Friday Letter Why ‘rights for shares’ is a bad trade-off

Industry representatives should be wary of supporting any reforms predicated on a diminution of employees' rights.  

On Monday, UK Chancellor of the Exchequer George Osborne used his speech at the Conservative Party conference to announce a new scheme: employers will be able to grant between £2,000- and £50,000-worth of tax-free shares to staff who agree to waive some of their legally-enshrined employment rights. The idea is that this will act as an incentive for firms to hire, while giving employees a greater stake in their company's future success.

Not long after, the British Private Equity and Venture Capital Association issued a statement endorsing the proposal. “A new generation of owner-employees will enter the labour market as shareholders, giving everyone a chance to work and share in the proceeds of enterprise,” said chief executive Mark Florman. “We look forward to working with the government on implementing this policy.”

On the face of it, the reasons for the BVCA's enthusiasm are obvious. Reducing barriers to employment makes it easier and cheaper for companies to grow; more importantly, companies with more engaged employees tend to perform better. And the more people within a firm who have their interests aligned through equity ownership, the better. That's all good news for private equity owners.

Nonetheless, backing the Osborne policy is a risky idea, for at least two reasons.

The first is that the chances of it catching on look slim. Even if owner-entrepreneurs – or indeed, corporations – can be persuaded to lift the lid on their equity, there's a good chance that many will find this scheme too complex and expensive to implement and administer. There could also be various legal complications, according to employment lawyers. So whether it will actually work as intended is still a moot point – and nobody wants to end up championing a policy that turns out to be unworkable.

Secondly, consider what Justin King, CEO of supermarket chain Sainsbury’s, told the Guardian newspaper: “What do you think the population at large will think of businesses that want to trade employment rights for money.”

This question should resonate with private equity more than most. The industry already has an image problem – in the UK; its practitioners are often portrayed in the media as secretive asset strippers, who will always put profits before people. By backing a policy that encourages staff to give up their right to resist unfair dismissal, plus their right to request flexible working or training, the industry risks apparently confirming the stereotype that all it really cares about is being able to cut costs and fire people more easily. This could damage the industry's public image further – with all the negative consequences this could have as policymaking is concerned.

What the industry should be doing is arguing that private equity can be good for everyone: owners, managers and staff. What it should not be doing is opening itself up to accusations that it sees employment rights as a hindrance, or worse still, a commodity that can be bought or sold like any other. That's bad business practice, because it will make it harder to engage portfolio company staff. And it’s bad politics, because it gives opponents another stick with which to beat the industry.

The unfortunate thing about all this, of course, is that the principle of employee participation is a sound one. It's much easier for private equity to sell its benefits if it can argue that the whole company gets to share in any financial upside, not just the GP and the management team. So wider employee ownership ought to be a good way of delivering staff better engagement, and thus, better performance.

Take Spie, the French deal that won the 'EMEA – Business services' category in our Operational Excellence Awards: owner PAI Partners introduced an incentive scheme that saw 6,000 people benefit financially when it came to exit. Everyone’s interests were aligned. But for all we know, Spie’s staff did not have to surrender any rights to participate.

NB. The full results of Private Equity International's inaugural Operational Excellence Awards were released on Monday; you can read them online HERE. The standard of submissions was incredibly high across the board, so many congratulations to all our winners. Their investments show exactly how private equity ownership can benefit many, not just a few.