Employee ownership: Cultivating long-term success

There's a growing realisation that, for many law firms, the traditional partnership (or LLP) has had its day. Recent headlines have been dominated by the stock market listing of Gateley plc on AIM (formerly the Alternative Investment Market).

As new ownership models for legal services emerge, one as yet small but discernible trend is for firms to involve a wider number of their staff in the ownership. Gateley has reserved 7 per cent of its shares for employees and Triton Global Group, which as an alternative business structure (ABS) combines insurance legal services with claims resolution, is an example of a firm now operating an all-employee share ownership plan.

In our own firm, we have made employee ownership a central feature of our structure.
With UK Employee Ownership Day taking place
on 3 July, we plan to complete the extension of our ownership to everyone in our practice and tell our firm's story: Why and how we have chosen an ownership model that involves our whole team, what are the pitfalls, and is our model relevant for other firms?

Postlethwaite is a boutique legal practice, based in central London but with clients throughout the UK and overseas, specialising in employee share schemes and employee ownership. We advise companies wanting some or all of their employees to become part-owners on how they can make that happen. We have enjoyed consistent growth over the years since we were founded.

Expired reward schemes

Three years ago we realised we needed a new ownership structure. As the firm's founder I continued as the sole owner, rewarding our team through a mix of salaries, personal results, and firm performance. This had worked well for a period, but it was getting perilously close to its sell-by date. Some team members were under-rewarded and we felt that a performance-based reward, wholly centred on the how well the firm did, would work better. We wanted to make a change that would not only fix these problems but further increase everyone's engagement, helping our firm become a more rewarding place to work (not only financially).

After looking at traditional partnership, we quickly decided that there was a better alternative in which a wider number of our staff would be part-owners. We did have the advantage of already understanding how employee share ownership works, of seeing the high importance clients attached to it, of observing the positive impact it can have on financial performance, attractiveness as a place to work, and long-term success.

We also felt it was well suited to our own firm, where we didn't want to limit ownership to some of our full-time lawyers but extend it to all and recognise everyone's contribution. There seemed to be potential benefits for all and that by allowing more of our team to have a slice of the cake we'd produce a bigger and better one.

Were we also thinking it might be helpful for our firm to be employee-owned because we spend all our time telling our clients how to do it? My answer would be yes, we thought it would give us some competitive advantage, but whatever our area of expertise we would want to do it anyway.

'Like John Lewis?'

Often, when talking about employee ownership with someone not steeped in the subject, it's odds on they will say, 'Oh, you mean like John Lewis?'
Yes, John Lewis is employee-owned, through a trust on behalf of employees. This is a model that has been very successfully deployed, not just by John Lewis but by a growing number of other businesses. There's no reason in principle why it shouldn't work well in law firms.

However, we have chosen a different model for our firm, whereby everyone has personal direct ownership of shares in the company. We've done it this way for a number of reasons:

• We have low staff turnover and therefore think it's unlikely we will often need to buy shares back from departing employees;
• Because of the work we do, the team knows how personal share ownership works and are engaged by it; and
• When we noted that we would have to go through a Solicitors Regulation Authority approval process to permit trust ownership and convert to an ABS, the significant extra work involved meant individual share ownership was strongly preferred.

From employee to shareholder

Each employee has been granted an option to purchase a defined number of shares after three years, paying a fixed price based on value at the date the option is granted. At the same time as they are granted their option they are allowed
to directly purchase further shares, with the incentive of then being granted an extra option for each share purchased.

The intention is that, as the business grows, our company's shares will grow in value. If we achieve that goal, when the options become exercisable the employee will be able to purchase shares at what is by then a discounted price. By making our option plan a Company Share Option Plan (CSOP), we use a statutory tax break that exempts that gain from income tax. The only tax payable will
be capital gains tax (CGT) when their shares are eventually sold.

Psychological benefits

The intended benefits for employees are a combination of financial and non-financial.
We do pay out an annual profit share through dividends, as well as annual bonuses according to whole company performance, and expect share value to rise over time. The planned non-financial benefits for employees are largely psychological, such as enjoying coming to work, enhanced job satisfaction, and a sense of purpose. Those are the benefits we are looking for. You would have to talk to our team to find out how successful we've been to date in achieving them, but the signs are very encouraging.

To an extent, achieving these benefits is
an end in itself. We don't measure our business's success purely on financial results and feel non-financial measures are also important.
But ultimately we are in business to make a profit and run a commercially successful practice. We>> think our ownership structure can only help us in achieving all those goals.

What are the pitfalls?

A key and simple task to ensure we derive the maximum benefit from our employee share ownership is to be transparent about our financial results. Everyone in our firm needs to understand how well we are performing, what that means
for them, and what we can all do to improve performance.

In practice this needs some time and commitment, and every firm needs to find its
own way. We see this as a process of continuous improvement; we've made a promising start but are looking for ways to do it better.

Every firm needs to engage its employees in a wider sense. This may not be too difficult for us because all our team understands the business and are committed for the longer term. I know that in this we are fortunate and that for many other legal practices this may be hard.

Hard, perhaps, but definitely possible. If you
can create an ownership structure involving
your firm's employees that features genuine and achievable benefits, and can communicate what those are and how they can be achieved, then you will be well on the way to making it work.

Employees are not managers

It's essential to separate ownership from management. Every firm needs an effective management team which can make the business decisions it needs to. This isn't the job of the owners, although the management will be accountable to them. Employees should categorically not be tasked with the job of managing the firm. However, the more engaged
a firm's employees are, the more they will want
to contribute to making a better firm.

In our company, although key decisions are ultimately made by our directors, this is generally after other team members have contributed, which I am convinced significantly improves the quality of the decisions made. We are also able to delegate a high proportion of management tasks to our employees. Our wider ownership has made both of these things much easier.

Reviewing your model

We feel we have found the right model for our business but we do not say it is for every firm. However, I would recommend every legal practice - if it has not recently done so - to review its ownership structure and think about whether it is fit for its purpose in the coming years. Ask yourself these questions:

• Do you think more members of your team could make a greater contribution, and would they be likely to do so if they had a stake in the outcome?
• Are there other people who add value apart from your partners?
• Are lawyers working part-time less likely to be partners?
• Are you concerned as to whether there is a willing next generation of people in your firm to take over the ownership and enable existing partners to retire?
• Would you like to retain more of your people for longer? and
• Would you like to build some new foundations for your firm to help it feel a more positive place to work?

The more you answer yes, the more it might
be worth considering alternatives, and whether employee ownership could form part of that.
If all your answers are negative, perhaps there is nothing in your firm that needs fixing.

Increased productivity

It is estimated that more than five million UK employees already have an ownership stake in
their company. Government policy is now to encourage greater employee ownership across
all business sectors. It believes that this has the potential to increase productivity, build more resilient businesses, and foster greater wealth creation, which is then shared among those
who have helped create it. Academic evidence suggests a number of strong positive links between employee ownership and company performance.

To stimulate the growth of employee ownership, in 2014 two new tax reliefs were introduced.
One gives retiring company owners who sell a controlling interest to an employee ownership trust full relief against CGT, the other enables employees of a company controlled by an employee ownership trust to be paid bonuses free from income tax.

The number of employee-owned businesses
in the UK is now reported to be growing by
10 per cent per annum. Looking outside the legal profession, some pioneering accountancy firms have now introduced employee share ownership plans, and Grant Thornton has announced plans
to become a shared enterprise.

It feels to me as if the ground may be shifting, and that a wide range of companies are now waking up to the fact that employee ownership will often make strong commercial sense.
The case for employee ownership is no less
strong in many legal practices than it is in any other business sector, arguably all the more so
as their main value rests in the skills and commitment of their people. SJ

Robert Postlethwaite is founder and managing director of Postlethwaite