BEYOND THE BOTTOM LINE
Workers’ Butterfly That Aims to Start a Whirlwind
09 January 2004


A leading apostle of employee share ownership sees worker-owned companies as a model for sharing wealth and improving company performance.One of Britain's leading advocates of employee share ownership says that companies owned by the employees serve the wider community better than those that are remotely owned by shareholders. It is a 'natural way of sharing the wealth', said David Erdal, chairman of the Baxi Partnership, a £20 million trust fund which supports small and mediums sized companies that want to transfer ownership to the workforce. Erdal was speaking in London at an event hosted by Caux Initiatives for Business, on 21 November.

'All the evidence is that companies become more productive once the employees become involved,' he said. Companies where managers own shares can expect a 12 per cent increase in productivity. But companies where the entire workforce are the owners see a massive 18 per cent increase, Erdal said, quoting a Harvard economist's study in the UK. The wealth generated benefits the whole community where the employees and their families live, Erdal said. So it is a model of ownership worth backing to the hilt.

Erdal was Chairman of Tullis Russell, the prestigious family paper making business in Markinch, Scotland, from 1985 to 1996. He instigated the leveraged buyout of the company's ownership from the family members to the employees. The hand-over was completed nine years ago, and he now reckons that, even with the slowdown in the world economy since 9/11, each of Tullis Russell's 1,100 employees have seen their share value in the company grow to some £6,000 to £7,000, without having to put their own savings at risk.

Now owned entirely by the employees and trusts for their benefit, Tullis Russell has retained its reputation as one of Europe's leading specialist paper makers, outperforming the industry in difficult times. The company makes premium coated and uncoated printing papers, as well as paper for postage stamp and for decorating ceramics.

Erdal now runs the Baxi Partnership, which has operated since 2001 as a trust-owned investment fund with the purpose of 'fostering the employee ownership of successful businesses'. The £20 million trust emerged after the forced sale of the Baxi central heating boiler company, itself a former employee owned company. And here lies a cautionary tale.

Philip Baxendale inherited the leadership of the Baxi heating company in the 1950s and built it up from 70 employees to 1,200 when he retired in 1983. The company was valued at £50 million but Baxendale and his cousin sold it to an employee trust for a mere £5 million, an extraordinary act of generosity, said Erdal. In the late 1990s the CEO fell for an ill-advised £500m City-inspired acquisition. It led to the company's forced sale to a venture capital group and the employee ownership ended.

Erdal warned that, however motivated the workforce are as owners of their own enterprise, companies still need to be well managed. He emphasised 'the importance of well-motivated managers with a concept more than their own personal bank balance'.

Baxi Partnership, based in St Andrews, Fife, is the Phoenix out of these ashes. In its first three years it has made substantial long-term loans to the all-employee buyouts of five enterprises. The loans, up to a maximum of £2 million, go into setting up company employee trusts, which buy the company and will always hold at least 50 per cent of the shares. This has the virtue of giving stability to the employee-owned company as well as acting as an internal market for employees to trade their shares. Over time each company passes out free shares to each employee, using Chancellor Gordon Brown's tax efficient 'Share Incentive Plan'.

Take, for instance, Loch Fyne Oysters, an hour north of Glasgow, which cultivates oysters and mussels and smokes fish, exporting them to 22 countries. The company also runs a popular seafood shop and restaurant. The major shareholder died suddenly and the company was put up for sale. A large food processing firm put in a bid. But the workforce of 100 wanted to keep the ownership local, to avoid the risk of asset stripping by an outside company or subsequent closure. Baxi invested £2 million in a 15-year loan at seven per cent interest.

Managing Director Andrew Lane says Baxi's investment has benefited the company hugely. 'Without them we would not be in existence,' he says. There had long been an ambition to put the ownership in the hands of the workforce. 'We could only see the staff having to hock their houses and cars to get involved before Baxi came along. Baxi offers a totally different root for well run companies. It is very exciting. There has been a lot of talk of the Third Way. This is it.'

The first company to benefit from a Baxi grant, in April 2002, was Aberdeen-based Woolland and Henry where 24 employees make the dandy rolls that imprint watermarks in paper. Some 45 per cent of production is exported worldwide. The third generation of family owners had no obvious successor, and approached Erdal to help transfer ownership to the employees through a £1 million long-term loan. 'What Baxi encourages is to have a partnership culture,' says Managing Director Fred Bowden. The two employee directors who sit on the board 'play a very valuable role,' he says. 'If people can come up with ideas they are more committed to making it happen.'

Interest on Baxi loans is way below the typical 30 per cent expected by venture capitalists, Erdal pointed out. Out of its original £20 million, Baxi has £9 million still to dispense, and Erdal is already looking for new backers or co-investors. 'People who sell their companies to employee buyouts like this can sleep easy at night, knowing they have not sold out their employees but left them in charge of their own destiny,' he said.

He thought that employee ownership worked best for companies of up to 200 employees, where each person felt really involved. There were examples from much bigger companies. The John Lewis Partnership with 60,000 employees, or 'partners', is one of Britain's most successful retailers. But when employees at United Airlines in the USA acquired 55 per cent of the company's shares, the management and unions failed to develop an inclusive culture and the airline went bust.

Employee owned companies still represent a tiny minority. But Erdal believed that employee share ownership 'could become the general model. It is a much more natural way of organising our lives, of sharing the wealth. We are a butterfly beating its wings, hoping it will turn into a whirlwind. But that will take two or three generations.'


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