Best Practice: Case Study on Childbase Ltd.

For our 2012 EU Parliament study on Employee participation in the European Union, we published best practice case studies on both companies and countries. Here you find the full version of our best practice case study on Childbase, a child care provider in the UK, that is implementing an ESOP with as a goal 100% Employee Ownership.

Introduction

Childbase Partnership Limited is a company with the headquarters in Newport Pagnell, UK, which operates a chain of nurseries throughout the United Kingdom, but mainly in the South of England. Originally, Sir Peter Thompson and his son Mike Thompson founded it as a small family company with four staff members and 20 children in 1989. Mike Thompson is still CEO and co-owner. As the company expanded, the owners introduced the “Childbase All Employee Share Plan” in 2001 to enable the employees to obtain company shares in order to increase employee motivation, to secure the succession, to provide additional capital resources for future expansion and, consequently, to achieve a sustainable progress of the company.

Childbase provides care for currently 4,500 pre-school children at the age from one to five years. According to the turnover in 2011, it is the largest private childcare provider in the UK.[i] It has 1,304 employees[ii] and operates 42 nurseries. The employees currently hold approximately 64 per cent of the equity capital individually or through the Employee Benefit Trust (EBT). Childbase is expanding by two to four new nurseries annually, either by opening new entities or by acquisitions (Bibby, 2009a). This expansion is at present being financed from Childbase’s own cash reserve, since the cost of credit on the financial markets has risen due to the European financial downturn (Bibby, 2009a).

In the ranking of best companies to work for in the Sunday Times, Childbase took the 23rd place in the category of mid-sized companies in 2011,[iii] and rose to the 13th place in 2012.[iv]

The case of Childbase

As the company expanded, the Thompson family as core owners, decided to enable the employees to participate in the capital of the company. The underlying idea was, in the first place, to act in line with the corporate culture “we all contribute, we all benefit” and to motivate the employees with the concept of fair participation. This idea, on which also the company image is based, makes the company also more attractive and reliable for its clients. A positive and fair working climate is of special importance in the childcare business. Additionally, the transfer of ownership to employees can solve the problem of succession, which might become relevant in a family company, and protect the company from hostile takeovers (Bibby, 2009a).

Origin of the Childbase Nurseries Employee Participation Scheme

Sir Peter Thompson, the father of the current CEO and co-owner Mike Thompson, already had experience with the ownership transfer to employees, since he was responsible for the privatization of the state-owned National Freight Corporation through an employee buyout.

The first step in the employee financial participation program of Childbase was to establish the Childbase All Employee Share Plan as an approved scheme, under which the employees could obtain one matching share for each share they buy from the Employee Benefit Trust (EBT). Later the number of matching shares was, for a certain period, increased to two in order to further motivate employees to buy shares. The core owners are committed to the goal of hundred percent employee ownership.

In order to provide EBT with its own funds, Childbase diluted its own shares and transferred them to the EBT as free shares under an approved scheme. From the established funds, the EBT first paid out the core owner Sir Peter Thompson. Afterwards, Childbase transferred matching shares to the EBT in relation two to one and occasionally also transferred free shares under the respective approved scheme.

There was a problem of legal nature, with concerns to trust establishment. It was preferable to establish the trust under the Scottish law, since the Scottish law, unlike the English law, allows establishing trusts for more than eighty years, as these trusts have no “shelf life”. Childbase founded three new trusts simultaneously under Scottish law, which was a complex legal process.

Schemes

The main scheme is the Childbase All Employees Share Plan, under which all permanent employees can buy shares and obtain the matching shares from the EBT. The employees can let the interest be paid out in cash or invest it in shares. Within the Childbase All Employees Share Plan, employees also can obtain benefits not directly related to employee ownership. Additionally, Childbase implements an approved save as you earn (SAYE) scheme.

The employees currently already hold the majority of the equity capital, so that they can influence the election of the management. The former core owner and current CEO and co-owner Mike Thompson now needs the approval of the employees to be re-elected. Such control corresponds to his idea of an employee-owned enterprise.

The employees have no direct representatives in the management of the company. However, their representatives, called councilors, are involved in decision-making, e.g. as far as remuneration and working hours are concerned. (McDonald, 2011) One councilor is elected in each of 42 nurseries to the Childbase Partnership Council. The tasks of the councilors are to promote employee ownership at company and nursery level through regular meetings with the staff, to decide on staff bonuses, reduction of hours strategy, to propose new policies, to represent staff views and to improve co-operation between the management and the staff. Additionally, the communication between the staff and the top management takes place at the regular “listening lunches”, specially organized in order to enable employees to directly address the top management.

The Employee Benefit Trust and its role

The core mechanism of the Childbase All Employees Share Plan is the EBT. On the one hand, the trust sells shares to employees and provides them with matching shares under the approved scheme. On the other hand, both employees and external investors are allowed to sell their shares only to the EBT, so that the EBT also serves as the only market place for Childbase shares. Employees are obliged to sell their shares to the EBT after leaving the company. Due to this mechanism, a pool of shares for the future one hundred percent employee ownership is created within the EBT.

Shares can be bought or sold back on two annual dealing days held in May and November each year under the Childbase All Employees Share Plan.

The company accountant is setting the share value before the trade takes place. The Child Base shares were traded at GBP 0.40 in 2000 and at GBP 1.14 in April 2011 (Employee Ownership Association, 2009). Each individual shareholder is limited to 2.5 per cent (Bibby, 2009a) to prevent individuals from gaining substantial control over the company.

The sale of the company is only possible with the approval of the Independent Board, holding the so-called Golden Share that grants the right to veto any decision concerning the company existence. The decision must be unanimous.

Implications

The share ownership plan has led to an increase of the employee share in the equity capital from zero to 64 per cent in 12 years. If the plan is implemented on the same lines in the future, the goal of one hundred per cent employee ownership could be achieved in the next ten years. Consequently, the succession in the company and the protection against hostile takeovers are secured. Profit-sharing schemes, social programs and participation in decision making flank the plan. The acceptance of the employee share ownership plan by the staff and the management is high and has already led to a substantial change of attitude.

According to the survey “Best Companies”, 80 per cent of Childbase employees like to work for the company, 85 per cent are proud of it and 71 per cent believe that they are treated fairly and that the management respects their needs. As a result, Childbase, unlike many mid-sized companies, has low personnel fluctuation and has the advantage of recruiting personnel for higher management positions from the own company.

The management also supports employee ownership and feels more responsibility towards the employees than in most companies. The CEO Mike Thompson conducted an experiment within the Partnership Council offering the managers high financial profits for the case the company is sold to a Bahamas trust. Even provided that the sale should be under the condition of employment protection, nobody voted for the sale.

According to CEO Mike Thompson, the results of the introduction of the employee ownership plan are:

  • A Times 100 company—still the only one in the sector to achieve that status;
  • Office for Standards in Education, Children’s Service Skills (OFSTED) results unparalleled for the sector—50 per cent for Childbase at a sector average of 12 per cent;
  • Profits up by over 200 per cent in six years;
  • Share take up amongst employees growing;
  • Dividend yields growing;
  • Annual bonuses for staff worth of GBP 650,000, i.e., EUR 775,000 per year.

Best practice and transferability

Success of the concept

Childbase qualifies as a best practice example by its structured approach towards employee participation, at the same time maintaining high performance, and by its thoughtful business approach that makes Childbase one of the leading companies in its industry. Further, Childbase managers are highly efficient in motivating the employees.

In the Sunday Times ranking of best companies to work for, Childbase moved to the 13th place in 2012. Commenting the 23rd place in 2011, Helen Bass, Child Base HR Director, said: “We take great pride in the fact that Childbase directors and employees are partners; it is the foundation on which we have built a successful, sustainable and ethical business” (Childbase, 2011).

Childbase is also active in spreading best practice throughout the UK. It is a member of the Employee Ownership Association. Recently, Childbase sponsored the report “All of Our Business: Why Britain needs more private sector employee ownership” by the Academic Director of the Centre of Mutual and Employee Owned Business at the Oxford University William Davies. (Davies, 2012) The report was launched at the House of Commons in April 2012 and enjoyed cross-party support. The Government also supported the report and promised to let political measures follow.

Transferability

The transferability of the specific scheme implemented by Childbase is limited, at least to the UK and Ireland, since the legal form of trust is possible only under common law. The specific tax incentives for the SIP scheme enabling Childbase to provide the trust with own funds and facilitating participation for employees are also limited to the UK.

Conclusions

The case of Childbase qualifies as best practice, while the legal structure is specific for the UK and in this particular way can be adopted only in common law countries.

The case is of special interest for mid-sized family enterprises throughout the EU, since it shows that succession problem can be solved and, at the same time, the productivity in- creased by introducing an employee ownership plan. This experience is of special importance to family enterprises in other EU Member States where employee ownership is considered to be a barrier for economic growth of the enterprise.

Childbase, being an enterprise where employees are majority owners, also shows that employee ownership can have a significant positive effect on performance and growth, also in the financial crisis. Among others, the case of Childbase has convinced the House of Commons and the UK Government to provide more political and legal support to employee ownership plans in order to strengthen the national economy and to overcome the financial crisis.


The full publication “Employee Financial Participation in Companies’ Proceeds” is available for download via our Intercentar website:  http://www.intercentar.de/fileadmin/files/Pro-EFP/IPOL-EMPL_ET%282012%29475098_EN.pdf

We are happy to hear your thoughts on our case study, please leave your comments below.

[i] According to the data of the Employee Ownership Association, the turnover of Child Base was GBP 25 million, i.e., EUR 29.8 million in 2011.

[ii] Bibby, A., 2009b. Schooled in a duty to employees

[iv] Ibid.

Best Companies, 2012. Published Lists. 2012. Available at: http://www.bestcompanies.co.uk/list_intro.aspx [Accessed February 18, 2012].

Bibby, A., 2009a. From colleagues to owners—Transferring ownership to employees. Paper. April 2009. London: Employee Ownership Association. Available at: http://www.employeeownership.co.uk/publications/from-colleagues-to-owners [Accessed February 2, 2012].

Bibby, A., 2009b. Schooled in a duty to employees. Financial Times UK , 22 April 2009. Available at: http://www.ft.com/intl/cms/s/0/e39e1ea8-2ed5-11de-b7d3-00144feabdc0.html#axzz1mMUtW2Yi [Accessed February 2, 2012].

Davies, W., 2012. All of Our Business—Why Britain needs more private sector employee ownership.  16 January 2012, London: Employee Ownership Association. Available at: http://www.employeeownership.co.uk/news/news-about-eo/new-reportexaming-the-case-for-expanding-the-eo-business-sector [Accessed February 2, 2012].

Employee Ownership Association, 2009. Ownership Matters—Child Base Ltd.  2 November

2009, London. Available at: http://ownershipmatters.co.uk/wiki/index.php5?title=Child_Base_Ltd [Accessed February 18, 2012].

McDonald, C., Mutuals provide sunshine amid public sector cuts.  The Guardian, 16 November 2011. Available at: http://www.guardian.co.uk/public-leadersnetwork/blog/2011/nov/16/mutuals-provide-sunshine-amid-cuts/print [Accessed February 12, 2012].

The full publication “Employee Financial Participation in Companies’ Proceeds” is available for download via our Intercentar website:  http://www.intercentar.de/fileadmin/files/Pro-EFP/IPOL-EMPL_ET%282012%29475098_EN.pdf

We are happy to hear your thoughts on our case study, you can leave your comments below.

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About Intercentar

Intercentar is devoted to dealing and promoting the idea of Employee Financial Participation for a more just society.

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