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.
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 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.
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.