Review: How to set up a Workers’ Co-op

workersco-opsThis is a great book. If you are planning on setting up a workers’ coop in the UK, this is definitely the first book you should pick up. And it’s free. You can download it as a PDF from Seeds for Change, although I bought the spiral-bound version from AK Press (the excellent Scottish/Californian workers’ coop), and I think I prefer it in that format. It is the sort of book you could see lying around a new workers’ coop, getting dog-eared from frequent use.

Many of the books I have reviewed here are aimed at US cooperatives, and much of the advice for new coops would be the same anywhere, but the legal side of setting up a worker-owned business is very different from place to place, and so the most important chapter for UK residents would definitely be Chapter 8: Choosing your legal form, where the authors go over the different kinds of business forms open to coops in the UK (e.g. company limited by guarantee; co-operative society; limited liability partnership, etc.).

This little guide has gone through many editions over the years, penned first by the Catalyst Collective in 1994, updated by Radical Routes in 2003, and again by Footprint Workers’ Co-operative and Seeds for Change in 2012 and 2015, with a minor re-edit in 2019, the most recent edition. The cooperative provenance and so many hands gives you a lot of confidence in the advice. The folk who contributed over the years really know what they are talking about.

This won’t be the only book you will need to read and the authors are honest about this. This little guide ‒ just 116 pages not including the appendices ‒ is more of a roadmap, laying out the territory, but leaving it up to the reader to read other books or seek training in the details, and rather than a weakness, this is its greatest strength. Starting a business can feel so daunting; you need to learn so much, it is really encouraging to see the whole process set out briefly, with very little jargon. It makes it feel much more do-able.

But this brevity comes with compromises. Some stuff was left out:

  • First and foremost, this guide is aimed at folk who want to start a very specific kind of coop, what the authors call a “radical small coop”, with a completely horizontal structure, governed by consensus of all members (i.e. no managers). To be honest, this is the sort of coop I would set up too, but it should be said that many, if not most cooperatives are not like this, and do have managers. Fully horizontal, consensus-based coops have to stay relatively small to work. There is nothing wrong with this kind of coop, but larger, more complex businesses generally adopt some sort of democratically-controlled management structure to coordinate things.
  • The authors discuss making some articles of incorporation “entrenched”, in other words, requiring a super-majority or full consensus of all members to change, particularly articles setting out the cooperative nature of the business, so it is harder in the future for members to demutualize the coop. This is a very good idea, but I was surprised that the authors did not discuss entrenched articles specifically limiting the percentage of non-member labour, since allowing non-member labour to grow out of hand is the principal way cooperatives degenerate into capitalist businesses over time.
  • Also, the authors say very little about mandatory profit (surplus) plow-back rules (p. 87), which is a shame because these sorts of structures can turbocharge the growth of cooperatives, both as individual businesses and as a movement, but are best put in place at the start, perhaps months or years before a cooperative actually starts turning a profit.
  • The authors also don’t say anything about new-member buy-in (p. 94). Many cooperatives require new members to “buy” their membership, typically deducted in small amounts from their pay-cheques over the first few years. This serves as another way coops can raise their own capital, helps to even out the contributions of new-members and founders, and can also be used as a kind of retirement investment that members can draw back out when they leave. The authors may be ideologically opposed to new-member buy-in, I am not sure, but it is odd that it isn’t mentioned at all, given how common it is.
  • And one small point: for retail businesses, I would have liked to see a bit more about the importance of location and passing foot-traffic (p. 35). In my experience, this is a make-or-break point. A really great store that is even half-a-block off the main drag, or has rented a place with small-windows and poor frontage, can fail on location alone.

These points to one side, this really is an amazing little book, and I cannot recommend it highly enough!

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Sortition: a better way to do democracy?

lottoWhen we think of democracy, we usually think of either consensus and direct democracy on the one hand, or elections and representative democracy on the other, but in a recent article in the Journal of Management Inquiry, Simon Pek argues that we are neglecting a third option: sortition, a way of doing democracy that bridges direct democracy and representative democracy, and a form of democracy that may be better for worker-owned firms, particularly as a way of running a coop that may be less likely to lead to degeneration over time.

Pek observes that while many small worker coops start out as fully horizontal organizations, governed by consensus of all their worker-owners, as cooperatives grow, they ultimately face a choice: either limit their growth in some way, or transition to a more vertical organization that is governed by democratically elected representatives.

Personally, I am a huge proponent of direct democracy and consensus, but there is no arguing that at some point businesses become too large and complex to efficiently govern in this way. I can think of no examples of very large worker-owned businesses anywhere in the world that are governed by direct democracy. Worker coops tend to either stay (relatively) small, or introduce management and representative democracy structures as they grow.

But Pek also observes that representative democracy comes with problems. Over time, elections can concentrate power in the hands of an elite group, which can then lead to corruption and bad management in the cooperative, which in turn can lead to apathy and disengagement among the rest of the coop membership. Pek believes that such failures of representative democracy may be behind a lot of the drift toward degeneration we see in real-world worker cooperatives over time.

So what is sortition then, and how might it work better?

Sortition is a type of representative democracy, but instead of elections, representatives are chosen by random lottery from all the members of the group. In the early days of democracy – in ancient Athens and in Italian city-states for example – sortition was a common form of government, and is of course (part of) the way we select juries even today; however, after the French and American revolutions, elections became the dominant method for selecting representatives in democracies.

But with electoral democracy going through a serious rough patch just now, many are looking back at sortition as a possible alternative. Citizens’ assemblies and advisory groups and other democratic organizations are increasingly experimenting with sortition as a way to insure that representative democracy is truly representative.

Sortition would seem to be the best of both worlds: just as with consensus and direct democracy, no elite subgroup is privileged (at least in theory), but at the same time, you get all the efficiency that comes with representative governance.

But before we rush to introduce sortition into the governance structures of our cooperatives, it is worth noting that much of Pek’s article is still speculative. Pek qualifies most of his claims with the words “likely to” because the truth is that we don’t have a ton of empirical evidence yet for the effectiveness of sortition in cooperatives, particularly as a way to avoid degeneration.

Fortunately though, sortition isn’t all-or-nothing. A cooperative could experiment with sortition in a few committees or work-groups and see for themselves how it goes. But first, definitely read the Pek’s original article. He goes over many of the possible positives and negatives involved, and he is a clear, unpretentious writer. Highly recommended

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Democracy is hard work

eroski
Why are coops so rare? If worker-owned businesses are so much better than traditional businesses, why aren’t they more common? Worker-owners face a number of external barriers that make it harder to start and run a cooperative business, a lack of ready access to capital being perhaps the biggest barrier, and as advocates of worker-ownership we usually assume that it is these external barriers, built into the structure of the capitalist economy, that account for the rarity of worker-ownership, both now and in the past.

But looking back over the history of worker-ownership, we see repeated cycles of growth and decline: in different times and places, worker-ownership growing, spreading and then fading away. Why doesn’t worker-ownership ever just catch on as a movement and continue growing? Are the external factors enough to explain these cycles? Are there perhaps some internal factors that also make worker-ownership more difficult? Is there something specific about worker ownership itself that makes worker coops less successful over time?

These are hard questions for us to ask, but if we want our worker-owned businesses to succeed, we need to ask them. We have to be honest about any potential costs or barriers we may face, so we can plan for them. Recently, in 2015, Saioa Arando, Monica Gago, Derek C. Jones, and Takao Kato published a research paper that may start to answer some of these questions. In this paper, the authors ask a simple question of their own: are worker-owners happy in their jobs?

The authors use one of the huge Mondragon coops, Eroski, as their research subject. As we have seen previously, many of the Mondragon coops have seriously degenerated over the years, and Eroski is no exception. Currently, most Eroski employees are not worker-owners. At the time of the research, the Eroski parent company owned 814 supermarket stores with three different levels of worker-ownership: “1) cooperatives with significant employee ownership and voice; 2) cooperatives with modest employee ownership and limited voice (known as GESPAs); and 3) conventional stores with no employee ownership,” (398) and while it is disappointing that Eroski has degenerated so far, the situation allowed the authors to use Eroski as a sort of natural experiment, comparing the performance of worker-owned supermarkets against GESPAs and conventional stores on a number of measures.

They found, as expected, that the worker-owned stores often out-performed the GESPAs and conventional stores, and also, that cooperative members enjoyed 100% job security and wages at least 20% above the industry standard, but when they looked at job satisfaction in the worker owned stores vs the GESPAs, they found that job satisfaction was lower in the worker-owned stores, in spite of the fact that the work was well paid and more efficient. What was going on here?

The authors found a clue to the difference when they looked at how job satisfaction changed over time and in respect to the overall health of the stores. They found that job satisfaction in the worker-owned stores went down when the performance of the stores went down. Based on the data, the authors present two interpretations. First, they suggest that being a worker-owner may be particularly stressful, that workplace democracy places an additional cognitive load on coop members that makes the work harder:

These co-op stores are more efficient and CO-OP workers have bigger financial stakes and voice, and also receive higher wages; however, employee owners with high stakes in the firm are expected to go beyond routine work and to engage in a variety of problem-solving activities. (420)

They also suggest that coop workers may have higher expectations for their work, and are disappointed when those expectations don’t always match reality. Worker-owners may be particularly stressed and disappointed when their coop is not performing as well as hoped:

stress is highest in cooperatives when sales growth is relatively weak […] by being significant stakeholders, CO-OP workers at Mondragon probably expect more from their work, resulting in high expectations and a higher likelihood of disappointment. Such workplace disappointment may be particularly acute when their hard work does not result in performance improvement. (421)

Like with any natural experiment, we have to be careful about the data. Eroski presents us with a complex picture: we have three types of stores with different levels of ownership, and even in the “worker-owned” stores, not all of the employees are themselves worker owners. Further, the authors found that working conditions were generally better for all employees of Eroski, suggesting perhaps that GESPA workers and non-owner workers might have been, to a degree, free-riding off the advantages of working for a cooperative parent company without having to take on the extra cognitive load that comes with running a worker-owned business.

Also, this is just one study, and these results would need to be replicated in many different situations before we could say that, in general, worker-owners are less satisfied in their jobs than non-owners. It is significant then that just last year Imanol Basterretxea and John Storey published a paper that repeated some of this work, but from data drawn in 2011, after the financial crisis, and they again found lower satisfaction amongst employee owners in comparison to GESPA workers, but this time they also found lower satisfaction amongst employee owners in comparison to non-owners and to temporary employees.

So if this is true, what does it mean for worker-ownership as a business model? I think anyone living in the UK or the USA just now would agree that democracy can be hard work. As I follow the struggles for democracy taking place in Hong Kong, I am so glad that I have the privilege of living in a democratic country, but at the same time, there is no doubt that democracies place extra cognitive load on their citizens, particularly when those democracies are under stress, as it is in the UK under Brexit, or in the US under Trump.

I don’t believe that these two facts are actually in conflict: democracy is a great privilege, but at the same time, democracy can be hard work. This is true for political democracy, and is probably also true for economic democracy. Democracy has real advantages, that is clear, but it also has a cost, and it is not surprising if this cost can sometimes be a drag on the performance of a worker-owned business, perhaps even contributing to degeneration over time. We may be advocates of worker ownership, but we can’t afford to be starry-eyed about it. Everything has pluses and minuses. I would argue that the pluses of workplace democracy far outweigh the minuses, but we need to be clear about the minuses if we want to grow worker-ownership as an economic model.

At a practical level, I am not sure if we have a clear picture yet of how to plan for the extra costs of economic democracy, but Basterretxea and Storey’s paper contains some hints. They interviewed managers at Eroski and some interviewees pointed to a breakdown in cooperative culture over time as one reason that worker-owners were less satisfied. They suggested that the success of the worker-ownership model was not made clear enough to members in the good times, so that members would remain committed to the model when a dip in the economy required longer working hours and lower pay:

engagement deteriorated over time; the increased workload for members following the 2008 crisis; and there had been a failure to build on the previous long period of success in order to foster a culture of ‘pride of belonging’. (308)

This is further evidence that creating and maintain a strong cooperative culture in a worker-owned firm is a key to success, but there may be other factors that influence the impact of the cost of democracy on a worker-owned firm’s performance. Clearly more research is required. Stay tuned!

Arando, Saioa, et al. “Efficiency in employee-owned enterprises: An econometric case study of Mondragon.” ILR Review 68.2 (2015): 398-425.

Basterretxea, Imanol, and John Storey. “Do employee‐owned firms produce more positive employee behavioural outcomes? If not why not? A British‐Spanish comparative analysis.” British Journal of Industrial Relations 56.2 (2018): 292-319.

Photo public domain.

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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 factor stands out in particular: in regions where cooperatives are strong, they often share a special 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, degenerating or demutualizing. 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.

Posted in Nuts and Bolts | 8 Comments