Why we need the Co-op 2.0 — Building Corruption-Resilient Companies
How to build a company that lives up to its vision and values, even when it grows big and powerful? This question guided the development of the model we named Co-oP 2.0.
The model described here was developed in 2012 with the creation of the cooperative online-marketplace, Fairmondo. At the time, Fairmondo ran Germany’s second most successful crowdfunding campaign and was one of the world’s first platform cooperatives.
Coop 2.0 is an open, evolving concept, and this article is an invitation to discuss and co-create the next iterations of the model.
By choosing the sector of online-marketplaces, we jumped right into a market dominated by huge, powerful corporations not particularly known for their sustainable practices.
Mainly due to network effects, this sector has a tendency to favor large, monopolistic platforms. Combined with the extractive model of traditional corporations, there is a risk of ending up with powerful players inclined to harmful behavior like forcing oppressive conditions on workers, putting excessive pressures on small producers, evading taxes, or promoting irresponsible consumption.
“Perfect!” we thought. This is a wonderful opportunity for making the point why we need better models for companies. And really, the two biggest online-marketplaces in Germany, Amazon and Ebay, both regularly earned critique for their harmful behavior. Surely, we thought, people would welcome truly responsible and democratically accountable alternatives.
Why cooperatives?
When it came to the right legal framework, we stumbled upon a seemingly rather old-fashioned business structure. The cooperative. Looking at it in detail, it actually seemed the most advanced, future oriented form of business out there, designed for building responsible and accountable companies.
The business structure of a co-op takes the question of ownership seriously. In particular, there are two aspects that tend to make cooperatives socially less harmful than traditional companies.
First, the one-member-one-vote principle. In a co-op, nobody can buy votes with money. Every owner has an equal voice, no matter how much they chip in. This may sound not very attractive to some investors, who may fear losing control of their investment. And governance mechanisms are a controversial and complex topic by themselves.
But for a Co-op 2.0, this aspect is essentially about accountability towards all stakeholders of the business. In the next section we will dive deeper into why this is so important when it comes to building truly responsible companies.
The second aspect is, the fact that the price of a share is fixed in the bylaws of the co-op. This means that there is no trading in shares and no speculation on share prices. Instead, the number of shares changes. If the company is successful, more members will join and buy shares at the fixed price (and existing members might buy more shares), which automatically creates new shares. Members can cancel their shares (with a defined notice period) and get their invested money back.
This simple legal attribute rules out in one swoop a pile of wrong incentives that keep traditional companies doing harm to our societies and our planet.
Why the old co-op model needs an update
But by itself, the model of a co-op alone does not seem to be sufficient when it comes to building actually responsible, accountable companies. You do not need to look long to find examples of large cooperatives that do not live up to the seven cooperative principles. Many older co-ops actually seem to act quite like traditional, growth-addicted corporations.
Moreover, the original concept of a cooperative emphasizes the notion, “member benefit”. A cooperative, according to the original concept, is first of all a company designed to serve its members.
Whilst for many co-ops this is certainly very justified and useful, it did not meet our intentions. Our goal was to create a business specifically designed to benefit the whole of society, not just a limited group of members. In the Co-op 2.0 model, membership is just a means for getting specifically involved and for exercising democratic accountability — open to anyone, who feels affected.
Another specific challenge was to develop a model that works for doing business in the competitive and dynamic field of internet platforms. This field is still dominated by the old start-up-venture-capital-logics. New products are constantly pushed into the market in pursuit of a quick exit for founders and investors. To enter such a market, agility is crucial. The classical co-op model did not, and still does not, have the reputation of being particularly agile.
The seven attributes of Co-op 2.0
These were the reasons why we developed a specific model of a cooperative: The Co-op 2.0. This model is intended for companies that want to internalize true social responsibility, not just by words or by the arbitrary goodwill of their managers, but by design.
It needs to be said that the Co-op 2.0 model was developed “on the go”. It was not an academic project, but the outcome of a founding process of a real company. Obviously, it does not claim to be the only model that can achieve the goal of true responsibility.
There was another limitation. When we put the model into concrete legal terms, we were bound by the framework of German cooperative law, which entails some outdated legacies from the last century like hand-signed membership applications.
So our Co-op 2.0 model is neither perfect nor final. It’s an ongoing experiment that calls for continuous development.
Nevertheless, after many years of running Fairmondo and many, many discussions on the topic, I am still confident that we did many things right when designing the model.
As highlighted in the title, the challenge was to ensure the company cannot be corrupted. So the following seven specific attributes of a Coop 2.0 are based on the three principles of anti-corruption work: Transparency, Accountability, and Integrity.
1. Clear basic principles protected by the statutes
The commitment to responsible behavior should not depend on the intentions and mindsets of founders, managers, or shareholders, but must be legally binding as part of the co-op’s bylaws.
These principles should be as clear and specific as possible, in order to enable real accountability.
To avoid the traps that come with with trying to define what “responsible” or “fair” actually means, we chose a more procedural approach: The co-op is required to behave fair internally (towards employees and members) and externally (towards partners, customers etc.), and the interpretation what that means must be published online and made available for discussion.
In the case of Fairmondo, the bylaws define 12 specific provisions, including a maximum salary ratio and the commitment to openly share all knowledge created by the co-op under a suitable open source license.
These principles, together with the other provisions that define core of the Co-op 2.0 model, are protected by a 9/10th clause: They can only be changed, if there is a broad consensus of at least 90 percent of the votes in the general assembly.
2. Uncompromising transparency
Transparency is key to responsibility. A company can promise everything and write beautifully sounding mission statements all over the office walls. What counts is what the company really does. Many of the problematic activities of classical companies are about hiding and twisting information about their behavior and its consequences.
There is much talk about transparency, but oftentimes corporations lobby hard to water down transparency regulations and put substantial effort into covering up their extraction-oriented activities and their externalization of costs.
If we seriously want to work towards a sustainable economy, we have to reverse this reality.
At Fairmondo, the bylaws require the co-op to publish any information that can be published legally. Interestingly, uncompromising transparency also enhances data-protection, because it allows for credible control of what actually happens with data.
3. Democratic accountability to all relevant stakeholders
This is where the legal framework of a cooperative comes in. Through the principle of one-member-one-vote nobody can actually use their weight to push through individual agendas. On the contrary, every member can incite initiatives to hold the co-op to account, and, if necessary, 10 percent members can call for a general assembly.
In addition, a Co-op 2.0 must be a “multi-stakeholder cooperative”: Membership must be open to anyone who feels affected by the co-op’s business.
This implies that shares must be affordable enough for potential stakeholders to actually buy a share and join. At Fairmondo, we defined the price of one share at 10 Euro, in order to keep the threshold for membership very low. In practice, the over 2000 members of the Fairmondo co-op have invested an average of around 250 Euro and roughly half of the members joined with the minimum amount.
Of course, the suitable price of a share depends on many factors, but as a general notion, ideally the threshold to membership in a Co-op 2.0 should not be much higher than 100 Euro.
4. Ensuring integrity — avoiding greed
Another key ingredient to a Co-op 2.0 is integrity. Obviously, integrity is a personal mindset — which is difficult to enforce through legal structures.
We decided, the best way to ensure integrity is simply to make the company uninteresting to join for people who are driven by greed.
One mechanism to do this is making sure that no-one has a big financial stake in the company. At Fairmondo, we limited the maximum amount of shares that any person can hold to a value of 25,000 Euro. Still quite a lot of money, but probably not enough for motivating anyone to start big conspiracies and corrupting the company’s purposes in hope to squeeze more out of their dividend.
Here again, the second big advantage of the cooperative business structure comes into play. Since the price of the shares is defined in the bylaws, it does not change with the growth of the company. This avoids the harmful incentive to grow the company’s business by any means.
By the way, this attribute turns Co-ops 2.0 into “post-growth companies”. They can grow their business, if there are sensible reasons for it, but they are not inherently desperate for growth.
Another advantage is that this attribute rules out the whole dirty game at the financial markets, where endless amounts of human creativity are wasted on conceiving ever more wicked instruments for the speculation on fluctuating share prices.
5. Fair distribution of profits
The Co-op 2.0 model is designed for for-profit companies. But it clearly defines what happens with a potential surplus. The main point is to avoid political discussions over this question, which could be a backdoor for greed and speculation.
In the case of Fairmondo, the model makes sure that the surplus goes to many:
- 25% are distributed through dividends for member-shares (remember that nobody can hold large numbers of shares).
- 25% are distributed through “Fair Founding Points”, which are points that any member can collect by actively helping to make the co-op successful. Everybody gets the same number of points per hour of work, and for buying shares in the early, high-risk phase.
- 25% are donated to non-profit organizations that the users decide on.
- The last 25% are used to support the creation and development of other Fairmondo co-ops, for example in other countries.
6. Democratic accountability to employees
The Co-op 2.0 model does not prescribe any particular management model or any specific procedures for operational decision-making. It just requires one thing: The management board must be elected by the employees.
Through this mechanism, employees can replace a management board that ignores their needs or that leans towards authoritarian rule. The management board is thereby incentivized to make sure that all employees understand major strategic decisions, and, if the team wants so, to choose an internal governance structure that ensures participation.
This attribute aims to encourage a culture of mutual respect and open communication, whatever management and decision making processes are chosen for running the business day to day.
7. The magic of the crowd
The Co-op 2.0 model does entail some restrictions. But it also brings a big advantage over the classic models for companies. A Co-op 2.0 can engage with its “community” of stakeholders much more authentically, and it creates trust much more easily.
At Fairmondo, we successfully used tools like crowd-funding and crowd-sourcing to get started. We also shared our source code, enabling developers from anywhere to help develop our marketplace software.
With regard to the important value of trust we noted another significant advantage. Rather than worrying about how to generate trust with new customers, we rather worried about users trusting us too much.
There are many examples showing that companies that allow customers and stakeholders to co-own the company provide better products and services at better conditions. Given that much competition today is about minimizing fake-prices by externalizing costs, a transparent and democratic business can claim a decisive competitive advantage by giving customers a real choice based on factual information.
Closing thoughts
All in all, I am today more convinced than ever that the Co-op 2.0 model and other responsibly designed models can be powerful instruments for bringing real sustainability into our economies.
In particular in the field of digital platforms and marketplaces, it is extremely important to be very careful about the way companies and their ownership are structured. This challenge is being addressed by a growing number of startups and organizations, joining forces in a movement called Platform Cooperativsm.
I am looking forward to developing the next iterations of Co-op 2.0 — and to discussing how it can complement other models for creating truly responsible companies.
Because, the best thing is we are not alone. Co-operation is THE key to success for future-oriented businesses that dare to put new models into practice. And if we continue having fun doing what we are doing, I am convinced that sooner than later we can out-compete the traditional, extractive corporations.
Looking forward to cooperating.
Next steps
This is my first article here on Medium, so I would be very grateful for likes and shares — if you did like it.
It is also the first of a series of articles that I plan to publish here. Stay tuned to read more about the specific experiences and lessons we had from founding and running Fairmondo as a Co-op 2.0. I will also write about strategies and next steps for broadening the movement and connecting with like-minded projects.
Some readers may wonder why this whole text did not mention blockchains and DAOs. These tools were simply not available when we were developing the Co-op 2.0 model. But they will play a role in the upcoming texts on Co-op 2.5 and the Co-op 3.0.
Finally, please do not hesitate to get in touch, if you have ideas for collaboration with similar projects or related movements.
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