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What Is Worker Cooperative Development?

Photo credit: dullhunk via Foter.com / CC BY. Article cross-posted from GEO.

In the 1980s, the British government supported a comprehensive system of local worker cooperative support organizations (CSOs). The first CSO was formed in Scotland in 1976. By 1986, approximately 100 CSOs spotted the country -- with higher concentrations in urban areas. About 80 of these CSOs were funded -- mostly by local municipalities -- with full-time staff at an average of three employees. In tandem, Parliament chartered a national “Co-operative Development Agency” with a 1978 bill -- which aided the growth of local CSOs, served as a “safety net” for regions without CSOs, collected statistics, and acted as government liaison with regard to new legislation.

These government-funded support organizations engaged primarily with low-income, ethnic minority, and female entrepreneurs. CSO staff members provided training courses on worker cooperatives, direct technical assistance, and also loan financing at an average of $50,000 (current U.S. dollars) per worker cooperative. This ten-year experiment produced approximately 2,000 new worker cooperatives -- and almost none exist today.

Worker assistance programs and incubators produce businesses that are dependent on a support organization. This is a general finding -- and not limited to worker cooperative training and incubation. In an award-winning study of business incubators, Alejandro Amezcua found that “among the 18,426 incubated firms in the study, 7,543 of them failed while in incubation, 193 of them failed after incubation, 464 of the graduates remain in operation, and the remainder, 10,226, continue operating in the incubator.” [See here for an abbreviated version of the study.] As such, when British municipalities severed CSO funding, it is no surprise that the incubated worker cooperatives rapidly failed. As Amezcua makes clear -- the study results need not be interpreted as a critique of incubators -- but should rather alter expectations as to outcomes.

The “Institutional” Model

This “worker assistance” model of worker cooperative development might usefully be contrasted with Mondragon’s “institutional” model. Contemporaneous with the Whytes’ research for their groundbreaking book on the history of Mondragon, David Ellerman produced a detailed study of Mondragon’s approach to worker cooperative development between 1972 and 1982. During this period, Mondragon concentrated its development activities in the Entrepreneurial Division of the People’s Labor Bank [translated]. By 1982, the Entrepreneurial Division comprised a 116-person staff dedicated to general research, agriculture, industrial manufacturing, export, marketing, operations, accounting, record keeping, personnel, administration, finance, legal, urban planning, housing, and construction. Staff members conducted feasibility studies of potential product lines -- and periodically updated these studies on the basis of changing market conditions and new technologies. With a strong business prospect in hand, senior staff members worked closely for 18 months with a single salaried manager to further develop the feasibility study into an operational plan -- and, ultimately, into a functioning business entity. At the time of Ellerman’s visits, all eight senior staff members had engineering backgrounds -- and most had formerly served as managers of Mondragon enterprises. Over the course of a decade of rapid expansion at Mondragon, the Entrepreneurial Division successfully launched 24 new entities -- all of which are still in existence today.

Anecdotally, the success of Italian worker cooperatives -- which have achieved a broad-based integration into Italy’s economy -- also resulted from an “institutional” model of worker cooperative creation. In the case of Italy, labor unions took the lead institutional role in the launch of new businesses. Unfortunately, little information is available in English on the history of Italy’s democratic firms.

Closer to home, the United States’s largest worker cooperative is also the product of an “institutional” startup model -- again, in contrast to a “worker assistance” model. In 1985, Rick Surpin and Peggy Powell were salaried staff members at Community Service Society -- a 100-year-old social services agency. They launched Cooperative Home Care Associates as a traditional business -- and then “converted” it into a worker cooperative after the firm achieved a measure of operational stability. This “launch & convert” strategy is the unifying thread behind the institutional startup model of worker cooperative development.

Packing oranges at a co-op orange packing plant, Redlands, California. Photo credit: The Library of Congress via Foter.com / No known copyright restrictions.

The “Conversion” Model

That said, an advocate of economic democracy might find even more benefit in an examination of the U.S. ESOP “conversion” model -- as an arguably stronger approach to worker cooperative development than offered in the examples of Mondragon and Italy. The head count of worker-members across Europe is 1,231,102 according to a 2013-14 report by CICOPA. This count includes Mondragon’s approximately 80,000 worker-members and -- according to an earlier report by CICOPA -- nearly one million Italian worker-members. In comparison, more than 10 million workers participate in an employee stock ownership plan -- in the United States alone. This achievement is almost entirely the result of a conversion model that was popularized in the mid-to-late 1970s.

Under the conversion model, consultants (mainly lawyers, valuation analysts, estate planners) assist existing businesses and owners with the transfer of a portion of company stock to employees. To be clear, the vast majority of ESOPs function as retirement plans -- with minimal voting control ascribed to workers. However, the basic paradigm of the conversion model is highly applicable to worker cooperative development -- which is, namely, to incentivize businesses and owners to transfer stock to employees. Of course, the distinctive difference between ESOP and worker cooperative conversions -- is the allocation of voting control over the transferred stock to workers on a “one person, one vote” basis. And, although ESOPs can be structured as democratic firms, any widespread adoption of the ESOP conversion model would necessarily require retooling for the purpose of democratic employee ownership.

The success of ESOP conversions followed on the early work of Louis Kelso; active lobbying by the ESOP Association (a national trade association) to legislate many of the incentives enjoyed by businesses and owners; the awareness-raising efforts of the National Center for Employee Ownership (a national educational nonprofit); and transactional services by scores of national for-profit firms (e.g., The Menke Group, American Working Capital, ESOP Plus), as well as independent professionals. To reiterate, the conversion model leverages regulatory and market incentives for businesses and owners -- as well as for the service providers themselves. These are incentives which are fundamentally absent in both institutional and worker assistance startup models.

Next Steps Toward Economic Democracy

How, then, do we go about democratizing businesses and transforming jobs? What is worker cooperative development? What is effective worker cooperative development? And what standards do we use to measure effectiveness? An honest assessment -- based on the slim historical evidence recounted above -- is that a clear answer does not exist. In theory and practice, a “worker assistance” startup model is not likely to be particularly effective -- if our standard is the creation of robust, independent, and scaled businesses. In contrast, an “institutional” startup model may result in measured success -- albeit, this approach is highly dependent on the availability of institutional resources. Finally, the “conversion” model offers a theoretical advantage over startups -- and has yielded a remarkable increase in the availability of pension plans to U.S. workers. However, conversions have only a limited track record to-date as a broad-based approach to democratic employee ownership -- let alone as a catalyst for transition to a democratic, worker-owned economy.

As such, a program of worker cooperative development should likely take a two-pronged approach: 1) aggressive experimentation with conversion strategies that mimic and, ideally, expand upon the system of ESOP incentives -- through the exploration of market-based and legislated incentives; and 2) institutional “launch & convert” startups, ideally in a manner that approaches that of Mondragon’s Entrepreneurial Division. Lastly, in the case that significant investment capital becomes available to the worker cooperative community, an acquisitions strategy -- i.e., “buy & convert” -- would be a natural extension of the above.

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Acknowledgements: This discussion is a product of many conversations with David Ellerman, Christopher Mackin, Fred Freundlich, Rick Surpin, and especially, David Hammer. Biography: Christopher Michael, Esq. is completing a JD/PhD in political science at the City University of New York with a focus on cooperative finance, community economic development, and labor law. Chris is General Counsel of the ICA Group, a not-for-profit organization that has been dedicated to the democratization of business enterprises since 1977. He is also Executive Director of the New York City Network of Worker Cooperatives; a Fellow in the Community & Economic Development Clinic at CUNY Law School; and an Adjunct Assistant Professor in the Department of Management at CUNY Baruch College Zicklin School of Business.

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