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Select Committee on the Future of Work and Workers
21/02/2018

CLEMENTS, Mr Andrew Philip James, Deputy Chairman, Employee Ownership Australia

McFEE, Ms Gillian, Chair Public Service Mutuals Task Force, Business Council of Co-operatives and Mutuals

MORRIS, Mr Benjamin, Chairman, Employee Ownership Australia

MORRISON, Ms Melina, Chief Executive Officer, Business Council of Co-operatives and Mutuals

[11:47]

CHAIR: Welcome. I understand that information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. If each organisation would like to make a short opening statement, we will then start asking some questions.

Mr Morris : Thank you very much for hearing from us today. I'll make a very brief opening statement. I'm the chair of Employee Ownership Australia, and Andrew Clements is the deputy chair of Employee Ownership Australia and importantly is also the chair of our experts panel, which brings together the best and brightest thinkers in the employee ownership space. Just to provide some context, EOA is a member-based not-for-profit organisation. It's non-partisan. We enjoy broad support from regulators and parliamentarians and we're certainly the go-to body in employee ownership in Australia.

For some broader context, you've probably heard the word 'gig' a lot as part of this review. The honorary role of chair is part of my portfolio of work, but my full-time gig is as the cohead of HR at Mirvac, the listed property company, where obviously the future of work and, in particular for us, as an office owner, the future of workspace is obviously an important topic. So, while I'm here in my capacity as chair of EOA, I'm certainly drawing on some of that experience in my full-time gig.

I'd like to highlight a couple of points that were made already in our submission to perhaps provide some context for this discussion today. The first one is that employee ownership makes a difference, and we included some data in our submission partly drawn from some local studies. For example, we've recently completed a study that creates an employee ownership index. It's fascinating to see that the results of that index are not only superior financial performance for those companies that have broad-based employee ownership but also outperformance on a range of other measures, including learning, sustainability, health and safety.

I'd also like to say that, from international research, we know that employee ownership creates resilience of companies in the case of downturn, improves productivity and improves employment opportunity. We see that companies with broad-based employee ownership have demonstrably greater job creation. We also see from international research that those companies with broad-based employee ownership have higher wages and higher retirement savings on average. Those data points are included in our submission.

In terms of the broader structural shift in the economy that no doubt you've read a lot about and heard a lot about through this inquiry, I'd highlight a couple of things. One is that, in terms of the shift that's required in respect of innovation and technology, it's widely known and widely seen that employee ownership plays a large role in many of those start-ups. It certainly, therefore, fuels development, growth and innovation. One of the things that we've touched on in our submission is the way that improvements can be made to facilitate more employee ownership in that space.

Having said that, I think the point was well made in the Productivity Commission's submission that the pace of change isn't so rapid that we should forget about our existing employers and employees. While there are certainly a lot of organisations that grapple with the digitisation and introduction of robotics into their own workforces, you have mature organisations whose organisations and employees need to be able to work through this structural change as well.

I'm reminded of an example of a very large industrial organisation that got to that point where the organisation was going to fall over unless it made significant structural changes within the organisation. I'm reminded of a conversation I had with their then head of HR, who said they think the biggest thing that made a difference to them was the fact that all their employees were owners of the company. The employees had been on that journey with them. They had a big board showing the share price, so, when it came to that discussion about needing structural change, the employees were already there and they already knew that certain changes needed to be made. One of the submissions I would make is that we should be looking ahead at what the future of work does to future employees, but we shouldn't lose sight of the fact that there are many things that we can continue to do in respect of our existing workforce.

The final thing I'd say—and it echoes the previous submissions made—is that with the uptake of the gig economy, certainly in respect of employee ownership, there's a lot of regulation that currently confines that to employees, and we would say that that needs to be broadened in order to facilitate ownership by other parties who are providing services to organisations.

CHAIR: Could you just elaborate a little bit on that point.

Mr Morris : Yes, I might actually hand over to Andrew. Do you want to touch on that point, Andrew? Well, my point, in essence, is that, if we take the provision of share ownership to an employee at the moment, in essence, unless the person providing that service is an employee of that organisation, it's almost impossible to treat that person the same as someone that is a permanent employee of your organisation. In our organisation, as an example, in terms of my full-time gig, we have about 10 per cent of our workforce who are providing services other than through a traditional employment relationship. So when we go out, for example, to our employees to invite them to participate in our annual offer of shares—we invite all of our permanent employees to participate in our share ownership program—there is a portion of our workforce that I would say is going to continue to grow but simply has no access to that. Therefore, one of the challenges for us as a corporate is then going to be: how do we create the same alignment around culture and purpose? How do we create that sense of contribution to a greater cause when you have 90 per cent, or potentially less, of your organisation that's actually able to participate in these things?

CHAIR: What's preventing you from making that open to them?

Mr Morris : It's largely a regulation issue—that is, the current regulations confine access to employees.

Mr Clements : Perhaps I can help in relation to that issue. We have two broad regulatory oversights of employee ownership, which are the tax rules and the corporate regulation of offering. The threshold tests, in terms of employment contractors, are different between the two. Indeed, one of the observations that I'd be making today is that one of the key aspects of the success of employee ownership is a coordination between those two regimes in a much more effective way. Senator, the example that you've gone to is a really good example, where there isn't the same consistency of treatment of participants in employee ownership for both the ASIC rules and the tax rules.

CHAIR: Thanks.

Mr Clements : If I could perhaps just take from Ben more generally, my background is that I'm a partner at King & Wood Mallesons and I've worked in the area of employee ownership for over 30 years. What I want to do a little today is give a sense of the existing regulatory regime and what its successes are and where its failures are or where we could do better. We've had some successes. We've had a start-up regime, which is a good step forward. Firstly, if you were giving a report card on employee ownership in a non-listed environment, it would be fair to say that it's probably not a very good report card, in that employee ownership in unlisted entities is, in my view, too complicated and too expensive for many people to access. Secondly, because of the lack of coordination that exists between the corporate regulatory rules and the tax rules, there are some proposals that haven't got the wind in the sails that you might have expected. The best or worst example of that is in relation to the start-up concession. The start-up concession provides the ability for either of two sorts of securities: an option or a share. The regime that deals with shares is entirely inconsistent with the preconditions for ASIC relief. That is, the maximum discount you can have for tax purposes is 15 per cent; the minimum discount you can have for ASIC purposes is 100 per cent. So, ostensibly, you can't use the regime and rely on the ASIC relief.

So I guess that takes me to this: if there are only two things that come through from my short presentation today it is that we need to aim for much better simplicity in the arrangements that we can provide to employees, and that can largely, in my view, be achieved through coordination—coordination of both the corporate regulation and the tax regulation—and an overview to make sure that the input or the requirements that go through the indicia for the operation of employee share schemes are directed towards a good policy outcome rather than having some historical bed. The observation I'd make in relation to that is twofold. We're not seeking or wouldn't be suggesting wholesale changes to it. There are things that could be changed, and the other part to this is that it's more about making that what we've got can work more effectively rather than actually suggesting things that have a large revenue impact.

Perhaps I could take you to a couple of examples where some relatively simple changes could make a big difference. The first is the one to which I've already alluded, which is the lack of coordination around the start-up concession on shares. The second, which the senator took us to, is the differential treatment of employees across the tax rules and the ASIC rules. The third is really a little technical, but it's important. In an unlisted environment there's no market for securities. There's no the listings, so there's no ready market for the securities. So, if you're an employee or a contractor and you take equity, we need to provide an arrangement where you can sell it, where you can deal with your security at an appropriate value. There are employee share scheme rules or employee buyback rules that are aimed at that. In the 30 years that I've been in practice they've never been used because there's a tax uncertainty about how they operate. We could deal with that tax uncertainty, use those buyback rules and remove a great deal of complexity from rolling out employee equity. So I guess they, to me, are simple examples of where, through some relatively simple changes, we can get a much more coordinated and simple outcome.

I will say one thing just in closing. I've talked a lot about the dealing. One of the large areas where we see this really being the greatest problem is in baby boomer succession. Looking at those businesses that are privately owned where they're not going to go to family owners, the obvious owners are the next generation of employees. The complexity that we have in rolling that out is beyond the means of most enterprises. I think that probably is a good segue to Ms Morrison.

Ms Morrison : Thank you very much, Senators, for this opportunity to contribute to a very important inquiry. We've made a long-form submission. We do have some copies of the submission, and you have an executive summary with you. Like our colleagues here at Employee Ownership Australia, we are a member-owned, not-for-profit, peak body representing the member-owned business sector, which comprises some 2,000 cooperative and mutually owned organisations that serve eight in 10 Australians—a very important contributor to the Australian economy.

Like our colleagues at Employee Ownership Australia, we are very concerned and have made key points in our submission about the need to diversify ownership through different business models in the Australian economy in order to ensure that the risks and the rewards of our economy—particularly as it confronts the technological era, which is enabling and also challenging for our economy—occur. We do enjoy, as the go-to body for businesses that are cooperatively owned, a growing awareness in the parliament. We're very grateful for the 2016 Senate economic references committee inquiry into cooperatives and mutuals, which found that there are many challenges and barriers—despite the contributions of these businesses—to their capacity to grow, innovate and compete and provide some of the benefits which I will quickly outline to you that we believe are going to provide the bedrock for a more equitable economy as we go forward with these challenges of the technological era.

The benefits of technological change in terms of increasing economic productivity are significant. However, the policy and ethical challenge that this inquiry is examining is how to harness the full economic, social and environmental benefits of technology, and that is our primary interest in this inquiry too—that is, how do we provide fair, sustainable and dignified workplaces to achieve a more prosperous and inclusive economy where all Australians share the benefits of technological change? And I very much include the workforce amongst those stakeholders.

Our core argument in the submission is that one way to respond to these changes is to build a stronger cooperative and mutual sector in Australia, because this will add diversity and resilience to our economy and to our workplaces. There are three ways, that I will just quickly outline, that cooperatives and mutuals do this. The first is in preserving existing Australian-owned jobs. My colleague has just alluded to the problem with business succession. Small businesses are the backbone of the economy and provide the most jobs. The loss of these important jobs through company wind-ups or buyouts to non-local firms is a great concern, and my colleagues at Employee Ownership Australia do have a raft of solutions that are going to make it possible for small-business owners to explore employee buyouts, including worker cooperatives, which is the full ownership of the business with the employees as a succession plan. There are also many examples—and we give them in our submission—where cooperatives have helped a displaced workforce find new jobs following the pullout of a major employer in a region, such as happened with BHP Billiton in Newcastle in the nineties. The Hunter region is known as a manufacturing hub which delivers contracts, including large defence contracts, all over the world because of the activity of a major cooperative formed out of the economic transition that happened in the nineties. That cooperative is called HunterNet.

The second way that we look at how cooperatives and mutuals will help the economy as it transitions going forward is ensuring that the rewards—as well as the risks—of jobs that are created in the technologically enabled 'Uber-ised' economy are going to be shared equitably. You might have heard today's announcement that Uber has a challenger in the ridesharing business called Ola. That was in today's news. But all of the drivers interviewed expected an eventual return to the model of rent extraction pioneered by Uber, which has the owners of the technology, venture capital in this case, taking up to 30 per cent of the fare. I don't know if you find it disquieting when you pay a $20 fare to Uber and you think about what proportion of that is actually going to the driver. We say that the issue is not scale or competition; the issue is who owns the technology. Platform cooperatives, which we can outline a bit further, are a growing model of challenging the idea that the sharing economy has to use a redundant model of rent seeking.

Lastly, but most importantly, we argue that cooperatives and mutuals are required to help grow a new empowered workforce for the burgeoning social care needs of Australians. Last week's news in South Australia that the South Australian government will spearhead the first employee-led mutual to deliver disability services under the NDIS as an alternative to full privatisation is an example of the idea catching on that the best people to run and own social care businesses are the ones delivering the service. My colleague Gillian McFee can elaborate on the delivery of jobs in the South Australian economy. I will just note that it had the bipartisan support of the federal government. That's a $47 million employee-led mutual that will secure at least 50 social care businesses.

Driven largely by the ageing of the population and the new social care programs like NDIS, we are faced with huge productivity challenges in the areas of the services sector. It's vitally important to delivering consumer outcomes and to the ideas of choice and control to be investigating those models of business that place user directed care at the very DNA centre of the business model.

As I alluded to before and as Doctor Jim Stanford outlined, the emergence of a contingent workforce in the gig economy is disrupting traditional employment patterns, and they are often achieved at the expense of lowly-paid contractors. This can result in a gradual erosion of workers' rights. If this continues, we believe that the benefits of technological advancement will not be shared equitably. I ask you to consider for a moment what that might mean—casualisation—in terms of retirement savings going forward if we start to deplete the very important pool of superannuation savings that are required to ensure that we have fair, equitable and safe retirements in the future.

Importantly, in the context of managing the impact of technological change, cooperatives and mutuals are well placed to deal with externalities or spillover effects that lead to market distortions that result in workforce participants, particularly where they disadvantage small firms and workers. They are less empowered participants in the economy. These business models can provide a platform, a new way of encouraging entrepreneurship and innovation in the economy, to ensure that the rewards of technologically enabled economies can be shared with all of the participants.

The recommendations in our submission include actions for governments and industry. They are: to summarise, to promote and to raise awareness of member owned business models; to simplify the legal and policy settings; to increase the resources available to support the development of member owned enterprises in priority areas, particularly in human services, as I have alluded to; and to overcome the barriers faced by member owned enterprises in accessing capital.

I would just like to end with a good news story. Yesterday we heard that NAB, one of the major banks, is shedding somewhere around 4,000 jobs because of technological impacts. Those impacts are creating new jobs in the bank. As Doctor Stanford said, there is the flipside of technological change, which allows new jobs to arise in the economy. But overall there is job-shedding. In the township of Moe in the Latrobe Valley, which is an area very challenged by economic transition, with the closing down of the coal industry in that region, Bank Australia, which is a mutual bank owned by 140,000 Australians, has recently spent $3 million upgrading its call centre. It has a third of its workforce employed in the Latrobe Valley. It's a locally owned business and, because the business model is not investor owned, it can concentrate on delivering benefit to members and looking at what the whole picture is like in terms of the stakeholders of the business, which of course includes local procurement and local employment. I think that's a great example to end on in looking at where we're seeing workforce acquisition and a commitment to the workforce in the Australian economy going forward by cooperative and mutual businesses. Thank you.

Ms McFee : I have a brief comment. My field of expertise is in the areas of health and social care, particularly aged care and disability services. I think you would all be well aware, with the ageing of the population and the new National Disability Insurance Scheme, that they are areas which are going to demand, increasingly, more jobs in the future and sectors which will be impacted positively, one would hope, by technology and new business models.

In 2014 Melina invited me to chair the Public Service Mutuals Task Force. That was an attempt to strengthen our advocacy and increase awareness about the role of cooperatives and mutuals, particularly in the health and human services sector. I had worked for many years in both government and non-government organisations, in health, housing and human services areas like disability and I had observed, particularly in recent years, the lack of readiness of those organisations in responding to these new market based areas. The mutuals task force focused on some of the work that was happening at the time in the UK, where the UK government explored the development of a particular type of mutual, which was an employee-led mutual.

As per Melina's earlier comment, we have, very largely as a result of the advocacy of the BCCM, succeeded in working successfully with the federal government and the South Australian government to see Australia's first employee-led mutual form to deliver disability services. We have also supported a number of start-up, family-governed models in disability services, and also in cooperative housing and home care. What we observe in each of these cases is that, as they get traction, they really are becoming very popular, and more organisations are wanting to learn more about the model.

Our submission outlines the barriers to forming these cooperatives and mutuals in health and human services. In some of these sectors, aged care and disability services in particular, where they're very heavily regulated industries, there is quite a conservatism and a resistance to change, and we believe that further support for the growth of cooperatives and mutuals in these areas will help to remove some of these barriers and create a better environment for people receiving those services.

CHAIR: One quick question from me, because I don't think anyone has mentioned this: is there any data on the overall growth of coops, mutuals and employee-owned businesses?

Ms Morrison : There is a plethora of data available, and some of it is in our submission, on the growth of cooperatives and mutuals, not only nationally but globally. Certainly, there's also a lot of data—and I'm sure my colleagues have some—on the higher success rate when you compare either employee-owned, fully-owned or employee-driven businesses to other start-ups or transitioning businesses.

Mr Morris : Some of the stats around the increased success of those employee-owned organisations are set out on page 3 of our submission. In respect of data around the growth in employee-owned companies in the private space, there's certainly less available on that. But, if this is perhaps a proxy for that, I can tell you, from looking at our own website where we do track which pages people are coming to, there is certainly a huge increase in the number of hits to our private company share ownership site.

CHAIR: Thanks. Anyone else like to go next?

Senator PATRICK: Ms Morrison, the Senate inquiry into cooperatives and mutuals obviously gave you a bit of a kick-off. I congratulate Senator McKenzie and former Senator Xenophon on their efforts there, and the government on following through on that. It seems to me, from the evidence we heard this morning from a range of people about the way in which some companies are not looking after their workforce, that the coops and mutuals framework just deals with that inherently. I'm not sure whether you've read some of those submissions, but in needing to look through them I thought there was opportunity for you there. Perhaps there could be some recommendations back to the committee on what else government could do to address some of the concerns that have been raised in evidence. In some senses it may be a question on notice. I think there's an opportunity there, but we'd need to understand the way in which your sorts of organisations would need help to address some of those problems.

Ms Morrison : I'll leave my colleagues to talk more about the compelling evidence that wherever workers have an ownership stake in an enterprise you have better jobs, higher quality services and much greater productivity. There's very compelling evidence of what employee ownership has created in that space where there are employee-shared-ownership plans.

Our submission contains a number of recommendations to this inquiry to make sure that the awareness that was kicked off by the Senate inquiry, which was tremendously important in bringing the contribution of cooperatives and mutuals front and centre, is continued through government programs. There is a lot of low-hanging fruit here. For a start, all government programs that currently encourage or enable business formation should be required, because cooperatives and mutuals are another corporate form, to include information on forming as a cooperative or mutual if that is indeed the way that people want to form their business. Currently, even at just the basic level of something like the New Enterprise Incentive Scheme, young entrepreneurs entering the workforce who want to start businesses cannot get access to the cooperative model, if that would in fact be a more effective way of them doing business.

We've also got some recommendations, which I might ask Gillian to speak about, in terms of the human services area.

Senator PATRICK: What about grants? Are you still prohibited from grants if you're a coop?

Ms Morrison : What often happens when there is a government co-investment strategy or grant program—and I'll give you two examples; one is the Tourism Partnerships program and the other is the Indigenous Advancement Strategy—more by regulatory blindness than by deliberate action, cooperatives and mutuals can be ruled out of applying for those grants because a cooperative can be formed under the state regulated Co-operatives National Law rather than under the Corporations Act. So a simple stroke of the pen that says, 'Only companies or corporate entities can apply for this grant,' can rule out cooperatives. This is an ongoing problem, and one way we sought redress to this was to include in the regulatory impact statement the need to check whether a current grant scheme was ruling out cooperatives.

Senator IAN MACDONALD: I don't quite follow that. Why are you saying that cooperatives are not eligible for Commonwealth government grants—unless they don't fit the criteria?

Ms Morrison : In the case of something like the Indigenous Advancement Strategy, the very idea behind that scheme is to ensure that the entities applying for funding under the scheme have the rigorous governance and corporate form to ensure that moneys will be well governed in the organisation. There is substantive research that cooperatives that are still very well used and are prevalent in the Indigenous sector often deliver better business frameworks for delivering services to Indigenous communities. Yet, under that scheme, unless you are an Indigenous corporation under the Indigenous corporations act, or a corporation under the Corporations Act, you can't apply for funding—

Senator IAN MACDONALD: Because there's a suggestion that it's not properly audited.

Ms Morrison : I think that, by default, there's a suggestion that cooperatives are not on par. They don't have parity with—

Senator IAN MACDONALD: Well, is that right or wrong? Do they have the same sort of accountability and audit requirements?

Ms Morrison : Absolutely. They are identical to a corporation in all respects, including—

Senator IAN MACDONALD: But you're saying they're state legislated?

Ms Morrison : Some of them are. Many Indigenous cooperatives that were set up under the state based regime, which was the primary way cooperatives were set up prior to the Corporations Act going under federal jurisdiction, are still regulated by state registries—often out of the Office of Fair Trading. They have the same rigour and the boards have the same governance requirements of any corporate board. Yet, under the Indigenous Advancement Strategy—and, again, I don't believe that it was a deliberate strategy to rule out cooperatives from being able to apply, but it's more a regulatory blindness—

Senator IAN MACDONALD: Have you made submissions about that?

Ms Morrison : We have made submissions. They were made during the Senate inquiry.

Senator IAN MACDONALD: No, I mean submissions to the minister.

Ms Morrison : We have made submissions to Minister Scullion.

Senator IAN MACDONALD: And what response have you got?

Ms Morrison : There is one path of redress at the moment; that is, a cooperative that wants to stay a cooperative and apply for the Indigenous Advancement Strategy can apply for an exemption. We're arguing with the minister that that actually is a pathway that dissuades the cooperative from keeping its—

Senator IAN MACDONALD: But if the underlying reason for that is the state legislated cooperatives don't have the same accountability—and you're saying it is—that should be an easy argument to make to the minister.

Ms Morrison : We have made that argument. There is an ongoing cultural idea that cooperatives are not as commercially disciplined as other forms of entity. That's a systemic problem that arises out of a lack of education and training about the cooperative and mutual models. It's still possible, and does occur every day in Australia, that you will complete a degree in accounting, commerce or law and not have spent one hour on the cooperative model of business. Some of the largest corporate entities in the world—I'll give you some examples. There is Rabobank. John Lewis, in the UK, is an employee-owned business. There is Migros, in Switzerland. CBH Group is the second-largest privately owned enterprise in the country and now a grain exporter. It's a cooperative—

Senator IAN MACDONALD: But if the rules and regulations on accountability are the same, it would seem, to me, to be an artificial distinction.

Ms Morrison : We have made that argument.

Senator IAN MACDONALD: Who talked about Bank Australia? Are they established under state or federal legislation?

Ms Morrison : They are under federal legislation. They are regulated just like any other bank. There are 83 or so credit unions, building societies and mutual banks in Australia, and Bank Australia is one of those. They are APRA regulated. Cooperatives and mutuals have all of the same corporate responsibilities and regulatory oversights.

Senator IAN MACDONALD: But you're saying they're not seen to be if they're state legislated, as far as grants are concerned.

Ms Morrison : They're falling between the cracks.

Senator IAN MACDONALD: Yes. Mr Morris or Mr Clements, I thought you said that there was some tax incentive for employee shares. Did one of you say that?

Mr Clements : The start-up regime for new start-up entities has a tax concession that was introduced in 2015. It has the very sensible outcome that employees are not assessed until they actually deal with the underlying security. This is really important in a start-up regime, because you may have been offered the security and you may hold it, you may cease employment, but the event that generates value is at some point down the road. It ensures that you are not taxed until the taxing point. That is a dilemma that exists across the field. The debate around being taxed at what we call cessation of employment is a very difficult question for employee ownership. It makes us uncompetitive globally, and there are some inequity issues that are generated through taxation at cessation of employment. It is a topic we have made quite significant submissions on over the years.

The other area in the context of not so much tax incentives but particular regimes that provide particular outcomes is the broad-based $1,000 exemption schemes. We would be suggesting that that threshold of $1,000, which was introduced in 1992, should be increased, because it is the basis for really providing broad-based share ownership. Similarly, arrangements that allow people to invest in the company, be they share save arrangements or salary sacrifice arrangements, are not facilitated in Australia in the same way that they are in the UK, and they have been remarkably successful. My observation then is: what is the specific regime—the start-up regime? The other observations I made are particular applications of the tax rules, which I think could benefit from being updated.

CHAIR: Thank you for your helpful information today covering a couple of issues we haven't explored with others too much.