Employee ownership schemes: A business culture and leadership challenge

Employee ownership and participation makes good business sense and is a core requirement for business sustainability. Since the late 1800s it has been used by companies to not only share profits with managers and employees, but it has been found to increase employee loyalty, retention, performance, productivity and co-operation.

In South Africa, employee ownership has become increasingly attractive with broad-based black economic empowerment ownership transactions (“BBBEE”), to allow companies to comply with the ownership requirements of BBBEE legislation. We recently assisted a client with such a scheme and managed to take away some key learnings.

Various options exist to affect these transactions, but given estate and tax planning many make use of a special purpose company, business trust, family trust or employee share ownership programme (“ESOP”) as opposed to direct shareholding by participants or the ultimate beneficiaries. With the development of BBBEE legislation, qualifying criteria has been set forth ensuring that the scheme is initiated, administered and managed in a sustainable and transparent manner. Complying with the criteria will enable companies to earn between 40 to 100% of the allocated ownership component points.

A brief overview of the criteria can be found below: 

Appointing Trustees

• Participants must take part in appointing at least 50% of trustees;
• At least 50% of trustees must be independent;
• The chairman must be independent;
• At least 50% of trustees must be black; and
• At least 25% must be black women. 

Trustee duties

• Trustees must present financials of the scheme at an annual general meeting (“AGM”) of the ESOP. 

Scheme Regulation

• The constitution/trust deed must be recorded and available for review by participants;
• Must have clear rules or defined mechanism governing the portion of economic interest that accrue to participants;
• Trust deed must define participants and portion of their claim and the Trustees must have no discretion regarding allocation;
• At least 85% of the value allocated must accrue to black people, crucial point to note if the scheme includes employees that are not defined as black per the BBBEE codes; and
• Fees related to the administration and management of the scheme may not exceed 15% of proceeds received. 

Operational Capacity             

• Scheme must have track record of operation or be able to demonstrate its operational capacity.
• This can be proven through employing qualified and experienced staff, employing experienced advisers and having operating premises. 

The criteria set forth have been developed in relation to BBBEE transactions, is legislated and (most importantly) provide good guidance on independence, participation, oversight, accountability and transparency, which are all key components to ensure a sustainable ownership structure. 

But, to gain the most from such a scheme requires adoption beyond mere compliance with legislation or ticking boxes. Empowerment schemes must form part of the business strategy of the company and, as such, should be implemented and managed from a leadership and company culture perspective. Many schemes ultimately fail or have limited success because employees and participants feel that they are still only viewed as an input into production and not given a right to participate in the decision-making of the company or the scheme. In short, the current structures of the business fail to view the employees as true shareholders.

What is required is a shift in company culture to one of inclusiveness and participation, where employees are provided with regular and meaningful feedback and included in the decision-making of the business. This is a responsibility that does not only fall on the company but also requires active participation of the fiduciaries of the scheme (i.e. the trustees) to be active participants by attending board meetings, attending shareholder meetings and holding regular trustees’ meetings in addition to the required annual AGM. Furthermore, this may require (sometimes extensive) upskilling and education of employees in order allow them to meaningfully participate in the scheme and business.

If the employee share incentive, profit share or BBBEE ownership transaction or related strategy is approached from a leadership and organisational culture point of view (in addition to the legislative and finance requirements) its likelihood of a success is greatly increased.

Article adapted. Originally published by Jason Hamilton