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Employee Share Ownership: Power To The People

26 Jun 2020

We tend not to have many rules at Octopus. There’s no 50-page staff handbook, no requirement to log holiday and no prescriptive list of what employees can and can’t do. Instead, we try to treat people like adults, ask them not to do ‘stupid stuff’ and then trust them to use their common sense.

One thing, however, has become an unspoken rule (even if I’ve not had to call anyone out on it since lockdown). It’s the requirement to tidy up a meeting room after you’ve used it. Don’t leave glasses, coffee cups or plates in the room on the assumption that it’s someone else’s job to tidy up after you.

For me, this is the corporate equivalent of ‘sweeping the sheds’. If you’re not familiar, this is the expression used by the All Blacks rugby team, one of the most successful sports teams of all time. Wherever and whenever they play, they never leave their changing room at the end of a match without first sweeping up all the mud and making the room look respectable. It’s a brilliant lesson in personal humility and a reminder that in sport and business it’s ultimately behaviour that determines your success.

So, while little things like this really matter and help shape the kind of company you build, there’s one thing that’s far more important and critical in creating the right culture, and that’s employee share ownership.

Fortunately, we made the decision very early on that we wanted as much of Octopus to be owned by the people working here as possible. So far, over the last twenty years, the percentage of the business owned by employees has gone from zero to more than twenty percent. Including the founders and their families that percentage increases to seventy percent The other thirty percent is owned by the brave individuals who funded the business when we started out back in 2000.

We’ve learned a lot from operating such a scheme, and for anyone considering setting up a share ownership scheme of their own, here are some of the benefits as I see them.

Accountability

One of the most disappointing things that can happen in businesses as they scale, particularly when they lose their founder, is that the people in charge stop caring as much. Leaders gradually lose sight of the behaviours that made them so successful. They end up thinking about themselves (and their bottom line) than their employees, customers or the wider world.

Share ownership stops this from happening.

Owners wake up caring about their business. They instinctively treat customers the right way because they see their actions and behaviours as a reflection of them as people, rather than feeling one-step removed and simply being another cog in the corporate machine. 

They feel accountable.

From my own experience, this accountability has reciprocal value. Employee shareholders demand more from the management team of ‘their’ business. They expect to know what’s going on in the business and they expect all stakeholders (employees, customers, community, shareholders and environment) to be treated fairly.

Now stop and think for a minute. Since the financial crisis in 2008, financial institutions have paid out more than £200 billion in fines and compensation. Would this still have happened if the decisions these businesses made back then had had to pass through the additional filter of ‘what do our employee shareholders think about what we’re going to do?’

Financial benefit

The gap between the wealthy and everyone else is at its widest in decades. According to Forbes, the average CEO of a S&P 500 company in the US earned almost $14 million last year, equivalent to 391 times the remuneration of the typical employee. For reference, this multiple was around 30 times in 1978. 

It’s simply not right – the wealth companies generate should be spread around everyone who helps to create it.

I’d add two further points here though. First, the best employee ownership schemes are, in my experience, the ones where employees have to invest their own money. It makes people far more active and engaged participants.

Our own Share Incentive Plan has been a great success, with around 80% of the company signing up every year. Employees can invest up to £150 a month from their gross salary and for every share they buy Octopus will grant them an additional 1.5 shares at no charge. As long as they stay for five years, all gains are tax free. In our case, those who’ve been in the scheme since the start (2012) are now sitting on more than £100,000 of Octopus shares.

The second point is that companies need to create a market in their shares for their shareholders. The whole structure is undermined if the value is theoretical as opposed to tangible and while we have no intention of ever floating Octopus on the stock market, we still managed to create an annual liquidity event that matched more than £10 million of shares last year.

Patience

I always explain to people that, unless you’re a CEO of an S&P 500 company, you’re unlikely to work in a job where your salary and your bonus create significant wealth. Significant wealth comes from long-term equity ownership. And the key concept here is ‘long-term’. While a handful of companies succeed in becoming overnight success stories, it’s much more common for it to take a long time.

Initial investors in Octopus, for example, saw almost no return for the first five years, but have made almost 80x their money over the last decade and a half.

Patience is a virtue in life, particularly when building or investing in a business. While most of our share schemes require you to stay with the business for five years to see the full benefit, it’s always the people who stay at Octopus over the really long term who benefit the most.

Engagement

Recruitment, especially for the right values, is critical to the success of these schemes. When you hire people who can see themselves and their own ambitions in your company’s mission, they’ll instinctively give more. Their alignment with the company’s purpose means that they’ll do things not because you’ve asked them to but because they want to. 

I think this also extends beyond someone’s day-to-day role. Our employees have a relatively broad definition of what success looks like, and wealth is not always the driver. Wellness, mental health and inclusion are all real problems they want to see Octopus help solve.

In a similar vein, our foundation – Octopus Giving – is less about the financial donations we make and more about the opportunities for employees to engage with the charities and make a difference personally.

Conclusion

Lots of entrepreneurs ask me for advice on how to build their business. Very near the top of my list of things to do would be to set up an employee share ownership scheme. The shared mission and sense of togetherness that comes from everyone sharing in the value that’s created is, for me, what makes building businesses so special. 

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