The relationship employees expect and demand from their employers is changing, and with it the way businesses choose to reward and incentivise their staff. A voice or a seat at the table is often as important as having an economic stake in the company.
This change has been gathering pace as millennials and generation Z enter the workplace and is likely to accelerate in the post-Covid era.
Businesses will need to find increasingly innovative ways to attract, retain and reward their staff.
In this, the second of two articles, we outline how businesses can use engagement and influence to motivate and build better relationships with their employees. This is typically achieved through employee collectives or member organisations and direct Board representation. Click here to read part one.
Employee collectives and member organisations
Engagement in the management of a company can be at board or member/shareholder level. Whilst involvement at the board level allows for influence over the day-to-day operations of the company, shareholder involvement is usually limited to more material decisions relating to ownership, corporate structure and profits.
Organisations whose primary focus is a common goal (eg social purpose) rather than profits have sometimes adopted a membership structure (ie a company limited by guarantee) rather than share capital. Companies limited by guarantee can be specifically designated as ‘not-for-profit’ organisations through their articles of association and can also be used to enable ‘ownership’ and ‘control’ by the company’s employees. The criteria for membership can be set widely to encompass all employees of the company, or restricted to employees of the company who satisfy certain qualification criteria (eg length of service). Tying membership to employment can allow a company to give employees a ‘seat at the table’ without the clawback issues associated with direct share ownership, as membership simply ceases upon termination of employment.
Membership structures can vary considerably. At one end of the scale, we might see a diverse membership with a single interest held by an employee body, and at the other an employee collective whose membership comprises only employees. They can give employees an element of (or ultimate) control over strategy and decision making and, in doing so, promote transparency and fairness.
However, flat organisations with sole or majority employee membership can run into other issues, for example:
- How will you avoid a situation of ‘too many chiefs’ arising? Strong leadership and clearly defined roles will be essential to ensuring management can take quick and decisive action when needed.
- How will sensitive or controversial matters be managed? Could non-executive directors help to provide an independent voice at board level?
- Have exit strategies been considered? Whilst rarely at the forefront of members’ minds at the outset, succession planning is important for common-purpose companies to avoid a situation where the company is left without management or with a small number of individuals facing the burden of managing a sale or dissolution by being the ‘last people standing’.
Employee membership could be a great solution where the primary aim is to provide employees with a voice. However, these structures can be unattractive to potential buyers who do not want a company limited by guarantee in their group and without share capital investment can be difficult to obtain.
Board representation
If growth, profits and an exit remain key objectives of the business and its owners but the expectation of those being incentivised is a ‘seat at the table’ rather than financial reward, board representation can offer a way to align employer-employee interests.
Appointing employees or an employee representative to a board gives the employee body a voice in day-to-day decision making without surrendering control at shareholder level or complicating the company’s ownership structure. It can increase awareness of the commercial drivers of an organisation and the difficult decisions directors are required to make, whilst allowing those on the ground who are often closest to the practical issues and day to day realities of the business to contribute to those decisions.
However, the level of engagement that comes with ownership can be hard to achieve with a temporary appointment, and employers should be mindful of the difficulties employee directors can face in distinguishing between their fiduciary duties as directors and their role as employees. Indeed, an employee director will be subject to the same statutory and fiduciary duties of all directors and some may find the risk of personal liability off-putting. As such, employee directors (alongside all directors) should be provided with appropriate training on their legal duties.
Care must also be taken to ensure that employees feel properly represented by the employee director/representative. One way to achieve this is to create an employee vehicle that runs alongside the company, i.e. a separate company limited by guarantee whose sole purpose is to appoint the employee director. As with the employee collective described above, all or certain qualifying employees would be members and they could then vote on how the employee director would cast his/her votes or what issues he/she would raise at upcoming company board meetings. While this can seem like an additional level of bureaucracy, businesses that have adopted this formal approach invariably report that there is a real sense of ownership and pride amongst employees, who find that having their own corporate vehicle gives them a sense of ownership and responsibility.
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There is no “one size fits all” solution to employee engagement and all schemes and arrangements come with their own pros and cons. This article only touches on a few options and there are many other vehicles you can use to promote employee engagement and voice.
At Fox Williams, our corporate, tax and employment specialists work together to advise clients on structuring and implementing bespoke and tax efficient employee incentives, ownership and engagement structures.
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