An AT round-table discussion, supported by The Rooflight Company, shared experience of employee ownership among architects and their advisers
The number of employee-owned businesses is increasing by about 10 per cent per year in the UK, with more than half in the professional, scientific, technical and other service sectors. For architectural practices in particular, transitioning to an employee-ownership structure can offer a number of advantages, some supported by tax incentives, not least in terms of employee engagement and succession arrangements.
Employee ownership can be direct – in which employees become individual shareholders – or indirect, in which shares are held collectively on their behalf, usually by an Employee Ownership Trust (EOT), or a hybrid of the two.
The Finance Act 2014 introduced incentives to encourage wider employee ownership. Individuals disposing of their shares to an EOT that leads to it holding a controlling interest (more than 50 per cent), can be exempt from Capital Gains Tax and inheritance tax charges on any proceeds from the disposal. Additionally, employees of an EOT-controlled company can be exempt from income tax on the first £3600 of any bonus.
In terms of business structure, the key change is that the board of directors of the company becomes answerable to the trustee board. This usually also results in greater transparency and employee involvement, with all staff working towards collective benefit. Many architectural practices have found that commitment, decision-making and profitability are also enhanced.
EOTs are administered by trustees, usually representatives of the employees, the directors of the business and often an independent chair, and they hold assets in the EOT for the benefit of the employees. The EOT has its constitution outlined in a Trust Deed, and this can be drawn up to help define the future of the business and potentially ensure its longevity.
Key questions that arise at the outset, according to the Employee Ownership Association, include: what time period is envisaged? What proportion of shares will the EOT hold? Should the Trust Deed make special provisions for protecting the company? How will the business fund any purchase of shares from the owners? Will employees feel a sense of real ownership? And how significant are tax considerations for both the company and employees?
Round-table chair Jeremy Gadd is founder of J Gadd Associates which supports organisations transition into employee ownership. He is a trustee director of Aardman Animations and round-table sponsor The Rooflight Company. Gadd spent more than 30 years at the John Lewis Partnership, working in Waitrose and John Lewis, in both operational and strategic roles, and in an independent role within the senior leadership team. He was an elected management representative within the branch council.
Experience with a variety of clients in the built environment sector leads Gadd to believe that employee ownership seems a natural choice for them. “There’s a natural alignment with those driven to make a better world through architecture, and wanting this legacy to continue through employee ownership”, he suggested.
Gadd stressed that transitioning a company to an EOT required passion, above all else. There is an underlying need to ensure that employees feel that their participation in the ownership is real, especially among younger staff, he felt, and key challenges are undoubtedly in finding ways to share and engage with employees throughout the whole process. He suggested that training and support were vital, a point with which all the participants agreed. Prompting the panel with questions, Gadd asked: how can employee ownership be made meaningful to new employees, and not just those who were involved at the outset? Does an EOT structure encourage innovation and new ideas, does it speed up things such as decision-making? And can an EOT be regarded as a force for good in its own right?
Having co-founded Assael 25 years ago, since when the practice has grown to employ 100 people, Russell Pedley and John Assael were prompted to look into employee ownership after they were identified as a potential acquisition by a large US-based company. The ensuing discussions led to a shared belief that the company’s future shouldn’t be as part of a large global business, and in January 2019 Assael joined the growing number of leading architectural practices to become an EOT.
The Assael EOT is configured such that two trustees are elected from among the employees, and they are joined by an external independent chair as well as Assael and Pedley. The transition coincided with the appointment as managing director of Pete Ladhams, who joined the practice as a student in 2001. The trust owns 75 per cent of Assael and the management team retains the remainder.
The process of getting to this point wasn’t straightforward, however. Pedley described how an initial presentation faced a wall of silence, but since then, over a two-year period, it has been achieved through a careful strategy of engagement in which focus groups of six to ten staff were tasked with missions, such as looking at zero-carbon. Some employees were sent on EOT courses, but there was an equal need for internal support. Some staff, he reflected, have still not fully adjusted to the new ownership, but the vast majority have.
Pedley sees the trust as a trigger for engagement. The staff trustees were elected by a hustings system – and they had been pleasantly surprised when ten individuals put themselves forward. These trustees remain in post for just two years, so he believes it should instill a dynamic management that brings in fresh ideas. In time, Pedley says a successor to the current founding directors will emerge, but the intention is for the practice name to endure.
One of two equity partners in the 70-year-old practice of Purcell (formerly Purcell Miller Tritton), chief executive Mark Goldspink has overseen its recent transition from LLP to limited company as a precursor to becoming an EOT. Currently employing 250 staff in the UK, Hong Kong and Australia, Purcell will thus “implement a more permanent structure to safeguard its ownership and independence in perpetuity”.
Goldspink admitted that the partners had struggled with a succession plan, but that the need to retain the culture of the practice was paramount. Harnessing the “collective ambition”, however, is still a challenge, but the EOT is set to be implemented in May 2020, when it will take ownership of 70 per cent of the shareholding.
Goldspink described how ‘Purcell Voice’ was set up at grass roots level a year ago, comprising a cross-section of employees tasked to listen to views and suggestions and work with the directors to influence desicion-making. The group is also now looking at innovation and work opportunities.
The transitional process has needed two years, said Goldspink, with many workshops and forums. “No one will put in money so everything comes from profits… and we found that the people who we felt were best equipped to take the company forward didn’t necessarily have the financial resources to invest in it, so a trust was a logical route.”
An associate director at Bennetts Associates, a practice set up in 1987 by Rab and Denise Bennetts and currently with 70 employees in London, Edinburgh and Manchester, Alison Darvill is also a trustee of the EOT that came into being in September 2016.
In 2003, Bennetts opted initially for an Enterprise Management Incentive scheme, with 22 per cent of shares distributed to four directors, paid by specific bonuses. The 2008 economic downturn raised issues that led to a reassessment, however, and an EOT owning 100 per cent of the equity was set up. Workshops were held in January and May 2016 and in September the EOT came into being.
While the timescale seemed fairly tight, Darvill said it has taken time and effort to focus minds and generate a general level of understanding among staff, and this was not helped by a significant turnover of trustees for various external reasons. However, as both a trustee of the EOT and a member of the practice’s management board, Darvill was in a position to see tangible progress.
A corporate lawyer with Field Fisher, Neil Palmer has 10 years experience in employee ownership and more in corporate transitions, especially in government and public services sectors. He speaks and writes regularly, including guides for the Employee Ownership Association.
For Palmer, every case has different needs and priorities. In the case of architectural practices looking for a successor, there’s a need for a comprehensive succession management plan, he suggested, which will need to recognise both present owners and the new leadership. He stressed the need for training – being a trustee is a responsible role, and it needs to be nurtured and supported. Trustees can also be privy to confidential matters regarding the state of the business, and there needs to be faith in transparency.
Transitioning to EOT ownership is an evolutionary process, Palmer suggested – you can’t necessarily get it right from day one. “No one has all the answers, and things need to be allowed to develop over time.” The process will continue and you have to deal with issues as they inevitably arise, preferably in bite-size chunks that make it easier to move forward – but in his experience things tend to work out rather than reach an impasse.
Director of BB Partnership, a practice with a strong domestic portfolio employing around 16 architects, set up by Henryk Busiakiewicz and Charles Biss in 1991, ten years after they left college together. The partnership became EOT-owned in 2016.
Having begun the journey in 2013-14, the founding partners first became minority shareholders, and marked the practice’s 25th anniversary when the EOT acquired all their shares, so moving to 100 per cent employee ownership. The founders remain active in the practice, but as employees sharing benefits with all other staff.
Williams explained that the arrangement seemed to be the best way forward for the practice, rewarding the initiative and effort of the founders as well as the loyalty and work of the current staff. As a result, he felt that engagement has improved, and there is more discussion about the direction of the practice. Despite some initial hesitation, they now regard EOT ownership as a mainstream model for architectural practices in the future.
Legal director at management and investment consultancy Baxendale Advisory, Ewan Hall has advised on employee ownership since 2003. He has worked with many architects and engineers on succession and ownership, including several switching to EOTs. Issues of succession planning can be especially relevant to architectural practices, Hall suggested, because they tend not to make much money in their day-to-day operations. He agreed with other panellists that in contemplating a transition to EOT ownership, the involvement of staff is vital from the outset. The process shouldn’t be seen as a management decision in which employees are simply told what’s going to happen. If the aim is to allow the next generation to come through, they have to participate in the process.
Hall reiterated that there is not just one model for employee ownership; many are a hybrid arrangement, and there’s often a need to be creative. And while external support is needed, it shouldn’t be seen as a substitute for internal commitment, not least in time – an EOT won’t come into being by itself. Momentum has to be achieved, however, as if the process is perceived to be too protracted there can be a negative effect among staff.
Head of practice operations at AHMM, which she joined in 2004, Morna Robertson has been involved with the practice’s ownership transition since its instigation. AHMM’s EOT, which holds the majority of shares in the practice, was set up in September 2017, to “sustain the spirit and ambition of the practice, and allow a route for future leadership to emerge”, and thereby ease the potential retirement path for any of the founding partners.
With around 500 employees, the sheer size of AHMM was a key issue in setting up and operating the EOT. Big forums were held but they didn’t seem to work for the practice, Robertson found, so they tried other ways to engage the staff, including working groups dedicated to particular areas, such as a gender pay-gap group. The EOT has an independent chair, and an ‘employee council’ whose role is to represent the large cohort of staff, supporting their understanding and facilitating their influence.
Robertson sees the trust as a mechanism for generating ideas, and providing a route for their consideration by the associates. It can therefore have a tangible effect in helping to shift the business, and experience so far is of much greater involvement among the staff, said Robertson.
Co-founder of architect Orms, which was set up in 1984, Richards and co-director John McRae decided to look into employee ownership in 2015. They worked with consultant Robert Postlethwaite from 2016, and the Orms EOT was set up in March 2018.
At first the process of ownership transfer seemed a bit painful, Richards explained, but it later became a fantastic experience, with a huge amount of involvement and engagement across the company, and this still continues. The transition had to be handled with care, however, and the external help was essential. Now, however, everyone can be involved in decision-making through Orms’ ‘employee ownership council’.
The Orms directors continue to set salaries, but a much greater level of transparency now permeates the company structure. A key test for the EOT, Richards envisages, will be if and when times get tough and the market tightens. Then questions such as how much time should be invested in competitons, for example, will inevitably arise. He hopes that grown-up conversations can be had when faced with difficult decisions – but that still has to be tested. Richards said that Orms’ directors always saw the transition to employee ownership as a five-year process, and while they are already seeing that new ideas can be implemented faster than before, they are very aware of the danger of complacency.
Reaching the age of 50, and after 30 years working with Norman Foster, Ken Shuttleworth set up Make in 2004. He was keen that the company should adopt a different way of doing business, and this was exemplified in its name – it was consciously not a ‘Shuttleworth’ brand. From the outset Make has been wholly owned by an employee trust, with Shuttleworth himself having a single share. Everyone is referred to as a partner – even the four directors. Shuttleworth cited Arup as a touchstone, where employees are “naked in and naked out”.
There was close collaboration from day one, said Shuttleworth, even though trust ownership represented a massive philosophical departure. Make’s employees share the profits as a multiplier of their salaries – one particularly good year saw them doubled – so the bonus system can be a really strong incentive. The company tends to keep a tight rein on costs – “there’s no helicopter”, Shuttleworth quipped. And they find that big projects can be run by an efficient team of 10 people, where in some offices it might require many times that. If someone’s not pulling their weight they will be exposed fairly quickly, he said.
Because Make was set up as an employee-owned company, there wasn’t a process of transition. Some employees, especially those straight from college, took some time to understand its implications, while others were cautious of the freedom. The practice therefore instigated activities to help engage staff, from meetings and study groups to charity events. While communication is easier and decisions can be quicker, greater transparency can pose new dilemmas – for example in deciding whether to work for a controversial client with whom some staff feel uncomfortable. For now, Shuttleworth sees himself as a ‘conductor’ with a set of musicians, but in time Make will need another conductor, and it is written into the trust’s constitution that he can nominate a successor.
Partner in law firm Lewis Silkin, Sara Cohen specialises in equity incentive arrangements. She was involved in helping set up Ken Shuttleworth’s practice Make as an employee-owned company from the outset in 2004. Cohen reiterated that shared ownership through an EOT is particularly well suited to architects’ practices. This is because they “tend to be more collaborative, run on a non-hierarchical structure and takeovers by other practices are rare”. In addition “there isn’t a ready market for shareholder owners wishing to retire, but employees do not generally earn sufficiently high salaries to buy them out”.
With Make, initial issues concerned how to encourage employees to engage with the EOT. Inevitably questions such as “When do I get my shares?” arose, and the concept of benefit without personal ownership was something that some employees, especially those used to ‘traditionally’ structured architectural offices, found hard to take on board.
Partner at Cullinan Studio, Wen Quek is also a member of the Employee Ownership Council’s Membership Council. The studio was established in1965 as a cooperative by Ted Cullinan, having studied at Berkeley and been inspired by the ideals of the Spanish cooperative business Mondragon. Cullinan also wanted to run a practice differently to what he had experienced working for Denys Lasdun, Quek suggested, where there was a singular boss and conversations tended to be behind closed doors.
In 1981 the Cullinan cooperative evolved into an employee-owned business. While in many respects everyone is equal, they can draw on the experience of the leadership team. Quek described how, for example, questions around ethical issues, or how and in what directions the practice might grow, are discussed with everyone sitting around a table. There’s a fine balance to be struck, she suggested, between making a living and investing in the future.
For the Cullinan Studio, Quek argued, the EOT brought a new openness, underpinning its meritocratic structure, where staff can rise to senior positions not just by seniority. It encourages a different kind of trajectory, but it’s important to keep up momentum, she suggested.
Corporate lawyer and founder of Postlethwaite, a specialist in employee ownership that is itself employee-owned, Robert Postlethwaite has been involved with a number of architect EOTs. He is author of the Employee Ownership Association’s Guide to Structuring Employee Ownership, and “loves working with architects”, stressing how they can bring a different perspective on business structure and ownership.
From a legal perspective, Postlethwaite noted that the comparative youth of the EOT concept means that various practical aspects still need to be tested in law. In the meantime, however, he applauded the fact that most architects are driven by making decent architecture rather than profit, which makes them very different from many other businesses. It might even make a better model for running the country, he mused.
With The Rooflight Company’s founder, architect Peter King, managing director Val King took the business into employee ownership in March 2019, just over 25 years after it was established. Motivated by the wish to ensure the future of the company’s values-led culture, its innovative approach and long-term sustainability, they also wanted to avoid the potential pitfalls in terms of disruption and continuity that a takeover or other change-of-ownership routes might have.
King is a passionate advocate of employee ownership, and outlined how the tangible benefits have included increased productivity and profit, more innovation, resilience to market fluctuations, and most importantly, a more engaged, fulfilled and less stressed workforce.
Profit is shared, so everyone can see what is going on in terms of the company’s operations and performance. It can be a more mature way of running a business, King suggested, with those managing the company acknowledging that they don’t necessarily have all the answers. Everyone is fallible, and you should accept that things don’t always go as planned, but you can always learn. Employee ownership should be the way forward not just for architects, but for many other businesses too, as The Rooflight Company has shown. For business owners wishing to pass on a cultural legacy, King concluded, employee ownership is the most effective route.
Architecture Today and The Rooflight Company are hosting a free-to-attend half-day seminar on employee ownership on 10th October at the Building Centre in London. Hear from architects who have taken the step, and experts who have advised them. Places are limited so register online here