Democracy in the workplace I: worker co-operatives This topic begins a two-part analysis of employee-owned enterprises by looking at worker co-operatives. Considered to be one of the purest forms of employee ownership, the worker co-operative model places ownership, control, and beneficiary rights in the hands of workers. Democratic Enterprise

Learning Goals understand the economic reasoning behind the worker co-operative model; analyse key operational aspects of worker co- operative; assess the ownership, governance and beneficiary arrangements of worker co-operatives in relation to other forms of co-operatives.

Key Arguments Worker co-operative must ensure they balance the needs of democracy and operations in order to create and sustain a viable co-operative enterprise. Profit maximisation is a poor theory for the economic analysis of a worker co- operative. The relationship between labour and capital in a worker co-operative is based on the primacy of labour, with capital as the subordinate (‘labour hires capital’). There are specific management theories that are applicable to worker co-operative but a new concept of the role of management is necessary for the implementation of these theories in practice. Access to capital is crucial to the sustainability and growth of worker co-operatives; the importance of member contributions and retained earnings cannot be overstated in this regard.

Introduction What is a worker co-operative? A business that is jointly owned and democratically controlled by the people who work in it. Definition Ellerman defines a worker co-operative as ‘a co-operative where the members are the people working in the company, and where patronage is based on their labour as measured by hours or pay. Thus a worker co- operative is a company where the membership rights, voting rights, and the profit rights are assigned to the people working in the company.’

Economic theory of worker co- operatives (1) Status of Factors of Production Final AuthorityTool Conventional Enterprise CapitalLabour Worker Co-operative Enterprise LabourCapital

Economic theory of worker co- operatives (2) If worker co-operatives (and co-operatives in general) don’t maximise profit, then what is their objective? Benjamin Ward (1958) – worker co-operatives seek to maximise the dividend (share of surplus) per member. (pQ - C)/L where p = price of output, Q is output, C is costs, and L is number of workers.

Economic theory of worker co- operatives (3) Ward’s theory states that worker co-operatives will seek to maximise dividend by adjusting L, the amount of members/workers. Does this mean that members will try to fire each other to maximise share of surplus!?

Ownership in a worker co-operative Worker co-operatives are collectively owned by their users i.e. workers. We’ll now take a look at some of the issues relating to ownership in a worker co-operative: Membership Finance

Membership (1) Are there different types of members in a worker co-operative? Simplistic typology but does highlight the fact that different members will derive different benefits from the co-operative. Ideological members (1960s/1970s)Pragmatists (1980s) Predominantly middle class Well educated Able to experiment with various forms of worker democracy Wholly committed to the principles and spirit of co-operation Predominantly working class Rely on the worker co-operative for their livelihood The principles of co-operation are secondary to the need to sustain the business

Membership (2) Can a worker co-operative hire non-member workers? The answer is yes but what is an appropriate ratio of members to non-members? Every worker should be offered the chance to become a member; if they refuse then that is fine. In practice, there are usually more members than non-members. Is a worker co-operative like any other kind of business if it has more employees than members?

Finance (1) Worker 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.

Finance (2) There are risks associated with raising the majority of your finance from members: 1.Resentment might arise between members who commit differing amounts of capital to the co-operative. 2.Members might expect a return on their capital that detracts from the values and principles of the co-operative (principle three in particular). 3.If the amount of capital needed to be become a member is excessively high, a situation might arise whereby workers are hired but not afforded the opportunity to become members; this leads to an increase in the amount of surplus to be distributed to existing members but possibly violates principle one (open and voluntary membership).

Control in worker co-operatives (1) General Committee (board of directors) Management Members hire/appointreport to co-ordinateparticipate electaccountable to

Control in worker co-operatives (2) Note that this is a ‘typical’ governance structure for a worker co-operative; in practice, worker co-operatives tend to adapt diverse systems of control. For instance, small worker co-operatives tend to have no General Committee and elected management that changes according to the task at hand.

Case study - The Worker Co- operative Code of Governance As well as the seven co-operative principles, worker co-operatives have a number of specific guidelines: Membership is free and voluntary, but is governed by the number of sustainable jobs the business can support. Generate wealth for one or more of the following purposes: sustain jobs, improve quality of life of members, democratic self-determination. Majority of workers should be members. Internal regulation is democratic (governance). Members have a unique working relationship with the co-operative (not recognised by law – e.g. Mondragón). Co-operatives UK, Worker Co-operative Code of Governance (Manchester: Co- operatives UK, 2009).

Management The premise of a worker co-operative is that it bestows control of the enterprise to the employees of the business. Workers usually exercise this control democratically at the AGM but some choose to extend this level of control to the area of management. There are two general management styles for worker co- operatives: 1.Collective management 2.Representative democracy

Collective management No organisational hierarchy The majority of business decisions are taken by all the members Consensus decision-making Suitable for small, simple worker co-operatives Advantage – true worker democracy Disadvantage – high transaction costs (e.g. reaching decisions)

Representative democracy Traditional organisational hierarchy Board of directors and management accountable to the members Majority decision-making Suitable for more complex worker co-operatives Advantage – more efficient operations Disadvantage – potential for management dominance over policy and operations

Management(2) Fanning and O’Mahony note that: Management in a worker co-operative needs to be viewed as a function rather than a position of power. The functions of management need to be broken into two areas: Horizontal – vocational or technical management e.g. finance, supply chain, marketing. Vertical – power based i.e. HRM, hiring and firing, discipline. It is the vertical aspect of management that causes issues in worker co- operatives.

Case study – GreenCity Wholefoods Blended approach to decision making: direct democracy (where every member is required to vote on a decision) is only called upon to deal with issues relating to company policy or membership, while a system of representative democracy (where the members elect a management committee to make decisions on its behalf) is in place to deal with the majority of strategic and operational business issues. GreenCity has a flat management hierarchy. At an operational level, Green City is organised by functional area: accounts, sales, purchasing, manufacturing, warehousing and transport. Each of these departments operates largely autonomously (e.g. have their own meetings and targets) and decisions relating to day-to-day operations are entrusted to each department.

Pay in a worker co-operative (1) The issue of pay in an organisation is traditionally determined using a wage or salary model, which is linked to one or number of factors such as hours worked, importance of role or seniority. In theoretical terms, members of worker co-operative do not receive a wage or salary since they are the owners of the business and as such are entitled to the surplus generated by the activities of the enterprise. In practice, value added (the amount generated by the co-operative minus costs – not including member wage costs) is calculated at the end of a trading or financial year and so it is unrealistic for members to receive the fruits of their labours only once a year.

Pay in a worker co-operative (2) Some system of pay is necessary. The choice of a system depends on a number of factors: ideological worker co-operatives tend to have equal pay while co-operatives that arose out of conversions or rescues are more likely to have traditional payment methods such as compensation based on role. There is no hard and fast rule regarding pay in a worker co-operative (tends to be conventional).

Case study - Edinburgh Bicycle Co- operative Pay in this worker co-operative evolved over a number of years. When it was founded in 1977, every member received equal pay. Over the years, members voted to change the pay as follows: equal pay; to each according to their need; equal pay; pay based on seniority; pay reflecting position in hierarchical structure; pay reflecting position in hierarchical structure with explicitly limited differentials.

Surplus in a worker co-operative (1) Once the members have received their advance of the surplus in either wage or salary all that is left to do is allocate the remaining surplus amongst the members and the business. In theory, the members have a right to all of the profit; this may be split between wages and an end of year bonus say. In practice, however, it is inadvisable to distribute the entire surplus to workers because it may expose the company to unforeseen risks and inhibit growth (remember the problems with raising finance).

Surplus in a worker co-operative (2) Most worker co-operatives will allocate x amount to reserves, y amount for distribution to members, and z to a charitable cause. Example: Mondragón worker co-operatives allocate seventy per cent of surplus to members, twenty per cent to collective reserves and ten per cent to a social/charitable fund (by law). Member surplus is distributed on a proportional basis (just like other co- operatives); this can be determined by the amount of hours worked, salary, or some other agreed formula.

Net assets Member shares usually remain at par value (don’t increase); helps prevent it becoming too expensive for new members to join. As regards the assets of the business, no member has any claim to them – they are commonly owned rather than collectively owned. Upon dissolution of the co-operative, the assets pass onto another co-operative or charity. Note: this is a British co-operative convention and doesn’t always apply to other co-operative movements (e.g. Spain and Italy).

Case Study - Mondragón Co- operative Corporation One of the largest and most successful worker co-operative movements in the world – headquartered in Mondragón in the Basque country.

Mondragón Co-operative Corporation - history 5 graduates of the local polytechnic acquired a bankrupt factory in 1955 and established it as a worker co-operative in Heavily influenced by the teachings of the local priest, Father Jose Maria Arizmendiarrieta. Original factory quickly became successful and a number of spin-out enterprises were created. Rapid expansion in the number of worker co-operatives in the region led to the creation of a secondary co-operative, Mondragón Co-operative Corporation (late 1980s and early 1990s).

Structure of Mondragón Co- operative Corporation Source: J. R. Fernández, La Experiencia Cooperativa de Mondragón: (Guipúzcoa: Mondragon Corporacion Cooperativa, 2001), p. 87.

Structure of a Mondragón worker co- operative Source: D. P. Ellerman, The Mondragon Cooperative Movement. Harvard Business School Case No (Boston: Harvard Business School, 1984).

Mondragón principles Open Membership Democratic Organisation Worker Sovereignty Instrumental and Subordinate Nature of Capital Management Participation Wage Solidarity Interco-operation Social Transformation Universal Nature Education

Mondragón Co-operative Corporation - today Mondragón Corporation, Video report of 2010 year

Summary Worker co-operative are businesses that are owned and democratically controlled by their employee members using co-operative principles. The theory of the conventional firm (profit maximisation) is ill-suited to worker co-operatives. While they are founded on the seven internationally recognised co-operative principles, worker co-operatives have a number of specific practices that form part of their code of governance. Worker co-operative must balance the democratic and operational needs of the business to achieve their objectives. Management must be conceptualised in a different manner in worker co- operative, based on functionality rather than power.

Resources and Support Co-operative and Community Financehttp:// Campaign for Sustainable Employment Co-operatives UK Worker Co-operative grouphttp:// Worker cooperative, Wikipedia article The European Confederation of Workers’ Cooperatives, Social Cooperatives and Social and Participative Enterprises The International Organisation of Industrial, Artisanal and Service Producers’ Cooperatives US Federation of Worker Co-operatives Mondragon Co-operative Corporation corporation.com/ENG.aspx. American Worker Co-operativehttp://american.coop/. International Labour Organisation

References and Reading Co-operatives UK. Worker Co-operative Code of Governance. Manchester: Co-operatives UK, Bonin, J. P., D. C. Jones, and L. Putterman. ‘Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?’ Journal of Economic Literature 31 (1993): 1290–1320. Ellerman, D. P. The Mondragon Cooperative Movement. Harvard Business School Case No Boston: Harvard Business School, Jones, D. C. ‘The Productivity Effects of Worker Directors and Financial Participation by Employees in the Firm: The Case of British Retail Cooperatives’ Industrial and Labor Relations Review 41 (1987): 79–92. Cornforth, C., A. Thomas, R. G. Spear, and J. M. Lewis. Developing Successful Worker Co-operatives. London: Sage, Mellor, M., J. Hannah, and J. Stirling. Worker Cooperatives in Theory and Practice. Milton Keynes: Open University Press, Thornley, J. Workers’ Co-operatives. London: Heinemann, Oakeshott, R. The Case for Workers’ Co-ops (2nd edition). Hampshire: Palgrave Macmillan, Ward, B. 'The Firm in Illyria: Market Syndicalism' American Economic Review 48 (1958): 566–89.