Australia has an enviable record of innovation, invention and scientific inquiry, yet it has a deplorable record of translating these achievements into meaningful commercial outcomes. While scientific inquiry for the sake of inquiry is too often diminished, the lack of linkages between our world class research institutions and commercial communities is detrimental to our economic and social futures. It is doubly concerning when too often this research is commercialised in other nations.
Indeed, when you look at the 20 largest firms in the United States by capitalisation, the oldest was established in 1975, however, in Australia a similar exercise yields you with the result that the youngest of the top 20 listed on the ASX is Woolworths, which was established in the 1930s.
Why does any of this matter, and how do Employee Share Schemes (ESS) play a role in reversing the situation?
In short, it matters because new businesses, innovation and start-ups are the engine of higher productivity in our country. Higher productivity leads to sustainably higher wages, better products and services, more competition and more choice. All of these outcomes directly impact on the quality of life that hard working Australians enjoy. Productivity is what makes life better, more affordable and easier.
All successful, and indeed some unsuccessful, start-ups have ESS as a core feature. Whether here or in other parts of the world, innovative companies all have a large part of their companies owned by their workers.
And this is another point of principle that some of even the most ruthless corporate titans agree on: it is not fair for those people who are in large measure responsible for the success, or failure, of an organisation to not share in the spoils of what they are building. Yet in Australia our public policy has been designed to deny workers access to that entirely reasonable principle.
There are too many reports to cite that show alignment between a company’s workforce and its owners has benefits not only to those two stakeholders but also to the nation at large. And yet, the institutions that have been empowered to promote productivity and rational policy making have for over a decade or more sought to stymie the introduction of these schemes.
This inquiry found what previous research has uncovered: that ESS are a public good, the benefit of which is far reaching. Secondly, that current policy settings have acted to discourage, inhibit and in most cases outright block the use of such schemes. In some extreme circumstances companies cited Australia’s policy settings as reasons for listing in other jurisdictions and keeping operations out of Australia. Third, and most seriously, public institutions that are meant to be promoting the general welfare of our nation have instead shown little interest in this policy area.
As the research paper from the Office of the Chief Economist found:
Firms with share based payments had on average a lower level of employee churn, higher wages per employee and higher labour productivity, compared to other firms of a similar size or age. This productivity difference was strongest for SMEs.
The Report makes two groups of recommendations: Option A recommends that ESS be treated as capital for the purposes of taxation and dealt with under the capital gains tax regime. If this option is taken up then most of the challenges that Australian businesses face in implementing ESS fall away. The other significant recommendation of this option is the removal of most of the regulatory regime that was initially designed for retail consumers not employees working at the company. The reasons for this are that the regulatory regime is not useful, most start-ups cannot meaningfully value themselves and doing so costs valuable money that could otherwise be used on business development. And in any case the employee is unlikely to be contributing financially to the scheme.
Option B borrows from many of the recommendations made by the Nuttall review in the United Kingdom (UK). It reduces conflicts between the Tax System and the Corporations Law. It further seeks to encourage the use of ESS by reducing the cost and complexity of implementing a scheme.
Guerdon Associates made the point:
Australia needs to step up and, at least, provide taxation that is comparable. Why relocate to Australia when our existing, entrepreneurial, high growth listed entities needing more scale can only offer equity taxed at a 49 per cent marginal rate when Singapore offers 20 per cent, the US 25 per cent, or the UK, under its various schemes, as low as 15 per cent.
In other words, the benefits of having the correct policy settings in this area could lead to material economy-wide benefits.
This Report highlights the successes and failures in public policy settings in this area, but also what could be done to create better alignment between corporate purpose and public good. The changes announced by the Government in the budget are a significant step forward, removing some of the most egregious barriers to the use of ESS. The following chapters highlight some of the steps that could be taken to make Australia a global leader in this area.