By David Stripling
How cooperatively-owned businesses are creating impact
Last week at SOCAP, TriplePundit had the chance to sit down and discuss cooperative business models with SOCAP keynote speaker Gar Alperovitz. Alperovitz is a celebrated historian, political economist, activist, writer, and currently the Lionel R. Bauman Professor of Political Economy at the University of Maryland. He is a former Fellow of Kings College, Cambridge University; Harvard’s Institute of Politics; the Institute for Policy Studies; and a Guest Scholar at the Brookings Institution.
TriplePundit: This morning you had the pleasure of being one of the opening keynotes, speaking about cooperative businesses and some of their successes seen in the urban United States, creating jobs and businesses through these innovative ownership models. To start, could you share with us some of the parallels between cooperatively owned businesses, and what impact investing is trying to achieve with the advance of the impact space?
Gar Alperovitz: Well, cooperatives have traditionally been one way to do community building, and to build ownership, and it has a long history. It converges with the whole social vision of SOCAP. People have not quite understood how advanced it is in some parts of the country. Most people think of the small cooperatively owned grocery store, but co-ops are large scale. 130 or 140 million Americans are members of co-ops, mostly through co-op credit unions. There are huge numbers of them, although they are concentrated in the agricultural sector, they are advancing to new sectors. Around the world there are one billion people who are members of co-ops. This year is the UN’s year of the co-op. So they are all over the world and you can find very sophisticated experiences of social investing in some of the more developed cooperative models. So there can be a convergence between the two. I was pleased to see that SOCAP is interested in one form of what I call Democratized Ownership. There are many forms, such as worker-owned companies, land trusts, municipal ownership, neighborhood ownership, social capital, B-corps. There is a whole range things that change and democratize ownership away from the mainstream corporate ownership.
3p: One of the core missions of SOCAP is to discuss how investors can bring liquidity to entrepreneurs who have a vision to change the world. I am wondering how it is that the co-op model brings access to entrepreneurs to do the same?
GA: So far most co-ops can have silent partner investors. This can happen legally. They don’t get any voting stock, but they can invest as a passive investor, which has to be structured properly, or debt financing. Either way you go, there are two opportunities. Now all of this is like most social investing. These are not going to be huge investments, but they are viable businesses with viable social investing opportunities. The sector itself has to advance further. The most advanced example are the Evergreen Co-ops in Cleveland, which are the sophisticated group of worker owned co-ops, linked together by a non-profit, with a revolving fund; to build more and more co-ops. They are linked together in ways that build community. It is broader than just worker ownership. Also, they are using the purchasing power through partnerships with hospitals and universities, called anchor institutions, that buy about three billion dollars worth of purchases a year, quite apart from construction and salaries, and they leverage that as well.
That model is the most sophisticated we have seen, and it is now being developed in Pittsburg, Atlanta, Washington DC, Amarillo, Texas, and there are explorations underway Milwaukee, Chicago, and Jacksonville, Florida. And there could be more because it uses the concept of worker ownership to build community; I think we are going to see this take off around the country.
3p: In private equity models there are often reservations around infusing capital into businesses without the trade off of investor equity; are you seeing this cause any shyness on the part of investors to get involved with co-ops. Is investing taking extra coaxing?
GA: I think what you are seeing is the appeal of novelty, as these co-ops were getting straight bank financing at the worst part of the recession, when no one was.
3p: Not government financing backed by the government or reserve funds?
GA: No, straight bank financing. These are viable businesses. Otherwise they would not do it. But think about it this way: If you have a contract or a letter of intent with a hospital, that is bankable. These have to be viable businesses, these are not charities, and they are not subsidized.
3p: In the early 2000s, there was a big push to create employee equity programs to incentivize employee satisfaction. The model you are describing is much more about access, employee ownership, and grassroots, its not just companies sharing their ownership.
GA: Yes, this is building bottom up for worker ownership. There could be some takeovers, as one of the biggest opportunities that I am aware of for democratizing ownership, is the employee stock ownership plan, or ESOPS. The basic tax advantages for an owner to sell to his employees when he retires are huge. These are all proven viable businesses, so they can have their ownership transferred, and the baby boom is retiring. Most ESOPS are run by a trust, so ownership is democratized, but not the control. In most of these cases they are rewriting the rules.
When that model begins to explode, that is going to be a really big deal, because the tax advantages are so big. The problem is that some of the unions have had problems with ESOPS historically, but now they are starting to get involved in ownership. The steelworkers are pushing it, and the electrical unions in Chicago, in an effort with a window-making co-op. So I think you are going to see a number of the unions look at this model slowly and develop further, and the steelworkers have taken the lead on co-ops. I think there will be a push to ESOPS because of the tax advantages once people realize they can change and democratize the control systems, but the light bulb has not gone off yet.
3p: Would you mind comparing customer owned co-ops to worker owned co-ops.
GA: Well, the customer owner co-ops are every common. It is a form that is traditional. There is nothing fancy about it, it is a very successful model. REI, which is a very successful sports and outdoors store, is a great example. The really interesting thing is when you transfer to the worker ownership side; you get community building, anchoring jobs and ownership. I am for both, but the customer-owned co-op does not have this other dimension.
3p: Are you seeing differences in management models for these worker-owned businesses?
GA: There is a great range of management structure within worker-owned business in general, including ESOPS and co-ops. Some are very top down in the ESOP world, and some are standard, and some are very exciting. So the more you invest in participatory training, the bigger the payoff in productivity and gains. Big studies have been done on the ESOP world. If you combine ownership with training and participatory management, open book management, participation, etc., if you invest in these practices, businesses come out ahead on almost everything: profits, long-term survival, pensions, productivity. As you might expect, as people have an ownership stake and adequate training, not surprisingly, they perform. That has been studied, although I have not seen any studies like this on co-ops yet.
3p: It seems like one of the big things here is around ownership and incentivization of ownership. You seem to be describing this shared ownership of co-ops becoming an engine of economic growth.
GA: Yes, if you can just generate income to purchase things through a regular business model. Because workers have to buy things, and right now co-ops are emerging in areas where people do not have any money, they end up getting jobs. Over about six years, they may have ownership in the co-op of $65K. That is phenomenal to think they can have this sort of capital, when otherwise they would have no income. And you get small businesses with customers that were not there before, and you build an environment for people in universities and hospitals, and people are not afraid to go outside their front door. This all begins to build a new tax base. So this is a growth pattern, but it is oriented to building community, and that is different than businesses that may come in and leave. This is stabilizing for the community, and stabilizing for climate change, and also stabilizing for democracy.
3p: Thank you so much for your time!
GA: Yes, thank you as well.