Interview: Jeremy Neal, Tribe

Jeremy Tribe is a worker-owned staffing platform for technology professionals, and in this interview, co-founder and chief technology officer, Jeremy Neal, talks us through the design of this innovative cooperative, and explains how they got started.

Jeremy studied computer science at the University of Maryland, Baltimore County, and had worked in tech for several years before he met Tribe co-founder and chief executive officer, Joseph Cureton.

“I met Joseph three or four years ago, bouncing around the Baltimore tech community. Baltimore is not a huge city, and we would see each other at various tech events. We were two of a handful of brown faces we would see, which with Baltimore being 60-70% black, was a little jarring to us, so we started a meetup, Bmore Black Techies, focused on bringing black and brown people in tech in Baltimore together.”

“That was two years ago, and since then, Bmore Black Techies has exploded. We started with ten members, and grew to over 1000 in the list-serve, with 30-50 showing up every week.”

Joseph was already involved in Core Staffing, a staffing coop that focusses on finding entry-level employment for returning citizens, part of the umbrella worker-owned coop: The Staffing Cooperative. When Joseph approached him about helping the Staffing Cooperative expand into technology staffing, at first, Jeremy wasn’t sure.

“It took a little bit of selling to get me to come over, to leave a comfortable job, and all that, but this something I think is really powerful, and if we can effect change, even on a small scale, I think we are doing something right.”

Jeremy was particularly attracted to the opportunity to broaden his skills. At the time he was working at a consultancy, and there wasn’t much room for mobility. Starting his own coop gave him the chance to take on more leadership roles.

“I now have the opportunity to be in a position of leadership but also to build the sort of organization that I would want to be a part of.”

At the center of the coop is a software platform that connects Tribe worker-owners with employers. In the gig economy, employing remote tech and design workers through an online platform is nothing new, but what is new is organizing those workers as owners of that platform, and Jeremy acknowledges that maintaining a cooperative culture among workers spread across the United States will be tricky.

“That will be sort of a pain-point as we grow. It will ultimately come down to good communication. Right now we are trying to build our membership base, and every two weeks, we have these community calls. We sit down with people on Google Hangouts or ZoomCall, and explain from the bottom up: here’s what are model is, here’s why we’re doing this, and ask, what questions do you have? That’s a starting point. And in the future, honestly, I think we are going to have to have people whose entire job is just managing our community.”

The Staffing Cooperative and Tribe are also unusual in the cooperative sector in that they have decided to try to attract outside investment. Jeremy definitely sees both dangers and opportunities in this approach.

“A lot of coops, for a lot a very good reasons, veer away from outside investment, but it’s all about being upfront with your expectations. In the same way we tell members, ‘Here’s the model and here is what you can expect to get out of it,’ we have the same conversations with investors. So instead of going with the traditional venture capitalists who want their 8% in some marginal buy-in and all this control, we explain, ‘You have one seat at the table; our members have another seat.’”

“Outside investors have their place. Getting that capital in allows us to grow, allows us to roll out services faster than we could if we were just reliant on our own, but our terms are very clearly structured around our members being our first concern. Also, there is a lot of value in having people involved who have prior experience running businesses and watching them grow.”

“We are at this intersection: we are a coop and we are a start-up, and we have a lot of the same sort of pressures that exist on both sides. We want to grow, we want everyone to make a good living, to be sustainable, but we are clear that massive, unicorn-style growth is not one of our goals. It is about building a sustainable business, so as long as everyone agrees with that, we’re fine, and if they don’t, then that’s one of the lines in the sand we have with people we work with.”

Tribe has been receiving support from Start.coop, a cooperative accelerator based out of Boston that works with worker-owned start-ups that want to growth and diversify. In addition to providing business and cooperative training, Start.coop also introduced Tribe to potential investors.

“Through Start.coop we met an investor in Boston, and from there it’s just been a series of introductions to people, some of which have been fruitless. Someone might see us, and be interested in our model, but in terms of delivering on expectations, they’re just not acceptable, and we have to say, ‘Thanks but this isn’t going to really work for us. Thanks for your time, but do you know three other investors who might be interested?’ And just going down the line, being clear about our needs and expectations, and what we are willing to negotiate, and being resilient enough to walk away even when it seems like, ‘Oh, this might be easy money.’”

Jeremy also found the coop accelerator’s training program a huge benefit, both in terms of building his business skill-set, but also in boosting his confidence.

“The actual ten week program itself was a huge crash course in business for me. My background is computer science and software development and I have never been on that side of the table where I have had to make the decisions, have had to understand the cap table, have had to research comps. So I feel much more comfortable getting on a call with an investor and discussing things in really granular terms.”

“I came into this with an initial idea that I was just going to help with the technical stuff, and Joseph was like, ‘No, you are a co-founder. You’ve got to do a lot of stuff that you do not know how to do, or are not comfortable doing, and are probably bad at, just … let’s do this.’ So every day is a new set of challenges, I’m learning new things, I’m uncomfortable, and really socially anxious in a lot of these conversations, but it’s just about putting on a game face, going forward with confidence, and decompressing later.”

Jeremy is clear that starting a worker cooperative is harder than starting a conventional business, but he believes that the benefits more than compensate for the extra effort involved. In his view, putting people first makes for a more sustainable business, and ultimately, a fairer, more sustainable society. He also argues that working together and building consensus often leads to a better product.

“It is great knowing that you can lean on other people for advice and ideas. I go into every situation with the idea that I am an idiot, I don’t know what I am doing, but let’s see what we can build together. I have my subset of expert knowledge, someone else has their subset of expert knowledge, and by merging all that knowledge together, you end up with a better product than anyone would have on their own.”

“No one is an expert at anything, so don’t be afraid to have your opinions, and just try to do whatever needs to happen. I don’t like to rail against the concept of expert advice, but I truly have found in every situation I have gone into that most people are faking it until they make it, and you can too!”

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Hiring the wrong people

people
Imanol Basterretxea
, Iñaki Heras-Saizarbitoria and Aitziber Lertxundi from the University of the Basque Country recently published an important paper about the failure of Fagor Electrodomésticos, the flagship cooperative in the Mondragon Corporation that went bankrupt in 2013, and last March, I reviewed a section of that paper that showed how difficult it can be to build real workplace democracy in a cooperative when much of the  membership is involved in fixed, repetitive labour.

Here I want to look at another section of this paper and discuss one of the authors’ main conclusions, that Fagor Electrodomésticos failed, in large part, as a result of a series of bad human resource management decisions made over the years.

If a worker cooperative is at all successful, at some point shortly after launch, the founders will need to start thinking about hiring new worker-owners to join the team. The authors of this paper show that Fagor Electrodomésticos went bankrupt after they made a couple of big mistakes when hiring new members, and one can easily see, under the right circumstances, that a new worker-owned business could make similar errors when they start hiring.

The first error that the authors identify is nepotism. It may seem scandalous, but nepotism was actually built into the hiring policy at Fagor Electrodomésticos. Applicants could earn up to 30 points on their hiring assessment (out of a total of 100) if they were related to a member, so many new workers were hired over more qualified applicants because they had a family connection. And many of these legacy hirees turned out to be terrible cooperative members. According to the authors, almost everyone they interviewed for their study agreed that nepotism was a disaster for the company, with one former member of the company’s social council commenting: “The entry of member’s children was a terrible social error.” (p. 16) These applicants often had little passion for the cooperative, seeing it merely as a place where they could find an easy, guaranteed job.

When we think of nepotism, we often think of rich parents installing their (feckless) children in management positions in the companies they own, but similarly, in cooperatives, where the workers have ultimate control over who gets hired, coop members may also want to guarantee jobs for their kids, and while new worker-owned companies probably wouldn’t institutionalize nepotism in the same, open way Fagor Electrodomésticos did, still, founders could be very tempted to hire friends and family over other applicants with better skills or with more passion for workplace democracy, applicants who might make better worker owners in the long run.

The second error the authors identify was growing too quickly. In the 90s and early 00s, Fagor Electrodomésticos expanded very rapidly, becoming, before it failed, the fifth largest household appliance manufacturer in Europe. This sounds like it should have been a good thing, but their rapid growth forced them to higher large numbers of employees in a very short period of time, sometimes up to 300 new workers in a single hiring round, and the cooperative struggled to properly integrate all of these new workers into the democratic culture of the company. Building and maintaining a shared cooperative ideology is critical to the success of a worker-owned business, but with waves of new workers coming on all the time, the cooperative culture at Fagor Electrodomésticos was overwhelmed, and the new members often had “little training and poor attitudes towards work and cooperative values” (p. 18) as a result.

And again, one can easily see how a new worker cooperative might face similar problems, just on a smaller scale. Say, if a new startup with five founders were to grow rapidly, and needed to hire ten new members, even though ten members isn’t the same as three hundred, they might still struggle to transmit their shared cooperative ideology to this new group, given how large the new group would be relative to the established membership. In this way, it may be particularly important for cooperatives of all sizes to carefully manage their growth, with an eye to maintaining and transmitting their unique cooperative culture to all new hires. It is counter-intuitive perhaps, but growing too fast might pose more of a threat to a new worker cooperative than not growing at all.

Basterretxea, Imanol, Iñaki Heras‐Saizarbitoria, and Aitziber Lertxundi. “Can employee ownership and human resource management policies clash in worker cooperatives? Lessons from a defunct cooperative.” Human Resource Management (2019).

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Cooperative Cities

newyorkHow US cities are beginning to take an active role in promoting worker-ownership.

There are certain places in the world, like the Basque Autonomous Community in Spain for instance, or the Emilia-Romagna region in Italy, where worker-ownership is much more common than usual, and one naturally wonders why this might be? Some of the difference is clearly historical and bottom-up. These regions often have a long socialist or collectivist tradition, and so folk living in these areas are more likely to think of worker-ownership when they start a business. But some of the difference is also top-down. Governments in these regions are often more supportive of worker-ownership in general and put policies in place designed to support local cooperatives.

In contrast, the United States has long been one place in the world where worker-ownership is substantially less common than in other areas, but in the last couple decades, in some cities anyway, this appears to be changing. Stacy Sutton from the University of Illinois in Chicago has just published an interesting article in which she describes and surveys the relatively new phenomenon of ‘cooperative cities’ in the US. These are cities where the local municipal governments offer support to cooperatives and, to a greater or lesser extent, try to grow the cooperative sector in their areas.

Surveying all 51 US cities with populations over 100,000, she found 12 cities that she classified as ‘cooperative cities’ in this sense. Looking at the type of support they offer, she further classified these cities into three groups:

  1. Developer cities: These are cities that started without much of a local culture of worker-ownership, and the energy for the development of a cooperative economy in these cities is therefore mostly top-down, with the local government taking the lead in providing support. This group includes: Cleveland; Richmond, California; Richmond, Virginia; and Rochester.
  2. Endorser cities: These are cities that already had a lively cooperative sector in place when the local government started to get involved, so most of the energy for the development of the cooperative sector is bottom-up, originating in the local communities themselves. This group includes: Austin, Berkeley, Boston, Oakland, and Philadelphia.
  3. Cultivator cities: These are cities where there is both bottom-up activism and top-down support for worker-ownership, where there is a strong cooperative culture in local communities that is matched by vigorous support from the local government. This group includes Madison, Minneapolis, and New York.

She doesn’t exactly say it, but Sutton strongly implies that the third group, cultivator cities, provides the strongest model for municipal cooperative development, and she reserves particular praise for New York and its Worker Cooperative Business Development Initiative with a budget of over $3,000,000 to support new and existing coops in the city.

Sutton ends her article on an optimistic note, citing a US Small Business Administration estimate that about 32,000 new businesses are started in the US each year, and imagining how different the US would be — in terms of employment, inequality and civic engagement — if even just a third of those new businesses were formed as worker-cooperatives. Currently there are a little over 300 worker-owned businesses in the US, a long, long way from 11,000 new coops each year, but Sutton is right to be optimistic and ambitious. The US government at all levels spends huge money on promoting capitalist start-ups; if more of that money started flowing to support worker-owned startups, there is no reason worker-ownership couldn’t be just as strong in the US as it is in many other places in the world.

Stacey A. Sutton, “Cooperative cities: Municipal support for worker cooperatives in the United States.” Journal of Urban Affairs (2019): 1-22.

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Worker-ownership and the assembly line

https://farm4.staticflickr.com/3073/3009516045_0c7fd883c5_b.jpgWhen Fagor Electrodomésticos, the flagship cooperative in the Mondragon Corporation, went bankrupt in 2013, cooperative economists began studying the failure hoping to learn more about why it went bankrupt, and also perhaps, to learn how other cooperatives might avoid the same fate in the future. To that end, Imanol Basterretxea, Iñaki Heras-Saizarbitoria and Aitziber Lertxundi from the University of the Basque Country have just published a really interesting paper reporting on their research into Fagor Electrodomésticos: Can employee ownership and human resource management policies clash in worker cooperatives? Lessons from a defunct cooperative.

There is a lot in this paper, so I think I will deal with it in several posts. Here, I would like to start with some interesting observations the authors make about worker-cooperatives in the manufacturing sector, and about the special challenges companies in this sector face in promoting workplace democracy.

The Mondragon cooperatives are interesting in that many are relatively large businesses involved in manufacturing both commercial and consumer products, and they demonstrate that worker-ownership can be successful in this sector, but the authors of this study found that repetitive, assembly-line labour often does not present workers with many natural opportunities to make decisions and control their own work-day, and that this ‘clash’ between employee ownership on the one hand and assembly-line labour on the other may have contributed to Fagor Electrodomésticos’ problems. Here is how one former manager described the clash:

I think it’s counterproductive to have members on the assembly line performing a repetitive job eight hours a day. In those circumstances, however much ownership they have, the reality of their day-to-day existence is a “nightmare”. (p. 12)

The authors call this type of repetitive labour Taylorist production, after Frederick Winslow Taylor, an early proponent of workplace efficiency, and according to former cooperative members interviewed by the authors, there was a clear mismatch between Taylorist production on the assembly line and worker-owners’ expectations of real democracy in the cooperative. Workers joined the cooperative expecting democracy, but found themselves with little opportunity to act as decision-makers in their actual work-day and as the authors discovered, this lead to very low job satisfaction at Fagor Electrodomésticos, absenteeism, and poor work.

Apparently, one production unit in the company, Cooking, recognized this problem and switched from Taylorist assembly-lines to U-shaped cells with a participatory approach to production, and according to the authors: “all satisfaction surveys we had access to show higher satisfaction of workers in Cooking than in Taylorist production units”. Unfortunately, these innovations were not universally adopted at Fagor Electrodomésticos, and overall satisfaction at the company remained low.

Many of the workers at Fagor Electrodomésticos have transferred to other cooperatives in the Mondragon Corporation, and some reported that other manufacturing cooperatives in the corporation were learning from the mistakes made at Fagor Electrodomésticos and had moved their production processes away from Taylorist assembly lines towards participatory processes more consistent with worker-ownership principles. But they note that there was a trade-off: these new production systems rely more on automation for many of the repetitive tasks involved and so employ a much smaller workforce.

To a greater or lesser extent, any group starting a worker-cooperative will probably have to grapple with these issues eventually. Most businesses, not just large-scale manufacturing, will feature at least some low-skill, repetitive labour somewhere in the workflow. This study strongly suggests that finding ways to structure this work (through participatory production systems), or spread it around more evenly (perhaps through job-sharing or job rotation), so that all worker-owners are fully involved in the democratic management of a cooperative, will be critical for avoiding the kind of democratic failure that ultimately contributed to the overall economic failure of Fagor Electrodomésticos.

Photo Robert Scoble, CC 2.0

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Degeneration and Regeneration 3: Kibbutzim

Kibbutz
Probably one of the most important research articles on worker ownership was published by Tal Simons and Paul Ingram: “Organization and Ideology: Kibbutzim and Hired Labor, 1951-1965”. It is both an important practical article and a key theoretical article. In it, the authors present real-world research on the link between ideology and degeneration in worker-owned businesses, but first, to serve as context for their analysis, they set out a detailed and valuable theoretical model of the fundamental role of ideology in organizations and in society as a whole.

This is one of my all-time favourite articles and I reference it frequently in my day job as a sociolinguist. Simons and Ingram’s thoughts on how ideology works in society have deeply influenced how I understand the sociology of language use and language revival, but their article has also profoundly influenced how I understand the world in general, how I understand organisations and their place in society, how I understand social change and social movements, and in relation to the subject of this blog, how I understand what makes a successful worker-owned business.

The subject of Simons and Ingram’s paper are kibbutzim, radical Jewish communes in Israel that share many features with worker-owned businesses. Kibbutzim are places to live, but they are also places to work, in agriculture and in other industries, and in their article, Simons and Ingram track employment patters in several different kinds of kibbutzim between the years of 1951 and 1965, studying how these unique communes struggled over this time to resist degenerating into capitalist organizations and to stick to their founding socialist principals.

Just like in worker-owned firms, ideally, everyone who works at a kibbutz should also be a member of that kibbutz, but under economic pressure, many kibbutzim started hiring more and more outside workers in this period, significantly degenerating away from their founding, democratic philosophy, and Simons and Ingram show that ideology played a central role in determining how much hired labor the various different kinds of kibbutzim employed over time. The authors found that those kibbutzim that shared a strong, collective ideology were far less likely to degenerate.

This research supports the idea that building a strong, shared cooperative ideology in a worker-owned business is key for success, but some folk may have a hard time with the idea of promoting a particular ideology in their cooperative because the word ideology often has a negative connotation. However, that is not how I use it here, or how Simons and Ingram use the word in their analysis. As Simons and Ingram define it, an ideology is simply a particular way of making sense of the world. Some ideologies can be positive; others can be negative, but they are unavoidable. We all have our own ideologies that we use every day to get through our lives.

In a business sense, we can understand ideology as the mission or the vision of a company, the fundamental philosophy that underpins how a company does business. For most businesses, that philosophy is some form of capitalism, but for worker-owned businesses, it is more likely a version of collectivism or socialism, and Simons and Ingram show that if a worker-owned business promotes a strong, shared ideology among its members, it will be less likely to degenerate into a capitalist business over time.

This certainly seems to be the case for the Mondragon cooperatives in the Basque country in Spain. Researchers theorize that the original, very strong founding ideology of the Mondragon Corporation has progressively weakened over the years, and that this has lead the Corporation to significantly degenerate: buying up foreign subsidiaries, but not converting them to cooperatives in their own right.

A strong cooperative ideology is therefore an important resource for a worker-owned business in its efforts to avoid degeneration, but this raises the practical question: how exactly is a strong shared ideology built and maintained in a business?  Simons and Ingram argue that ideology is managed in organisations in two basic ways: through socialization and through selection. By selection, they mean recruitment, that an organisation can try to manage its internal ideology by selecting members who share in that ideology already. Selection is frequently how worker-owned startups establish their cooperative ideology, by deliberately seeking out co-founders who are enthusiastic about starting a collectively owned and operated business.

But selection can only get you so far. As a worker-owned business grows, it can’t count on always finding new employee-owners who will come to their jobs already committed to cooperative ideals. Eventually, worker-owned businesses will need to manage their internal ideology through a continuous process of socialisation, or as it is usually called in this instance, cooperative education. Capitalist businesses usually don’t have to worry too much about socializing their employees in this way. We live in a world where capitalism is the dominant economic system, so most workers would come to a capitalist business already understanding the basics of what it means to be an employee working for a wage.

But worker-owned businesses don’t have this advantage. They are swimming against the tide of the general capitalist ideology of our society, and so they can’t assume that their employees will fully understand the difference between being a worker-owner of a cooperative and being an employee of a private business. If worker-owned businesses are to succeed they have to constantly strive to educate their members about the philosophy and practicalities of running a cooperative. The pioneers of the cooperative movement clearly understood this and named education as the fifth fundamental Rochdale Principal of cooperative organisation:

Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives.

It is clear from this research, and also from the Mondragon example, that cooperative education is not something that can happen once and then be left behind; it has to be a ongoing part of the day-to-day business of the cooperative. The capitalist ideology of our society is so strong that cooperatives have to build cooperative education into the basic design of their businesses, as a continuous process, or over time, the committent of members can fade and cooperatives risk degenerating. But cooperative education costs money and time, and it takes discipline to stick to a ongoing employee-owner education program, particularly if a cooperative is struggling. It is no wonder that many worker-owned businesses let cooperative education slide over the years, but Simons and Ingram’s research shows this is a grave error.

In their study, Simons and Ingram also show that outside organizations, particularly banks, can work to force cooperatives to degenerate. They show that the kibbutzim with the greatest reliance on loans from banks were also the fastest to employ outside labor, presumably because their lenders used the leverage of their debts to force them to adopt more capitalist ways of doing business.

In my recent interview with Kateri Gutierrez of Collective Avenue Coffee, she spoke to a similar problem her coop faced when it came to raising startup capital, reporting that investors had approached her cooperative about funding, but that they had turned them away because the investors were not simply interested in loaning them money, but also were interested in establishing outside control their new business.

This is one more reason, perhaps, that individual cooperatives, as well as the worker-ownership movement as a whole, may need to develop new ways to self-fund cooperative start-ups or expansions through some form of mandatory profit plow-back structures. Capitalist banks and investors are not value-neutral; they come with their own ideas of how businesses should be run, and if they loan a cooperative money, they are in a powerful position to tell that cooperative how to do business.

In 2010, Zachary Sheaffer, Benson Honig and Abraham Carmeli published a research article that confirmed and expanded on Simons and Ingram’s findings. They gathered historical data on 171 kibbutzim from the years 1990 to 1997, and using a range of measures of degeneration, again demonstrated that a strong shared ideology is a key feature that protects cooperative organisations against degenerating.

This is clearly then a very robust set of findings, and together, all this research strongly suggests that founders of new worker-owned firms should carefully plan how they will use selection (recruitment) and socialisation (cooperative education) to establish a shared collective ideology in their business that will give them the best chance of succeeding for years to come.

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Interview: Kateri Gutierrez, Collective Avenue Coffee

CAC1Collective Avenue Coffee is a worker-owned coffee shop founded three years ago by Kateri Gutierrez and Jonathan Robles in Los Angeles, California. I recently spoke to Kateri by phone and discussed the history and vision of their young cooperative.

Kateri grew up in Lynwood, a working-class neighbourhood in LA, and gained her first business experience selling health products with her mother and tamales on the street to help her family make ends meet. She attended the University of California, Berkeley, and wrote her undergraduate thesis on the impact on social media on consumers as citizens. After graduating, she worked for a time at the Disney corporation before returning to Lynwood to set up Collective Avenue Coffee. Kateri believes her time working in corporate America taught her valuable lessons that she draws on as she and Jonathan build their own worker-owned business.

I don’t see myself going back to corporate; it didn’t match my values, but what I did take away is that you need to be efficient. Coops need to combine democracy with efficiency. In the end, a cooperative is a business, and the business has to thrive for the workers to survive. The coop movement can get symbolic very quickly, and we can forget to pay attention to the everyday process of running a successful business.

Like many other entrepreneurs looking to set up a worker-owned firm, Kateri and Jonathan lacked access to capital, so rather than start with a permanent, brick-and-mortar shop, Collective Avenue Coffee was launched as a pop-up shop, appearing at various venues and events around the neighbourhood. Kateri recommends this as a relatively low-risk, low-capital way to get a worker-owned business off the ground.

We did have investors interested, but we wanted to maintain the integrity of our worker coop, so we turned down the investors’ proposals. We offered them the alternative of writing loans for us, but they seemed to be more interested in establishing outside control of our business.

Recently, Collective Avenue Coffee has joined forces with two other worker-owned cooperatives and one certified B corporation, and together they are working to establish a cooperative hub in their neighbourhood, which they have christened COOP LA, that will house all four of the enterprises under one roof.

Opening COOP LA and moving into a brick-and-mortar space will be a big step for Kateri and Jonathan. Keeping the cooperative going over the last three years, even as a pop-up, has been a struggle. For the first two years particularly, the cooperative did not make enough money to allow Kateri and Jonathan to regularly pay themselves, and so Kateri worked as a substitute teacher on the side. Even now, the coffee shop doesn’t make quite enough money for them both to earn a living from the business, but Kateri says that in spite of all the struggle, she has never felt alone.

Entrepreneurs often feel alone, but if you start with a coop, it is a collaborative effort right from the beginning. When you distribute the work-load and responsibility, there is less stress.

Kateri believes that growing the worker-owned cooperative sector in the US will not only require a cultural shift, but will also require better basic support for cooperative start-ups. When they were first setting out, Kateri and Jonathan approached the Small Business Administration, a US government agency supported by tax dollars, and asked for help, but they found that the business coaches working for the SBA knew very little about worker cooperatives:

We went to the SBA for help, but felt that rather than learning from the coaches, we were teaching the coaches about coops.

Kateri does however recommend a free online course that she took, Economic Democracy: The Cooperative Alternative, produced by the University of Edinburgh in Scotland.

It is clear from speaking to Kateri that while she is working hard to establish a workers’ cooperative in her neighbourhood, she is ultimately working to spark a broader cooperative movement in LA. In addition to collaborating on COOP LA, Collective Avenue Coffee runs an apprenticeship program for teenagers and young adults in Lynwood, and also invites community members to attend their meetings and get involved in the development of the business.

We wanted to create an alternative in our community. We chose a coffee shop because it is a place where people can socialize. To make a change, we have to set an example. We have to show the glamorous and the not-so-glamourous. The coop movement is not glamourous, but it is necessary if we want sustainable change.

Worker cooperatives may not be glamorous, but if we grow them fast enough, they will change the world, and the COOP LA project feels like just the sort of initiative that could provide a foundation for a growing cooperative movement in LA. It will be interesting to check in with Kateri and her fellow co-owners in a few years and learn how their project has developed.

CAC2

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Cooperative nuts and bolts: minimum profit plow-back rules

This is a first in what I hope will be a series of practical articles about the nut and bolts of setting up a worker cooperative. In this first article, I’m going to take a look at an important but poorly-understood subject: minimum profit plow-back rules.

A key to success?

The size and strength of the cooperative sector varies enormously from country to country and from region to region around the world, and while there are all sorts of reasons why cooperatives might be more common in some places than in others, one particular factor stands out: in regions where cooperatives are strong, they often share a particular type of internal financial arrangement called a minimum profit plow-back rule. Indeed, it seems that minimum profit plow-back rules may be behind the success of many of the most well-known cooperative groups, like the Mondragon cooperatives in the Basque country, and the cooperatives in the Emilia-Romagna region of Italy.

Minimum profit plow-back rules help cooperatives raise the capital they need to grow and multiply, and because they accelerate the growth of cooperatives, these rules could prove to be the key to expanding worker-ownership beyond the fringes of the global economy, but unfortunately, it is hard to find much detailed, practical information about these rules in the literature. In this post, I want to share what I have discovered so far. It’s a fairly short post now, and that is a measure of how difficult it is to find information about these structures, but I plan to add to it little by little as I learn more. If you have any information or experience with minimum profit plow-back rules, please share it the comments below.

The capital problem

Cooperatives tend have a capital problem. While capitalist business-owners and entrepreneurs are often very rich, and therefore have access to money to start up their businesses and to expand, worker-owners generally do not have the same access to capital — they aren’t personally rich and banks are far less likely to extend them credit — so they have to find other ways to raise money. A minimum profit plow-back rule is one way a worker cooperative can solve this capital problem for itself over time.

There are all sorts of different ways to implement these structures, but basically, a minimum profit plow-back rule requires a cooperative to save or to reinvest a certain percentage of its profits back into the business each year; in other words, it requires the cooperative to create its own capital reserves. Sometimes these rules are imposed by the state as a legal condition for incorporating as a cooperative, and at other times, like in the case of the Mondragon Corporation, the rules are internally imposed by the cooperative group itself.

Italian Cooperatives

By law, cooperatives in Italy are required to plow back at least 30% of their net profits, although research shows that Italian cooperatives often voluntarily plow back much more than this, sometimes up to 100%. These capital reserves cannot be divided between members, even if the cooperative eventually closes shop. This arrangement is usually called an asset lock. (Navarra 2016; Navarra 2009;  Pérotin 2012)

Italian law rewards cooperatives that reinvest their profits in this way with a tax break: up to 70% of profits can be made exempt from corporate income tax if they are reinvested, and it was widely assumed that the high level of reinvestment seen in Italian cooperatives was a result of this incentive, but when Cecilia Navarra (2013) actually studied the behaviour of Italian cooperatives, she found this was not the case. Rather, she found that Italian cooperatives reinvest most or all of their profits as a way to insure against economic downturns, to protect employment, and to keep wages stable. She also cites research by Alberto Zevi (2005) showing that Italian cooperatives have been growing faster than equivalent capitalist businesses, and she believes that greater capital reinvestment may be a factor contributing this faster growth.

The Mondragon System

The profit plow-back arrangements in the Mondragon Corporation are more complex than most, but they are also particularly powerful. One key feature of the Mondragon system is that very early on their history the Mondragon group of cooperatives set up their own bank: the Laboral Kutxa (formally called the Caja Laboral). The Laboral Kutxa is a worker-owned credit union that in addition to serving as a regular public bank in the Basque region of Spain, also serves as the principal commercial bank for the Mondragon Corporation. The Caja Laboral was founded in 1959 as an integral part of the Mondragon cooperative system, and all of the individual firms in the Mondragon Corporation are tied to it.

Everyone agrees that Mondragon’s cooperative bank […] was vital to its expansion. The [cooperative bank] mobilized the savings of thousands of depositors and funneled them into the growth of the coops. (Dow 2003, 65)

The Mondragon system is constantly evolving, but according to the best information I have just now, the Laboral Kutxa requires all of the Mondragon cooperatives to set up three streams of profit plow-back. Net profits (after wages) are divided between a social fund (10% used to fund community social projects), a collective capital reserve fund (a minimum of 20% for direct profit plow-back into capital reserves), and the remainder is deposited in individual workers’ capital accounts. When new worker-owners join a Mondragon cooperative, they have a capital account set up in their name. Seventy percent of the cooperative’s net profit are deposited in these accounts, and the members can withdraw this money when they retire, but in the meantime, the Mondragon system is free to use this money as investment capital. (Dow 2003, 60-1)

The power of the Mondragon system is that, because they all share their own bank, all these capital reserves get pooled together in the Laboral Kutxa (Caja Laboral) and can be used as capital to start new cooperatives:

The main purpose of the [cooperative bank] was to finance the creation and expansion of worker cooperatives and other cooperative organizations. (Whyte and Whyte 1991, 52)

Suma Wholefoods

Suma Wholefoods is remarkable as a fairly large worker-owned cooperative in the UK that maintains a perfectly flat pay structure: everyone earns the same wage per hour, and in the 80s, Suma apparently implemented an interesting form of profit plow-back based on wages. They set up a cooperative development fund to help aid other cooperatives, and every time they voted themselves a pay raise (pay rise), they would deposit an equal sum in the development fund. (Parker 2018, 117)

The cooperative ecology

One can understand the cooperative sector as a kind of ecology, with new cooperatives constantly being founded (or “born” into the ecology), and established cooperatives leaving the ecology (or “dying” out of the system) by going bankrupt or converting. This ecology model of the cooperative economy would also include those supporting organizations that facilitate the growth of cooperatives, like credit unions and cooperative incubators. The cooperative sector as a whole grows if more cooperatives are “born” into this ecology at any one time than “die” out of it, and it seems clear that minimum profit plow-back is one way to strengthen the birthrate and longevity of cooperatives. Further, as demonstrated by the Mondragon system, the advantages of minimum profit plow-back rules are turbo-charged if a system of cooperatives all share the same cooperative bank.

These sorts of structures are definitely worth considering if you are founding a worker-owned firm. Rarely would founders of a worker-owned cooperative be thinking much about future profits as they are setting up their business; they may expect to struggle for months or even years just to break even, but these structures would be much easier to build into the design of a cooperative from the start. Then, when the business finally does first turn a small profit, the structures would be firmly in place and fully agreed.

Also, as the cooperative movement as a whole lobbies to have worker-cooperatives better recognized in corporate law in jurisdictions around the world, it would be worth building minimum profit plow-back into this legislation, mandating this structure in the design of worker cooperatives as it is in Italy and elsewhere.

Sources:

Dow, Gregory K. (2003) Governing the Firm: Workers’ Control in Theory and Practice.  Cambridge: University of Cambridge Press.

Navarra, Cecilia (2009) “Collective accumulation of capital in Italian worker cooperatives: an empirical investigation on employment stability and income smoothing.” Paper presented at  AISSEC XVII Conference, Perugia, Italy, June 2009.

Navarra, Cecilia (2013) “How do worker cooperatives stabilize employment? The role of profit reinvestment into locked assets.” Department of Economics, University of Namur, Working Paper 1307.

Navarra, Cecilia (2016) “Employment Stabilization Inside Firms: An Empirical Investigation of Worker Cooperatives.” Annals of Public and Cooperative Economics 87: 563–585.

Parker, Martin (2018) Shut Down the Business School:What’s wrong with management education. London: Pluto Press.

Pérotin, Virginie (2012). “The performance of worker cooperatives.” In P. Battilani and H. Schroeter (eds.) A Special Kind of Business: the Cooperative Movement 1950-2010… and Beyond. Cambridge: Cambridge University Press, 195–221.

Whyte, William Foote and Kathleen King Whyte (1991) Making Mondragon: The Growth and Dynamics of the Worker Cooperative Complex. Ithaca, NY: ILR Press.

Zevi, Alberto (2005) “Il finanziamento delle cooperative.” In Enea Mazzoli and Stefano Zamagni (eds.) Verso una nuova teoria economica della cooperazione. Bologna: il Mulino, 293–331.

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