Democracy in Business

I am writing this article on 4^th May 2023 which, importantly, is Star Wars Day. It is perhaps just as importantly the date of the Local Elections in England.  This has made me think more about democracy and, more particularly for the purposes of this article, how democracy might look in a business environment.

In many businesses the very concept of democracy beyond the Board or the Director/Shareholders might be seen as anathema.  Certainly I do not intend in the course of this article to explore the well trodden path of shareholder voting, but to look at some other ideas which can go a long way to promoting and reinforcing the health of a business.

The challenge for many owners of businesses is the issue of succession planning.  Much time and money is spent on grooming a business for sale to an external party in the market, however this may not always prove to be practical and, in any event, it also hinders consideration of potential purchasers right on the owners doorstep – such as particular senior employees or a management team.

One particularly tax efficient way of exploring this would be a sale to an Employee Ownership Trust.  In many respects this is the successor vehicle to the ill-fated Employee Benefit Trust, however it has so far resisted the rather unsavoury trappings that the media have reported on those latter structures.  An EOT is a great way of passing ownership of a business on to a vehicle which would benefit employees, former employees and future employees while also saving the seller considerable amounts of tax.  In this way a broader number of people can be brought into ownership and participate in decision making in the business.

Another consideration might be share incentive schemes. A share incentive scheme is where employees can be entitled to buy into the company with specific rights attached to the shares in a manner which is less onerous from a tax perspective than might be the case if someone is given shares in the course of employment.  By expanding the pool of ownership here and increasing the range of participation, not only can democracy lead to a greater spread of ideas being introduced but it can also reinvigorate engagement by employees.

The third and final example to which I will refer would be a constitution that could be put in place for a family company, such as a Family Investment Company.  A constitution should be read alongside the Articles of Association and any Shareholder Agreements but in particular to detail the rights and responsibilities of the family members participating in the family company.  While this does not in of itself necessarily create a more democratic process,  what it can do is provide a road map to greater ownership, responsibility and rights in a family company for participating family members and incentivise particular behaviour toward shared ownership and thus shared democratic participation.

Whether or not these are things that you as a business owner want to do is of course another matter entirely, however there are a great deal of options that can be explored with your professional advisors, if you want to both share the load and share the joy.

• James Hall – Managing Partner