3:  Firms do better when workers take control:

Dominic Prince Sunday Times 14.9.03

A quiet revolution is taking place in the world of small business, and it's called worker power. Forget the management buyout. The new buzzword on the block is employee buyout, and it could be coming soon - to a company near you. Hundreds of workers have already taken part in buying the firm they work for, and the numbers are rising.

In the past year the Baxi Partnership, a £20m fund set up to finance employee-led buyouts, has been involved in four such deals and says it has three more in the pipeline, one in retailing, one in healthcare and another in manufacturing.

Financier David Erdal, who formed the Baxi Partnership, says that all three are near to fruition, although he will not disclose what they are. As far as he is concerned, the same rules of financial confidentiality apply to an employee buyout as to the hostile takeover of a FTSE 100 company.

One benefit of staging an employee buyout is that it enables a company's old shareholders to cash in, while allowing employees to become stakeholders. One of the four companies that made an employee buyout this year was Loch Fyne, the shell fish-to-smoked-salmon business that completed the move in April.

Andy Lane, co-founder and managing director of Loch Fyne, says the effects of employee participation have been very positive: "It started immediately, with the customers who knew us saying, `well, at least this is not going to be some brand frenzy financed by some horrible merchant bank that is going to sell out as soon as possible, with no care or consideration for the workers. It's going to be good'."

And so it has been. The retail side of the business, a chain of restaurants, has raised its sales by 12% in a year that has not been notable for its tourism.

"We put that down to the deal we did," says Lane. "It makes people feel good about being shareholders." He also says that one of the first effects was that the company became much more efficient. "It has made us far more competitive because, in the end, you're harnessing 100 minds instead of just four or five."

There are two elected staff members on the board. Their job is to communicate strategy and direction to the other staff. Colin Phillips runs the IT side of the business and Carrie-Ann McCheyne works in the accounts department, but started at Loch Fyne as a waitress.

The John Lewis partnership, the employee-owned group that runs the department stores and Waitrose supermarkets, is perhaps the best example of successful worker participation. Last week, against the trend, it announced a £130m refurbishment and modernisation programme for its Waitrose stores. The group has more than 50,000 partners who are called to vote on aspects of company development such as store openings and investment policy. Big strategic decisions are put to the workers to vote on.

Employee participation can deliver other benefits too. According to a study undertaken by a Co-op subsidiary, Union Bank, companies that are owned by their employees are a better lending risk.

Since it started in 2002 the Baxi Partnership has also financed the employee buyout of UBH International, a Lancashire firm that makes container tanks, and Woolard & Henry, a 125-year-old Aberdeen engineering business.

With each investment, Baxi takes half the equity in the company and the other 50% is retained by the employees. The Baxi shares are held in trust for the benefit of the employees and the shares held by employees can be traded in the normal way.

Learning IT, a fast-growing computer training company, established in 1997, has also had the Baxi treatment. Carole Leslie is responsible for recruitment at the company and is also an employee director. "It's brilliant. We are getting rewards and there is a real sense of ownership. I don't feel like I’m working to line someone else's pockets. We are encouraged to participate in all discussions and decisions - employee issues are at the forefront," she says.

At any one time Erdal says he is talking to "about half a dozen companies" and he is hungry on deals because the more of them he puts together, the more money he has to invest. "We get very good interest rates but there is a requirement from the companies we deal with that. they should reinvest in the Baxi fund so we can fund further buyouts," he says.

Ironically, Erdal formed the Baxi Partnership after the failure of the Baxi gas boiler company, an employee-owned group. When it collapsed* there was a £20m cash pool left and it is now governed by its own act of parliament to invest solely in employee buyouts.

Worker participation clearly something that Erdal believes in. He took control of his family-owned papermaking business, Tullis Russell, in 1985 and within nine years had sold it to the 1,500 employees of the company. What really convinced him that employee ownership was the way forward was the quadrupling of productivity at the company after the employees had taken a stake.

Although he stepped down as chairman in 1996 he remains a non-executive director.

Erdal went back to university to study worker co-operatives and did his thesis on three towns in Italy that had a high proportion of them. He found that there was less crime, that the workers were healthier, and that education and social participation was far better where there was worker participation in the business. (emphasis added)

 *CHS (UK) has been filing information on the Baxi co-operative for some years. A old-established and greatly respected Lancashire firm, the owner decided it should become a co-operative and it prospered greatly for years. However, in November 2000 there was a ‘forced sell-out’ and its manufacturing operations now continue as a conventional company under the name Baxi Fires Division (BDF), supplying five brands including Baxi and Valor.