Buy out the bosses … if only Treasury would let you.
By Gary Scarrabelotti
It’s great news for employee share ownership reform to see a group of Coalition backbenchers putting their shoulders to the wheel.
According to The Australian Financial Review (March 3) Tony Smith, Christian Porter and Bert van Manen are doing the heavy lifting. And today Tony Smith has done a background piece on the project — Employee share ownership crucial to innovation (AFR, March 4). All power to them, I say.
What the reformers are aiming for coincides with the agenda of Small Business Minister, Bruce Billson: to get up a reform that will make it easier for start-ups (and maybe some other private companies) to implement an employee share ownership plan or ESOP.
Very interestingly, Smith argues in his Fin piece that ESOP reforms should be of aid and assistance to entrepreneurs and their employees not only at the beginning of the business life-cycle but also at maturity when employees might want to buy-out retiring founders. Now that’s talking!
Place to start
Start-ups and “privates” are a good place to begin an ESOP reform because it is the private companies – or, more precisely, small businesses – that employ most private sector workers.
So, if you want to spread employee share ownership widely among the workforce, if you want to transform workers into owners, you have to have a share plan reform that includes unlisted companies. This is because the present ESOP régime effectively excludes them — and has done so since the Keating government tinkered with share plan legislation back in 1994 – 1995. Since that time, only publicly listed companies have been able to make effective use of ESOPs.
In other words, public policy favours preserving, in practice, the proletarian condition of ordinary working people.
The situation got a lot worse in 2009 when the Rudd government was induced by Treasury to make far reaching changes to this same legislation. Rudd Labor was forced into a major retreat by an astonishing and sustained outcry over the measures from business, chiefly ASX-listed companies.
The outcome, nonetheless, was a victory for Treasury, the perennial adversary of employee share plans. When the dust settled and the shape of the amended legislation was finally understood, few listed companies wanted to use the new régime. Business stopped implementing new share plans and new offers under existing plans dried up.
So, thanks to the combined efforts of the Keating and Rudd governments — and to some cunning Treasury advice — small business can’t take advantage of share plan measures explicitly provided for in tax legislation while listed companies, who can access the system, don’t much care to do so.
Now, I very much hope that the PM and the Treasurer will listen attentively to the backbench activists – Smith, Porter, van Manen — and to Minister Billson. History shows that a reform of the kind these sterling fellows have conceived will not see the light of day unless the PM and Treasurer favour it with one mind. Only then will Treasury relax its traditional rejectionist stance on workers getting a slice of the action.
I won’t go into the technical details of how the present system works, what is wrong with it, and how to fix it up. The problem, in the end, is not a matter of arcane tax law but of imagination and political will power. It ever has been thus.
Last week, Senator Stephen Conroy was in the gun for some ill-considered remarks made in a Senate Estimates Committee. Others have flayed him for this and there is no need for me to lay on more blows. On the contrary, I’d prefer to think kindly of the Senator for some observations he once shared with me.
It was early 2007 and I had called on him in his Senate office. I was hoping to gauge where the ALP might stand on reforming employee share ownership legislation should Labor win the federal election due later that year.
Conroy had this to say, or words to this effect:
I can’t understand why the Coalition has not run with this. Employee share ownership is a natural issue for them. We are not opposed to it. But in government we will always privilege superannuation. If the Coalition were to carry out a major reform, it would always remain part of its legacy. We would not touch it.
Why the Howard government did not seize the opportunity provided by 11 years in power to lay the legislative foundations for “worker capitalism” has long perplexed me.
Public policy favours preserving, in practice, the proletarian condition of ordinary working people.
There was no opposition within the Howard government to employee share ownership. In principle, the government was on board; but the conviction and the will were not there. The man who really could have made a difference was Treasurer Peter Costello. But, when the issue surfaced (or perhaps re-surfaced) for him in 2006 – 2007, it was too late. By then Costello was suffering from “reform burn-out”.
There was a moment, however, during the Howard years when worker ownership might have risen close to the top of the Coalition’s agenda.
Around the middle of 2001 an insider advised me that a cabinet committee had drawn up a list of major issues that the Coalition might take to the elections due later that year. Five issues were on that list and employee share ownership was said to be among them.
Then, alas, came the MV Tampa incident in August 2001 and soon after that September 11. These events changed the electoral dynamic dramatically. The “five agenda items” went out the window and when Australians went to the polls on November 10, 2001, the paramount issues set for voters to ponder were national sovereignty, border control and the challenge posed by globalised Islamic terrorism. Employee share ownership “fell off” the agenda – and there it has remained.
Beside a lack of conviction at Cabinet level, there was another factor to consider.
In Canberra the Treasury is not only a source of “frank and fearless” advice. Treasury is a political player. As I have remarked more than once in these columns, Treasury entertains an institutional aversion to employee share ownership and has worked consistently and effectively over the years to curtail and undermine it.
Treasury did a brilliant wrecking job in the run up to the 2009 Budget. It sprang on an unsuspecting Treasurer, Wayne Swan, a destructive ESOP revamp sugared with promises of savings to be made. As one Labor staffer put it to me at the time, “About one minute in the expenditure review committee.”
What’s behind Treasury’s entrenched opposition?
Key is a philosophical unwillingness to concede a principle central to employee share ownership: that workers should be able to acquire shares in the companies where they work out of pre-tax dollars. This is anathema to Treasury. It forgets — or chooses to ignore — the fact that, when capitalists buy out businesses, they do not do so out of their post-tax savings.
Capitalists structure their buy-outs around debt and finance it out of pre-tax cash flow. In the final analysis, ordinary workers who want to buy into their boss’s business have to compete with capitalists who can raise debt and use cash flow to pay it off. To put the worker on something like the same “level playing field” as the entrepreneur, an ESOP funded by pre-tax earnings is called for.
Treasury understands perfectly well, of course, that the proposal for a start-up friendly ESOP is only the opening move in a wider reform. You can’t just create an ESOP for start-ups and “privates” and then refuse to let public companies and their workers benefit from it. And yet Treasury is capable of precisely that. “Ringfencing” is the Treasury watchword when confronted with reforms like that now proposed. This is why Smith & Co need Abbott and Hockey to take up the reform cause with resolution.
Joe Hockey has become something of a hero of mine because of his “End of the Age of Entitlement” campaign. Ends, however, cannot be achieved without means. Hockey wants people to assume greater personal responsibility for their own health and welfare. I am right up there with him. To do that, though, the people need financial resources; and the greatest such resource is capital for it is to capital that the profits flow, not to wages.
Workers of the world unite and buy out the bosses … if only Treasury would let you.*Gary Scarrabelotti is Managing Director of the Canberra-based consulting firm Aequum: Political & Business Strategies. He is also director of the ESOP consulting company Equityplan.This is an edited version of an article originally published on the Henry Thornton blog.