Analysing the Values and Limitations of Cooperative Firms
Analysing the Values and Limitations of Cooperative Firms
A Compilation of Academic Literature
Preface
The purpose of this document is to provide a non-partisan analysis of the current data on the benefits and limitations of cooperatives firms in the modern economy.
There are three main types of firm structures which can fall within the umbrella of cooperatives firms, and a fourth which shares certain aspects of a cooperative moreso than a conventional firm. Whether or not cooperatives should be classified as “capitalist” or “socialist” is ambiguous, outside of the scope of this document, and in my opinion, of little importance when it comes to making progress. The names for the 3 cooperative models were produced by myself to allow for easy understanding through the descriptive etymology:
Complete Autonomous Cooperatives
These firms operate with either direct or representative democracy
These firms are completely owned by the workers at the firm
No external shareholders
Autonomous Cooperatives
These firms operate with either direct or representative democracy
These firms are majority owned by the workers at the firm
External shareholder do not hold voting shares
Majority Cooperatives
These firms operate with either direct or representative democracy
These firms are majority owned by the workers at the firm
Some external shareholders may hold non-controlling voting shares
ESOP (Employee Stock Ownership) Firms
These firms may be operated in any way
The workers at these firms all own some part of the company
External shareholders may hold controlling voting shares
The first three are far more similar in nature to the fourth, as they all require some form of democratic operation, as well as for the firm to be at the least majority owned by the workers who work there. Notably, the key principle driving the primary three models tends to be maximising income, while maximising profit is the key principle for the fourth. As such it is hardly fair to characterise it as a cooperative, but nevertheless it will still be included here as many of the patterns demonstrated in the upcoming literature apply to them as well.
Towards the end of the document I will provide a more comprehensive list of the observable values and limitations of cooperatives firms, however I wish to touch on the topic of investment and financing here, as it is important to understand in order to be able to properly interpret the rest of the document.
Here is a table of possible avenues of capital financing in the form of internal equity, debt, and external equity, and whether or not they function for the models of cooperatives mentioned, ESOPs, and for conventional firms.
As shown in the table there are possible avenues for outside equity to be obtained by cooperative firms, alongside the general debt and internal equity sources. However, there is an important caveat to obtaining outside investment through shares for cooperative firms. Because labour is a cost of production (wages), and coops seek to maximise income for workers, an investment into cooperative shares will always be a riskier investment than an investment into a conventional or ESOP firm. This is because the holders of voting shares (the workers) can choose to allocate more revenue to labour (wages) as a cost of production, and as such not take it out as profit.
While it is seldom the case that cooperatives only compensate their workers in wages, it nevertheless remains a comparative risk compared to conventional and ESOP firms for investors. Because of this, there are fewer sources of external equity for cooperative firms than for conventional firms, and this makes it harder to raise capital. On the other hand cooperative firms do gain more relative to conventional firms on member capital contributions, as well as likely qualifying for more grants, although these do not appear to balance out or outweigh limitations in outside investment. There are ways for cooperatives to circumvent difficulties in acquiring capital, such as conversion, which, along with much more, will be covered in the cited literature.
As for the data collected in this document it is limited to works published in the 21st Century
Note that just because the work may have been published in the 21st century this does not necessarily mean that the data sets were obtained in the 21st century, only that the work itself was produced/published within that time period
A key limitation to practically all the literature presented within this document is that the sample sizes may be small/selective. As an effect of this it is difficult to prove causality for a lot of the relations found. The reasons for this are covered in some of the citations. This will be taken into account for the policy recommendations at the bottom of the document.
Resilience
The purpose of this paper is to examine whether or not worker cooperatives (WCs) suffer a competitive disadvantage relative to conventional firms (CFs) and also why WCs are rare in the economy
Studies of worker cooperatives in a variety of national settings indicate their failure rate is lower than conventional firms at least in the short and medium term
The implication of this research is that theories explaining the rarity of WCs by assuming they must suffer from some inefficiency should be discounted
On the other hand, existing theoretical and empirical research points to financing constraints as a key limitation on the creation of WCs, and the shift to less capital-intensive industries by US WCs also supports this conclusion
WCs in the United States are almost always created as new enterprises using funds from the worker-members themselves. The liability of adolescence experienced by new WCs makes this viable only where the initial capital requirements are low, the expected profit rate is high, or both. Except in circumstances like these workers are likely to choose conventional employment rather than the uncertain rewards of collective entrepreneurship
Notably however, these factors tending to inhibit the formation of WCs are greatly reduced when the creation occurs through the conversion of an existing firm, with the exception of portfolio diversification
Studies Co-op Survival Rates in Alberta, Canada
Incorporation and dissolution data was examined for 127 co‐operatives incorporated from 2000 to 2009
Recent data shows that three year survival rates for co‐ops incorporated in 2005 and 2006 was 81.5% compared to 48% for conventional firms in Alberta
Co‐ops operating in the same field as other co‐ops (e.g., housing, water and sewage) generally had better survival rates than those which are more innovative
The majority of capital was from member shares and loans. Securing financing from the lending sector was considered challenging for more than half of respondents
Coordinating with different regulatory organisations was one of the most significant challenges for co‐ops in terms of maintaining their momentum, optimism and financial viability
Reasons for failure of co‐ops were most often cited as being rooted in external factors, particularly shifting markets and regulatory requirements. Internal factors were cited less often, but included lack of a united vision and dishonesty among members
The main resources respondents felt they lacked where
Someone to provide mentorship and/or coordination of activities
Start up capital/venture capital fund
A package of available resources upon incorporation
Studies the survival of worker managed firms (WMFs) and conventional firms (CFs) in Uruguay
After excluding microenterprises and controlling for differences in the effective tax burden faced by the two types of firms, the hazard of dissolution is 29% lower for WMFs than for conventional firms
The higher survival rates of worker-managed firms seem to be associated with their greater employment stability
WMFs outperform CFs under both recessionary and expansionary macroeconomic conditions
The fact that WMFs survive longer may partially reflect self-selection by both WMFs into industries and workers into organisational forms
Ministry of Economic Development, Innovation and Export in Québec 08
Examine the survival rates of coops in Québec
It finds 62% of coops surviving after 5 years and 44% after 10 years
This statistic is relevant once compared to the survival rate of other forms of Québec business enterprise, which are 35% after 5 years and 20% after 10 years
This demonstrates that the survival rate of co-operatives surpasses other business enterprises by an average of 25%, during the first 10 years of operation
After the first year alone, only 6.7% of co-ops closed their doors, compared to 24.6% of other businesses
Coops retain higher survivability regardless of quantity of employees
Notably, the survival rate of co-ops with less than 5 employees is higher than that of cooperatives with more than 5 employees
Coops also survive better in rural areas than in urban ones
Four factors indicate that the higher survival rate is specifically due to the inherent structure of the co-op model:
The focus on member service as opposed to profit, which has an impact on business decisions
The central role of the member, who is both investor and consumer in the co-op
The democratic nature, the return of profits to members and the open governance structure of co-ops
The presence of a group of promoters rooted within the communities
Three factors also indicate a historical advantage, as well as the business environment of co-ops:
Strong representation in economic sectors that fulfil basic human needs, including agriculture, forestry, residential services, funeral services and education
The majority of co-ops operating in both regional and sectoral networks
Support of primary and secondary organisations, which favours improved project management of start-ups and in the development and presence of financial and fiscal tools and resources, which are adapted to the co-op model
Examine the survival rates of coops in British Columbia
Overall, the survival rate of co-operatives in BC is significantly higher than that of conventional, capitalist forms of business
The 5-year survival rate of both operating and dissolved co-ops is 100 out of 150 co-ops (for which we have data) or 66.6%
By contrast, Industry Canada figures show a 43% and 39% 5-year survival rate for conventional business start-ups in 1984 and 1993 respectively
This study uses data on all U.S. public companies as of 1988, following them through 2001 to examine how employee ownership is related to survival
Estimation using Weibull survival models shows that companies with employee ownership stakes of 5% or more were only 76% as likely as firms without employee ownership to disappear in this period, compared both to all other public companies and to a closely matched sample without employee ownership
While employee ownership is associated with higher productivity, the greater survival rate of these companies is not explained by higher productivity, financial strength, or compensation flexibility
Rather, the higher survival is linked to their greater employment stability, suggesting that employee ownership companies may provide greater employment security as part of an effort to build a more cooperative culture, which can increase employee commitment, training, and willingness to make adjustments when economic difficulties occur
Wage Structure
Investigates the differences between worker-owned and capitalist enterprises with respect to wages, employment, and capital in Italy
Employment was somewhat less responsive to product market shocks in co-ops than in capitalist firms, which is consistent with the notion that enterprises where workers command a greater voice will protect workers from employment reductions
Wages tended to be more sensitive to product market shocks in co-ops than in capitalist firms
In conclusion, co-ops had 14% lower wages than capitalist enterprises, on average; more volatile wages; and less volatile employment. Given the quality of the data set analysed, the authors argue, these results can be regarded as having broad generality
This paper reviews existing literature on worker cooperatives
When market conditions change worker cooperatives review wages first and keep employment more stable. In a downturn worker co-operatives drop wages rather than reducing their workforce. When business picks up they are ready to respond and can make up for lost pay because employees enjoy a share of profit
Worker co-ops are larger than other firms and not necessarily less capital intensive, although they may be created more often than other firms in less capital intensive industries, all else being equal
The reason for coops being on average larger is likely because a lot of existing cooperatives were converted from traditional firms
They are present in most industries and differences in industry distributions with conventional firms vary from one country to another
This paper measures the comparative behaviour of worker cooperatives (WCs) and capitalist firms (CFs) in regards to wages and employment responses in Uruguay
The effect of output price changes on wage variations is positive for both types of firms, but larger in WCs than in CFs
CFs exhibit a well-defined and negative relationship between wages and employment
By contrast, WCs display a well-defined and positive relationship between wages and employment
The 2002 crisis negatively affected both wages and employment, although the employment adjustment was larger in CFs than in WCs. CFs would produce a socially inefficient level of lay-offs due to their inability to establish credible commitments between owners and workers
By contrast, because of their unique control structure, WCs would have more egalitarian adjustment mechanisms at their disposal
This paper studies the effects of the more compressed worker managed firm (WMFs) compensation structures and what effects they have on employment
The paper has 2 key findings
Firstly, is a small wage premium associated with being employed in a WMF, which declines significantly with increasing wage
Secondly, WMFs suffer from brain drain: the separation hazard of high-ability members is more than three times higher than that of low-ability members
Moreover it finds that there is a relationship between the extent of pay compression and the severity of brain drain in WMFs: high-ability workers are less likely to exit a WMF whose wage structure is less compressed
The explanation for this is likely that these high ability workers would be able to attain a higher wage in a non WMF as the wages are less compressed
There is one notable exception to this pattern, that being high-ability workers who also were founding members, these high-ability workers have a far lower separation hazard rate than other high-ability workers
However, the costs of equality associated with brain drain and inferior management quality may be outweighed by other labour discipline benefits, such as higher motivation of shop-floor workers, greater workplace cooperation and lower supervision costs
Examines productivity and survivability of worker cooperatives
Worker cooperatives and other employee owned enterprises generally pay wages that are competitive or better than locally prevailing wages when profit-sharing, bonuses and dividends are included
Coops are less likely to lay off workers during economic downturns, prefeing to share to work, even accepting a lower price of the product in order to remain in the market and maintain production and employment
They tend to offer better fringe benefits than conventional companies in their field
Productivity
Examines productivity and survivability of worker cooperatives
Considerable evidence from the developed countries shows that participatory worker cooperatives and employee-owned firms can match or exceed the productivity of conventional firms
The survival rate of worker cooperatives and employee-owned firms appears to equal or surpass that of conventional firms
It seems clear from the empirical literature that farm and business cooperatives have a net positive impact on value added per hour worked when both the cooperative and its member units are included in the analysis
In sum, there is no great accumulation of evidence to suggest that cooperatives and employee-owned enterprises are less productive than conventional firms, and substantial evidence that they at least equal, and probably exceed, the productivity of their conventional counterparts
A meta‐analysis of 102 samples representing 56,984 firms aimed at studying the effects of employee ownership on productivity
The analysis found that Employee ownership has a small, but positive and statistically significant relation to firm performance ( = 0.04)
The effect is generally positive for studies with different sampling designs (samples assessing change in performance pre‐employee–post‐employee ownership adoption or samples on firms with employee ownership), different performance operationalisation (efficiency or growth) and firm type (publicly held or privately held)
It found no differences in effects on performance in publicly held versus privately held firms, stock or stock option‐based ownership plans or differences in effects across different firm sizes (i.e. number of employees)
It found that the effect of employee ownership on performance has increased in studies over time and that studies with samples from outside the USA report stronger effects than those within
There is a possibility of bias in sampling where employees in ownership firms are less likely to respond than employees in non-ownership firms
Additionally, among the pool of employees, employees most influenced by employee ownership may also be more likely to respond
However, it finds little to no evidence of publication bias
In closing, by drawing on studies from multiple disciplines that include samples from firms around the world, the present meta-analysis provides more generalizable inferences on the role of employee ownership on performance
The paper compares the productivity of labour-managed and conventional firms using two new panel data sets covering several thousand firms from France, including representative samples of conventional firms and all worker cooperatives with 20 employees or more in manufacturing and services
It finds worker cooperatives to be as productive or possibly more productive overall than conventional firms in most industries
These findings suggest that the way in which worker cooperatives organise production is probably more productive overall than conventional firms’ way
In several industries, French worker cooperatives produce in such a way that they use their current inputs better than conventional firms, which could produce more at their current levels of inputs if they behaved in the same way as worker cooperatives
Univariate comparisons show that worker cooperatives are not smaller than conventional firms in all industries and are observed to expand their capital at least as fast as conventional firms
Although we find consistent evidence that worker cooperatives are at least as productive as conventional firms and do not produce at inefficient scale, behaviours observed for both types of firms, as well as differences between the two groups, seem to vary across time periods and stages in the business cycle, and are not entirely homogeneous across industries
This paper analyses the relative productive efficiency between cooperatives and investor owned firms in Portugal
Utilises two calculation systems to reach its results
The first system (the benchmark random‐effects model) suggests that cooperatives are, on average, considerably less productive than their investor-owned counterparts, and this result applies to a majority of the thirteen industries considered
The second, author preferred, System‐GMM calculation system is much less conclusive, and does not conclude that cooperatives are generally less efficient that investor‐owned firms
Nevertheless it finds no evidence that cooperatives are more productive than investor‐owned firms in any industry.
Notably, the research does not conflict with the general idea that cooperatives have significantly higher survival rates
This data seems to suggest that the performance in productivity for worker cooperatives is highly dependant and varies greatly depending on the industry
Worker satisfaction and wellbeing
This study analyzes the causal linkages between well-being, income, health problems, worries, autonomy and hours worked in the job for working German individuals from 1984-2008
Given that autonomy and hours worked are the key causal drivers, it seems that individuals first choose their career trajectory in terms of autonomy or personal freedom, then decide how much to work (intensity down this trajectory), and well-being (work satisfaction and life satisfaction) is the result of these decisions.
Finding that autonomy is such an important non-pecuniary determinant of individual well-being is consistent with the predictions of self-determination theory and prompts a more prominent role for autonomy in labour economics
Individuals aiming at improving their workplace and general well-being are well advised to seek out work that allows them room for self-determined action and discretion
Investigates the role of cooperative enterprise in in the creation of social trust in Italy
The findings suggest that, unlike any other type of enterprise, cooperatives have a particular ability to foster the development of social trust
This supports the view that the development of cooperative enterprises—and, more generally, of less hierarchical models of governance and of enterprises that do not aim purely to maximise profit—may play a crucial role in the diffusion of trust and in the accumulation of social capital
Trust reduces uncertainty and transaction costs, enforces contracts, and facilitates credit at the level of individual investors, thereby enhancing the efficiency of exchanges and encouraging investment in ideas, human capital and physical capital
The cross sectional design of the survey has prevented it from controlling for fixed effects at the individual level. In addition, it did not carry out fully randomised experiments, and it has not been able to isolate suitable instrumental variables
Hence, it cannot exclude the existence of some form of endogeneity leading to inconsistent estimates
Investigates the relationships between job demands and job search behaviours in regards to employee attitudes and behaviours for cooperatives in Seoul, South Korea
The findings revealed that worker cooperatives moderated the relationship between job demands and organisational commitment
In other words, while the negative relationship between job demands and organisational commitment was significant in capitalist firms, it was not maintained in worker cooperatives
A potential limitation of the present study is that individual-level variables were measured by self-reports
This paper examines job satisfaction and participation in decision making in three home health aide facilities with different organisational structures (worker-owned for-profit, for-profit with no participation or ownership by workers, and nonprofit)
More than 600 surveys were completed by home health aides across the three facilities. The author also engaged in participant observation during training sessions and other meetings and conducted a small number of interviews with caregivers and agency management
Home health aides at the worker-owned, participative decision making organisation were significantly more satisfied with their jobs
This study involved respondents from one of each type of business
A study across several of each type of organisation would allow more focus on the effects of the structural characteristics of the organisations
Studies the effect of employee ownership on company culture and function
The analysis of the data set finds that shared ownership forms of pay are associated with high-trust supervision, participation in decisions, and information sharing, and with a variety of positive perceptions of company culture
It is also associated with lower voluntary turnover and higher return on equity
The random-effects estimates mainly reflect comparisons between rather than within firms, raising the possibility that there are unobserved firm characteristics that help account for the findings
Nevertheless, these results indicate that group incentives are likely to have positive effects if implemented in the appropriate way – with supportive HR policies rather than on their own
Additionally these results indicate that public policy supporting group incentives, which may be motivated by a concern to increase middle class incomes and share the rewards of economic performance more broadly, is unlikely to harm and may even improve economic performance
Investigates 2 major cooperative leagues (Mondragon in Spain and La Lega in Italy) and the way they interact with other cooperatives and form economies of scale
The findings suggest that coops perform better in markets which have a pre-established cooperative league
On the one hand it seems that players would have an incentive to form such a league since they can look forward and calculate the incentives of other players to participate in this league once it has exceeded some critical threshold
On the other hand, if the cost of forming such a league is borne primarily by the early movers, then players would have an incentive to wait and let others go first
As such the absence of cooperative leagues is believed to be a disincentive for the formation of new cooperatives
Conclusion
Based on the literature presented in this document we can identify a number of values and limitations of cooperative firms.
Values
Cooperatives appear to be significantly more resilient than conventional firms, both during regular market conditions and especially during crisis and downturns
As such cooperatives may be an effective way of reducing unemployment
Due to their resilience, they may be able to attract large institutional investors, such as pension funds and the like, who are principally looking for a secure investment
The compressed wage structures and collective ownership of cooperatives lead to a higher median wage compared to similarly sized conventional firms
This compressed wage structure also forms a more equitable wage distribution, reducing inequality and the need for additional wealth redistribution policies
Cooperative firms appear to be more productive than conventional firms, although this is more true for certain sectors than for others
Worker satisfaction and wellbeing appear to be higher in cooperative firms than in similar conventional firms
All these positive effects are increased depending on how coop heavy the sector of the economy is
Limitations
How to prevent the abuse of contract labour?
Employing a worker for a short period of time and then firing them before they are allocated their vote and/or share of the company
How to capture high skill labour?
Due to the more compressed wage structures high skilled workers often have a higher rate of resignation
How to mitigate the free rider problem?
Due to the fact that there is a collective rise in income based on firm performance some workers may not pull their weight
How to mitigate start up costs for cooperatives?
Starting up cooperatives from scratch is an expensive and risky endeavour for the founding members
How to compensate for the lack of certain sources of outside equity?
Due to the nature of cooperatives certain means of procuring outside equity is unavailable cooperative firms
How to motivate cooperatives to try experimental practices?
Due to the fact that cooperatives on average have less capital to fall back on, and that the workers livelihoods are strongly tied to the performance of the firm, engagement in innovative, risky practices may be reduced
Potential Policy Proposals
The current literature on cooperative firms does NOT warrant blanket mandates for cooperative firms on the economy as a whole, or even specific sectors of it at this point in time. Additionally, a co-op mandate on certain sectors or the economy as a whole may reduce or get rid of certain premiums discussed in this document, and as such more research is needed before we consider such policies. These policy proposals are aimed at taking advantage of the established benefits of coops, as well as facilitate the production of new, more comprehensive literature on the role of cooperative firms on the economy.
The addition of tax incentives for the cooperative firms
Preferential tax codes which lessen the tax burdens of cooperatives would encourage their growth
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
The addition of tax incentives for owners to turn their firm into a cooperative
Firm conversion is one of the best ways by which to establish coops
Firm conversion mitigates the severity of several coop limitations such as
Start up costs
Lack of certain outside equity sources
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
The addition of preferential/subsidised loans/grants for cooperatives
Mitigates limitations of capital acquisition
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
The creation of cooperative educational and training programs
Competition and conventional firms are the dominant business culture
Programs which seek to educate and train on cooperative business models and worker/management technique will increase supply of specialised cooperative labour
The funding of research into cooperatives and their effects
More research into the benefits and limitations of cooperative firms will allow us to be able to draft more pointed legislation which further capitalises on cooperative values while mitigating the limitations
More research will also allow us the ascertain the validity of the values and limitations mentioned in this document with greater certainty
Government loans for employees willing to buy firms from owners
Firm conversion is one of the best ways by which to establish coops
Firm conversion mitigates the severity of several coop limitations such as
Start up costs
Lack of certain outside equity sources
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
Capital gains tax cuts for owners selling firms to employees
Firm conversion is one of the best ways by which to establish coops
Firm conversion mitigates the severity of several coop limitations such as
Start up costs
Lack of certain outside equity sources
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
Preferential purchasing rights for employees of a firm facing closure/dissolution/sale
Firm conversion is one of the best ways by which to establish coops
Firm conversion mitigates the severity of several coop limitations such as
Start up costs
Lack of certain outside equity sources
This also reduces the need for government redistribution programs, making up for the loss of tax revenue, as well as stimulates economic growth, which generates more tax revenue
Promotion of unions
Unions (especially trade unions) can facilitate the formation of new cooperatives, as well as conversions, through union funds and other organisational structures
Fight against pseudo (contract) cooperatives
Workers rights legislation needs to be set in place to reduce the risk of being laid off prior to obtaining a vote/share of the firm
Beyond what is laid out above, these policies will also collectively increase the likelihood of forming cooperative leagues within economic sectors
Cooperative leagues have been shown to
Increase the magnitude of cooperative benefits
Allow for an improved capture of high skill due to vertical integration of cooperatives
Increases the likelihood of higher quality organisation which may take more effective action against the free rider problem
Mitigates the costs of new cooperatives/wings forming
Facilitates the acquisition of outside equity through economies of scale
Due to increased capital to fall back on, the disincentives for cooperative innovation are mitigated or eliminated
The likely reductions in unemployment, especially during economic downturns, will also decrease the fiscal burden on government, and as such further compensate for the fiscal costs of a lot of the aforementioned policy proposals.