Children's nursery chain moves towards employee ownership

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2009

Before Mike Thompson can get down to talking about his company and its unusual plans for the future, he has to explain to a three-year-old boy what we are doing in his day nursery. Mr Thompson squats down to chat and the children quickly gather round. The infants at the Edwalton nursery on the outskirts of Nottingham are, if indirectly, Mr Thompson's customers, so his sense of priorities is understandable.

Child Base Nurseries has expanded from one daycare centre near Milton Keynes 20 years ago to a chain of 36 day nurseries, mainly based in the Home Counties. The six original staff have grown to 1,300, the annual turnover is £25m ($37m), and last year operating profits rose 18 per cent to £2.7m. It makes Child Base, Mr Thompson claims, the biggest privately owned nursery business in the country.

Mr Thompson was 26 when he threw in his junior management job and, almost by chance, became involved in the childcare sector. The problem at his previous job was that his father was the boss – and, he says, whatever you do yourself, you end up being judged because of the family link. “I'm lucky, the old man is fantastic,” he says. “But you can't always live in someone's shadow.”

In Mr Thompson's case, the “old man” is Sir Peter Thompson, and the company in question was NFC (formerly the state-owned National Freight Corporation), which under Sir Peter's leadership was privatised through a unique employee buy-out where drivers and staff were encouraged to own the shares.

In fact, escaping the paternal shadow has not been quite so straightforward. Child Base for much of its life has been a Thompson family business, with Mr Thompson as chief executive and his father as chairman and a large shareholder. The company's cur­­rent chairman Sir Roger Hurn is another heavyweight, a friend and former boardroom colleague of Sir Peter's at Smiths Industries.

But that is changing. His father's commitment to employee share-ownership principles at NFC has followed Mr Thompson to Child Base, where he has started off a series of steps that will see the company ultimately become fully employee-owned. “It is very important to me that Child Base will be secure for the long term,” Mr Thompson says. The changes mean, among other things, that for the first time last year his reappointment as CEO had to be submitted to the staff shareholders for endorsement.

Many day nurseries in Britain are run as single businesses, but from the start Mr Thompson set Child Base on a strategy of expansion, initially into towns near Milton Keynes , such as Bedford and Leighton Buzzard. Child Base also pioneered innovative public-private partnerships with public sector institutions wanting onsite staff nurseries, including John Radcliffe hospital in Oxford and Stoke Mandeville hospital in Buckinghamshire. In each case, Child Base built the nurseries and now runs them under a management agreement. Thompson family money for early development was supplemented by a £1m bank loan and subsequently by investment from a number of ex­ternal investors, who benefited from the Enterprise Investment Scheme.

Today, Child Base adds two to four nurseries to its network each year, either through new-build deals or acquisition of existing nurseries. The company is slowly moving west along the M4 to Swindon and Bath and also is eyeing potential in Kent and Sussex . Each nursery carries its own individual name (“It's what parents relate to,” Mr Thompson says), with the Child Base brand left in the background.

Being a network helps staff development, however, says Mr Thompson. Several nursery nurses have moved up the career chain, the most dramatic perhaps being that of operations director Lynda Gostelow, who joined at the start as a nursery worker.

Other senior management posts have been filled by internal promotion, although Child Base also looks to make external appointments, including from competitor companies.

At present, Child Base's expansion is being funded from the company's own cash reserves – Mr Thompson complains that bank capital is currently almost impossible to access, although a certain caution may be appropriate anyway. The recession has seen an unprecedented number of nursery businesses put up for sale, he says. He professes himself confident, however, that his own venture can ride out the downturn.

The transition to employee ownership is clearly his big goal. Child Base set up an Employee Benefit Trust about eight years ago and started to make shares available to employees using the tax concessions available under an all-employee share scheme.

A “buy one, get one free” offer was later extended to offer two free shares for each purchased. In this way, the overall shareholding structure of Child Base has gradually changed. The Thompson family interest is now down to about 28 per cent, Mr Thompson says, while shares owned by individual employees and collectively through the EBT are close to or above the 50 per cent mark often used to define a genuinely employee-owned concern. Significantly, the company's legal rules were changed last year so that Child Base is now legally established for the benefit of employees, present and future. The Thompson family and remaining external investors are res­tricted in selling only to the EBT.

There may be an element of savvy management practice here – since staff with a stake in the business may be more loyal – but Mr Thompson is also passionate about employee ownership in principle. He could have sold out, he says, and realised more money. But he says: “You get where you are in business because of other people. Why not put the business back in the hands of people who helped build it?”

In one key sense, he may be trying to go a step further than his father did at NFC. There, the experiment in employee ownership effectively ended in the late 1980s when NFC was floated, with some drivers' £500 shareholdings having grown to be worth £50,000. Mr Thompson is concerned that the business he created does not end up sold to an external buyer.

There is an irony here: having given power to staff, he now has to hope they share his commitment to keeping the business intact. “The John Lewis Partnership-type structure may ultimately be the one to aim for,” he suggests.

Mike Thompson's home is 45 minutes from Child Base's head office in Newport Pagnell, but he often heads off in a different direction to visit two or three Child Base nurseries and talk with the staff: “If I don't get around, I get cross,” he says. Last year, he made 250 visits. This year, he has visited 110 nurseries already. The first visit may conclude with lunch with the nursery manager before he heads off to the next town and the next nursery.

Comments, criticisms and suggestions: all are scribbled down in a small black notebook for later consideration. Currently, it has a variety of comments, ranging from a suggestion that staff with good sickness records should be rewarded, to a plea that nurseries should not open on Christmas Eve. One employee has enquired about the possibility of working abroad.

The roadshow season is currently under way, in which he addresses staff formally about progress and prospects for the business. He also takes the opportunity to remind staff about employee ownership: there is a need for an educational process to help people understand, and that work can be tough, he says.

The transition to employee ownership has not meant changes to the main company board itself. Mr Thompson is sceptical of the benefit of staff representatives at this level: “Management by committee doesn't work,” he says.

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