Employee Ownership

October 2012

Dr Mike Lynch OBE on employee ownership, incentivization, and boosting job creation.

In 1996 I co-founded a company in Cambridge, England. I was naïve. If I had known then what I know now, that sentence would have read, "In 1996 I co-founded a company in Cambridge, Massachusetts." However, times, they are a-changing. Back then, setting up a high-tech company in Britain was much like I imagine climbing mount Everest to be: a steep climb, with limited oxygen, no-body to throw you a rope when things get tough and the peak, well, always out of reach behind a cloud. The obstacles were many: it was hard to raise money, there were crazy amounts of red tape and it was difficult to find good talent.

When I set up Autonomy, the landscape was very different from today. Access to capital was limited: we were just two men and a dog, and the idea of angel investment in the form of Aunt Mildred giving you £5,000 hadn't really taken hold here like it had in Silicon Valley. In many ways, it still hasn't. What helped us back then, was our drive to prove our idea – and we got lucky. A man in a pub backed us with £2,000. Today, there is a much clearer route to early funding.

Economic growth in this country depends on maintaining the ability to foster innovation and nurture companies at critical stages of their development. In order to do so, we have to make changes in the way we legislate business and Britain today is one of the most attractive countries in Europe thanks to a panoply of measures designed to ease the path to setting up and growing a business.

This government has expanded the Enterprise Investment Scheme and created a Seed Enterprise Investment Scheme, smoothing the path and incentivizing those who put their money in early-stage fast-growth companies. New tax credits for research and development and a corporation tax rate of 22% (the lowest in the G20) make Britain an attractive place to set up a company.

Whilst it will be impossible to eliminate paperwork altogether, I think we are making strides in reducing the bureaucracy that can be so stifling and costly for small businesses. The most complex area is in employment, and so we come to George Osborne's announcement of an employee ownership scheme.

I welcome measures like this one that give employees an opportunity to be part of the success of a company, from its inception. I have seen first hand that people work harder (are productive), are happier at work (gain job satisfaction) and are more motivated if they have a stake in the company. The controversy around Osborne's plan lies in the conditions that the shares come with: in exchange for up to £50,000 of tax-free shares, an employee must give up statutory redundancy, right to flexible working and time off for training, and double the time they have to say whether they are returning from maternity leave. This does not open the door to a return to Victorian sweatshops. These conditions, which are actually voluntary on the part of the employer who could offer flexible working if he wishes, will actually take some of the fear out of hiring people. And let's face it, our economy needs job creation.

Any executive will tell you that recruiting good people is one of the key factors to success for a company. Surround yourself by a good team, the lore goes, and you can bask in reflected glory. But no matter how good you are at identifying talent, you sometimes get a bad apple. For a big company with a sophisticated HR department, removing that bad apple from the team is a painful, but do-able process. For a small company, with scant in-house resources, removing an underperforming employee is a complex job, so much so that small companies are reticent to hire – and are particularly unlikely to take a gamble on an inexperienced young person – and thus the impasse in job creation. This measure should take some of the sting out of the firing process, should the need arise. Let's face it, nobody hires to fire. The reason you offer somebody a job is because you need their particular skillset for a particular function.

It is about time that Britain offered an easier path to employee ownership. I am a firm believer in incentivizing people through performance bonus schemes, and stock options. In this country, John Lewis operates as a partnership where employees have a share in the company. John Lewis is one of the most successful retailers, thriving even in the recession, a factor attributed largely to the fact that employees (partners) actually care about not just their own job, but about the success of the entire venture. Thus, they are likely to go the extra mile to satisfy a customer. And as we know, satisfied customers, return. But ownership in the company doesn't just make it easier to smile for customers, it also gives employees a motivation to succeed and to come up with ideas that will lead to improvements.

We have to get away from the notion that ownership is a dirty word. It is, in my experience, a source of immense pride and I don't think there is a single employee of Autonomy who doesn't point to its $11bn valuation and say to him or herself "I helped do that." Giving people the opportunity to have a sense of ownership and investment is a great thing. This is one way to achieve that. Our economy can no longer be sustained by a nation of shopkeepers –but we can return to that ethos where together we drive Britain forward by having a shared ownership in its success.

There are some conditions attached to receiving up to £50,000 of free money. These will require the employee to weigh up some pros and cons and yes, take a risk. But isn't that what entrepreneurs do every day?