Acting like MD's

by Real Business - Thursday, 30th August 2007

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Andy Leet had one of those telling encounters in a pub recently. He bumped into an accountant who worked for one of his customers (Leet is MD of Burall, a successful printing group). "Oh, we were talking about you in our board meeting the other day," said the accountant. "We all think your people are pretty special."

Leet continues the tale: "This accountant also mentioned that he played golf with one of our drivers, nicknamed Rocky. He'd been pumping Rocky for information about Burall. And, try as he might, he couldn't get Rocky to say a bad word about us. He was so impressed. They all wanted to know how we did it."

Go on, admit it. You've all dreamed of such fervour in your people. Here's how Jonathan Newth, MD of the computer games developer Kuju Entertainment, describes it. "The manifestation of ownership is: one, employees thinking about the company as a whole and coming up with suggestions about how to do things better; and two, a willingness to go the extra mile."

So, how do you instil that spirit? We've asked some of Britain's brightest entrepreneurs: how do you make your people care?

Ownership is the hottest topic in entrepreneurial Britain. Ask any owner-director what keeps them awake at night and you'll soon hear one word: people. How do we create that feeling of urgency enjoyed by the company's founders? How do we build structures within the business to complement it? And will those people respond? It's no surprise that Chancellor Gordon Brown used his March Budget to produce a bumper increase in the number of employee shareholders in the UK.

"Everybody is asking about ownership," says Sue Cheshire, head of The Academy for Chief Executives, a club and support network for owner-directors. (She's even thinking about introducing a share scheme in her own organisation, even though most of her people are self-employed).

Much of the change is down to dot-com culture. In a buoyant economy, the best talent is in enormous demand - and knows it. Employers nowadays are more likely to hear the question "What's in it for me?" than "When will you let me know?" The dot-com economy, awash with venture capital money and lucrative share options, has created a vicious marketplace for the best people. "Dot-com start-ups seem to be offering absolutely everything," says Jeremy Newman, head of partner development at BDO Stoy Hayward and chairman of KITE, the business club established by the firm. And owner-managers feel threatened.

Brent Hoberman famously gave up half of the company he founded to Martha Lane Fox. Together they took the business, Lastminute.com, onto the stockmarket in less than 18 months. How has dot-com culture changed the culture of ownership? "It's basically about getting away from thinking about the size of the slice and more about the size of the whole pie," he says. It's also about minimising risk. "If you get more people behind the idea you have a better chance of making it work." American ownership guru Jeff Gates calls this phenomenon "up-close capitalism."

Indeed, according to Hoberman, the idea of equity stakes has become so pervasive that, in certain sectors, (particularly those where there is a battle for the best people), companies face a stark choice. "If they don't offer equity, somebody else will," says Hoberman.

Take a look at the figures. According to ProShare, the organisation that encourages wider share ownership, one million people in 859 companies are covered by Inland Revenue-approved profit-sharing schemes; a further 1.25 million people in 1,201 companies take part in the Save As You Earn share-saving scheme; and 300,000 people in 3,769 companies participate in the government's company share option plan. All in, that means there are 2.5 million British people working in share-ownership schemes.

We may be behind the States, where some 12 million employees are involved in broad-based company share-ownership schemes. But we're certainly changing: "More and more unlisted companies are introducing all-employee share schemes," says Fred Hackworth, director of the ESOP Centre, which promotes the employee share-ownership approach.

Burall
Back to Andy Leet. How come his people care so much? Simple. Burall has given its employees the chance to buy a share of the business. For over 20 years it's run a share-of-profits scheme. But two years ago, the Burall family, who had founded the company back in 1892 and run it ever since, decided it wanted to take a back seat. The family didn't want to sell up because that would have meant job losses. So it decided to increase the scope of its employee share ownership scheme.

Today, everyone who has worked for the company for two years or more is entitled to buy shares in Burall; as a result, 50 per cent of the company is owned by employees or on their behalf. "The idea was that the ownership structure should be such that the majority of equity couldn't get into management hands," says Leet. "We didn't want management to sell it down the river at a huge profit. This is meant to sustain the company in the long term."

And it seems to have paid off. Burall goes on to bigger and better things - it's just set up a new company that develops smartcard technology - and the staff get the opportunity to benefit from the company's growth.

But of course it isn't simple. "It would be very wrong to believe that a share scheme in itself will achieve your objectives," says Leet. "It's never been seen to be, or expected to be, an incentive scheme as such. But it fits into the philosophy of the business that employees are encouraged to understand how they contribute to Burall's future success."

"It's all about communication," says Leet. "We've always communicated openly with our people, but it becomes especially important when they own part of the business. So we have quarterly 'talk-ins', where the divisional managing director will explain how Burall has performed, give them the headline figures etc. We publish an annual report just as we would if we were a public company. We're also starting up an annual road show, where I'll visit each of our four sites, and present our people with information, just as I would to the City if we were a plc."

But what if the company isn't doing so well? Can't openness become demotivating? "You get a real feelgood factor when the share price goes up," says Leet. "But shares go down, too, and you have to be able to manage that." The company has eight divisions. One of these is based in Liverpool, at which Burall recently implemented an ambitious expansion and relocation plan. But, as with many long-term investments, it has affected short-term performance and, inevitably, the share price. "It's frustrating because the short-term impact on our employees is that they see our profits reduced," says Leet.

Still, such schemes can motivate the people who need it most. The people in the Liverpool site have a great incentive to get the business going. Many of them have shares in Burall, after all. "They're fiercely aligned to Burall because we're supporting them," says Leet. "Although their operating profit is low at the moment, they take a share in the profits from the holding company. They're 100 per cent fired up."

Rocket Medical
Robi Bernberg's family medical equipment manufacturing business was doing pretty well - in the past year, it had just gone through the £7m turnover mark. His father felt comfortable enough to retire in his mid-fifties to concentrate his energies on his gold handicap.

But Bernberg felt it could do more. "Over the last couple of years, we've been doing very well," says Bernberg who inherited Watford-based Rocket Medical from his father ten years ago. "But we haven't increased sales dramatically. We haven't been growing as fast as I would like."

After a lengthy period of "soul-searching", he came to a firm conclusion: the problems were something to do with his people and, in particular, with how they were being rewarded. The company enjoyed great loyalty among its staff (many have been there for over 20 years), but Bernberg's father had run a typically secretive corporate culture. Robi wanted something "much more open, participative and communicative."

In fact, "I want them to act more like MDs."

By giving real incentives, he's hoping that this will lead to growth-orientated decisions - "because success will be reflected in their own pay packets." (Remember, too, that Rocket Medical is a small company; he needed to find an alternative to promotion).

But it wasn't an easy path. "There are a number of Inland Revenue-approved schemes," says Bernberg. "I found that they might be good for tax purposes, but they didn't seem to do what I wanted to do, which was motivate the staff.

"What I wanted was that feeling that people could get a sense of the capital growth in the organisation," he says. What he got, from seminars and Revenue officials, were bewilderingly complex schemes that none of his people would understand.

There is, of course, one fundamental problem for privately owned companies such as Rocket Medical: there is no real market in the shares. It can be immensely tricky to put a value on them.

Bernberg's solution? A "phantom" scheme, effectively a bonus scheme that, while not particularly tax-effective, offers flexibility and simplicity. Under this, employees are being given the opportunity to "purchase" shares at a low price with the proviso that they keep them for two years. After that they can sell them back to the company at a higher price linked to the company's audited profits, thereby seeing an immediate gain.

Great scheme, but it raised another thorny issue. How many of the 115 employees - split between a head office in Watford, a factory in Tyne & Wear and a ten-strong salesforce on the road - should benefit? The whole shebang or just a hand-picked few?

It was a tough choice. Bernberg opted for a limited scheme. Seven employees - the hitherto non-shareholding directors and a group of senior managers - have been allocated five per cent of the company. But, in a canny move, Bernberg hasn't yet allocated all of that five per cent yet. "I'm open to allowing more senior managers to take part in the scheme."

Technical Asset Management
Kevin Riches takes a slightly different tack. "The broader the spread of ownership in the workforce, the better," says the managing director of Technical Asset Management, a Hertfordshire company that disposes of IT equipment for banks and other blue-chip organisations.

Riches has long run bonus and profit-related pay schemes. Now he's putting together "a proper share-ownership scheme." He particularly likes the look of the tapered Capital Gains Tax relief rules introduced in the Budget. Under these, employees stand to pay only ten per cent tax on any improvement in the value of shares in their own companies.

But Riches isn't relying on share incentives alone. The atmosphere and working environment play a big part. "We are trying to create an open culture where people feel a part of it," he says. "The business isn't mine. It's everybody's business."The policy appears to be working. The first ten people to join the company are still there; now they're part of a 50-strong workforce. And all the bad signs - sickness, time-keeping etc - are at a minimum. Turnover has passed £10m. But Riches isn't under any illusions. It's much easier to run a traditional, hierarchical business than it is to run one where everyone has a stake. "It requires constant effort to make sure the information is there," he says.

One of TAM's innovations is a company council. This takes the sort of decisions you'd normally leave to the MD. Recently the company came to the conclusion that it would be more convenient to have pay day at the end of the month rather than in the middle; the council then came up with a plan to achieve this and launched it to the workforce. "If your peers introduce it, you're much more likely to buy into it," says Riches.

Sometimes, though, you have to communicate bad news. This usually tests the resolve of "open government." A few months ago at TAM, there was a problem with a bad debt that put back the company's expansion plans and, in particular, its intention to go public. Still, it got an airing at the council meeting. Riches: "It helps to have the problem aired rather than it just being something for management. I'm trying to create an environment where I'd want to come to work."

News flash - Budget changes
The modern employee expects to share in the success of their employer. Dot-com culture has made more people think about share options, incentives etc. Gordon Brown's Budget added fuel to the fire. "People are really waking up to this," says Alex Henderson, a tax specialist with the accountants Arthur Andersen.

Brown created what Henderson calls "a new playing field" by improving the tax treatment of save-as-you-earn share schemes and company share option plans; Brown also confirmed the introduction of an all-employee shareholding plan and increased the number of staff who can be covered by the Enterprise Management Incentive available to high-tech start-ups. He changed the rules on capital gains tax taper relief, so that all shareholdings - rather than substantial stakes - are covered. Employees can potentially pay CGT at the rate of only ten per cent if they hang on to the shares for four years.

But small-business owners should beware. Creating Inland Revenue-approved share schemes has always been complex - as Robi Bernberg and others have discovered. But the new regime has so many technical provisions that employers could easily create a situation where instead of enjoying a favourable CGT regime, employee-shareholders could find themselves liable for income tax and possibly National Insurance contributions on the grounds that they have been granted benefits-in-kind.

Complex ownership structures may limit your options in the future. Henderson worked on a recent acquisition in which the acquiree ran a bonus scheme and an unapproved share scheme. Sure, the scheme was in the best interests of the company and its employees, but it made the transaction a helluva lot more complex. And guess who benefits then? Yup, the advisers.

Thirteen ways to make them care

Be an info-maniac Give them lots of information - "it doesn't matter if it isn't directly relevant to their specific jobs," says Jonathan Newth of Kuju Entertainment. "Share everything with your people," says Richard Pursey, CEO of IT consultancy Adam Associates. "Ask them - and make them - contribute to strategy."
Make it interesting Match people to the jobs that interest them. "But there's a fine line here between pandering to an individual's every wish, and making the effort to find the right work," says Newth. It's a question of balance.
Hold get-togethers Newth again: "We run a monthly lunch meeting, out of the office, for all staff. The purpose of this is to give information about how the company is running internally and any changes that are planned. We also talk about how the company and its products are perceived externally and what the high-level long-term strategy is. The presentations deliberately dwell on company triumphs."
Be entertaining "We spend more on entertaining our people than we do on client entertainment," says Peter Knight, MD of the property marketing business, Phoenix.
Do inductions. Pursey: "I personally meet every new recruit the day they join (where possible) and spend an hour with them telling them about the history of the company, how it works, why we're best, where we're going, why we're going there, and when we will be there by."
Be realistic Some people won't make owners. "Some staff will show commitment beyond expectation and want to belong and contribute - whatever the work conditions," says Newth. "Others will always be looking for the 'next best thing', however good their conditions."
Don't expect too much "When you start a company from scratch, invest everything you have, work all the hours you do and feel the pain of risk, then it's natural that the owner-founder will have a greater sense of ownership than an employee," says Adam Associates' Pursey.
Make work addictive Pursey again: "Work becomes a drug if you get the culture right. People come to work to enjoy it, stimulate themselves and develop their own minds and careers. Yes of course they come to work for money, too, but to an extent that is almost ancillary to job satisfaction."
Give free pianos Adam Associates gives very personal prizes. Adam Associates has a stalwart member of staff who works all hours and never grumbles. "We found out that it was her ambition to play the piano, so we gave her one - with lessons. We've also given a first-time Dad a video camera. And we've hired Ferraris for the weekend." A real personal touch.
Don't give money Murphy's Law says that the day you get a surprise bonus coincides with your car breaking down. So you'll have to blow the money on something that doesn't provide a memory.
Make stakes real Bonuses, profit-sharing etc are all very well, but real shares are even better. "It is almost impossible to achieve a sense of ownership without having real ownership," says Graeme Robertson, managing director of the Aberdeen gravestone business A&J Robertson.
Don't be stupid "Do not do silly things such as building stationery cupboards with locks - it says that people can't be trusted." And don't think you have write a manual for everything - people can work out their own, better systems for many parts of their job.
Don't hide Pursey: "As we grew, it became increasingly difficult for me to get my work done in an open-plan office. So I moved into my own office. Mistake. It placed a distance between me and the rest of the company. I sacrificed culture for peace, quiet and confidentiality. I've moved back into an open office now."