Starting a Worker Owned Cooperative

Starting a Worker Owned Cooperative

By Frank Adams

Vol. 10, No. 2, 1988, pp. 20-22

There are a variety of reasons for starting a worker cooperative. They include workers’ desires to own and work in a business where human values are of equal importance to productivity and profits, an owner’s decision to retire or sell an existing business, the threat of a plant closing, or a community’s determination to help create jobs by starting a new business. Whatever the reasons for starting a worker cooperative, there are several steps which can be taken to increase the probability of success.

Most new businesses, including worker-owned cooperatives, typically develop through four phases:

Organizing. A three to six-month period in which the decision to organize is made.

Startup. A phase that usually lasts for six months in which the basic business strategy is tested.

Growth. A phase that may last for several years in which the markets are expanded, management techniques and governance systems are refined, production techniques are altered as dictated by experience, and the workforce is expanded.

Consolidation. The phase in which the worker-owners assess their experience in reaching the targeted growth and develop the firm’s goals and strategies for the next three to five years.

During the organizing phase prospective worker-owners

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must decide whether they really want to establish a worker cooperative. If, for whatever reason, you are thinking of forming a worker-owned, democratically controlled business, either to produce goods or provide services, you must ask yourselves some hard questions about your motivation and the risks involved.

Are your reasons for wanting to start a worker-owned business sound? Do you and your prospective fellow owners share a common understanding and enthusiasm for the venture? Do you have a viable business idea or concept? Is there a market for your proposed product or service? If so, is the market growing or shrinking?

Are you knowledgeable about the various legal and organizational forms which can be used to set up a democratic workplace? Is a worker cooperative the type of business you want to set up? What about finances? Do you have sufficient money to start or buy a business? How much money will have to come out of your own pockets and where can you obtain the rest?

Worker cooperatives are for-profit businesses in which only the firm’s employees can be owners, usually after a probationary period. Worker cooperatives are somewhat different from consumer and agricultural producer cooperatives. Consumer cooperatives are owned and controlled by their patrons (customers) who want to purchase high quality groceries at reasonable prices and obtain cost savings on other consumer goods. Producer cooperatives are primarily supply and marketing cooperatives created by independent farmers to purchase farm supplies or process and market their products. Neither type is owned or controlled by its employees, and neither type sees worker ownership and workplace democracy as its primary objectives.

Worker cooperatives are usually started by more than one person. The organizing group, or steering committee, understands and accepts the basic tenets of workplace democracy:

~ Every worker-owner owns one membership share which entitles him/her to vote in the election of a board of directors and to participate in self-governance;

~ All worker-owners contribute both labor and capital; No one outside the firm can be an owner. Profits earned or losses sustained are allocated to worker-owners according to hours worked, gross pay, or both;

~ Wages vary according to skill and seniority, but usually the range between the highest and lowest paid workers and managers does not exceed a ratio of 5:1. This fosters the well-being of the entire group and insures that a few do not get rich in comparison with, or at the expense of, the lower paid workers.

Reading and agreeing with these tenets is easy, but putting them into practice in a business is tough. The fundamentals of worker-ownership are almost self-defining, but because most workers have had little or no experience owning or managing their workplace, putting these principles into practice requires experimentation, patience, and attention to fairness.

In order to fully understand worker cooperatives, it is necessary to talk about the relationship of money and ownership to employees and workers. Money is needed to organize a worker with materials and a place to work, to meet the expenses of daily operation, and to use when the going gets tough or business recessions occur. Whoever puts up the money to start the business becomes an owner and holds equity in the enterprise. These investors take the financial risks and earn the financial rewards of entrepreneurship.

In a traditional for-profit capitalist corporation, the degree of control is directly related to the equity held by the individual investor. Investors do not have to work in the business to exercise the rights of control. Dividends on the net profits of the business are paid out to the stockholders according to the size of their equity investment as denominated in the number of shares they own.

Unlike traditional capitalist corporations, worker cooperatives give workers control of the business on a one person-one vote basis without regard to their level of equity except for the membership fee paid by each worker-member upon joining. The membership fee is a capital contribution equal to the contribution of every other member, which puts the new member at equal risk with fellow worker-owners. The balance sheet of a worker cooperative differs in several

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ways from a traditional firm where capital controls labor. In a pure labor-managed cooperative only workers are shareholders, and each owns only one share of stock. A member’s one share of stock is divided into two parts, political and economic rights, which have differing but related functions. First, a worker-member’s share of stock insures a right to vote, certain other membership rights, and the right to a share of any profit or loss. These constitute the political rights of worker-ownership. Second, a share of stock assigns the net worth of the cooperative’s assets to a system of internal capital accounts. An account is established for each member-worker. The initial balance in these accounts is the membership or equity contribution made by each member upon joining the cooperative. These internal accounts are the repository of the economic rights of the worker-owners. They derive from the contribution of labor, not the purchase of stock shares.

The worker cooperative system of internal accounts generates internal debt capital for expansion and modernization, creates reserves against recessions, and provides worker-members with a share of equity.

It is largely through the internal, individual accounts system that a worker cooperative raises the owner’s share of risk capital to start a business and generates the internal debt capital to run a business. The internal accounts also help effectuate the principles of workplace democracy.

Another unique feature of work cooperatives is their policy of employment security. They make every effort to keep their members employed even during economic downturns. In a conventional capitalist firm, workers directly involved in the production of goods and services are assumed to be expendable. They can be hired and fired as demand warrants. Direct labor is determined by production, which is a function of sales and the desired level of inventory investment. If sales decline, workers are laid off or dismissed so that inventory does not build up too high.

In a worker cooperative these relationships are reversed. After a probationary period workers are either accepted into membership or rejected from membership and terminated. Thus the amount of labor is fixed, at least in the short run. Since the number of workers (and the labor available) determines production, in order to match production with sales it is necessary to adjust inventories upward or reduce prices of products or services to maintain sales volume during economic downturns.

During business downturns or recessions worker cooperatives use a variety of techniques to maintain employment levels and prevent layoffs. Worksharing, aggressive sales efforts including reductions in prices, and ultimately shared reductions in income, may be used as part of the strategy of balancing the production and sales equation.

Placing people ahead of profits in a worker cooperative increases the importance of the planning process and of maintaining a flexible workforce; it also accentuates the need for good management. These are the same employment security principles which have used so successfully during the past two decades by a few enlightened American firms, and by the Basque worker cooperatives in Spain.

Frank Adams is author of Putting Democracy to Work, a practical guide to worker cooperatives.