Co-operatives and Capital: A Love/Hate
Relationship
Diarmuid McDonnell
Co-operative Education Trust Scotland
06/03/2013
diarmuid@cets.coop
Outline
1.
2.
3.
4.
5.
6.
What is a co-operative?
Relationship between labour and capital
How do you establish a co-op?
What are their capital requirements?
Case studies
Conclusion/Discussion Qs
Introduction
Despite the wide-ranging successes of cooperatives, 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:
Sectors:
1. Consumer
Finance
Insurance
2. Producer
Agriculture
Retail
3. Worker
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)
No. of co-operative businesses in the
UK:
5,450
No. of members:
12.8m
Turnover of co-operatives:
No. of people
operatives:
employed
£32.2bn
by
co-
236,000
Source: Co-operatives UK. The UK co-operative economy 2011: Britain’s return to cooperation (Manchester: Co-operatives UK), 2011.
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
1.
2.
3.
4.
5.
6.
7.
Co-op Principles
Voluntary and open membership
Democratic member control
Member economic participation
Autonomy and independence
Education, training and information
Co-operation amongst co-operatives
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
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.
2.
3.
4.
5.
6.
7.
Shared purpose and objectives
Ownership structure
Democratic governance
Distribution of surplus
Membership
Capital requirements
Legal structure
Example
Business 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 selfemployed 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/selfemployed and the majority of businesses/selfemployed 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 cooperatives 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: Cooperate 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 coop (‘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)?