Growth and Infrastructure Bill

Lord Vinson Excerpts

Wednesday 6th February 2013 Lords Chamber

[Baroness Brinton]

My Lords, on Second Reading I expressed my concerns about the whole concept behind this clause. Various Ministers have suggested that only a small group of companies are likely to be interested in these proposals: new, high-technology, rapid-growth, micro and small companies which might want to encourage employees into more commitment and endeavour by offering them shares in their company. So far, so good. However, many employers already do this in this sector, especially those running fast-growing, leading-edge, high-tech companies, because they know that they are going to grow much faster than many other companies and they want to commit their staff to working for them, to share the benefits in the longer term and the hardship of trials that most companies face in their start-up phase.

I declare two past interests. First, I have a foster son who has recently been employed by one such firm, joining it from university. He has received a share package as part of his employment. I have talked to him and some of his colleagues about the benefits and whether they would be prepared to talk about giving up their rights. I will come to that later. My second interest is that I advised St John’s College, Cambridge, as it created the St John’s Innovation Centre in the late 1980s and subsequently was a non-executive director at the centre until 2010. The centre works with entrepreneurs and academics spinning their ideas out of Cambridge and other universities, offering them short-term leases and, very specifically, business, legal and technical advice that is the envy of many other science parks and innovation centres that have developed in the intervening 25 years.

These companies are the exact target audience that Ministers tell us will be interested in the proposals in Clause 27. Having talked to the directors of these small but high-growth companies, I know that many already offer shares, as I mentioned. They, as directors, do not understand why an employer would want to do so in return for a reduction in employment rights. One of their key issues as the company grows is to keep the morale of the staff going during the difficult times. It is very rare for a new company to have an entirely smooth journey to success and reward. Proposing that staff should give up their rights to redundancy pay is an issue, as not all early-stage companies survive and so redundancy is a real possibility. They are also concerned about training. This is absolutely vital in the leading-edge technology sector, where the skills of your workforce are likely to make all the difference against your competitors, particularly the business skills that technical staff may not have had when they arrived at the company. They need those skills in order to progress in their market. Losing part of paternal leave is also a concern, as many of their staff are in exactly the age group likely to be beginning their families.

So if the stick—that is, the loss of rights—is not attractive either to employers or to staff, what about the carrot? The carrot of capital gains tax exemption sounds very exciting but I do not believe that the Government have really understood the two likely outcomes for these high-tech companies. The first, sadly, I have already alluded to. Not all of these companies are a success. Probably one in 100 is. There is a chance that the company will not succeed and that the shares will be worthless.

The second is the unlikely event that the company will do well enough to make those shares really worth something in the future. However, even this route is fraught to those coming in on the ground floor. Let us assume, for the sake of argument, that the group of employees who joined the company in its first two years were given shares at the then face value. It would not be unusual after their issue, as the company grows and faces all the typical excitements of launching in the market, for those shares to become worthless. But our fledgling company is taking off, and in order to become a really effective player, it will have to take on finance. It often needs to seek that finance when the company is not attractive. So, some business angels or venture capitalists invest in the company, and all the original shares are diluted substantially by this investment. We are only talking about round two of investment at this stage.

Well, the rubric goes, it is better to have a small share of something than a larger share of nothing at all. Often, though, there are three or four subsequent rounds of financing, and those employees are likely to find that their small share becomes a minute one. This is a really risky business. Would many employees understand the risks that they were taking? Would they honestly be prepared to wait 10 years or more for the carrot of the CGT exemption for the one company in 50 to 100 that starts to make a return for its shareholders? I doubt it. I also doubt that many employees would understand the nature of the process that I have just outlined.

That is why my noble friend Lord Tope and I have tabled Amendments 82A, 82B and 91 in this group. For people working in the financial services sector, such as venture capitalists and bankers, the process of growth and new share issues, with the consequential dilution for longstanding shareholders, is common knowledge, but for a young software engineer, perhaps fresh out of university, it is an area that they are likely to know nothing about The amendments in my name and that of my noble friend address this. We believe that employee shareholders under Clause 27 should have access to independent legal advice. More than that, we think that the employer should have a duty to ensure that the employee has a right to receive the appropriate legal advice and that the employer should make a contribution towards that legal advice.

I am reminded of the small print in the public shares issues of the 1980s: shares can go up as well as down. The noble Baroness, Lady Thatcher—I am astonished to find myself praying her name in aid—felt that it was appropriate for the ordinary man or woman in the street to have that advice then, so I am sure that it is right to be provided in these circumstances for employees who are unlikely to have had training in the finer points of share prices and rounds of investment in high-growth companies.

Amendment 92, in the names of the noble Lords, Lord Pannick and Lord Adonis, takes my proposal one stage further, and in a new subsection (12) demands much more specific types of advice as well as a written agreement for individuals being offered the opportunity of employee shares and specifies the nature of that advice in much more detail. Not only do I think that is more useful but I am sympathetic to it.

Amendment 82B would then put the onus for paying for that advice on to the employer. I am sure that this is correct and only fair. If you are giving up your rights as an employee in return for shares that may, though probably may not, increase in value and will certainly be diluted out of sight in the future, that is a complex decision that needs specialist advice and careful consideration by the prospective employee shareholder.

When we come to discuss clause stand part I will return to some of the principles of the clause in general, but I want to conclude on these amendments by saying that all the evidence that I have heard from both employers and employees, in the sector that Ministers say is the one most likely to take this up, is that it just will not be attractive. I hope that the clause will wither on the vine, but if it does not then we must have protection for the employees who are going to be faced with this sort of proposal.

[Lord Vinson]

My Lords, I declare an interest in that for many years I was chairman of the Industrial Co-partnership Association. I also happen to be fortunate enough to have floated a company on the stock exchange when we had 1,000 employees, and we gave 10% of the company to our employees.

I am deeply committed to the concept of wider share ownership but I am concerned about Clause 27. I shall give the Committee an example of quite what ownership means to some people. One of the older women in our company came up to me about a month after we had floated it and said, “Guvnor, you just don’t know what it means to me to feel I am part of this company. It has made my life”. That just brought tears to my eyes. People want to belong, and in smaller businesses they can belong and feel that they are names, not numbers.

However, the whole point of wider industrial shareholding is to try to create a sense of common purpose. I fear that the unnecessary obstacles and quid pro quos put into Clause 27 go in exactly the opposite direction; they negate trust rather than increase it. With great reluctance, therefore, I have to speak against the Government, who I am sure are right to encourage wider share ownership. If you wrap it up in complexity, cover it in advisers and make it all too difficult, it simply will not happen, but it is fundamentally the most attractive and important thing to create a wider capital-owning society in which everyone feels they have a stake.