Employee Ownership is a no-brainer
By Shaun Smit
ESOPs in South Africa are a strategic tool helping multinationals address top challenges such as talent attraction, performance enhancement, and achieving BEE ownership goals. This article explores how employee ownership can drive business success, boost retention, and align with B-BBEE compliance requirements.
As a director of Transcend Capital, my primary role is to assist leadership teams craft and executing ownership strategies aimed at fostering growth and sustained business success. Working with a diverse range of South African companies of varying sizes and across a range of industries, I consistently hear the same concerns being raised:
- There is a shortage of skills – attraction, and retention of top talent is a challenge
- Performance is lackluster – profitability is under pressure and growth is difficult
- B-BBEE ownership is a challenge – multinationals are sensitive to this issue, and often previous approaches to addressing Black ownership did not yield the desired outcomes
These issues are largely impacted by the South African macro environment context, however, although our political and socio-economic issues are not conducive to growth, there is always an opportunity to outperform competitors and improve on the business status quo.
I want to focus on employee ownership as a tool to address these challenges and promote growth and stronger performance.
Challenge 1: Skills shortage – attraction and retention of top talent
Response: Employee ownership promotes attraction and retention
With a scary level of unemployment, South Africa sadly also has a shortage of skills. To effectively attract and retain employees, companies need to focus on several key areas, including competitive compensation and benefits, building a strong employer brand, ensuring career development opportunities are available, maintaining high levels of engagement, and providing a supportive work environment with a healthy work-life balance.
International research has shown that companies that have implemented an Employee Share Ownership Plan (ESOP) have higher levels of employee engagement. Employee ownership fosters a heightened sense of ownership and responsibility among employees, making them more invested in the company’s success and motivating them to contribute to its growth. Furthermore, having a share in the company improves job satisfaction, with employees feeling valued and recognized for their contributions. This creates a more positive work environment and increases loyalty to the company. Promoting an ownership culture can strengthen the business brand.
Ownership can break down organisational barriers, promoting collaboration and a team-oriented culture. Companies with employee ownership plans often experience lower turnover rates and become more attractive to potential employees by offering long-term incentives. Additionally, the potential for meaningful financial benefit through dividends or increased business value serves as a significant motivator for prospective employees to join and existing employees to remain.
Challenge 2: Lacklustre performance – profitability under pressure and growth is difficult
Response: An ESOP aligns interests and fosters high performance
Achieving growth in the economic context of high inflation and sluggish growth is hard. Employee ownership can lead to better business performance through several key mechanisms. When employees have a stake in the company, they are more likely to feel a sense of ownership and responsibility. This increased engagement drives them to work harder and take more initiative, as they directly benefit from the company’s success. As a result, motivation and productivity often rise, leading to higher overall efficiency and output.
Job satisfaction also tends to improve with employee ownership. Employees who feel valued and recognized are more committed to their work, contributing to a positive organisational culture. This improved morale not only enhances individual performance but also reduces turnover rates, saving the company recruitment and training costs.
Employee ownership aligns employees’ personal goals with the company’s objectives, fostering a unified direction and collective effort towards common objectives. This alignment ensures that everyone is working towards the same goals, improving strategic coherence and operational effectiveness. Enhanced collaboration and teamwork further support this, as ownership breaks down barriers and encourages employees to support one another.
Additionally, the potential for financial rewards through dividends or increased business value serves as a strong motivator, encouraging employees to focus on long-term success rather than short-term gains. This financial incentive can lead to better decision-making and a more sustainable approach to business growth.
It is important to note that to achieve the best results, ESOPs should be structured taking into account who the targeted participants are and what benefit structure makes the most sense. ESOPs should also ideally provide a means for employees to participate in decision-making processes, particularly those that affect their work.
Challenge 3: B-BBEE Ownership is a challenge
Response: An ESOP can achieve strong B-BBEE Ownership outcomes and makes business sense
B-BBEE Ownership carries a heavy weight in the overall determination of an entity’s B-BBEE score and related status. Not only does it contribute significant points, but as a ‘Priority Element’, not achieving sub-minimum scoring under Ownership results in material penalties being incurred. A lot of my clients have been multinationals addressing B-BBEE Ownership for the first time. There is often concern around losing control of the organisation, or rogue shareholders that can damage the business. I have never seen this play out, but can understand the nervousness of bringing in “outside” shareholders. Some clients that have previously addressed B-BBEE ownership believe there is a gap between expectation and reality of the relationship, and are now cautious about future transactions.
The B-BBEE Codes of Good Practice specifically recognise B-BBEE ownership via an ESOP, with bonus points being available if a qualifying ESOP is implemented. Furthermore, the Department of Trade Industry and Competition has confirmed the feasibility of ESOPs as an approach to address B-BBEE ownership.
Yes, there are various requirements that need to be met to achieve B-BBEE ownership through an ESOP, but all can be met with relative ease if care is taken through scheme structuring and legal implementation.
B-BBEE Ownership via an ESOP enables keeping the financial rewards of ownership closer to home – enabling those that have been instrumental in running the business to benefit from success. In addition, there are various other benefits already mentioned, which is then creating a virtuous cycle of ownership participation and reward.
From the broader transformational and empowerment objectives of B-BBEE, employee ownership is a strong model of broad-based empowerment in action.
In summary, given the various positive benefits of employee ownership it should come up bright on the radar of any leadership team looking to attract and retain top talent, best position their business for continued success, and address B-BBEE Ownership. When looking to implement an ESOP, care must be taken to align the scheme structure with who the targeted participants will be as well as a general business strategy.
About the Author
About Shaun Smit CA(SA), MBA – Director at Transcend Capital
With over a decade of experience in providing Employee Share Ownership Plans (ESOP) and BEE transaction advisory to multinationals and South African corporates, Shaun Smit has a proven track record in crafting and executing ownership strategies aimed at fostering growth and sustained business success. Shaun believes that employee ownership can be a powerful tool for increasing engagement, improving business performance, and achieving meaningful broad-based empowerment. Outside of work, Shaun is a dad-taxi and enjoys running and playing tennis.