providing insights that enable foresight the flight plan the facilitated workers’ trust...

Providing insights that enable Foresight

The Flight Plan

• The facilitated Workers’ Trust establishment process in the IDC context in SA.

• Managerial challenges and responses

• The Systemic View – Social dynamics at play

• The Global Perspective

- USA, UK and India

• Harmonisation of divergent interests

• Conclusions and recommendations

A number of USA literature sources make the statement that “The employee stock ownership plan (Esop) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets.”

Trade unions in rejected the concept when Anglo announced, in 1988, what was then a ground-breaking move in South Africa, this was after a strike in which tens of thousands of workers were dismissed.

Background

Unions charged that Anglo was trying to bring the flavour of “people’s capitalism”, championed by Iron Lady Margaret Thatcher, to South Africa.

The Contextual Environment

Contextual Local Environment

Local Enterprise

Global Environment

Key Drivers of Change


Local Enterprise

Global Environment

Societal Economic TransformationImperatives

Organisational Transformation- Driven by legislative Imperatives

The Flat WorldGlobal communicationsSustainability

Complexity of the Environment


Local Enterprise

Global Environment

Societal Economic TransformationImperatives

Organisational Transformation- Driven by legislative imperatives

The Flat WorldGlobal communicationsSustainability

GlobalisationGeopoliticsChanges in BoPSocial MediaTechnological InnovationsDemographics

Restructuring- Driven by business imperatives

Political/PolicyEconomicSocialTechnologicalEnvironmentalLegislative

Broad Management Roles and Responsibilities

Products & ServicesOperations

Asset Base CostsFinancial StructureMarketingIndustry

Research &Development


Industry dynamicsMarket growth

Customer NeedsCompetitor moves

SuppliersRules &

Regulations





Industry dynamicsMarket growth

Customer NeedsCompetitor moves

SuppliersCompliance to Rules &

Regulations

Social changeTechnology advances

Economic shiftsEnvironmental drift

Political developmentsLegislative changes




Some concrete examples


Former Arch-Bishop Desmond Tutu lauds the Sharon Fruit Industry.

Baffuljagsrevier, Swellendam, South Africa.ARISA Workers’ Trust and ARISA Community Trust

09 MAR 2012 09:35 -

http://mg.co.za/author/


Preferential treatment of workersThen Magwa’s management gave pay rises of 100% to some workers but not to others, the union claims. “This led to conflict among the workers. Management was selective in terms of compensation,” said Mbalisi Tonga, the union’s provincial secretary in the Eastern Cape. “The manager said he would reward, in his words, ‘deserving cases’.”Tonga said there was further resentment when, to comply with the law, lunch breaks were extended from 30 minutes to an hour—but with a deduction of R6. “At that point, they unified the workers. The workers said we must fight and the strike started.”

09 MAR 2012

1. The decision to introduce an ESOP Scheme2. Mapping the process of establishing an ESOP

Scheme3. Establishment of the actual ESOP Scheme4. Administration of the ESOP Scheme5. Management of the ESOP entity6. Measurement of its performance7. ESOP Governance Issues8. Representation on the Board of Directors9. ESOP and related stakeholder

communications10. Role of the ESOP in long-term planning

Management Challenges

Let’s start from the beginning

In 2006, we assisted the IDC with a reviewof Workers’ Trust transactions thathad been completed by that time.


There was a growing need to facilitate empowerment of workers

in selected industries in SA.

There was increased desire to use Workers’ Trusts as the ideal

empowerment vehicle

No consistency in approach even within the IDC’s own historic

involvement with Workers’ Trusts.

The non-existence of a common body of knowledge and

approach to the establishment of Workers’ Trusts.

Background:


To determine the key success factors (“best practices”) in the

formation and functioning of workers’ trusts within the

following focus area:

a) Mainly in the Agriculture, Mining and Tourism sectors, with

more emphasis on the Agriculture sector

b) Trusts aimed at the empowerment of lower skilled workers

c) Legal and developmental perspectives

The Brief

Focus on Enterprises


Local Enterprise

Global Environment

We looked at about 22 entities in the Western Cape, Gauteng andMpumalanga. All being IDC clients at that time.


Local Enterprise

The Global Environment

We looked at Workers’ Trust Deeds in place at that time

Focus on Enterprises

Legal Aspects

Legal/Policy/Social Facilitation

Activities/Results Trust Deed Registration

Shareholders‘

Agreement

Management Agreement

Loan Agreement

Put Option

A Holistic View of Knowledge Requirements

Trust Creation

People/Business/LegalPolicy/

Social Facilitation

Activities/Results Project management

MeetingsFacilitation

CommunicationElections

New structureNew culture

New relationsCode of Conduct

The Transaction

Financial/BusinessPolicy/

Social Facilitation

Activities/Results

Due diligence

Business planning

Fund raising

Shareholding structure

Dividend policy

Governance policy

Essential Requisite Knowledge and Skills

Rationale and MotivationAs a result of;

Inheritance of assets as a result of a successful Land Claim

in terms of Restitution of Land Rights Act, 1994 (a farm, farm

land or a tourism asset)

The sale in execution of a business owned by a state entity

(to save jobs)

Debt reduction or raising of capital for expansion

Privatisation of a state-owned business/asset

A Local Economic Development initiative

Act of benevolence by a Trust Donor (rare in SA)

The need to manage succession (rare in SA)

The need to improve productivity and shared growth

Legal Framework and the Trust Deed Trust Deed

Formation, Objects, Security, Name Trustees

Election / Resignation / Removal Duties / Powers

Beneficiaries Initial & New / Resignation / Removal Duties / Rights & Benefits Shares (NB: Exit clauses)

Meetings (AGM, SGM) Disputes Amendments, Termination Appendices

Legal Framework and the Trust Deed Trust Deed

Formation, Objects, Security, Name Trustees

Election / Resignations / Removals Duties / Powers

Beneficiaries Initial & New / Resignations / Removals Duties / Rights & Benefits Shares (NB: Exit clauses)

Meetings (AGM, SGM) Disputes Amendments, Termination Appendices

What is the finite number of clauses in any Trust Deed ?

The Trust Formation Process

Low levels of education amongst workers – ignorance regarding Trust Deed & the Transaction

Lack of business knowledge amongst the workers – no formal training programs exist

Confusing roles and responsibilities as … shareholder vs. worker, Trustee vs. Director, Beneficiary vs. employee

Unrealistic expectations of immediate returns/benefits Inability to draw on local professional expertise to assist

workers Power relations between owners/management and workers

remain unchanged (even after the deal has been concluded) Lack of a workers’ communication forum separate from a

Trade Union structure

Issues and Concerns


% equity to be acquired

Finance costs of the transaction

Current performance and future prospects & risks

Any foreseeable drastic developments (e.g. job cuts, new

job opportunities, new acquisitions, etc.)

Basic Terms of the Deal


Normal market related risks

Climate risks on crops

Currency risks for exports/imports

Cash-flow and debt management

Inflation and competitive pricing

Associated Business Risks


Trust Deed

Shareholders’ agreement

Management agreement

Loan agreement

Put-option

Important Legal Documents


Appointment, dismissal and remuneration of directors

Dividend policy

Protection of minorities interests

Dilution of employees’ equity stake as a result of a new share

issue or the re-capitalisation of the business

Surety requirements

Dealing in company shares

Worker empowerment policy and practice

Key clauses in these documents

Trust Formation ProcessPrinciples & Values Transparency

Empowerment

Being “enabled & accountable”

Financial

Knowledge & Skills

Requisite Authority

Inclusive Participation

Fairness

Justice

Equity

Mutual Respect

Financial liquidity of the Trust

Exit and entry mechanism for new beneficiaries

What criteria should used ?

How will it be financed? (selling & buying of “trust

units”)

Ongoing mentorship/support

Ongoing knowledge empowerment and change

management

Key Considerations & Priorities

Lessons learned and best practices Structure and content of the Trust Deed

Simplicity of representative structures

Simplicity of the management and operational processes

Facilitation of the implementation process

Relationship Management- Management of the Paradoxical dynamics

- Management of emerging social and business complexities

- Power relations within and amongst the Trust beneficiaries

Monitoring mechanism to ensure integrity of leadership and statutory compliance

Provision for mediation/arbitration of disputes

Management of the exit and entry from the Trust

Post-settlement support (when the sponsor has exited)

The need for a spirit of true empowerment

A Systemic View

The ESOP environment in context

Systems thinking has been defined as an approach to problem solving by viewing “problems” as parts of an overall system, rather than reacting to specific parts, outcomes or events and potentially contributing to further development of unintended consequences.

Based on Systems Thinking

Realities that should be acknowledged by all role players specifically sponsors, (be it government, the company or

employees) funders and Facilitators the Various systems exist and are simultaneously at play:• The Enterprise• The Board• Management (at all levels)• Non-managerial staff • Workers (in a factory or farm

environment)• The Trade Union (where applicable)The identity, roles, interests, functions and

duties of each are neatly separated and well defined.

A Systemic View of - the social dynamics at play


Management and Staff

Workers

Board of Directors

Staff Representative body

Existing systems prior to an ESOP

The identity, roles, interests, functions and duties of each are neatly separated and well

defined.

Trade Union


Influential Stakeholders – local and international

External investors

& Regulators &

influential suppliers

The influence of powerful yet silent and invisible actors outside the enterprise should

be recognised and considered.


Existing systems prior to an ESOP

The ESOP System- Effective but

subtle influence on the overall

performance of the enterprise

External investors

& Regulators &

influential suppliers

A minimum of 4 paradoxes immediately confront the enterprise role players in different ways and in different degrees of magnitude.

a) The Paradox of Perception

b) The Paradox of Disclosure

c) The Paradox of Belonging

d) The Paradox of Identity

Oxford English Dictionary defines paradox as ‘a statement or tenet contrary to received opinion or belief, especially one that is difficult to believe’. Paradoxes represent instances where the present knowledge is lacking and expectations are inconsistent with actual events or findings.

Paradoxes surprise us and should evoke a desire to gain deeper understanding. Therefore, realizing and highlighting paradoxes is important as unique opportunities to acquire new knowledge and question assumed truths.

European Journal of Neuroscience, Vol. 32, pp. 1030–1031, 2010 Alvaro Pascual-Leone, at Harvard Medical School


A Systemic View – The Paradox of Perception

It’s too good to be true !!!! Traditional employer/employee relations have always

been characterized by the overriding paradigm of “putting the interests of the enterprise first”

Where the ESOP idea originates from and external BEE promoting agent of government, can employees/workers be expected to trust the “new found goodwill” of management and directors?

The perception that prevails amongst beneficiaries is often expressed in the scepticism of “…what’s the catch?, they have never been this good to us in all these years”.In many instances, the relationship never transcends

these perceptions, especially where the inspiration came from an external agent. Where these have been

overcome, trust needs to be built and nurtured over time

To tell or not to tell, is the question !! To what extent is the Workers’ Trust representative on

the board, constrained or obliged to disclose the discussions and forward thinking of the board, outside of formal communication channels ?

If new developments are likely affect negatively, the interests of the workers/staff members, is there not a duty to disclose to one’s constituency ?

What are the consequences of failure to disclose ? And what are those of actual disclosure?

For many Workers’ Trusts representatives, this is a major source of conflict !! It has the potential of

destroying mutual trust in an enterprise

A Systemic View – The Paradox of Disclosure

A Systemic View – The Paradox of Belonging

To join or not to join the union !!!• Unions are known be positioned in the workers’ camp in

direct adversarial postures against the management of the enterprise promoting and protecting the interests of the workers.

• In a climate where a thriving and lucrative ESOP or Workers’ Trust is known to exist, new entrants to the enterprise are bound to be conflicted in exercising their right to join an existing union.

• Where a trade union exists, solidarity strikes in initiated at other companies place workers in ESOP enterprises in paradoxical situations.

• The workers desire and work hard to ensure maximum profits and dividends but feel constrained to join a solidarity strike that threatens their financial rewards.

Trade unions in SA have long standing well established & thriving ESOP entities but still

the paradox prevails.

A Systemic View – The Paradox of Identity

Owner(employer) or employee ?• While for many owner established and operated

businesses, the dual identities of owner and employee at the same time do not give rise to any paradox, the same is not true for newly empowered ESOP beneficiaries.

• The adversarial and subordinate relations of the employee towards employer, present a paradox of identity. Along with the paradox of belonging conflicting feelings of loyalty and trust begin to surface.

• How these manifest and how they are dealt with is at core of a more competent and enlightened new paradigm, that displaces the old.Recognising and dealing with these paradox dynamics requires insightful knowledge and

understanding of emerging social complexities and knowing when to take proactive

interventions.

The Global Perspective- A View from India - Empowerment

An Indian ESOP company on the NASDAQ Stock Market

The Global Perspective- A View from India - EmpowermentAn Indian ESOP company on the NASDAQ Stock MarketIn 1994 the company put in place the Employees Stock Option Scheme, which along with the 1998 ADR scheme gave stocks to over 18,000 employees, creating hundreds of dollar millionaires and thousands of rupee millionaires. Drivers, office assistants, secretaries got stock along with others and became millionaires. It soon became the most successful scheme in India and set a benchmark for other companies.It gave us an unique positioning, democratized wealth and suddenly the professionals realized that they too could become wealthy by ethical means early in their careers. It revolutionized India.

The Predictability, Profitability, Sustainability and Derisking (PSPD) model has been at the core of our business philosophy. In 1993, we had 25 projects, 750 employees, US$ 5 million in revenue and operated out of two offices in India and one international sales office in Boston. Today, we have over 620 clients, 6,500 projects, 1,30,820 employees, US$ 6.04 billion in revenue, and operate out of 64 sales offices and 63 global development centers spread across 75 cities in 32 countries.

When I look back, I realize that quality at Infosys is not just about governance, prerequisites or metrics. Through quality, we have succeeded as an organization to set ourselves on the path of the continued pursuit of excellence with a constancy of purpose. In the process, we have earned the sustained trust of our stakeholders – employees, clients, alliance partners, the industry, government and the society at large. This trust is an intangible, yet an invaluable asset and reflects the success of our quality journey over the past three decades. I strongly believe that it will continue to be at the core of our success in the years to come.

N. R. Narayana Murthy Chairman and Chief MentorInfosys Annual Report 2010-11

The Global PerspectiveA view from the USA

Getting Your Company Ready for an ESOP: The Ownership Culture Perspective: By: Virginia J. Vanderslice & Alexander P. MossPraxis Consulting Group, Inc.

✔ Initial Perceptions of Employee Ownership: Suspicion and Skepticism:

Employees often learn that they have become shareholders through an announcement by

the company president or CEO, after the transaction is completed. It is typical for employees

to greet such an announcement with suspicion and skepticism. This reaction may arise from

any of several sources.

a) ESOPs as “Something for Nothing.”

b) Trading Compensation or Benefits for Company Stock.

c) Replacing Other Benefits with an ESOP.


Getting Your Company Ready for an ESOP: The Ownership Culture Perspective: By: Virginia J. Vanderslice & Alexander P. MossPraxis Consulting Group, Inc.

✔ Cultural Contradictions:

The nature of a company’s culture before and at the time an ESOP is implemented can greatly affect employees’ initial responses to the ESOP and the company’s ability to transition to a culture that maximizes the performance-enhancement opportunities that employee ownership presents.

✔ Misaligned Ownership Expectations

Diverse expectations of employee ownership that people bring to their roles in ESOP companies present a major challenge.

Until people’s expectations for “ownership” are consistent throughout an ESOP company, tensions arising from disappointed expectations may present a roadblock to maximizing company performance. This is as much a problem for companies that only see their ESOP as a financial tool as it is for companies that want to make their ESOP the foundation for developing a high-performance ownership culture.• Command and Control Management Styles. • A History of Distrust

Turning Ownership into Motivation There are five major categories of activities through

which an ESOP company can reinforce employees’ understanding of the linkages and develop company practices that strengthen the linkages. These are;

◦ ongoing communication,

◦ education,

- Broad business literacy

- Skills Training

- Corporate governance

◦ participation,

◦ short-term incentives

◦ shared vision and foresight


Source: The Ownership Culture Perspective: Praxis Consulting Group, Inc.

The Global PerspectiveA view from the United Kingdom

“Growing the economy is the Coalition’s most pressing priority.Lessons from the financial crisis have exposed our economy as too narrowly focused on certain sectors and regions, with the majority of our companies structured around one type of business model. We need to fundamentally change our economy to ensure long term growth is strong and more evenly balanced in the future. One of the centerpieces to creating this sustainable growth is to encourage more responsible and more diverse ways of running a business in Britain today. I want this to be the decade of wider employee ownership.”

Norman Lamb; Minister for Employment Relations, Consumer and Postal AffairsJuly 2012

The Global Perspective

List of the Nuttal Review Recommendations

a) Promoting and raising awareness of employee ownership

b) Raising awareness of employee ownership within the Government, and

ensuring continuity

c) Raising awareness and demand through a Right to Request employee

ownership

d) Ensuring employee ownership and employee buy-outs are well known

business concepts

e) Improving employee owned companies’ access to finance

f) Reducing the complexity of employee ownership by providing simplified ‘off

the shelf’ models for employee ownership

g) Avoiding unintended regulatory burdens upon employee owned companies

Graeme Nuttall UK Government adviser on employee ownershipJuly 2012

A view from the United Kingdom – Sharing Success

The Global PerspectiveA view from the United Kingdom – Sharing SuccessList of the Nuttal Review - Implementation Recommendations

a) Through the Minister for Employment Relations, the Department for Business, Innovation and Skills should, within three months of this review, publish an Action Plan showing actions taken to implement its recommendations and others aimed at promoting employee ownership.

b) The Minister responsible for employee ownership should produce a ‘one-year on’ report 12 months after the formal Government response to this review, reporting publicly on progress made on promoting employee ownership and the implementation of these recommendations.

c) The Minister for employee ownership should convene a small ‘sounding board’ of sector representatives to advise him or her periodically on the direction of implementation and on new opportunities to promote employee ownership.

Graeme Nuttall UK Government adviser on employee ownershipJuly 2012

a) The establishment of an ESOP amounts to fundamental transformation of the business.

b) The impact of both overt and subtle changes in the social relations manifest immediately after the announcement of the intension to establish one.

c) Honesty and integrity are essential prerequisite that can maintain and sustain mutual relationships.

d) Facilitated change management processes should kick-in right from the beginning not only when problems manifest, that may be too late.

e) The over-arching goal of the ESOP concept should not be limited to advancing enterprise goals and objectives, it should be to harmonize the interests of employees along with those of society and nation building in general.

f) South Africa, is still focused at the Local Enterprise level, while the developed and developing world is concerned with the transactional and broader industry and sector level sustainability over the long-term.

Conclusions

Harmonisation of divergent interests

Enterprise

Local Community

Industry and Sector

SA and other SADC states

Pursuit of Broadbased BEE Goals should harmonise with the employees’ and community interests

a) ESOPs and Workers’ Trusts as empowerment vehicles should gain greater recognition by both business owners and employees.

b) An institutional framework, perhaps outside of the government structures but in direct collaboration with government is needed.

c) The emerging trend of ESOPs and the Right to Request, may have special significance for the sustainability of the South African industries and economy.

d) Make special effort to create an enlightened view of the complexities of the operational environment.

e) Apply Systems Thinking to recognise and manage the paradoxical situations that arise.

f) Apply Foresight to create a desired common future for the enterprise in the context of its operational environment.

g) On-going communications, active participation, skills development and education shall remain the corner stones of building trust and confidence in a sustainable ESOP enterprises.

Some Recommendations

Thank You

providing insights that enable foresight the flight plan the facilitated workers’ trust...

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