Analysing the Values and Limitations of Cooperative Firms

Co-operatives are businesses owned and run by their members. Whether the members are customers, employees or residents they are everyday people who have an equal say in what the business does and a share in the profits. Here we look at their pros and cons.

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Analysing the Values and Limitations of Cooperative Firms

Co-operatives are businesses owned and run by their members. Whether the members are customers, employees or residents they are everyday people who have an equal say in what the business does and a share in the profits. Here we look at their pros and cons.

finance, economics, business, startup, study, research

Analysing the Values and Limitations of Cooperative Firms

by Rose Wrist

Preface 3

Resilience 6

Wage Structure 9

Productivity 11

Worker satisfaction and wellbeing 13

Conclusion 15

Values 15

Limitations 15

Potential Policy Proposals 16

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. If you have any suggestions for revisions/additions to this document please send an email to me at:

[email protected]

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:

1. Complete Autonomous Cooperatives

1. These firms operate with either direct or representative democracy

2. These firms are completely owned by the workers at the firm

1. No external shareholders

2. Autonomous Cooperatives

1. These firms operate with either direct or representative democracy

2. These firms are majority owned by the workers at the firm

1. External shareholder do not hold voting shares

3. Majority Cooperatives

1. These firms operate with either direct or representative democracy

2. These firms are majority owned by the workers at the firm

1. Some external shareholders may hold non-controlling voting shares

4. ESOP (Employee Stock Ownership) Firms

1. These firms may be operated in any way

2. The workers at these firms all own some part of the company

1. 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 maximizing income, while maximizing profit is the key principle for the fourth. As such it is hardly fair to characterize it as a cooperative, but nevertheless it will still be included here as many of the patterns demonstrated in the upcoming literature applies 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.

Financing Types

Complete Autonomous Cooperatives

Autonomous Cooperatives

Majority Cooperatives

ESOP

Firms

Conventional Firms

Member Capital Contributions

Donations

Crowdfunding

Loans

Pre-selling

Consumer Memberships

Bartering

Grants/Subsidies

Asset Sales

Divestments

Sponsorships

Non-voting shares

Non-voting shares w/ board seat or board observer rights

Non-controlling

voting shares

Controlling voting shares

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 maximize 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

Olsen 14

* 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

Stringham et al. 11

* 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 organizations 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

Burdín 14

* 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 organizational forms

Ministry of Economic Development, Innovation

Analysing the Values and Limitations of Cooperative Firms
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Tags Finance, Economics, Business, Startup, Study, Research
Type Google Doc
Published 11/10/2021, 18:41:16

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