The story of Loch Fyne Oysters by David Erdal: lessons from a case study in employee-ownership

Introduction

This is a story in two parts. The first part is the biography of a company from its uncertain, precarious beginnings, through to the adventures of securing reliable revenue sources and stabilising its operations, to the eventual success of becoming a nationally recognised brand with international franchises. The second part brings a twist whose rarity gives this story its particular value and interest: when sold, the company becomes employee-owned.

This text will focus on what this second part of the book by David Erdal teaches us on how employee-ownership came about, what circumstances and arrangements made it possible and how it finally ended with the company reverting to private ownership. David Erdal takes the opportunity to invite us think about and challenge normative understandings, structures and practices of business ownership, e.g. how is the trading of ownership rights justified? is it rational or moral that ownership rights to profits, information and votes (power) are held exclusively by the people/entities risking their capital in a business?; can employee claims to ownership rights ever be justified?

This is not to say, however, that the first part is not a remarkable story, lovingly told, with a number of important lessons. To do it some justice and to set the scene for the longer discussion of the second part of the book, I will briefly present below what were for me the salient aspects of the first part of the book.

The protagonists

The story of a company is very much the story of its people. The personal and social universes of the main characters are portrayed in rich and detailed relief. The main characters of the first part are the remarkable and contrasting founders of Loch Fyne Oysters, John Noble and Andy Lane. They are a seemingly very unlikely pair in terms of background, upbringing, personality, temperament and resources.

Andy Lane is a philosophical, meditative, highly principled, introvert with a deeply felt connection to nature, a childhood commitment to protecting living things, and the descendant of a long line of farm labourers near Nottingham in England. John Noble was a charming, larger-than-life, intriguing and complex character whose many peculiarities and idiosyncracies — he is said to have thought that ‘a meal without wine was like a day without sunshine’ and to have had a personal assistant who spent much of her time retrieving his briefcase after it had been forgotten on top of his car before driving off in it — only ever added to his intense personal charisma and charm. John Noble was the Laird of Ardkinglas in Scotland and his early life trajectory fully conformed to the institutional journey of the UK aristocracy: boarder in a public school (Eton), then Oxbridge (Oxford), then a foray in merchant banking (Warburg — founded by a family relative).

Yet, Lane and Noble were similar in that they both broke with the trajectories predicted by their family backgrounds. Andy Lane was the first of his family to go to university where he read marine biology. John Noble dropped out from both Oxford and Warburg. They were also similar in their need to establish a reliable income stream; Andy Lane to escape the dangerous, draughty, rickety caravan that his alienating, deeply unsatisfying — spiritually and financially — employment at an environmentally destructive salmon farm afforded him, and John Noble to pay off the debts his estate was saddled with and to provide a living for the people who had been working there for generations.

Andy Lane’s principled stance in how the business was run: values before profits

Andy Lane and John Noble created Loch Fyne Oysters (LFO) which in its early days involved an oyster farming operation, a small restaurant, and a Scottish seafood sourcing and retailing operation. Later on, a chain of seafood restaurants was created that was separate from the farming and sourcing operations. The restaurant chain never came into employee ownership. The success of LFO reached the high point of a number of international franchises. It would later in the future, having put Loch Fyne on the UK’s gastronomic map, spur a whole eco-system of food-related businesses at Loch Fyne including cheese makers and beer brewers.

Apart from the trials and tribulations of a new start-up, the struggles with the weather, equipment, the authorities, luck, and uncooperative railway station employees, the story is also made remarkable by Andy Lane’s insistence in living his values and ideals.

The footfall of the small shop near the lake where they initially sold their products benefited from a cigarette-dispensing machine. People who stopped to re-stock on cigarettes often ended up buying the company’s seafood. When Andy Lane became convinced that smoking was bad for human health, he refused to profit from tobacco sales and threw out the cigarette dispensing machine along with the direct revenue and the footfall it provided. How ironic then that a few years later, when Andy Lane resigned his role as managing director, the person appointed was a former tobacco industry man.

With hindsight, it is easy to suggest that that the decision to recruit a business leader to replace Andy Lane primarily on the basis of experience and skills rather than values may have contributed to the eventual demise of employee ownership. There is a debate to be had here as to whether employee-ownership merely improves conventional, business metrics such as revenue growth, labour productivity, product quality, operational efficiency etc. and therefore results in a ‘better’ business within a narrow, ‘economistic’ frame of reference or whether employee-ownership creates a ‘different’ business that changes the very definitions of the purpose of a business and of its performance to include social, environmental and humanistic concerns. To put it differently, are business ownership models and business management models independent, ‘orthogonal’ variables or are they closely inter-dependent? My tentative answer is that they are interdependent and that the eventual distancing of Andy Lane and John Noble from the management of the firm — in favour of conventionally ‘experienced’ and ‘trained’, professional, ‘career’-focussed managers— marked a shift from a values-based model of running a business to a ‘technocratic’ one which in reality is a ‘rationalised’ fig leaf that prioritises revenue growth for the ultimate purpose of the personal enrichment of the managers.

A second example of Lane’s principled stance is this. Loch Fyne Oysters became, once the farming and seafood sourcing business were established, a supplier of the supermarket Tesco. Andy Lane, however, found the attitude and behaviour of the Tesco buyers insulting and bordering on the abuse and ended the commercial relationship. He clearly did not pursue turnover growth for its own sake.

Finally, Andy Lane was a pioneer of environmentally sensitive seafood sourcing. He avoided mass, indiscriminate fishing methods and sought out small-scale and selective ones generally operated by small vessels fishing near the coast and landing their catch near their fishing areas. The company would not source from the destructive trawlers. The lagoustines, prawns, crab and lobster sourced were caught in cages. Andy Lane as a business person clearly allowed his own sense of moral duty to guide his business decisions.

Business, like any other human activity, is inevitably a moral enterprise, a moral project advancing a particular vision of living well in this world and in direct competition with alternative projects advancing and realising different ways of relating to other humans and to the resources humans transform with their labour.

The dual reliance of their business start-up on unearned, inherited wealth and on the state welfare system - two different ways of supporting entrepreneurial risk-taking in society

This is also a tale of how difficult start-ups really are and how they often rely on systems of risk-sharing contrary to narratives that focus exclusively on the graft, determination, intelligence and other personal and moral qualities of the founders/owners of a business.

The book makes clear that LFO depended on its inception on John Noble’s ability to keep financing it by taking out loans secured on its Scottish estate and lubricated by his extensive connections to Eton’s old boy network and his membership of UK aristocracy. Apart from debt and capital financing, LFO also relied on the same resources for its fist customers and then for continued business with John Noble marketing LFO products as complementary to his wine business.

Would the idealist, humble, hard-grafting Andy Lane, without the titles, the land, the estate house, the merchant-banking connections, the Eton connections, would he have been able to raise any start-up capital? Worse still, would Andy Lane, having quitted his dead-end job at the salmon farm and relying on the dole for an income during the time he was trying to set up the oyster farm, have been able to raise any capital? Andy Lane like many people in his generation — artists, musicians, actors, activists, writers, inventors , businesspeople — relied on unemployment replacement income by the government to escape a limiting job in order to create something new and something better. This is a very rarely discussed role for the welfare system and for unemployment support in the UK.

Although, the dole allowed Andy Lane to find the time to work on his start-up, it did not free him from the inequality in terms of financial clout of his relationship with John Noble. It was John Noble’s personal code of decency and fairness that guaranteed Andy Lane’s share of the ownership of the company. If John Noble had insisted that company ownership reflected the financing burden each of them had shouldered, Andy Lane would own much fewer shares. (They started with a 50–50 split but Andy Lane recognised the increased financial risk taken by John Noble and the split changed to 40–60 which still did not reflect their relative contributions in terms of financing). And, as we will see later on, Andy’s capital share would have enormous consequences for his capacity to initiate and drive the employee buyout process.

THE EMPLOYEE OWNERSHIP STORY

Sadly, this part of the story begins with the untimely death of John Noble at a time when he had succeeded to secure the financial survival of his estate and of the people working in it. It is his death that precipitated the events of the second part.

Dealing with the consequences of John Noble’s death, Andy Lane does something remarkable. He does not cash in, invest in London real estate, accept peerages by political parties, spend his life giving interviews, pontificating, endlessly repeating his life story in books, wallowing in the self-importance afforded by the attentions of television producers and make-up artists, socialising in award ceremonies and televised charity events.

Andy Lane, controlling a minority stake, goes for the John Lewis option and leads an employee buyout. Andy Lane joins a small, elite group of idealist visionaries who are not content to merely realise the financial gains they are legally entitled to as owners of a business. Instead, he wishes that the future structure and operations of the company reflect the contribution of the company’s employees to its growth and success. In this, he joins the founder of John Lewis, the founder of the Baxendale Partnership, and the author, David Erdal who moved his family’s paper manufacturing company in Scotland to employee ownership. David Erdal’s own life story is fascinating and in the book we get a whistle-stop tour of its main formative moments and of the political and intellectual figures who had an influence on it.

This is a rare story and therefore valuable. Those convinced of the utopianism and groundlessness of employee ownership will rejoice at its eventual demise and the eventual sale of LFO to a private company. For those thinking that employee ownership embodies their ideals of workplace democracy and economic fairness in the allocation of rewards to work, there are important lessons to be learnt and although there is sadness in its demise there is also hope: it is doable and next time it may last a lot longer. Of course, there are gradations in ownership of firms: many companies, for example, have employee share plans. ‘True’ employee-ownership means that employees are the controlling interest and that management is accountable and reporting back to employees.

What made the employee-buyout possible?

Firstly, Andy Lane’s motivation.

As the co-founder, Managing Director and holder of 40% of shares, he was actively seeking alternatives to the usual one of selling to the highest bidder irrespectively of who/what the highest bidder was. ‘Doing a John Lewis’, i.e. the option of employee ownership, was on his radar but he, alone, left to his own devices, did not know how it could be made possible. The majority shareholder (the inheritor of John Noble’s shares) wished to sell at the highest market price. In the case of certain employee-owned companies, the owners passed ownership to the employees by accepting themselves a discount on the company’s estimated market value. Philip Baxendale and his cousin Joan sold their UK gas-boiler manufacturing firm to an employee trust at a mere 10th of its value. But that option was not available to Andy Lane. The company was being sold openly in the market with the hiring of a merchant bank that was scoping out potential buyers. Selling to the employees outright would have required that the employees collectively matched the highest market bid for the company. That would have required that each employee contributed approximately £33k which would have been impossible as it was unlikely that the employees owned anything near that amount or that they could have raised it by selling personal assets or incurring personal debt. The wages for a fish filleter at that time were about £16k a year.

Andy Lane’s motivation in seeking an alternative was grounded, we are told, in his personal anxiety about job losses in the case of a takeover by another company. Given his principled choices over the years, one also presumes that he was worried about all the other ways in which the company would change e.g. would the new owners continue supporting small-scale, coastal, environmentally sensitive fishing methods? The most likely buyer appeared poised to abolish the business support and back office functions with subsequent job losses. They also may quite plausibly have taken a negative view on the mussel and oyster farming operation as well. We are told that at the time the potential corporate buyers were visiting, the oyster and mussel farms were losing money due to recent weather conditions. Buyers tend to seek to recoup the costs of the acquisition in their own interests and not those of the company. Andy Lane considered that such an outcome would have been unfair to the employees on which the success of the company had so heavily relied on, particularly in its early days. Apparently the idea of him walking away with a neat sum while his colleagues’ jobs were lost was unpalatable to him. Andy Lane’s moral sensibilities were remarkably heightened, developed and evidently deeply held. The behaviour of other business owners attests to their view of their businesses as mere instruments of their own enrichment and not as human communities. Or rather they potentially view the human community of a company as of less importance than their personal economic wealth. So, the moral code of the owner can be an important determinant of a company’s path.

Second: Crucially important in this case was the fact that John Noble’s inheritor did not have immediate voting rights despite being the majority shareholder. Lane and Noble had agreed that if Noble died first his shares would automatically lose their voting rights which could be restored by a decision of the board — which included Lane with a minority stake — and some of the senior managers.

Third: The existence of the Baxi Partnership and the lucky coincidence of Andy Lane finding out about it at the right moment in time

Andy Lane chanced on the existence of the Baxi Partnership, whose purpose is to make employee-buyouts possible, through a friend who posted to him a cutting of a Financial Times article. Andy Lane then contacted the president of the Baxi Partnership (BP hereafter) who at the time was the author of the book, David Erdal. BP was prepared to extend a significant, unsecured loan to the company allowing it to pay the existing owners and buy their shares from them. The importance of BP cannot be under-emphasised. Loch Fyne Oysters borrowed £1.5m from a bank (secured on the company’s assets and having primacy for repayment over the debt to Baxi) and £2m from Baxi Partnership (unsecured). We are told that the Baxi did not expect to be fully repaid for 10 years or even 15. In return, Baxi charged a higher interest rate plus an additional yearly payment linked to the company’s performance.

The employee buyout would not have been remotely thinkable without the BP input. Incurring debt in an employee-buyout can be unavoidable because typically the employees cannot afford to buy the company outright. This is a form of leveraged buyout and it means that the company carries a lot of debt.

Fourth: BP favours profitable companies with prospects of growth so that the incurred debts necessary for the employee buyout can be repaid through future profits. If LFO did not look financially strong at the time, Baxi or the other loan providers may have walked out.

Final Outcome: The employee-buyout offer was the highest and won the bid.

How was the new ownership instituted?

A trust was created that bought the shares of the company with the loans from the bank and BP. The trust would in perpetuity hold 50% of the shares. The rest would be owned by employees directly. Andy Lane kept less than 25% of the shares (he previously held 40% of the shares).

A Share Incentive Trust was also created that would provide a market for employee-held shares but would also buy shares and distribute them to employees ensuring liquidity in share trading. Past experience with employee ownership, e.g. the case of Peninsula Newspapers, suggested that lacking such a mechanism threatened employee ownership.

In the first year, employees were given shares in proportion to their years of service. In the second year, an equal proportion of shares was distributed per head. Employees were also invited to buy shares. The company offered matching shares to those bought by employees and also the amount spent was tax deductible so, according to the author of the book, the shares could be bought at effectively less than half price.

Employee ownership started in 2003 and the first dividend was paid in 2006. Employees could not sell their shares until 2006. The sale was not tax-free but it would become so after two years. Only two people sold their shares in 2006. Presumably the delay in buying shares back was put in place to avoid the company losing capital. According to the author:

“In the first four years after the buyout, shares worth £466k were distributed, employees bought £86k and received the same in matching shares. In the last of these two years dividends of nearly £100k were paid.”

Employment at the time was a bit more than 100 people.

Implications for governance and management

Defending employee ownership

The trust owning 50% of the shares in perpetuity was governed by four trustees in the employees’ — present and future — interests: “The trustees hold the shares themselves as individuals but they do not hold them for themselves”. Trustees have a legal duty to exert their powers as owners only in the interests of the beneficiaries. The trust deed was written to consider the broad, not just financial, interests of employees and to protect employee ownership: financial benefits were to be considered alongside those stemming from shared ownership and participation in organisational decision making. Three trustees were elected by the employees and one was a professional lawyer.

The investment agreement between the Baxi Partnership (BP) and LFO included the requirement for approval of all key ownership decisions by BP. Further, the constitution of the company agreed at the buyout placed a ceiling of 5% on the share-holding of any individual. Covenants were agreed so that in the event of serious decline in the performance of Loch Fyne Oysters, it would be possible for the Baxi Partnership to intervene, even taking over the board, in the extreme scenario.

Democratising management

Worker representation at board level was instituted with the election of two ‘employee directors’. The rest of the board consisted of three non-executives, one of which was also on the board of Waitrose, and the sales director, the operations director, the finance director and the production director.

Employee representation by itself, however, does not address the power gap between senior managers and employees. The ‘employee directors’ that serve on the board, although formally equally members, are in fact at a disadvantage. The other board members are professionals and can use distinctions of class, education and experience to browbeat the employee directors, to sideline or to deceive them.

Employee ownership was accompanied by changes in organisational culture. Most notably, senior management extended its efforts to communicate information to employees and to explaining managerial and financial reporting conventions.

The benefits of employee ownership: “When you feel you own a company you enjoy making it successful.”

The new flow of information from senior management changed employees’ perception of bosses’ intentions and attitudes. The division between ‘higher management’ and ‘lower members of staff’ softened. Employees were said to feel better informed, more involved and more respected. The employees reported a stronger sense of connection with the company.

The new relationship to the new firm changed the relationship of employees to one another. Performance monitoring and discipline became distributed such that the role of peer pressure, through direct feedback, gossip, new social norms, became more pronounced. But voluntary alignment of effort became also more spontaneous and emergent as people found a common, shared commitment in the flourishing of the company and of each other.

Employees acquired in the shares they held an economic asset. They shared in increased profitability through dividends. The income from selling shares to the Share Incentive Plan meant that profits remained in the community feeding back into it instead of disappearing to distant, irrelevant, indifferent investors. When an employee retired, their shared were sold to the Share Incentive Plan and the employees received a lump sum.

Finally, the author reports that after the buyout the company became more productive:

“In the year before the buyout, the average sales per employee was 66k; in the following three years it grew by 40% to over 92k, a compound growth rate of nearly 12 per cent.”

Challenges and ultimately failure

One: it is difficult to find business people with experience in managing employee-owned businesses and in nurturing and developing robust partnership cultures.

Bob Graig was brought in as a chairman of the LFO board with the explicit aim of balancing out Andy Lane and John Noble’s unstructured, unsystematic ways of running the firm. Graig had been a naval commander and he had built an accountancy firm. With Andy Lane retiring as an MD after the employee-buyout, Bruce Davidson was brought in which also came from a career in large, traditional, multinational, corporate background. Not only that but the industry he built his career on was tobacco. Erdal notes that employees raised the obvious question of whether his appointment tallied with LFO’s values. It is interesting that when quoted by Erdal Davidson referred to tobacco products as brands that were not politically correct. I find that a rather hypocritical and anodyne description for an industry that wilfully sought to misinform the general public about the huge personal and social cost of its products. In my view, that quote speaks of the character of the man.

Second: As with any organisation, when the board members are appointed they are subsequently hard to control and to make accountable. It is hard to align the interests of top managers with those of employees and it is hard to check managers’ actions. The remuneration details of Davidson, agreed between Craig and senior management, were not discussed openly. Once they were agreed, BP objected. The issue was whether BD could be paid in stock options which would have raised his share ownership to unacceptably high levels that would have diluted the ideal of wide and balanced employee ownership. With Andy Lane out of the way Bob Craig and BD did not share the view of BP and considered their joint decisions as normal and acceptable practise. Craig and Davidson are narrated as resenting the involvement of the Baxi Partnership in issues such as this.

Third: Employee ownership values, practises, attitude and knowledge are hard to find not only in top managers but in non-managers as well. Erdal notes that the democratic culture attendant to employee ownership, i.e. a culture that recognises in employees their full rights, privileges and responsibilities as owners went against the habits and experiences of employees as well. How sad that people have been beaten so hard and for so long to not be able to defend what was theirs. Or am I romanticising them and in reality it was their disengagement, disinterest and apathy that meant they did not effectively take part in decision-making? According to Erdal, the employees were dogged by habitual responses; their life experiences have not developed their self-confidence in the face of seemingly educated, knowledgeable people in positions of authority; they experienced fear of sounding ignorant and rude and fear of the potential negative consequences of speaking out. Erdal refers to the fear of humiliation, low self-esteem and the barriers of status “that keep people in their places”. Erdal mints a lovely phrase in referring to the difficulties of the journey “from dependent servitude to shared entrepreneurship”.

“For many people life is disappointing. They have seen hopes dashed and trust betrayed. They are used to being taken advantage of by people with more education and experience, used to losing out to people with better connections or luck or just quicker wits.” (p. 144)

David Erdal clearly suggests there were problems with direction senior management was taking by the time the AGM in November 2007 was held. He notes that AGMs are:

“potentially important occasions for making clearly visible the reality that the board is accountable to the employees. John Lewis do this quarterly: the directors in turn are cross-examined by a council of over 100 elected people, and the exchanges are published verbatim in the weekly Gazette. At Tullis Russel AGM there are presentations by the MD, the finance director and sometimes division leaders as well as a report from one of the elected representatives of the Share Council. Then the whole board sits in front of the meeting to answer questions an interrogation which can take more than an hour before the formal business is taken. In LFO, as this book goes to press, the reality of accountability has yet to be made manifest” (p.204)

This was the first AGM Andy Lane did not attend. This gives, in my view, a new twist as to why Andy Lane left — it is ironic that he was seen as a barrier to the new culture because of his previous standing as a founder and leader when the new management did not seem that enthusiastic about it itself. Erdal suggests a large gap between the conception of what employee ownership means between the Baxi Partnership and Bob Craig and Bruce Davidson.

The end of employee ownership

There seem to be similarities in how employee ownership ended in both LFO and Baxi. Erdal tells us that in the case of Baxi, the chief executive, the chairman and the merchant bank involved engineered a big acquisition that financially wrecked the firm that had to be sold at a fraction of its pre-acquisition value ending employee-ownership. Employee-ownership is vulnerable to abusive, extractive, self-serving leadership.

In the case of the LFO, the managers acquired a distribution operation which as often happens in takeovers was found to be overpriced. Previously, a separate spin-off of LFO, Loch Fyne Restaurants (LFR) was sold to a pub chain. LFR was a major customer of LFO. The new owners of LFR put pressure on seafood prices cutting the profit margin of LFO. LFR was a separate company owned by John Noble, Andy Lane and two more partners. With the advent of the 2008 financial crisis, LFR was adversely affected increasing the financial problems of LFO which was eventually sold to private investors to avoid closure.

Epilogue

Listening to a BBC Radio 4 programme I chanced upon randomly, it became obvious that LFO created a brand of ‘Loch Fyne’ which allowed other businesses in the area to capitalise on including cheesemakers and beer brewers. In the same program, we were informed that LFO is now a private limited company whose owner has Russian nationality. The programme did not say anything about how or whether the company took care of its employees and the Scottish environment the way Andy Lane appeared to have done.