Co-operatives and Capital: A Love/Hate Relationship

Diarmuid McDonnell Co-operative Education Trust Scotland

06/03/2013diarmuid@cets.coop

Outline

1. What is a co-operative?2. Relationship between labour and capital3. How do you establish a co-op?4. What are their capital requirements?5. Case studies6. 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:

Finance

Insurance

Agriculture Retail

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.

http://www.ica.coop/coop/statistics.html, 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), 2011.

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 ValuesSolidarityEquityEqualityDemocracySelf-helpSelf-responsibility

Ethical ValuesOpennessHonestySocial responsibilityCaring for others

BUT... Google, Tesco and Barclays have values as well...

Values in action

Co-op Principles1. Voluntary and open membership2. Democratic member control3. Member economic participation4. Autonomy and independence5. Education, training and information6. 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 Authority Tool

Conventional Enterprise

Capital Labour

Worker Co-operative Enterprise

Labour Capital

Uses of co-op model

Share resources Share risk Share reward

KnowledgeBuildingsCapitalEquipment

InvestmentCostsTraining

New clientsWork-life balanceShare 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 objectives2. Ownership structure3. Democratic governance4. Distribution of surplus5. Membership6. Capital requirements7. Legal structure

ExampleBusiness idea: marketing services for local SMEs

Design elements In practice

Shared purpose and objectives To allow members to access larger contracts

Ownership structure Members will be the individual businesses and self-employed marketing professionals

Democratic governance Each member has one vote to elect the management committee

Distribution of surplus 65% retained in business, 25% to members, 10% to charitable donations

Membership The majority of members must be businesses/self-employed and the majority of businesses/self-employed must be workers

Capital requirements Not a capital-intensive business so no need for shares

Legal structure Company 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, 2012. 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 1950. 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.

http://s.coop/1fu5z

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). http://s.coop/1fu6q

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.

http://s.coop/1fz2u

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

http://s.coop/jkqm

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.

http://s.coop/1fz7g

Get involved

In higher/further education:

• Join/set up a ‘vegbag’ scheme – http://s.coop/1f35f

• Need books or other services? – http://s.coop/1f35j

• Freshsight model – http://s.coop/1f35t

In the ‘real world’:

• Bank/save with a co-op – http://s.coop/8157; http://s.coop/1f36a

• Shop with a co-op – http://s.coop/1f36b; http://s.coop/1f36h

• 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

http://s.coop/1fz8v

Simply Finance – an online resource by the UK’s trade body for co-operatives

http://s.coop/3biv

Co-operative and Community Finance – a significant source of funding for co-ops in

the UK

http://s.coop/23t2

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).

http://www.baxipartnership.co.uk;

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)?