownership and more in corporate transitions, especially in government and public services sectors. He speaks and writes regularly, including guides for the Employee Ownership Association.
For Palmer, every case has different needs and priorities. In the case of architectural practices looking for a successor, there’s a need for a comprehensive succession management plan, he suggested, which will need to recognise both present owners and the new leadership. He stressed the need for training – being a trustee is a responsible role, and it needs to be nurtured and supported. Trustees can also be privy to confidential matters regarding the state of the business, and there needs to be faith in transparency.
Transitioning to EOT ownership is an evolutionary process, Palmer suggested – you can’t necessarily get it right from day one. “No one has all the answers, and things need to be allowed to develop over time.” The process will continue and you have to deal with issues as they inevitably arise, preferably in bite-size chunks that make it easier to move forward – but in his experience things tend to work out rather than reach an impasse.