Co-op basics

Cooperative Basics

Cooperatives are businesses that are owned and governed by their members, who form the cooperatives to meet their needs. Co-ops can form as new start-ups or as a transformation of a conventionally-owned business. This report considers four major types of cooperatives:  Consumer, Employee, Business and Multi-Stakeholder.

Consumer cooperatives, owned by individual customers: Consumers generally start or convert businesses to cooperatives in order to obtain products that are otherwise unavailable to them or that they feel they can obtain at a better price than offered by conventional businesses. For example, when large utilities would not provide electricity to rural customers in the 1920s and 1930s, many rural communities responded by forming their own electricity cooperatives, and today over 75% of the landmass of the United States receives power from these consumer cooperatives. The 1930s also saw the closure of a significant number of small-town groceries due to the economic conditions of the Great Depression, and once again consumers responded, starting their own food cooperatives; consumers looking for organic and alternative products in the 1960s and 1970s led to another pulse of food cooperative formation (e.g. Belfast Co-op, Blue Hill Food Co-op and Fare Share Market in Maine). Along with electricity and food cooperatives, consumer cooperatives include credit unions, phone collectives, outdoor equipment (e.g. Recreational Equipment, Incorporated, better known as REI), school and daycare facilities, and bookselling. Housing cooperatives and Resident Owned Communities (ROCs), which are manufactured home parks owned by the park’s residents, are also consumer cooperatives, as the residents own the buildings or the land. Emerging sectors with promise for consumer cooperative formation include broadband access, distributed renewable energy production, and home energy efficiency.

Employee-owned businesses: Workers may own businesses to enjoy the profitability of the business for which they work, have more say over working conditions, pay, and locational decisions, or have more control over their economic future and avoid the adversarial relationship that can exist between owners and workers. Employee ownership also allows for the pooling of capital, expertise, and experience, all valuable assets in the long, challenging road toward successful small business formation and scalability. In this report we consider both worker-owned cooperatives, in which workers are full, direct owners and democratically govern the company, and employee stock ownership plans (ESOPs), in which workers own significant shares of their firm’s stock, with varying degrees of direct control over the running of the firm.  Well-known national employee-owned businesses include King Arthur Flour, W.L. Gore and Associates, makers of Gore-Tex, and Equal Exchange. In Maine, we have approximately 35 employee-owned businesses with over 7,000 employees, including VIA Agency (advertising and marketing), the Island Employee Cooperative (groceries and retail), Crown O’Maine Organic Cooperative (wholesale food distribution), Local Sprouts Cooperative (café and catering), and numerous construction firms.

Moody’s Coworker Owned is a state of the art collision repair facility with 9 locations and 155 co-owners throughout Maine. Company founder Sean Moody began slowly transitioning the company to employee ownership in 2003 using an ESOP. By the end of 2015, coworkers owned 34% of the company through individual retirement accounts valued at $6.5 million. In 2015 alone, they repaired over 16,000 vehicles–nearly 8 an hour on average! The bottom line is directly impacted when coworkers feel empowered. Giving coworkers a vested interest in the success of the organization has allowed them to grow at an average rate of 18% year over year. Photo courtesy of Moody’s.

Business cooperatives are formed by independent businesses to gain better access to the inputs they need to operate, or to improve their ability to sell the products and services they create. Business cooperatives take on three primary forms: groups of producing firms that obtain inputs and process and sell the products they produce, groups of firms that retail lines of products under a common trademark and marketing approach, and groups of firms that share services, such as back-office support. (These types overlap, in practice.) The first type of business cooperatives are producer cooperatives, where independent producers come together for shared purchasing, processing, distribution or marketing. This is very common in agriculture, accounting for about one-third of all farm revenue in the United States, with common brands including Welch’s, Land O’Lakes, and Cabot Creamery Cooperative. These producer co-ops often allow owners to capture more of the value obtained from product processing, such as making cheese from milk or ethanol from corn. Producer cooperatives can also be found in fisheries, food production and other fields such as arts and small-scale manufacturing. The second type of business cooperative is a purchasing and marketing cooperative that facilitates branding and purchasing for independent stores, as in the case of Associated Grocers of New England, Ace Hardware, True Value, or Best Western hotels. A third type of business cooperative is a shared services cooperative which provides members with different business services including back office, Human Resources, legal, communications and other functions. The Independent Retailers Shared Services Cooperative has dozens of local businesses as members, mostly in Maine, and offers a range of coordinated services, including accessing marketing and distribution agreements, management training and succession planning. Essentially, business-owned co-ops help small and independent businesses (whether a pharmacy or grocery store owner, a dairy farmer, or a lobsterman) secure a greater share of value for themselves from up and down the supply chain. Independent businesses gain this value by cooperating with similar businesses in a shared enterprise.

85 Maine Farmers are owners of Cabot Creamery Cooperative.  Photo courtesy Cabot.

Multi-Stakeholder Cooperative: The fourth type of cooperative is a combination of different classes of owners who come together to meet common needs. While less common in the US, they are prominent just across the border in Quebec, and Maine has three multi-stakeholder co-op businesses: Fedco Seeds, Maine Farm & Sea Cooperative (read our profile here) and Eat Local Eastport.

All four types of cooperatives are businesses that are jointly owned and democratically controlled by their members, and that operate for the benefit of their members. Cooperatives come in many shapes and sizes, from some of the most well-known food brands such as Ocean Spray and Organic Valley, to a collective of artists running a gallery down the street. Throughout this report are profiles of cooperatives and statistics about the size and scope of the global and U.S. cooperative sectors. At the heart of every cooperative is a group of people who gain more value from owning and controlling a business that serves their needs than they would from using a business owned and controlled by others. To be an owner means two primary things: democratic direction of the company and a right to a share of the profits. Ownership does not mean that every decision in a cooperative (e.g., the price of zucchini in a food co-op, or the signing of a contract in a worker-owned construction firm) is decided by the individual owners. Just as in a conventional business, the owners hire management, which then carries out the day-to-day functions of the business, based on overall direction provided by the owners.

A Rich History

Cooperatives have a long and storied history. Throughout time, communities have relied upon cooperation to meet their basic needs. Native tribes in Maine worked together fishing on the rivers and the coast and then traded this food with tribes further inland who hunted moose and trapped woodland animals. Farming communities around the world have worked together to share tools and build infrastructure (with barn raisings being a classic example of this cooperation). In the US, the first legally established cooperatives were formed by Benjamin Franklin—the Union Fire Company and a subscription library (before these were publicly-owned resources). In the 19th century, cooperatives were started by the Grange Movement to meet the needs of farmers and rural communities, while the Knights of Labor started the first industrial cooperatives in emerging urban areas.  Later in the century, newly freed African Americans started cooperatives and mutual insurance companies to build their economic security.

Cooperatives also emerged in Britain and elsewhere in Europe as a reaction to the harsh working conditions of the Industrial Revolution. In 1844, some of the earliest cooperatives in England developed and adopted the Rochdale Principles, which set out the definition, purpose, and ethics of cooperatives. The Rochdale Principles are echoed in today’s Cooperative Principles, which have been adopted by the International Cooperative Alliance and numerous cooperative associations in the United States:

  1. voluntary and open membership
  2. democratic member control
  3. member economic participation
  4. autonomy and independence
  5. education, training and information
  6. cooperation among cooperatives, and
  7. concern for community.

Cooperatives can appear to be somewhat foreign to American business traditions, because they play a relatively small role in the contemporary U.S. economy and their characteristics differ from conventional businesses. However, nothing could be further from the truth.  While they took for granted the disenfranchisement and exploitation of enslaved Africans, the Founders of the Republic did perceive widespread ownership of the means of production (land, at the time) not just as an avenue toward equality and prosperity, but also as essential for a stable, well-functioning democracy as a way to imbue citizens with self-sufficiency, foster a vested interest in the protection of liberty, and provide a check on corruption.

Leaders in the early days of the United States saw widespread ownership and respect for property rights as complementary, since a propertied middle class would be unlikely to seek seizure of property from other settlers. Legislation such as the Northwest Ordinance of 1787 and the Homestead Act of 1862 were critical institutional junctures in American history, moving the U.S. away from the grossly unequal land distribution patterns that plague many other parts of the world today. People being owners wasn’t limited just to agriculture: one of Maine’s earliest major industries, the cod fishery, often used arrangements whereby fishing seamen received a share of the profits from the catch rather than a (very low) wage, and sometimes even owned a share of the fishing vessel. This arrangement was deemed so advantageous both to the fishers and the development of the industry that “sharemen” vessels benefited from legal and financial incentives.

In the modern political era, few issues have broader political support than employee ownership. In the 1980s, President Ronald Reagan was a great champion and secured passage of major bipartisan legislation that created a host of financial, tax and regulatory incentives for converting businesses to employee ownership. In 2016, Democratic presidential primary candidate Bernie Sanders made boosting employee ownership one of ten main campaign planks, and the National Republican Party made expansion of employee ownership a plank in their Party Platform.

An Important Future

Over the past four decades, the United States has become increasingly unequal and the concentration of wealth in fewer and fewer hands has only accelerated. These trends are at odds with a founding premise of the nation, that widespread ownership of wealth, whether in the form of land in the 18th Century or cooperatives in the 21st Century, is good for the economy and good for democracy. Cooperatives reflect America’s long tradition of community engagement, self-help, and “getting things done.” They emphasize people taking charge of their economic futures and being productive in order to advance their interests, rather than relying on large corporations or large government. It is clear that our economy has strayed from the vision of the Founders, with deleterious economic, social, and political effects. Cooperatives can be a significant step toward re-establishing a fairer, more stable, and more prosperous commonwealth.

The Cooperative Advantage: Economic and Social Benefits of Cooperatives

Cooperatives come with numerous notable business advantages, and provide economic and social benefits to workers and communities that investor-owned businesses struggle to match. These advantages vary by type of cooperative, but can generally be found in some measure in any type of cooperative.

Cooperative Efficiency

Let’s start by looking at the internal operations of a cooperative.  Often cooperatives are at least as or more efficient in their production than are similar investor-owned businesses.  This is largely because in a cooperative the people receiving the benefits of the business (consumer products, employment, sales support) are also governing the business and in some cases, directly managing the business. In employee-owned businesses, for example, workers are motivated to work hard without heavy managerial oversight, provide ideas to improve production processes, and make sure co-workers are pulling their weight. In consumer cooperatives, the customers have a direct voice in the governance of the cooperative, have a stronger allegiance to the business, can have better understanding of the operations and often help to promote the business as they are owners and benefit from increased business. In producer cooperatives, individual producers are assured fair and equitable access to markets and within certain industries they don’t have to worry about “hold up,” i.e., receiving unfavorable terms in the sale of perishable or unique products to processors, retailers, etc.  Other business cooperatives can help streamline purchasing, branding and marketing, giving individual stores a stronger advantage in the face of big chain competition.

Several other factors give cooperatives a productivity advantage. In an investor-owned business, owners for the most part have a significant incentive not to share information with workers and customers about business profitability. In cooperatives, on the other hand, information about profitability, production, sales, future plans, anticipated rough patches ahead, and just about any other kind of useful information can be shared within the business, leading to much greater efficiency and transparency. Consumers don’t need to worry about being taken by questionable sales pitches.  In worker-owned cooperatives, workers and management don’t need to jockey for position when it comes time to renew contracts, producers know they’re getting the best deal when they sell their product to their own cooperative. As relations between owners and other parties to the business tend to be longer-term in nature, all parties are more likely to make long-term investments that improve productivity. For example, workers who are also owners are more likely to stay with a business for a longer time and invest more in the skills and knowledge needed for the business to succeed. Ownership is a great way for businesses to attract and retain more quality workers.

Cooperatives Cooperate

“Principle Six” of the Cooperative Principles, cooperatives helping other cooperatives, can have a direct impact on business success. Our experience with cooperative formation in Maine is that cooperatives answer other cooperatives’ phone calls and emails when they are looking for support. Imagine that you are starting a small retail business in Maine, an undertaking with which you have little experience. Yes, there are agencies such as the Small Business Administration (SBA), Small Business Development Centers (SBDC) and the Service Corps of Retired Executives (SCORE) to give you some general business assistance, but wouldn’t it be great if you could call up a similar business currently operating in a nearby town and receive many hours of assistance along with fresh, detailed input and marketing information to help you start your business? This is an unlikely outcome if you are starting a conventional business. On the other hand, if you are point person in a group effort to start a cooperative, other cooperatives will often share their lessons learned, organizational documents, even financials and other assistance. Organizations such as ours, the Cooperative Development Institute, provide assistance to cooperative start-ups and conversions.  Even if we had unlimited support and capacity, there are ways in which businesses can only be helped by other businesses. We encourage “Co-ops Seeding Co-ops” through mentoring, space and equipment sharing, networking, procurement, and many other methods.

It is very likely that in the future the most successful businesses in Maine will be small businesses that are highly networked. As described in the next section, craft manufacturing and other forms of nimble production and marketing are key ways that Maine can indirectly tap into the “innovation economy.” The fundamental ethic of business in Maine must change in this regard: businesses that may in the past have seen other firms solely as competitors must now see them also as cooperators. The level of cooperation can vary, from formal business cooperatives to informal or formal networks that refer business to each other (“I can’t make that, but the person down the road can”) to “sister businesses” that share marketing, equipment, etc. For cooperatives, this kind of approach to other businesses is built into the structure. Thus, another advantage of cooperatives is that they will both help to create and will thrive within this highly productive business environment.

Compelling proof of these advantages is that cooperative and employee-owned businesses make up almost one-quarter of this year’s list of Best Places to Work in Maine , despite comprising a much smaller percentage of Maine businesses overall.

A Spark for Key Economic Sectors

The networking that is particularly fostered by cooperatives can provide benefits in several major sectors of the Maine economy, catalyzing expansion of these sectors.  Within the wood products sector, parcelization of property means more relatively small parcels of forested property that present management challenges, while disappearing paper mills present hurdles with regard to selling logs. Successfully responding to both of these trends can be done via forestry cooperatives , which already play major roles in the wood products industries in Finland, Canada and Sweden. Joint management of forested parcels can lead to cost savings and enhanced environmental stewardship, while joint contracting, transportation, and value-added processing can help landowners overcome the constraints posed by fewer mills. In the renewable energy sector, decentralized and distributed production of energy via solar or wind makes energy cooperatives increasingly sensible as an alternative to single, large scale production facilities that are often owned by out-of-state corporations and are less responsive to local people’s needs and concerns. Energy cooperatives can help homeowners obtain better deals for solar installation and energy efficiency measures, and businesses can band together for better deals on items such as heating oil. A group of farmers in Canada even own, operate, and purchase from their own oil refinery.

Perhaps in no other sector is networking and cooperation of such vital importance as in food production. Cooperatives are found in all aspects of Maine’s food system and help smaller producers and independent businesses to access markets or procure inputs. Consumers benefit from cooperatives as they help to increase access to food at accessible prices. Additionally, cooperative structures support food service workers, who often lack access to capital, to start new businesses or take over ownership of existing businesses.

Community Partners for the Long-Term

Increased networking is only one of many beneficial social and economic effects of cooperatives.  All businesses provide jobs and income to their workers, and create additional benefits by purchasing goods and services they need from other businesses, all of which induces even more economic activity in a ripple effect. However, firms differ in how much of this spending stays local. The “indirect local economic multiplier” is estimated to be 17% higher for cooperatives than it is for conventional businesses, which means that cooperatives give a greater boost to the local economy. “Going local” can be seen in many other dimensions of cooperative businesses. For example, relative to conventional grocers, food cooperatives:

  • spend more money locally,
  • source more of their products locally,
  • create more jobs for the amount of business they do,
  • have more full-time employees relative to part-time employees,
  • provide better benefits, and even recycle their plastics more effectively, leading to lower impact on local waste facilities.

Shouldn’t every community want businesses like these?

Just because cooperatives are nimble and responsive to economic change, that does not mean they tend toward instability. On the contrary, cooperatives are associated with a long-term economic view that emphasizes the creation of real value rather than financial or “paper” profits. Studies show that executive compensation at cooperatives tends to be less incentive-based, so that executives are more likely to take a long-term perspective on firm value. Cooperative and employee-owned businesses are not publicly traded (aside from some very large ESOPs) and, therefore, place more emphasis on long-term value creation rather than short-term financial valuation. Analysis of credit unions (and smaller community banks) reveals they behave in a more prudent manner, and weathered the recent economic crisis much better than large financial institutions.

Cooperatives benefit their communities in myriad ways well beyond simple economics and finance. Most directly, the local ownership and control provided by cooperatives means that they are more likely to be interested in promoting community development in all dimensions. Cooperatives are rooted in community: they aren’t going to seek lower wages in some far-off land, nor pull up stakes for a property tax break in some other state. And they tend to care about values beyond profit (though they certainly must turn a profit, which then gets returned to members), such as the health and safety of their workers, the resilience of their community, and the quality of the products they sell to their customers. Co-ops often lead the way in transforming entire industries toward more humane, responsive practices. For example, mutual life insurance companies were the first to provide true accountability to policyholders, until the government recognized the need and made guarantees generally required for any insurance company. Consumer food cooperatives were the leaders in the movement toward natural, fair trade and local foods, which have now become widespread in other grocery stores. Cooperative Home Care Associates, the largest worker co-op in the U.S. with around 2,000 employees, has raised the standard for training and employment of home care workers by demonstrating that it is possible to pay higher wages and provide better benefits while still operating a profitable company.

Cooperatives are also associated with the formation of social capital, which refers to the norms of trust and reciprocity that are critical to healthy, safe, prosperous communities. Communities with high social capital tend to thrive, while those with low social capital tend to struggle. In North America and further afield, cooperatives are associated with poverty reduction, either via direct economic benefits or by fostering community governance skills among members. At a larger scale, strong cooperative economies are associated with high levels of broader measures of social and economic progress, such as health and nutrition, access to education, personal freedom and choice, tolerance and inclusion, and higher wages, greater wealth creation and lower inequality. By one measure, of the top ten countries in terms of social progress, five of them (New Zealand, Norway, Switzerland, Finland, and Denmark) are on the list of top ten cooperative economies,  certainly not a coincidence. In other words, cooperatives and cooperative economies are associated with very successful economic outcomes, high social progress and high standards of living.

The Seventh Co-op principle is “Concern for Community.” Co-ops are honor-bound to operate with the well being of the community in mind, and for the most part they do. In fact, the United Nations declared 2012 the International Year of Cooperatives with the theme “Cooperative Enterprises Build a Better World.” Internationally, cooperatives have played a hugely significant role in socio-economic development, particularly poverty reduction, employment generation, and social integration. As U.N. Secretary General Ban Ki-Moon put it, “Cooperatives are a reminder to the international community that it is possible to pursue both economic viability and social responsibility”.

Expanding Ownership

For low-income people and others who face social, economic, racial and cultural barriers, starting up a business individually can be particularly challenging as they may lack access to capital, support systems and all the knowledge needed to run the business. For these entrepreneurs, a cooperative may be easier and more accessible as people can pool resources and knowledge together in the start-up. Immigrant-owned worker cooperatives are the fastest growing in that sector. Maine now has two cooperatives owned in part or fully by New Americans. In Lewiston, Raise-Op Housing Cooperative (read our profile here) is focusing on making housing affordable to all and has New American owners and Board Members. New Roots Cooperative Farm (read our profile here) is the first refugee-owned cooperative in Maine.

The Challenges of Cooperation

The community and social benefits of cooperatives are irrefutable, but returning to the economics of internal business operations, we should also point out that cooperative businesses face several hurdles in their internal operations. We highlight these challenges to provide a balanced perspective and because overcoming these hurdles is the place where cooperative institutions, policies, and “ecosystem” play such an important role. These challenges are faced in contemporary Maine, but have been largely overcome in the regions of the world that have significant cooperative economies. With the right mix of support, they can be overcome in Maine as well.

As is known to just about anyone who has been to a New England town meeting, democracy takes time, and having voice in decisions means showing up for meetings and participating in voting. Cooperatives give democratic voice to their members, which can sometimes be more time-consuming. Investor-owned businesses are comprised of owners whose primary (if not sole) goal is simply to maximize profits, whereas a cooperative is much more likely be comprised of a group of owners with relatively diverse preferences and objectives, leading to a greater likelihood of conflicting values and priorities. As in any business, management in cooperatives must be given appropriate latitude from owners and clearly delegated power in order to effectively run the business, and successful cooperatives must find ways to strike a healthy balance between members’ voices and effective managerial decision-making. This is usually accomplished by invoking rules of governance and fostering an organizational culture of collaborative compromise and patience, so that decision-making is as much a joy as a chore. Nevertheless, many cooperatives struggle with this aspect of their business and this challenge is compounded by the limited education within schools, business and society around democratic decision-making, collaborative process and organizational governance. Too often decision making, whether in business or government, is reserved for a sub-set of people rather than being broadly shared and widely understood.

Start-up cooperatives have different challenges than businesses converting from conventional to cooperative ownership. Fostering a cooperative culture within a business organization can sometimes be easy for start-up cooperatives because the people involved in forming the business are likely to be interested in cooperation and have an opportunity to create an organizational culture from scratch that facilitates ownership and its responsibilities. On the other hand, converting an existing conventional business to a cooperative often leads to challenges in developing new procedures and significantly shifting the organization’s culture. When a conventional business is converting to employee ownership, workers who are used to punching a clock and “doing what they’re told” must adapt to being decision-makers and holding greater responsibility for the success or failure of their company (although in most worker cooperatives ownership is not mandatory for all workers). However, start-ups face a different but equally significant hurdle, one that is actually remedied in the case of conversions. This challenge arises from the simple fact that starting a business is very demanding and involves many, many hours of hard work, often with an uncertain probability of success. For some entrepreneurs, starting up a business with one owner can be easier as there are fewer people with whom to consult and decisions can be made quickly in the start-up phase. Sole proprietors have a strong incentive to succeed because they will be the beneficiaries of all the profits and other benefits of their business succeeding. In other words, failure means being out of a job, while success means considerable financial well-being.

For anyone forming a cooperative, it is often a challenge to determine clear responsibilities for business formation, which sometimes slows down the development process. Additionally, while a cooperative is started by a group of people, a small group of founders may shoulder more of the responsibility for the start-up phase, but unlike the sole proprietorship, these people will only receive a small fraction of the benefits of success. This is one of the benefits of converting existing conventional businesses to cooperatives: the employees buy out the founding owners, and thus can directly compensate the founders for their hard work and risk-taking incurred during the formative stages of the business.

Cooperatives face business challenges in their operations. Member-owners of cooperatives are regular people who came together to meet a shared need, not necessarily business majors or professionals. They may lack business and financial skills that would help the cooperative succeed. Also, cooperatives must honor internal governance processes that generally lead to better outcomes but are more time-consuming than they are for conventional businesses.  Overcoming challenges in the formation and operation of cooperatives can be greatly assisted by:

  • providing (and people being familiar with) model cooperative business bylaws and operating procedures
  • educating citizens about facilitation, decision-making and entrepreneurship
  • fostering a larger culture of cooperation that views engagement with fellow workers, consumers, or producers as a regular part of work and community, and
  • developing ways to compensate those most involved with cooperative formation.