As mainstream corporations are hit by economic crises and reputational scandals, companies with alternative ownership structures, such as cooperatives and mutuals, are enjoying a resurgence

The economic crisis has been a tale of woe and disaster. Business has been battered, jobs have been lost and trust in corporations has plummeted, with some boardrooms exposed as nests of unethical, and even criminal, behaviour. Growth is stagnant and seems likely to remain so. There is not much to be optimistic about.

Or is there? In some economies, one sector has proved remarkably resilient in the face of economic strife. Alternatively structured businesses, including cooperatives and mutuals, have prospered during the crisis.

According to trade body Co-operatives UK, between 2008 and 2011, while the UK economy as a whole shrank by 1.7%, the “cooperative economy” grew by an amazing 19.6%. In the same period, the number of cooperatives increased from 4,820 to 5,933.

Even in the countries worst affected by rising unemployment and economic contraction, cooperatives have held their own. According to a review carried out by the European Confederation of Workers’ Co-operatives, cooperatives in countries such as Italy and Spain are in a “healthy, almost defiant, state”. Although the number of workers’ cooperatives in Spain declined by 2.5% in 2011, they fared better than standard businesses, 14.7% of which closed down. Italian social cooperatives (which provide social services) took on 4.5% more employees in 2010.

For advocates of the cooperative model, these are signs that a more collaborative approach to business is the way forward. Shelagh Everett of Co-operatives UK says: “Cooperatives have often been neglected in the business press and it is only with the renaissance they are enjoying … that we are seeing cooperatives get the attention they deserve.” Consumers are also paying attention. Between 2008 and 2011, membership of UK cooperatives was up by 20%, to 13.5 million people.

The cooperative movement is now readying itself for a concerted push for more awareness. The United Nations made 2012 the International Year of Co-operatives. Now the International Co-operative Alliance (ICA), the global federation for cooperatives, wants there to be a “cooperative decade”, during which cooperatives can “become the acknowledged leaders in economic, social and environmental sustainability”.

Chuck Gould, director-general of the ICA, says “people are beginning to not necessarily think of the corporate model” as the best model for a new business. Cooperatives “are about a more robust and diversified global economy”, he says.

Limits to growth

Though the crisis has shown the resilience of alternative structures compared with the standard corporate model, cooperatives remain relative minnows. The UK cooperative economy grew to £35.6bn in 2011, according to Co-operatives UK, which is just 2.5% of UK gross domestic product. The biggest British cooperative, the Co-operative Group, achieved gross sales of £13.3bn in 2011, but this lags significantly behind its major competitor retailers, such as Sainsbury’s (£24.5bn) and Tesco (£72bn).

Could cooperatives ever achieve such size? Chuck Gould says this is a “big issue of debate within the cooperative movement”. Typically, the larger a cooperative becomes, the more its membership dilutes, and the harder it becomes to keep everyone happy and involved.

Cooperatives can be owned by consumers, by residents of a particular area, by workers, by a community with a common need or interest (such as a farmers’ cooperative), or even by companies. An example of the latter is United Merchants, Britain’s fourth largest cooperative by turnover. United Merchants provides invoice-clearing and transaction-processing services to its members, which are builders’ merchants with a turnover of at least £1m.

The members of a cooperative steer the ship with some form of democratic structure, usually involving votes at general meetings, at which management tasks are delegated to nominated individuals. The precise structure depends on the business. The Co-operative Group, for example, is a consumer cooperative with membership open to all for a nominal £1. Members are entitled to stand for election to area committees, regional boards and, ultimately, the group board, which is responsible for strategy, and which appoints the chief executive.

Other cooperatives have a much flatter structure. Suma, Britain’s largest independent wholefood wholesaler, is a workers’ cooperative of about 150 people. Decisions on the running of the business are taken by all the workers at regular general meetings, though an elected management committee implements the decisions. All staff receive the same wage, and rotate throughout the various jobs within the business. Suma has been trading for 30 years, and turned over £26.5m in 2010.

Alex Bird, chair of Co-operatives & Mutuals Wales, says smaller societies are “more tightly bonded in the hearts and minds of the people that control them”. A local retail cooperative, for example, is likely to be closer to its members, and generate more loyalty, than leviathans such as the Co-operative Group, which “lose a little bit of the cooperative advantage by their sheer size”. The Co-operative Group has 7.2 million members, and ensuring the involvement of such a large base is “really, really tricky”, Bird says.

The disadvantages of size are that the management of a cooperative can become detached from its members and its commitment to serving the interests of those members. The consequences of such developments were seen in the demutualisation of a number of UK building societies in the 1980s and 1990s. The societies, initially set up to enable members to save, and to provide them with mortgages, began to act more like banks, and became targets of speculators, or “carpetbaggers”, who would open accounts in order to push for demutualisation and windfall payouts. A host of institutions demutualised, including Bradford & Bingley, the Woolwich, Halifax and Alliance & Leicester.

Pauline Green, president of the International Co-operative Alliance, says demutualisation was “more or less management capture. There was no loyalty left with the client base.” If the demutualised institutions had proved sustainable their change of status would arguably not have mattered. But the outcome was very different.

The demutualised building societies have been wiped out as independent companies, either through takeover or, in the case of Bradford & Bingley and Northern Rock, because of failure during the banking crisis. Even before the crisis, however, a March 2006 UK parliamentary inquiry found that consumers overall had lost out through demutualisation. “There had been substantial increases in remuneration enjoyed by directors of those institutions which had demutualised in the 1990s, but no corresponding improvement in performance,” the inquiry found.

The importance of engagement

Martin Shaw, chief executive of the Association of Financial Mutuals (AFM), says that, along with size, the engagement of members is critical for alternatively structured businesses. AFM represents friendly societies and mutual organisations that provide insurance and savings for members. They are another form of cooperative arrangement: members pool their savings so that they can be invested.

Financial mutuals have also shown resilience in crises. None has been involved in banking scandals, and over longer periods – 20 to 25 years – money invested with financial mutuals has earned in the region of 25% more than money invested with plc insurers, Shaw claims. Returns from public companies are reduced because “3p of every £1 invested is siphoned off to the shareholders”, he adds.

Most members of financial mutuals seem happy to invest their money without exercising their participation rights, however. On average, 3% of members vote at annual general meetings (AGMs), Shaw says, though in some organisations it is up to 10%. At AGMs, members can influence strategy, elect the board and agree management remuneration. “The members are the only audience for the AGM,” Shaw says. “The degree to which those AGMs are democratic depends on the organisation.”

Despite the risk of low engagement, the democratic underpinnings of cooperatives and mutuals tend to be favourable to sustainability. Many cooperatives are set up with specific sustainability goals in mind. Alongside its egalitarian treatment of workers, the Suma wholefoods cooperative aims to be environmentally sustainable. It is busy cutting energy consumption and accepting waste packaging back from customers, only uses renewable electricity, and plants five hectares of woodland each year.

Alex Bird of Co-operatives & Mutuals Wales says cooperatives are intrinsically more sustainable because they operate according to a series of principles, including that they should work for the sustainable development of their communities. “A worker-controlled factory is going to run cleaner and safer because they are concerned with their own safety,” he says.

The ICA’s Chuck Gould agrees. “The design of the cooperative inclines it towards an ethical existence. It is conducive to ethical governance and ethical operations,” he says. In particular, the incentives for the managers of cooperatives are different from those of the managers of corporations. Instead of taking decisions purely on the basis of what will generate the greatest profit, cooperatives seek to make sufficient income so that their principled objectives – be they social or environmental – are met. Any additional profits go back into the business.

Shelagh Everett of Co-operatives UK says that the quality of participation in cooperatives, not just the fact of cooperation, favours sustainability. “The principles of open and voluntary membership, democratic member control and member economic participation mean that the people who are involved in the cooperative can influence the social and environmental goals of their organisations,” she says. “As a result people who want to influence social and environmental goals often gravitate towards cooperatives as a way to see their values put into action. So it is not just the number of voices involved but also the kinds of voices.”

According to Co-operatives UK, 88% of cooperatives aim to minimise their environmental impacts, whereas 44% of all UK small businesses say they have taken no action in this direction.

Cooperatives and mutuals are unlikely to be the answer to all economic ills. They have to make compromises as they get larger, and may stay true to their cooperative roots only at the expense of some flexibility in decision-making. “Democracy often slows things down,” says Alex Bird.

They cannot go to the markets to raise money without losing their status, and might be less likely to make high-risk but potentially high-return investments, perhaps in new products or innovation. And they might not attract the best executive talent simply because they pay less. The Co-operative Group’s highest-to-lowest to pay ratio, for example, is 87-1, compared with 158-1 for large plc retailers.

However, in the post-crisis economy, in which the emphasis might shift more to community, fairness and sustainability, cooperatives are likely to be an attractive option. In uncertain times, people are likely to seek safety in numbers.

Case study: John Lewis Partnership

The John Lewis Partnership is Britain’s largest employee-owned business. It is famous for motivating its 81,000 staff, which it calls partners, by sharing its profits with them. This is no small measure: in the year to the end of January 2012 – a year the company called “difficult” – John Lewis made a profit of £353.8m and paid £165.2m of that to its workers, equating to a 14% of salary boost for each.

The partnership’s structure dates back to 1928 when John Spedan Lewis took control of his father’s Oxford Street shop. Lewis took the view that excessive profits were potentially destabilising to society – “it is all wrong to have millionaires before you have ceased to have slums,” as he put it.

As well as sharing profits, Lewis set up a structure to promote employee involvement in the management of the company. In practice, this means that employees can participate in branch councils, divisional councils and, ultimately, a partnership council, which can appoint some directors and influence the company’s direction. The partnership council can also, in principle, dismiss the chairman – effectively, the chief executive – though this has never happened.

John Lewis Partnership’s Neil Spring says: “All of these forms of engagement have increased productivity.” Staff at John Lewis department stores, and at the supermarket chain Waitrose, which the partnership owns, are more loyal, and the business has been consistently profitable, and has proved resilient during the economic downturn. Its first-half 2012 profits jumped by 60% compared with the previous year – meaning the next staff bonus it is likely to comfortably beat that 14%.

The John Lewis Partnership also prioritises sustainability. Spring says this is “more driven from the centre rather than coming up from the shop floor,” though “the nature of the business being employee-owned encourages us to take a long-term view”. It has the reputation of selling quality, responsibly-sourced goods. Waitrose is regularly ranked, alongside Marks & Spencer, as the most sustainable supermarket for seafood, for example.

Case study: Bath & West Community Energy

Bath & West Community Energy (BWCE) is a UK “BenCom”, a community benefit society – a particular type of cooperative. It was set up to develop and install low-carbon energy generation projects. Its first investments have been in solar power, with solar arrays at a business park in Wiltshire, and on the roofs of local schools.

BWCE crowdsources the money to pay for these projects by selling shares at £1 a piece (minimum investment £500). Each investor becomes a member of the society with one vote. Members elect the board and have a say in other key society decisions. Such is the interest in the scheme, says BWCE’s Peter Andrews, that at the first annual general meeting, two thirds of the members turned up – a level of engagement most cooperatives can only dream of.

The interest is down to two factors. First, the scheme appeals to those who want to see something done about climate change. The schools that have lent their roofs to BWCE get free electricity, and any surplus money from selling electricity is ploughed into a community fund that supports low-carbon projects.

Second, BWCE aims to offers a 7% return to its investors. The UK government’s feed-in tariff for solar electricity generation means a guaranteed price until 2032. Unsurprisingly, in a time of below-inflation interest rates on bank savings, the first BWCE share offer quickly raised £750,000 from 200 members. There is a “backlog of potential investors”, Andrews says.

The approach has been effective in getting clean energy projects off the ground, though so far in a limited way – the local schools meet about a third of their energy needs via BWCE’s solar panels. Andrews believes the cooperative model can be replicated and scaled up. It is “an archaic structure, but one which is coming back into fashion and we find very useful”.

BWCE is looking into further solar projects, and at wind and hydro power generation. “We hope to build on that,” Andrews says, speculating that one day cooperative renewable energy provision could be “as big as E.ON”. While he is of course (half)joking, there is no reason why renewables shouldn’t be funded like this and such projects can be easily scaled up.

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