Jonathan Djanogly: Employee Share Ownership schemes can help reverse the UK’s slow rates of productivity growth

30 Jun

Jonathan Djanogly is a former Minister, and is MP for Huntingdon.

The importance of promoting corporate best practice is an issue close to my heart. The All-Party Parliamentary Corporate Responsibility Group, which I chair, is always looking for ways to challenge and encourage businesses to improve their Environmental, Social, and Corporate Governance (ESG) reporting. One of the ways that many companies enhance the “S” in ESG is to give their employees the chance to invest in the company through what are known as Employee Share Ownership (ESO) plans.

There are several plans designed to accommodate different types and size of business. Two of the most important and transformative (for both employers and employees) are Save As You Earn (SAYE) and Share Incentive Plans (SIPs). They are known as “all-employee” plans because companies that offer them must make them available to every single employee. This differentiates them from other option schemes where management or owners decide which (generally small and targetted) pool of employees (typically managers) are to be offered options.

For 40 years and 20 years respectively SAYE and SIP have enabled millions of people to invest in the companies they work for. In so doing, they have enhanced company productivity, encouraged long-term savings and, crucially, shared the proceeds of growth and corporate success with employees at all levels – a vital component of good workforce engagement and, responsible corporate governance.

But these schemes are now facing a crisis point: established in the days before mobile share trading apps were widely available, designed for a world before the gig economy and at a time when people moved jobs much less frequently, SIP and SAYE need to be modernised to appeal to staff in the 21st century workplace.

Why now? Crucially, SIP and SAYE are proven to have a positive impact on productivity, estimated at 2.5 per cent in a Treasury study. As we look at the economic uncertainty ahead there is one thing of which we can be certain: the UK must reverse its slow rates of productivity growth. Over the past decade output per hour and real wages are no higher today than they were prior to the 2008 financial crisis. While the US and other advanced economies have experienced similar productivity slowdowns, our slowdown has been more dramatic (we rank 31st out of 35 OECD countries in growth of output per hour between 2008-2017). SAYE and SIP can play a part in helping to address this.

The problem? Employer and employee participation in ESO is falling. From the Government’s own data, we know that firms offering an SAYE scheme in the last measured year (2018-19) is flat-lining, while the number of employees granted a new SAYE “option” was 310,000 and you have to go back as far as 1986-7 to the last time that take up was that low.

With Share Incentive Plans (SIPs), the picture is similar: in 2018-19 there were 470 companies where employees were either awarded or purchased shares – down from 530 firms in 2015-16, part of a long-term downward trend. What’s more, the initial value of shares offered is also on a worrying downward trajectory: in 2018-19 the initial value of shares offered was down to £660 million. The last time it was that low was 2002-3, when SIP was in its third year of operation.

Of particular concern is the need to attract younger workers towards ownership of and engagement in their employing companies. Recent reports indicate that nearly one in 10 young British adults started to invest because of the recent GameStop saga. Given also the easy availability of trading apps and the fad for investing in digital currency – my instinct tells me that the problem is not the principle of share ownership, nor a missing appetite for risk. Rather what we see is an inadequate offering to cater for the needs of today’s younger generation.

So, what can be done? The Social Market Foundation has made a series of interesting recommendations in its new report, A stake in success: Employee share ownership and the post-COVID economy. It put forward some bold ideas designed to make ESO schemes more appealing to both employers and employees. These include recommending shorter scheme lengths, the inclusion of gig economy workers in plans, annual reporting requirements on the health of the employee share ownership plans firms operate and a review of the accounting treatment of SAYE share plans, to remove disincentives to their implementation.

The existing schemes tend only to be adopted by larger companies, with managers of smaller and younger companies often complaining that the schemes are too complicated to establish. Rules need to be revised to encourage simple formation and participation and education of companies and employees is required to explain the possible benefits for all parties through ownership and mutual engagement.

These changes cannot be piecemeal. We need wholesale reform and we need it urgently. That’s why I am also backing the SMF’s call for the Government to establish an Employee Ownership Commission, tasked with developing the necessary institutional support needed to generate wider rates of employee ownership.

This would be good for employees, good for companies, good for corporate governance, good for UK productivity and good for the wider economy. As we plan how to build back better after the pandemic, it’s in all of our interests that we have a real shake-up of Employee Share Ownership schemes as part of our reinvigoration of a share owning democracy.

Jonathan Djanogly: Parliament should be able to scrutinise new trade deals properly. But the current arrangements are simply unfit for purpose.

29 Jun

Jonathan Djanogly is a former Minister, and is MP for Huntingdon.

Did we come through the Brexit process only for the UK Parliament to have less scrutiny over new free trade agreements than we had during our membership of the European Union?

This is the question that Parliament is going to have to address through the Trade Bill, currently making its way to report stage in the House of Commons.

In fact, it seems to be surprising most people that, seemingly contrary to what was proposed in the Queen’s Speech, the Trade Bill does not actually address future trade agreements at all.

Rather, it provides a low scrutiny mechanism, using Statutory Instruments (SIs), for existing EU free trade agreements (FTAs) to be ‘rolled over’ to the U.K. However, given that we have left the EU, it can be questioned as to whether any EU deals with such third countries should now be dealt with as new trade agreements.

For instance, the U.K /Japan proposed FTA is now being treated as a new agreement, and will not replicate the FTA that the EU agreed with it. Likewise, countries such as Canada seem to be waiting to see what the EU agrees with the UK, before agreeing their own new deals with the UK.

In effect, it is arguable that the Bill, which was perfectly rational when its second reading was initially heard in January 2018, may now simply have missed the boat, in terms of the future relevancy of EU trade deals that we have thus far failed to adopt.

It is also somewhat annoying, to those of us that have been following the generation of this bill for the last three or more years, that most of the sensible amendments offered by the then Secretary of State, Liam Fox, have not been re-incorporated into the current bill now before the House.

Agreement that the SI regime should only last for three years rather than five, and that the Government should have to produce reports for Parliament to explain their proposals at least 10 days before the SIs are heard, are surely not contentious. Accordingly, I have re-tabled the last Government’s own amendments for debate.

There then arises the question as to how we are going to deal with future FTAs with countries and organisations, such as the US, China and the EU. On this the Bill is quiet, despite Fox agreeing to consult on a new scrutiny process in 2018.

For the last 40 odd years, the EU has been negotiating our trade deals. As part of the EU scrutiny process, a vote needs to be taken by the EU Parliament on the draft FTA prior to its signature.

Most other countries have similar approval arrangements. In fact, some go further and allow the legislators to get involved in the provisions of the deal. So, for instance, the U.S. Senate can amend draft trade agreements.

In practice, a parliament holding the threat of a veto means that it is very rarely used. This is because the executive will have good reason to look for consensus on its negotiating mandate, as well as carrying legislators along during negotiations through regular disclosure and discussion.

A wise executive would naturally wish to avoid an unnecessary parliamentary bust up just before signing an FTA. Of course, this is where it all went wrong with the TTIP negotiations between the US – EU. Here, both the US Congress and the EU Parliament were disclosing information to their respective elected representatives, that was not being provided to UK parliamentarians.

As a result, and with the inevitable leaks, the whole debate surrounding thousands of lines of deal negotiations got reduced to accusations of selling the NHS and Brits being forced to eat American chlorinated chicken. One might have thought that the UK government had learnt its lesson from the TTIP experience.

The point to be addressed in the Trade Bill is not whether individual issues, such as food standards, environmental regulations, public services or digital services provision or consultation with the devolved authorities are good or bad things in themselves.

Rather, it is the need for the Bill to provide a statutory framework that requires government to take early stage consultation and ongoing soundings through the course of FTA negotiations. This is in order that business and citizens feel they are being listened to with similar rights to their counterparts in the country with whom we are negotiating. Then, before signing, MPs should get to vote on the deal, as will be the case with the counter-party.

In effect, I would argue that current UK practice on scrutinising trade deals is neither democratic nor practically fit for purpose. Moreover, I would go further to point out that our poor scrutiny process is going to be undermined, in any event, by other countries’ more modern scrutiny practices.

The Government suggest that the Constitutional Reform and Governance Act (CRAG) process, allowing a short delay mechanism before ratification (ie after the signing) of FTAs, is adequate. This is the same CRAG process that was implemented by Labour in 2010 at a time when the U.K. benefited from the EU Parliament veto. By the way it’s also the same process that was described in 2019 by the Lords Constitution Committee as ‘anachronistic and inadequate’.

Secondly, the Government suggests that the Trade Select Committee could be utilised to provide scrutiny for proposed new FTAs. Let us here, firstly, assume that the Trade department and therefore its committee is going to survive a rumoured merger with the Foreign Office. Even so, and despite negotiations with the US and now Japan having already started, no such arrangements with the trade committee have yet been agreed. We know this from an on the record June letter sent from the chair of the committee to Truss.

Of course, the Trade Committee will not have jurisdiction to look at the proposed EU FTA and, following the post- Brexit demise of Bill Cash’s European Standing Committee B, it has not yet been made clear who or how any proposed EU deal will be scrutinised.

I am not suggesting that MPs should be able to impede Government negotiations on FTA’s, and nor am I saying that MPs should be able to amend draft FTAs. However, we need legislation that provides for Parliament to approve FTAs, on a yes or no basis, before they are signed. I have tabled an amendment to the Trade Bill to that effect, and I look forward to the debate.