Tuesday, 4 March 2014

Opinion Piece - Employee share ownership crucial to innovation - Australian Financial Review - 4 March 2014

Employee share ownership crucial to innovation

In budgetary terms, Joe Hockey has rightly declared the end to the age of entitlement and the beginning of the age of personal responsibility.

In broader economic terms, we are also seeing the end of another age - the sun is setting on the age of economic intervention.

Now the focus must be about bringing on the dawn of a new age of enterprise and innovation.

That is why the government is right to say no to bad policies that are blocking or constraining the path. These include the caustic carbon tax, ever-escalating debt and repressive red tape. Removing these weights and barriers will help to liberate the economy, drive growth and create more jobs in the industries with a bright future instead of looking back at a nostalgic past.

But if we are to move to the age of enterprise and innovation, as a nation we must strive harder on the policy front. As well as rightly saying no to bad policy, we must also emphatically say yes to new policy settings that will add power to our economic engine to drive us faster towards our destination.

One policy area that can help and that deserves new and dedicated focus is employee share ownership.

A revolution in employee share ownership in our country is one vital ingredient we need to build an "enterprise and innovation" economy.

In the past, employee share ownership in Australia has largely come from big corporates providing shares and options to their management and staff. As valuable as this has been, it comprises only a small part of the untapped potential that exists in our country.

Sure, it is not suitable for every enterprise, but it does offer the potential of a vital turbo charge for many others in many fields.

Deeper and denser employee share ownership would kick-start our stalled start-up sector. More generally it offers employees a stake in the outcome, which overseas experience has shown boosts productivity by unleashing human capital and breaking down industrial barriers. It also creates an ownership transition structure for long-serving employees in small and medium-sized businesses who, over time, may want to own part of the business they work in.

Employee share ownership in Australia has never realized its transformative potential, and in 2009, Labor’s tax changes delivered a king-hit to the fledgling sector.

Labor’s changes mean that an employee provided with options is hit with a tax bill for their value before they can be exercised.

The entrepreneurial nature of start-ups mean that because risk is high and cash flow is low, their capacity to pay high salaries to employees is limited. Offering a share in the future success of the enterprise is vital in attracting the top talent that may well deliver it. Employee share ownership used to be the critical policy germinator for start-ups – before Labor’s pesticidial changes that worked like a super-sized dose of Roundup.

Start-ups are still thriving – but in Australia they’re struggling – yet we know they are so often the birth of innovation in our fields of strength, like science, medical research and advanced food manufacturing – developing the ideas into the products and creating the jobs of tomorrow.

We are missing out on the opportunities, the action and the jobs right now.

Our Government is rightly reviewing all Labor’s tax changes with respect to start-ups. Restoring what Labor destroyed is a vital step that should be taken in the May budget. But that should only be a first step.

We must move further and be more ambitious if we are to meet the demands of the decades ahead and seek to spawn a new age of enterprise and opportunity.

The concept of employee share ownership is foreign to many – but only because it has been largely foreign to Australia. The US and the UK have a far better take-up of employee share ownership because they have far more favourable policy settings.

With broader reform, employee share ownership would have deeper appeal and be of bigger benefit to our economy.

All too often we see smaller and medium-sized businesses built up from the ground over many years that are subsequently sold to a larger firm or dissolved.

With the proper employee share scheme framework in place, an owner could, in the right circumstances, progressively sell the business to one or more employees.

Getting tax right is one hurdle, regulation is another.

That is why in addition to some first step restorative tax changes, we must also further simplify the onerous prospectus requirements to lower costs and increase the attractiveness for employers to offer share plans in the first place.

We also need to take a lead and establish an advisory panel of experts from both government and industry to steer these changes through so they are realised rather than lost in the bureaucratic forest, as well as promote and communicate the benefits.

And finally, in our coming tax white paper, we must seize stage-two tax reforms to drive development further.

As a nation we can do this, but we need to start working now.

Tony Smith MP is the Federal Member for Casey, and the Chair of the Coalition’s Backbench Economic and Finance Policy Committee.

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