Co-operatives and Capital: A Love/Hate Relationship Diarmuid McDonnell Co-operative Education Trust Scotland 06/03/2013

Outline 1.What is a co-operative? 2.Relationship between labour and capital 3.How do you establish a co-op? 4.What are their capital requirements? 5.Case studies 6.Conclusion/Discussion Qs

Introduction Despite the wide-ranging successes of co- operatives, in financial terms as well as in the development of sustainable communities, the study of these democratic forms of enterprise remains surprisingly absent from the curricula of most university business schools around the world.

The Invisible Giant

Co-ops defined Co-operatives are businesses Member-owned Democratically controlled Distribute surplus to members Purpose is not profit maximisation; they serve the needs of members. However, the do generate a surplus.

Members Why become a member? It’s about achieving self-interest in a collective manner  A group of individuals have a common need that is not being met

Types of co-op Typical types: 1.Consumer 2.Producer 3.Worker Sectors: FinanceInsurance AgricultureRetail Housing Education Creative....and pretty much every other you can think of!

Co-operatives globally (1) Source: ‘Statistical Information on the Co-operative Movement’ ICA. accessed 29 September 2011.

Co-operatives globally (2)

The UK co-operative sector (1) Source: Co-operatives UK. The UK co-operative economy 2011: Britain’s return to co- operation (Manchester: Co-operatives UK), No. of co-operative businesses in the UK: 5,450 No. of members:12.8m Turnover of co-operatives:£32.2bn No. of people employed by co- operatives: 236,000

The UK co-operative sector (2) Source: Co-operatives UK. The UK co-operative economy 2012: Alternatives to austerity (Manchester: Co-operatives UK, 2012.) p. 15.

The UK co-operative sector (3) Source: Co-operatives UK. The UK co-operative economy 2012: Alternatives to austerity (Manchester: Co-operatives UK, 2012.) p. 13.

Value-driven Co-op Values Solidarity Equity Equality Democracy Self-help Self-responsibility Ethical Values Openness Honesty Social responsibility Caring for others BUT... Google, Tesco and Barclays have values as well...

Values in action Co-op Principles 1.Voluntary and open membership 2.Democratic member control 3.Member economic participation 4.Autonomy and independence 5.Education, training and information 6.Co-operation amongst co-operatives 7.Concern for community All* co-ops subscribe to these principles – firm ethical foundation

Odd one oot!

Economic theory Status of Factors of Production Final AuthorityTool Conventional Enterprise CapitalLabour Worker Co-operative Enterprise LabourCapital

Uses of co-op model Share resourcesShare riskShare reward Knowledge Buildings Capital Equipment Investment Costs Training New clients Work-life balance Share of a larger pie Example: sharing a studio, IT equipment/software Example: joint purchasing of raw materials, insurance policies Example: joint marketing/bidding for contracts

Setting up a co-op 1.Shared purpose and objectives 2.Ownership structure 3.Democratic governance 4.Distribution of surplus 5.Membership 6.Capital requirements 7.Legal structure

Example Business idea: marketing services for local SMEs Design elementsIn practice Shared purpose and objectivesTo allow members to access larger contracts Ownership structureMembers will be the individual businesses and self- employed marketing professionals Democratic governanceEach member has one vote to elect the management committee Distribution of surplus65% retained in business, 25% to members, 10% to charitable donations MembershipThe majority of members must be businesses/self- employed and the majority of businesses/self- employed must be workers Capital requirementsNot a capital-intensive business so no need for shares Legal structureCompany Limited by Guarantee

Finance Co-operatives are heavily reliant on equity provided by members and loans/grants. It is possible to offer non-voting equity shares in the co-operative but is this attractive to investors, especially coupled with the limited return on capital (principle 3)? Mellor and others also argued that the unique financial challenges faced by worker co- operatives resulted in ‘a vicious circle where under capitalisation and lack of access to investment finance relegates them to a marginal existence’. Member equity is vital to the creation and sustainability of the worker co-operative. Implications for expansion and entrepreneurship

Capital requirements Initial considerations Selecting the correct mix of finance will allow a co-operative to commence operations on a sustainable platform, prevent over-dependence on one source, and minimise the cost of capital to the business: The legal structure of the business – can you issue shares?; The requirements and provisos of the source of finance – do you distribute your profits?; The amount of capital needed for starting up and maintaining operations (working capital)

Capital requirements Source: McDonnell, D., E. Macknight, and H. Donnelly. Co-operative Entrepreneurship: Co- operate for growth. Glasgow: Co-operative Education Trust Scotland, p. 32.

Capital requirements The role of shares in a co-operative A co-operative, depending on its legal structure, can issue one or more classes of shares: Withdrawable shares (upper limit) Transferable shares Preference shares

Capital requirements The attitude of banks towards co-ops/employee-owned businesses is not positive: Unfavourable debt/equity ratio; Seemingly obscure ownership and governance structure; The risk of the co-op defaulting on the loan due to other concerns (satisfying members rather than capital). How does this chime with the calls to establish SME specific banks in the UK as well as worker co-op credit unions in the States?

Case study 1 – John Lewis Partnership Became employee-owned in 2 stages: 1929 and Now has 81,000 employee-owners (‘partners’). The original owner gradually sold his shares to a trust, financed by profits. 100% of shares reside in trust which is run for the benefit of partners. Leverages its customer and partner base to raise external finance for projects; this is done through bond issues.

Case study 2 – Woollard & Henry Employee-owned engineering business based in Aberdeenshire; manufacture of machinery for paper and paperboard production. Turnover £5m+ and 30+ employees. Succession crisis in 2001 when owners retired. Employee buyout. Utilised a hybrid model: 50% shares in a trust, 50% owned by external financier (Baxi Partnership). Now 100% owned by employees (most of shares in trust, some in employees hands regulated by internal market).

Case study 3 – ESOP Employee Stock Ownership Plan US version of an Employee Benefit Trust (EBT). 1.Uses a trust to borrow money with which to purchase shares in the business. 2.The ESOP purchases shares from the owners. These shares are then assigned to individual employee accounts. 3.The debt is repaid via profit contributions from the business.

Case study 4 – Bristol Energy Co-op Wave of new community co-operatives utilise share issues to raise finance. Bristol Energy Co-operative’s first community share issue in April 2012 exceeded all expectations and raised over £120,000 from more than 130 investors. Shareholders can invest anything between £50 and £20,000

Case study 5 – New Leaf Co-op Recently established (2012) wholefoods worker co-operative in Edinburgh. Needed £40,000 to cover start-up costs. Mainly used community sources of finance (through loan stock offerings) as well as member equity.

Get involved In higher/further education: Join/set up a ‘vegbag’ scheme – Need books or other services? – Freshsight model – In the ‘real world’: Bank/save with a co-op – Shop with a co-op – Create your own employment – see any of the cases in this presentation!

Conclusion Capital works for the benefit of members. Members must take financial responsibility for their co- op (‘skin in the game’). Co-ops need to be creative when sourcing finance. Poorly understood by banks, investors, government, academia...

Key message

Further resources Co-operative Entrepreneurship – an ebook and VLE aimed at students/graduates containing information on how to set up a co-operative enterprise Simply Finance – an online resource by the UK’s trade body for co-operatives Co-operative and Community Finance – a significant source of funding for co-ops in the UK

Reading suggestions McDonnell, D., Macknight, E. and Donnelly, H. (2012) Democratic Enterprise: Ethical Business for the 21st Century, Glasgow: Co-operative Education Trust Scotland (see Chapters 5 & 6). Erdal, D. (2011) Beyond the Corporation: Humanity Working, London: The Bodley Head (see Part III).

Discussion Qs 1.If everything I’ve said about co-ops is true and so great, why are there not more of them? 2.Why do traditional financial institutions take such a dim view of lending to co-ops/employee-owned businesses? 3.Why is democracy not widespread in corporations, but is nonetheless something we strive for in society (and for which people in some countries sacrifice their life)?