The Business Benefits of Employee Ownership
How and why a UK manufacturer shifted to employee ownership
Angus Stewart | | 8 min read | Interview
Dave Seaward isn’t just Founder and Engineering Director at 3P innovation; he’s also one of our Cell and Gene Champions. In his submission, Seaward argued that advanced therapy needs a “Ford” – a manufacturer that can shift its therapies’ mode of production from “high-end, slow, and artisanal” to “automatic, standardized, and low cost.” But, as this interview reveals, his own company does dabble in the artisanal – and for a range of customers that includes, and goes beyond, the pharmaceutical industry.
Not long after we published Seaward’s perspective, one of his posts on LinkedIn caught my eye. It was about his company’s recent transition to an employee-ownership model. Was this viable? How did it feed into 3P’s work with pharma companies? I wanted to find out, so I interviewed Seaward to find out more about the strategy and values that informed this transition and some of its knock-on effects.
When did you first learn that companies could be collectively owned by their workers?
I’ve been aware of that since childhood, but in terms of personal interest, I only began paying attention to employee ownership about five years ago.
As one of the founders of 3P innovation, I knew that I would have to figure out an exit strategy at some point. The most common exit strategy is a trade sale – for instance, selling the business. However, I’ve been involved in large organizations in the past and I’ve seen them strip all the value out of smaller businesses after acquisition. It never sat well with me, and it put me off the idea of selling 3P to a major company. My colleagues and I have put a lot of effort into every aspect of the business, including its culture. I didn’t want to see it all poured down the drain.
This conundrum led us to examine alternative exit mechanisms. First, we looked at a management buyout. We received some advice from legal experts on what those options – including employee ownership and other hybrid models – could look like. Then, we went one level down from the owners and had a very open conversation with our management team. We said, “In 10 years’ time, we (the founders) aren't going to be here, so we need to make a decision on our future now.” We found that the managers had the same mindset we did: they didn’t want a sell-off. However, they also didn’t have much of an appetite for a management buyout. You may see where this is going.
Since the earliest stages of the business, 3P has made the choice to issue shares to most of its workers. In 2014 we offered shares to everyone with a year of service, meaning that at the time of our chat with management over 50 percent of our employees owned some of the business. Shared ownership and shared information were already part of our ethos. When we decided to opt for a transition to employee ownership, we found that many of the practices and benefits were already somewhat in place!
What was the plan and how did you communicate it with ground-level employees?
It was all very cloak-and-dagger to begin with. Only the management team and founders knew “the plan”. Before taking discussions to ground-level employees, we recruited an external figure to act on behalf of what would become the trust (see later). This external person had experience of similar situations and could ensure conflicts of interest were avoided. They recommended that we bring in a similar figure to handle communications. The person we brought in was formerly from the John Lewis Partnership, so he knew the relevant administrative ins and outs very well.
Eventually we called one of our regular company-wide “town hall” meetings and, after the usual announcements, we told all the staff that we were selling the business to itself – and that, in fact, we were selling it to them! Then came a great many questions, which we answered with as much information as we could. We had one employee who was very suspicious of the move, but otherwise we received generally very positive feedback.
We had to explain the nuts and bolts of the sale. We would set up a trust for the benefit of all current employees. The founders and all the shareholders then sell the business to the Trust (at a price set by external valuers and agreed with HMRC). This changes nothing in terms of business operations. It means that the business owns itself, but owes its value as debt to all the shareholders – including me. Over time, the business essentially buys itself by paying off the debt. Its value is many times its profits and revenue, so this makes sense. Once the last piece of debt is paid off, the business truly owns itself and the handover from founder to employee ownership is complete.
The reality, of course, is a little more complicated than my description. We had to have various legal teams acting on behalf of the sellers and the trust, and we had to spend a lot of time explaining the deal to the employees. One thing that really helped persuade them was the support that the British government provides to employee-owned businesses. One benefit such companies receive is a £3,600 (around US$4,356) yearly tax dividend for each employee. This is equivalent to around an extra £5,000 added to their salaries per year, so very quickly there were lots of smiling faces in the room.That said, not everyone was equally happy; more recently hired employees who did not yet own shares in the company learned that they wouldn’t immediately see quite as many benefits as their longer-serving colleagues.
Did the switch change workplace culture?
I think our existing culture made the transition a natural one, but some things did change. For example, we now have an employee council. Representatives on the council are voted in by each group of employees and meet once per month. Its members sit on our Trust Board and attend management meetings, but we don’t sit in on their meetings. By and large, I have seen that the council attracts employees who are likely to become managers in the future. It’s a good training ground.
Speculation about future progression aside, the function of the council is to give employees a say in how the business is run and to provide them with transparency on the decisions that managers make. The council is also allocated a budget to spend on benefits for employees. This spending has bought everything from fresh fruit for the cafeteria to picnics and paintball expeditions.
Does the new model make 3P look more appealing from the outside?
Admittedly, the new model can be a thief of time because it takes some explaining. However, I don’t see this as a problem. Most people we speak to – be they potential new hires or customers – are intrigued. Most of our customers are big multinationals and highly risk-averse. From their perspective, dealings with small companies are a risk because small companies can be bought with little or no notice. We’ve done them a favor by effectively nullifying that risk, because a company owned by a large collective of employees is much harder to buy out than a company owned by a handful of founders. The other upside outsiders should see is that employee-owned companies tend to outperform conventional businesses.
Has the change affected your relationships with pharmaceutical companies?
We have many ongoing partnerships with big pharma companies and the working relationships are very positive. They will never tell you something like “we took on and maintained this contract because of your ownership model,” but I do think the model is indirectly responsible. Our ethos and our model are mutually reinforcing and both feed into the quality of our products.
I’ve worked in proximity to the pharmaceutical industry for most of my career and, for me, the longstanding irony with pharma is that the regulatory framework means that its people always ask you to make things better but without changing anything. I jest, of course, but there’s truth in every jest! The reality is that, when pharmaceutical companies come to 3P innovation, they’re already a bit stuck wondering how to manufacture and get regulatory approval for something that is a little out of the ordinary. That’s because we produce the custom automation that enables their production; we create equipment that does not yet exist.
When a clever new medical device makes waves and wants to get to market, the problem is that there’s no machinery to make it. That’s our niche and the problem we address. Not many companies can do what we do because the barrier to entry is so high. By and large, pharma is a wealthy sector willing and able to spend when it needs to, which makes their more refined needs and our care and capabilities an excellent match.
Did any personal philosophies inspire the switchover?
Yes! For me, the big concept is “legacy.” As I said, all the founders didn’t want to risk the company falling into uncaring hands. We could have made more money by selling it to another company, but that was not our priority. I don’t hold any specific political allegiances, but I do have a few important personal beliefs – first, that the wealth of any nation comes from its businesses and services, and second, that shared wealth and egalitarianism are worthwhile ends. I’ve seen a lot of the world and it’s hard not to notice that, in countries with less severe inequality than the UK, people seem much happier. I’m no bohemian and 3P is absolutely a normal business – but, underlying it, we maintain a sense of fair play. That’s the legacy I want.