Terri Butler (Griffith, Australian Labor Party) Share this | Hansard source

I am very pleased to rise in respect of the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 because I want to talk not only about the measures in the bill but also about why employee share ownership matters, what the bill itself does and some other reforms that I think might need to be considered in the future. Firstly, I will go to why employee share ownership matters. I am very pleased to say that I have Andrew Pendleton from the United Kingdom coming in this week; Tony Smith and I are the co-chairs of the Parliamentary Friends of Innovation, and we will be hosting Andrew. Could any members of this House who are interested in talking about the United Kingdom's arrangements for employee share ownership please get in touch with one of us, and we will be happy to arrange a time for you to see Andrew.

I wanted to talk very broadly about some of the big economic issues and where I think employee share ownership fits in with those issues. Standards of living and inequality are affected by a whole range of things, including incomes from wages and salaries, assets and returns from assets, taxes and transfers, prices and economic growth. The middle-class and working-class households generally have assets in the form of superannuation and real property. Some invest in managed funds or have shares themselves and other forms of assets, but I think that this class of asset, employee share ownership—owning shares in the business in which you are employed—opens up another class of assets for employees to own and to benefit from. The reason I think this is important is described quite well by David Hetherington of the Per Capita institute, which is a think tank, in his paper Employee share ownership and the progressive economic agenda, written in 2009, in which he said:

The most important feature of ESO—

that is, employee share ownership—

for employees is that it offers them access to returns on capital, in addition to their returns on labour. The benefits of Australia's 15-year economic boom have flowed disproportionately to investors (owners of capital) rather than workers (owners of labour).

He went on to say:

The economics journalist Ross Gittins has observed (2007) that the share of national income going to workers is the smallest it's ever been, having shrunk from 70.2% in 2001 to 66% in 2007.

And I might add that you continue to see the profit share of the national income rising and the wages share dropping to the present day. David Hetherington went on to say:

This lost share flows instead to investors through corporate profits.

And he said that employee share ownership:

… addresses this imbalance by giving workers access to the flow of corporate profits. It ensures that workers are not unreasonably excluded from this flow by institutional or information barriers.

Employee share ownership schemes could be a way for middle-class and working-class people to get access to more and different assets in the form of shares or as beneficiaries of a trust that owns shares in the business in which they work. As returns on capital can be higher than economic growth and incomes growth, I would argue that middle-class and working-class people should have greater access to assets of this type to assist our nation in combating inequality.

It is worth remembering why it is important to combat and arrest inequality, and I will say something about that when I talk about economic growth shortly. But firstly I do acknowledge that, with greater returns, you often have to bear greater risk. For that reason there should always be appropriate safeguards in place in relation to employee share ownership schemes. For employees, for example, employee share ownership schemes must only be a secondary form of remuneration—it can never replace wages and salaries as the primary form of remuneration in the employment relationship.

There are also other risks. There is a risk to the revenue—a risk that employee share ownership schemes might be misused to avoid tax. Again, safeguards are needed. That is why Labor's 2009 changes were made—to avoid these schemes, which have a rightful place in our economy, from being misused and exploited by people who would avoid their taxation obligations and therefore not pay their fair share.

So of course there are risks, but we cannot let risk aversion stand in the way of opportunity and growth. There is opportunity in share ownership—the opportunity, as I have said, to build wealth through asset ownership and returns. There is also an argument that employee share ownership helps with growth from a couple of perspectives: firstly, if it does in fact help to combat inequality, then that will help with growth, and I want to say something about that, but also, secondly, because of the economic benefits that employee share ownership can bring in terms of private sector economic activity, through providing a capital source for start-ups and also through the productivity and buy-in benefits that you get from employee share ownership schemes. I wanted to mention both of those things.

First, on inequality and economic growth: growth is low and it is slowing around the world. We have seen OECD figures very recently that show that that is continuing—that growth is slowing around the world. Some writers have even suggested that we are in a new low-growth paradigm—that our economies will never grow as quickly as they have done previously. Some are less pessimistic about the future of growth. But, whatever your view about the future, it is a fact, if you look at the numbers, that we do have low growth around the world, and the recent OECD figures show that their member states are suffering slower growth.

Any discussion about worldwide low growth requires that we give some thought to inequality—the two are linked. Inequality matters not just for fairness reasons but also because it can impede economic growth. Last week The Wall Street Journal reported that the secretary-general of the OECD had said:

We have reached a tipping point. Inequality in OECD countries is at its highest since records began. The evidence shows that high inequality is bad for growth. The case for policy action is as much economic as social. By not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth.

In very widely reported remarks last year, the IMF's managing director, Christine Lagarde,said the following:

Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion and a wasteland of discarded potential.

Those are very evocative words from Christine Lagarde. These high-level people in major economic organisations talking about income inequality in this way should remind all of us in this place that we need to deal with the growing inequality in developed nations, including our own.

So, if employee ownership schemes could conceivably be used as a tool for combating inequality by opening up access to additional assets and returns on assets for working and middle-class people, then that is an issue that we should be treating very seriously. If we can combat inequality, then that will help us with growth. As I said, for growth to occur our country needs new businesses, new economic activity, new jobs, and innovation that improves products, improves services, and improves work practices—leading to better productivity. We also need to improve, as I said, buy-in—ownership in the real sense of the word, not just in the legal sense but in the sense where employees actually feel like the business is their business, that they have a stake in it.

Start-up companies are important forms of new economic activity that can create jobs and opportunity. A recent study commissioned from PwC by Google, The startup economy: how to support tech startups and accelerate Australian innovation, showed that in the right conditions high-growth technology companies could contribute four per cent of GDP, or $109 billion, by 2033 from a base of approximately 0.2 per cent of GDP today—and add 540,000 jobs to the Australian economy.

But start-ups need access to capital. They need access to finance. The people behind start-ups are often using their family homes as security to get capital. Employee ownership schemes can be a piece of the capital puzzle for new businesses—and so too can the measures that Bill Shorten recently announced in his budget reply. I think his start-up finance measure is an example of excellent policy. In my work as an MP, and as a co-convener of the Parliamentary Friends of Innovation and Enterprise group, I have heard businesses talk about their concerns that there is a culture in Australia where people are scared of failure. Businesspeople are worried about risk aversion, about people being too cautious. They say we do not have a culture where it is seen as okay to fail. They draw a distinction with Silicon Valley, where people are actually expected to fail a few times in business. They are concerned that our home-grown entrepreneurs are being too cautious and risk averse.

One important difference between the US and our country is that here, as I have said, the family home is often used as security. I am told that is not the case in the United States. So Bill's announcement on start-up finance is, I think, a great initiative. It is a way of giving those new businesses access to finance without their having to use their family home as security. Bill said:

Currently Australian micro-businesses either struggle to get a loan or may borrow via other means, such as residential mortgages, in the absence of cheaper, more appropriate financing alternatives.

We want to help more Australians convert their great ideas into good businesses. We will enable entrepreneurs to access the capital they need to start and grow their enterprises without them having to take risks on the family home.

I think, as I have said, that that is an excellent policy and I congratulate the Leader of the Opposition for that announcement in his budget reply.

To return to employee share ownership schemes: they can be a piece of the capital puzzle. But, as I have said, they can also be useful in creating that sense of ownership, that buy-in, and for so many other things. They can build employees' preparedness to give discretionary effort. We all know that in business it is discretionary effort that really makes for a great-performing team or individual. Employee share schemes can be a means of providing additional remuneration. If you pay people better, you tend to get better performance out of them. I know that comes as a shock to some people in the coalition, but that is the case. Employee share schemes can also create incentives for innovation—not only in products and services but in work practices and collaboration.

In the paper I mentioned before, David Hetherington said:

Employee shareholders enjoy the returns of improved company performance and can affect this performance through their own productivity.

A host of studies demonstrate that employee shareholders do in fact demonstrate greater productivity.

He went on to list a number of studies from the United States, from Australia and from Japanese firms. He noted, for example, the study by Douglas Kruse and Joseph Blasi of 250 companies that had adopted ESO plans. That study found that these firms increased sales per employee by 2.3 per cent per annum over what would otherwise have been expected. David Hetherington went on to say:

In addition to the specific productivity benefits, a second set of research indicates that companies with ESO plans demonstrate higher performance across a number of parameters. An analysis of seventy separate studies by Blasi et al. (2003) considered the effects on company performance of "partnership capitalism" (defined to include employee stock ownership, broad-based stock options, profit sharing and employee participation). This found that companies that embraced any one of these four approaches experienced a 4% gain in productivity, a 14% gain in return on equity, a 12% gain in return on assets, and a 11% gain in profit margins (controlling for other factors).

This research shows that you can link a greater employee stake in businesses with greater returns for everyone—in other words, growing the pie. For those businesses that think, 'I am happy to share my profits but I do not want to really share ownership', I would say that, if sharing ownership can improve returns for you and for your employees, it seems to me to be something that really ought to be considered—and those additional benefits I have spoken about are really important benefits for our wider economy.

So, as I have said, there is a really progressive case for employee share ownership. I think it is an issue that requires a lot more discussion, debate and investigation. There are a lot of things we can talk about in this space. Last week Employee Ownership Australia and New Zealand held their annual conference in Melbourne. I was fortunate enough, with my colleague Tony Smith, to attend a breakfast hosted by a number of the larger companies with employee ownership plans. We talked there about some of the issues they faced. There are so many different large businesses that use these plans—not just as a form of remuneration and a way of engaging their most senior executives but as a way of engaging people throughout the business.

The businesses at that breakfast mentioned one possible future reform that I do want to cover, but before I do I wanted to make it clear that Labor are supporting these changes because we believe that they build on our approach to employee ownership. We do want to see protections against tax evasion. We have made that really clear. We do want to see integrity measures, but we think the amendments being made today represent a sensible refinement aimed at boosting innovation while still ensuring that that tax evasion, that misuse of schemes, does not occur. We have been consulting with start-ups—and I pay particular tribute to Ed Husic in that regard. The next step, as raised by a number of businesses, is to address taxation upon cessation of employment. It is an issue I will be continuing to raise.

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