In a move that would make most City investors choke on their morning espresso, a growing number of British entrepreneurs are handing the keys to their companies not to private equity vultures, but to the very people who make the tea and balance the books. The employee ownership trust (EOT) model, once a quaint Quaker-ish experiment, is now spreading from the Lake District to the boardrooms of Wall Street. But before we break out the bubbly and sing ‘Kumbaya’, let’s examine the numbers. Is this a genuine revolution in capitalism, or a tax-efficient exit strategy dressed in ethical tweed?
The EOT structure, introduced in 2014, allows owners to sell a controlling stake (more than 50%) to a trust for the benefit of all employees. The vendor pays no capital gains tax on the sale – a significant saving given the top rate of 20% on business assets. In return, employees receive tax-free bonuses of up to £3,600 per year. It’s a win-win on paper. But the cynic in me wonders: is the Treasury losing out? Treasury figures suggest that by 2023, over 1,200 businesses had adopted the model, up from just 50 in 2015. That’s a lot of forgone tax revenue. Yet, the government argues that productivity gains and reduced reliance on welfare will offset the initial hit. A 2022 study by Cass Business School found that EOT firms report 8% higher productivity and 4% lower absenteeism. Employee turnover drops by a third. These are not insignificant numbers.
The catalyst for the global surge? A cocktail of disillusionment with traditional exit routes (private equity and trade sales once dominated, offering quick cash but often leading to culture-clash and cost-cutting), and a new generation of founders who prioritise legacy over liquidity. Take the case of Aardman Animations, the Wallace and Gromit studio. When co-founder David Sproxton sold his shares to an EOT in 2018, he said: ‘It’s about ensuring the clay doesn’t crumble.’ Sentimental, perhaps, but the studio’s subsequent output suggests the model hasn’t stifled creativity. Similarly, Riverford Organic Farmers, the veg box delivery firm, moved to an EOT in 2018. Founder Guy Singh-Watson stated: ‘I wanted the business to remain independent and keep its soul.’ Critics argue that such models can lead to ‘groupthink’, where employees avoid risk for fear of tanking their own bonuses. But the data so far shows that EOT firms invest more in R&D than their private-equity peers. Perhaps motivated workers are better stewards of capital.
Globally, the model is catching fire. In the United States, the ‘employee stock ownership plan’ (ESOP) has long existed, but it’s the British EOT that is now being studied by policymakers in Germany, Japan, and even China. Why? Because it offers a middle ground between state ownership and unfettered capitalism. In an era of ‘stakeholder capitalism’ and ESG mandates, the EOT provides a tangible way to align interests. Parliament’s recent ‘Ownership at Work’ report recommended expanding the model to include employee representation on boards. But my scar tissue from the MBO boom of the 1990s makes me wary: governance is key. Without proper safeguards, an EOT can become a vehicle for management entrenchment. The trust’s trustees must be independent, not cronies of the founder. The employee benefit must be genuine, not a tax dodge. So far, the evidence suggests that well-run EOTs outperform their peers. But there have been failures, such as the collapse of Sussex bakery chain Flour Power in 2021, where the trust structure couldn’t prevent mismanagement.
What does this mean for the average investor? If you hold shares in a company considering an EOT, you might see a short-term dip as the market adjusts to a lower-margin, employee-centric model. But long-term, the stability and loyalty of the workforce could lead to steady, if unspectacular, returns. For the broader economy, the rise of employee ownership could reduce wealth inequality – a goal the Bank of England has been fretting about for years. But let’s not get carried away. The EOT model is not a panacea. It works best for mature, profitable businesses with a strong culture. It’s not for startups or highly leveraged firms. And it certainly won’t replace the venture capital ecosystem that fuels innovation.
Yet, as I watch the gilt market wobble and inflation peck at our savings, I can’t help but admire a model that ties the fortunes of workers to the success of the enterprise. It’s a hedge against the short-termism that plagues our markets. So, yes, the employee ownership model is gaining traction. And in a world starved of trust, perhaps giving the keys to the staff is the ultimate vote of confidence. But remember, the bottom line still matters. Even in a cooperative utopia, someone has to count the beans.
