Dr Rory Ridley-Duff- the contribution of co-operatives to social enterprise

Presentation for Northampton University

Advancing Social Enterprise Education

The place of employee-owned and cooperative enterprises in the social enterprise movement

Dr Rory Ridley-Duff, Sheffield Business School

(email [email protected])

Course Leader - MSc Co-operative and Social Enterprise Management

UnLtd/HEFCE Ambassador for Social Enterprise

25th March 2011

An orientation for this talk…

“Anyone unable to learn from history is living in the dark ages.”

Theorising ‘social’ in social enterprise

• Social purpose enterprises (most CICs, CLGs, Charities):– Where social enterprise is seen as ‘business with a social purpose’, only the task

of the enterprise is socialised.– Relationships are developed to pursue a (social) mission, and are justified if they

contribute to the organisation’s mission to improve human well-being.– The underlying management philosophy remains unchanged, usually rooted in

‘rationalist’ and ‘managerialist’ logic based on board control.

• Socialised enterprises (IPSs, some CLSs, CICs/CLGs):– Where social enterprise is seen as the ‘socialising’ of entrepreneurial and

business processes, both power and task are socialised.– Relationships viewed as ‘ends’ not ‘means’: economic activity is selected on the

basis of its contribution to social well-being.– Management philosophy is changed, based on concepts such as ‘mutuality’,

‘reciprocity’, ‘representative and/or direct democracy’.

Ridley-Duff, R. J. (2010b) “Social Rationality and its Implications for Social Entrepreneurial Thinking”, Plenary to 2010 Research Colloquium on Social Entrepreneurship, Oxford University, 22nd – 25th June 2010.

Theorising ‘social’ in social enterpriseThe word “private” is used in two senses: (1) “private” in the sense of being non-governmental, and (2) “private” in the sense of being based on private property.

Let us drop the first meaning and retain the second.

Similarly “public” is used in two senses: (1)“public” in the sense of being governmental, and (2) “public” in the sense of being based on personal rights.

Let us use the second meaning and take it as the definition of “social” (instead of “public”).

Thus we have the suggested redefinitions: Social institution = based on personal rights.Private organization = based on property rights.

By these redefinitions, a democratic firm is a social institution (while still being “private” in the other sense of being not of the government), while a capitalist corporation is a private firm (not because it is also non-governmental but because it is based on property rights). [emphasis added].

Based on Ellerman, D. (1997, [1990]) The Democratic Corporation, Beijing: Xinhua Publishing House. p. 38, http://www.ellerman.org/Davids-Stuff/Books/demofirm.doc

Theorising ‘social’ in social enterprise

What is mutuality?“The essential characteristic of a mutual business is that those who contribute to a common fund as part of a scheme for their mutual benefit must be the same persons as those who are entitled to participate in any surplus that arises from the operation of the scheme.”

HM Revenue and Customs: http://www.hmrc.gov.uk/manuals/gimanual/gim9010.htm

“Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.”

ICA, Third Cooperative Principle

Source: http://www.scottish.parliament.uk/s3/committees/eet/inquiries/banking/CooperationandMutualityScotland.pdf

The history of mutuality in the UK

• Profit-sharing cooperatives started in 1769 (in Scotland) and from the 1790s in the US.

• The first journal for cooperatives was established in 1824 (20 years before the ‘first’ set of cooperative principles).

• In 1834, the UK Government passed the Poor Laws Amendment Act to cut welfare payments by 50%.

• The Poor Laws started to distinguish between the ‘deserving poor’ and the ‘undeserving poor’.

• Charities supported the ‘deserving poor’ while the ‘undeserving poor’ formed a network of Friendly Societies.

Ridley-Duff and Bull (2011), Chapter 1

The history of mutuality in the UK

• By 1905, the ‘vast majority’ of working families (estimated at 80% in Australia) obtained welfare and medical help through a network of friendly and mutual societies (Weinbren, 2008).

• The government nationalised welfare provision in 1911 (National Insurance Act).

• In the 1930s, Britain’s network of cooperative retail societies accounted for 54% of the national grocery market (by 2006, it was only 15%).

Source: http://home.wlv.ac.uk/~in6086/2007conf.html

• To put this into perspective, cooperative societies in the past achieved nearly double Tesco’s market share (approximately 30%).

ICA definition of a worker co-operativeOn the basis of the definition, values and principles enshrined in the Statement on the Cooperative Identity (Manchester, 1995), and incorporated in ILO Recommendation 193 / 2002 on the Promotion of Cooperatives:

1.They aim to create and maintain sustainable jobs and generate wealth, in order to improve the quality of life of the worker-members, dignify human work, allow workers’ democratic self-management and promote community and local development.

2.The free and voluntary membership of their members, in order to contribute with their personal work and economic resources, is conditioned by the existence of workplaces.

3.As a general rule, work shall be carried out by the members. This implies that the majority of the workers in a given worker cooperative enterprise are members and vice versa. [Most staff are members, and most members are staff]

4.The worker-members’ relation with their cooperative shall be considered as different to that of conventional wage-based labour and to that of autonomous individual work.

5.Their internal regulation is formally defined by regimes that are democratically agreed upon and accepted by the worker-members.

6.They shall be autonomous and independent, before the State and third parties, in their labour relations and management, and in the usage and management of the means of production.

•Based on CIPOPA (2005) World Declaration of Worker Co-operatives, Approved by ICA General Assembly

Typology of Worker Co-operativesCommon Ownership

Workers do not share in the assets of the company

Individual / Collective Ownership

Workers and stakeholder groups share the assets of the company

Non-Equity Common ownerships. Limited profit distribution in equal proportions. Reserves and assets belong to the organisation, not members.

Mondragon style co-ops and co-operative societies that provide for internal capital accounts that are re-valued as fixed assets vary in value. A proportion of profit accrues to their account (and is owned by the individual member). Interest is paid on the full balance each year. Reserves and assets belong to members collectively.

Equity-based

Common ownerships that allow equity that does not rise/fall in line with market values (par value shares). Limited profit distribution according to equity holdings. Reserves and assets commonly owned, not member-owned.

CLSs combined with EBTs / ESOPs in the UK/US and elsewhere or Labour Companies (Sociedad Anonima Laboral) in Spain that support majority employee‑ownership. Equity rises and falls in line with market values and dividends are allocated member accounts. Share values reflect the market worth of the company. Reserves and assets belong to members.

Ridley-Duff, R. J. (2009) Co-operative Social Enterprises, Social Enterprise Journal, 5(1): 50-68. Table 1.

The contribution of co-operatives and employee-ownership to social enterprise• Combined individual and collective ownership increases the viability,

durability and political efficacy of social entrepreneurship (Matrix Evidence, 2010).

- Staff in the Mondragon co-operatives report 3 – 5 times more ‘voice’ in key decisions, more effective and efficient use of resources, and 1000% higher investment in social and educational projects. than comparable private companies (Bradley and Gelb, 1982)

- A recent study of 41 UK employee-owned businesses (EOB) and 22 non-EOB businesses concluded that:

• EOBs staff numbers grew at 12.7% during the 2007/08 recession compared to 2.7% for non-EOBs.

• EOBs sales grew at 11% during the 2007/08 recession compared to 0.61% for non-EOBs.

• EOBs reacted to the recession by investing in jobs and quality, rather than cutting jobs.

- Lampel et al. (2010)

- A study of 10 worker co-operatives (5 with shareholding, 5 without) suggested that staff / community share capital is linked to growth that is 3 - 5 times faster than asset-locked or non-share capital co-operatives, but also greater volatility.

- Ridley-Duff (2009)

Video – The Mondragon Experiment

• BBC documentary about the early years of the Mondragon co-operative network.

• Made in early 1980s

• http://video.google.com/videoplay?docid=7565584850785786404&hl=en

• (play 9:30 to 25:50)

Social and Private Enterprise ComparedMondragon Cooperative Corporation US Multinational Corporations

Shareholders Now over 100,000 co-operative owners (about 80% of workforce). Owners are all workers and/or consumers. Supporting organisations can have a voice in ‘secondary’ cooperatives. Open membership system (not limited by ability to pay as contribution is linked to starting salary, and ‘people’s bank’ provides loan finance).

Capital owners typically managers and/or institutional investors (limited only by ability to pay). Since the 1950s, substantial interest in employee-ownership (usually without voting rights).

Leadership President elected by members for four-year term (maximum two terms). Governing council comprised of 7, 9 or 12 workers/consumers. Social council(s) elected from the workforce in each department.

Elections rare (if at all). CEO appointed by directors. Directors appointed/elected by shareholders (one share, one vote). Rarely includes consumer or worker representatives, and leadership role for trade unions.

Ratio of highest to lowest paid

Typically 5:1 (maximum 9:1) – stable (highest to lowest paid worker).

Source: “Wage Regulation”, http://en.wikipedia.org/wiki/Mondragon_Corporation, accessed 1st December 2010.

Increased from 85:1 to 419:1 throughout the 1990s (highest to average employee).

Source: Aslam (1999), US Labor Statistics.

Cooperative Values at Mondragon

Source: http://www.mondragon-corporation.com/mcc_dotnetnuke/Portals/0/documentos/eng/management-model/mgc.swf

Social and Private Enterprise Compared

1. There is no barrier to social enterprises being as ‘successful’ as ‘private’ corporations (whether measured by social and/or economic metrics).

2. The legal forms adopted change the interests that are served (why are the ‘cheapest season ticket’ prices so different at Arsenal and Barcelona?).

Source: Conn, 2006 Barcelona

(based on citizenship rights)

Arsenal

(based on property rights)Shareholders 142,000 members (“socios”), one

member, one vote.

4 major shareholders own 87% of voting shares.

Leadership President elected by members for four-year term (maximum two terms).

No meaningful elections. Chair of the Board decided by major shareholders.

Cheapest adult season ticket

£69 £885

Most expensive adult season ticket

£579 £1,825

• A large number of (sympathetic) researchers attribute the slow spread (and periodic decline) of social enterprises in the UK to the absence of a share capital structure that enfranchises the enterprise’s wider stakeholders.

• Legacy of Labour Movement commitment to ‘common ownership’

• In the ‘private’ economy, share capital is bought or acquired primarily by institutional investors and founding entrepreneurs/managers. This is not the only possible arrangement.

• Why not issue labour shares to recognise and attract workforce support?

• Why not offer community shares to recognise and attract community support?

• One-vote, one-stakeholder can be combined with variable dividends depending on the stakeholders’ (labour and/or trading) contribution?

• Using ‘shares’ creatively can assist new forms of mutuality and reciprocity, and help to socialise power and wealth distribution in a community.

Share Capital – Getting Creative

Social Enterprise - Model Rules (Four cases)

Model Rules Brief DescriptionStakeholder Model Ltd (Case 7.1)

The rules were designed by Geof Cox Associates, a specialist in the development and support of Social Firms, and were published by the Common Cause Foundation in 2006. Underpinned by a Company Limited by Shares, the model rules define the power of an active board, elected by each shareholder group. Three share types are defined:Stewardship SharesPartnership / Customer SharesInvestment Shares

Cooperative CIC Model

(Case 7.2)

Designed and published by CooperativesUK in response to the introduction of Community Interest Company legislation (2005). Underpinned by a Company Limited by Guarantee, the model rules are framed to encourage active service-user and workforce-based membership on the basis of one person, one-vote, with a commitment to consult:‑EmployeesFundersSuppliersCustomersCommunity representatives

Social Enterprise Model Rules (4 cases)

Model Rules Brief DescriptionNewCo Model

(Case 7.3)

Designed by Morgan Killick and Bill Barker in 2002, with support from the Sheffield Community Economic Development Unit (SCEDU). Underpinned by a Company Limited by Shares, a 2004 version developed rules giving control and decision making power to three classes of shareholder, and ‑investment rights to a fourth:Class A Shares (for social entrepreneurs)Class B Shares (for social economy organisations)Class C Shares (for employees)Class D Shares (for supporting organisations)

Surplus Sharing Model

(Case 7.4)

With a heritage stretching back to the work of Guy Major and Gavin Body in the mid-1990s, the surplus sharing rules developed by Rory Ridley-Duff, at Sheffield Business School, embrace cooperative principles across the labour/capital divide. The rules provide for active membership control on the basis of one-person, one vote, with special provisions for issuing:Founder SharesLabour SharesInvestor Shares

References / ReadingAslam, A. (1999) “U.S. Wage Gap Widens”, Global Policy Forum, http://www.globalpolicy.org/component/content/article/218-

injustice-and-inequality/46639.html, accessed 14 December 2009. The claim is based on data from the US Bureau of Labor Statistics.

Bradley, K. and Gelb, A. (1983) Cooperation at Work: The Mondragon Experience, Heinemann Books.

Conn, D. (2006) “Barcelona‟s Model of Integrity Show Rights is Might”, The Guardian, 17th May, http://www.guardian.co.uk/football/2006/may/17/championsleague.europeanfootball, accessed 20th January 2010.

Cornforth, C. J., Thomas, A., Spear, R. G. and Lewis, J. M. (1988) Developing Successful Worker Co-ops, London: Sage Publications.

Coule, T. (2008) Sustainability in Voluntary Organisations: Exploring the Dynamics of Organisational Strategy, unpublished PhD Thesis, Sheffield Hallam University.

Ellerman, D. (1997) The Democratic Corporation, Beijing: Xinhua Publishing House. First published as ‘The Democratic Firm’ in 1990.

Matrix Evidence (2010) The employee-ownership effect: a review of the evidence, Employee Ownership Association.

Lampel, J., Bhalla, A. and Jha, P. (2010) Model Growth: Do employee-owned businesses delivery sustainable performance? John Lewis Partnership.

Ridley-Duff, R. J. (2009) “Cooperative Social Enterprises: Company Rules, Access to the Finance and Management Practice”, Social Enterprise Journal, 5(1): 50-69.

Ridley-Duff, R. J. (2010a) “Communitarian Corporate Governance: Case Evidence from the Mondragon Cooperative Corporation and School Trends Ltd”, Social Enterprise Journal, 6(2): 125-145.

Ridley-Duff, R. J. (2010b) “Social Rationality and its Implications for Social Entrepreneurial Thinking”, Plenary to 2010 Research Colloquium on Social Entrepreneurship, Oxford University, 22nd – 25th June 2010.

Ridley-Duff, R. J. and Bull, M. (2011) Understanding Social Enterprise: Theory and Practice, London: Sage Publications, (in press).

Weinbren, D. (2008) Families and Friendly Societies, Friendly Society Research Group.