UK: WATG: Employee-Owned Through A Perpetual Trust

Last Updated: 19 April 2016
Article by Graeme Nuttall

In 2014, the design firm WATG became the first US company to create employee ownership through a perpetual trust, an innovative model in the United States that is becoming common in the United Kingdom.

WATG is an integrated planning, architecture, and interior design firm founded in 1945 in Honolulu, specializing in hospitality, urban, resort, and entertainment design. The firm's 365 employees now work in nine offices around the world on high-profile projects from hotels and resorts to business districts and an urban forest in Istanbul. Prior to becoming employee-owned, the company was owned by members of its senior leadership, who had each bought shares in the business. Their individual ownership stake ranged from less than 0.1% of the company's shares to nearly 10%. The owners had buy-sell agreements giving them the right to sell shares back to the company, so WATG was often buying 5% to 7% of its equity each year. In addition, the company's success caused the price of shares, determined as adjusted book value, to continue rising, making it harder for employees to buy shares.

Considering Ownership

WATG found a possible solution that came in the form of an opportunity to sell the company. The company's leaders looked hard at the buyer's offer, which was for more than three times the most recent book value, but decided to reject it. As company president Mike Seyle noted: "Our decision criteria included many things that went beyond just the commercial deal. None of us wanted WATG to be dissolved, and we had all seen what happens to a firm's culture and identity when businesses are acquired."

The company also weighed the possibility of a sale to an ESOP, but decided against it. Leadership wanted to avoid the cost and time requirements of creating and maintaining an ESOP, including legal work, administration, and valuation. They also wanted to avoid simply replacing their repurchase obligation from the buy-sell agreements with an ESOP repurchase obligation.

The Perpetual Trust Ownership Model

The most prominent employee-owned company in the UK is the John Lewis Partnership, a company whose popularity is often credited with spurring the rise of employee ownership in the UK. Some of WATG's London employees had worked at the John Lewis Partnership, and they introduced the idea to management. The company invited Graeme Nuttall, the author of the UK government report that has served as the blueprint for employee ownership policy in the UK, to speak at a meeting of the company's board of directors, where he presented the case for ownership through a perpetual trust modeled after the John Lewis Partnership.

Nuttall helped WATG create its new ownership structure, in which a UK-based trust was established to buy shares in WATG, a Delaware-based holding company. WATG took a bank loan, which it used to make a gift to the trust, allowing the trust to buy roughly 60% of the company shares from the current owners at a price determined using an adjusted book value.

The company's goal is to have 100% of the shares owned by the trust.  When WATG's board decides to facilitate the purchase of more shares, the company will set a sale price and allow its existing shareholders to decide how many shares they wish to sell to the trust.

The trust's founding document notes that its purpose is to hold shares of WATG "as a permanent part of [WATG's] ownership and governance arrangements." Employees of the company are beneficiaries of the trust, regardless of where in the world they are based, and if the trust ever liquidates its assets or dissolves, employees will receive their share of the value of the trust.

Since the intent is that the trust endures permanently, however, in practice the employees benefit from the success of the company not by being owners of an asset that increases in value, but by receiving a share of the company's annual profits. The company's board determines each year what the bonus percentage will be, and every employee, from the receptionists to the CEO, receives the same percentage. For John Lewis, this bonus announcement is the largest corporate event of the year, and WATG intends to use the bonus percentage in a similar way.

Shares or Profits?

This difference is at the heart of the contrast between WATG's plan and an ESOP. Since the value of a share directly affects the retirement assets of ESOP participants, annual appraisals are essential for ESOPs, but not for WATG. Since more shares are allocated to participant accounts and accounts are distributed over time to former participants, ESOPs require in-depth administration. By contrast, except under special circumstances, WATG employees do not receive financial benefits directly from the trust. Instead, employees receive an annual cash profit-sharing bonus at the discretion of the board, which is governed by compensation rules and practice, not by ownership or benefit plan laws.

An advocate of ESOPs might ask if the WATG plan is really ownership. WATG calls its plan "co-ownership," and explains that employees have most of the benefits of ownership: employees are entitled to vote for the company's board of directors and on major changes to the business, have input into the business strategy through local trust representatives who regularly communicate with management, receive regular reports on the company's plans and financial performance, and receive a share of the profits. The only real difference is that they are not required to buy in, and they will not sell out of the plan.

Seyle says that not being driven by transactions or valuation is an advantage, since "unlike a public company, we do not have to favor stock price over investments, employee development, or long-term planning. Also, having all employees involved in company strategy and performance as co-owners builds morale, trust, and engagement, making us a stronger company."

When we asked his advice for other business leaders, Seyle recommended that they ask themselves what they believe is the fundamental purpose of their companies. "If a major purpose of your business is providing opportunity and growth for your employees over the long term, then having your employees fully engaged as owners is key to their development, the company's performance, and everyone's long-term success. Most business leaders try to disassociate their ownership structure from their business model but, the fact is, if the business's purpose does not fit the ownership model, the company will suffer from pursuit of conflicting goals." 

This article was reprinted from the Employee Ownership Report (March-April 2016), a publication for members of the US National Center for Employee Ownership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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