What’s the Story?

Last month, Blackstone, the world’s second biggest private equity investor, announced a systematic program of employee broad-based equity incentives for its new large-scale USA PE controlled investments.

This initiative was launched in connection with Blackstone acquiring Copeland, a leader in energy efficient HVAC manufacturing. The plan for Copeland will cover 18,000 employees believed to be the largest group of equity incentivised employees in a PE owned company.

Royal Mail owner IDS also last month, accepted it’s EP Group bid. On that news, the Royal Mail union the CWU, called for “a dynamic new model of employee share ownership” at Royal Mail, to refresh and energise the partnership between Royal Mail workers and its owners.

On this proposed transaction, the shadow Secretary of State for Trade and Industry issued a public letter to EP Group, setting out some views, including the need for a “sustainable Royal Mail” to be attained by EP Group working closely with CWU. Which plainly will not be attained absent an employee equity agreement.

Why Does it Matter?

Employee equity has come of age for each end of the commercial spectrum. Deep capital views from PE; and deep Labour views from the Unions.

For PE owners of capital, employee equity generates strong engaged talent within their investments. That both de-risks the business and enhances the investment return. This is all the more critical when businesses face major change from technology, demographics and regulation for example.

The old-fashioned Private Equity view was that equity is good for the Top Team alone. The workforce should be cost minimised however possible by contrast. That results in top management being set against the interests of the workforce overall. A clear recipe for trouble.

For the unions and Labour, the benefits of equity ownership by employees are increasingly understood and embraced. The traditional attitude was that any value on offer should go into base pay. In fact, it was not until 2000 that the UK TUC dropped its active opposition to employee share ownership.

Union recognition that employee equity supports a strong business shows a clear-sighted view of the role of equity ownership in long-term business success. That supports the business ability to create new jobs, supports high wages, increased job-security and enhanced job progression opportunity within the business. That aside, it creates long term wealth for employees. What’s not to like from a Union viewpoint?

Newspoint view

Employee share ownership has been viewed as a good thing by many. For those on the right wing, it shows the benefits of capitalism. On the left, it is Labour owning the means of production. And for liberals, sharing success is just social justice.

Employee share ownership is near universal among successful major companies in the OECD. The model is sharp equity incentives at the top, combined with equity shared broadly within the workforce.

But in PE, classically equity incentives focus on the top team alone. This Blackstone move is therefore a welcome recognition of the role of employee equity in creating shareholder value by the workforce generally.

The CWU call for employee share ownership at Royal Mail is important. Royal Mail has long needed modernisation and new offerings. Those aims have been confounded by poor industrial relations. Growth in revenue and profit are overdue and much needed, notwithstanding the Universal Service Obligation which might need an overhaul.

HM Government regulatory consent is needed for the Royal Mail transaction. Given the sensitivity of the Royal Mail brand, it would be surprising if the union call for significant employee ownership goes unheard.

How that is structured and delivered needs no new UK legislation or finance techniques. What is needed, however is clear and insightful thinking on how commercial value is created; and shared fairly.

In a gain share plan, there are no losers. The EP Group and CWU discussions regarding employee ownership at Royal Mail may well become a trail blazer.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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