Organizing Complexity: The Path to Ownership Through Worker Cooperatives
I’ve spent my career to-date building operations teams at early-stage companies, and have always been fascinated by the question: how do groups get things done? Organizing Complexity is a series of articles where I’ll be unpacking the structures and systems developed in various contexts, from software engineering to foraging ants, that enable groups of individuals to solve collective problems. The goal of this series is not to reach a forgone conclusion about what is the best system, but instead to shed some light on the process of work.
Gallup’s 2017 State of the Global Workplace report included a statistic that has fascinated and disturbed me ever since I learned of it: 15% of the global workforce is actively engaged in their work. That means the other 85% are either not engaged, defined as being generally apathetic and unattached, or actively disengaged, meaning resentful to the point of undermining company initiatives. So it turns out that the workplace, where the average person spends a third of their lives, is not just a place where we receive compensation in exchange for our labor — it’s where we receive compensation in exchange for sacrificed happiness and well-being.
There are many reasons for our collective dissatisfaction with the experience of work, such as bad managers, low wages, mundane tasks, and time spent commuting. Addressing these problems are a good start, but perhaps they’re just bandaids distracting us from the conversation we should be having about a system that was not designed with workers in mind.
If you’re new to the concept of worker cooperatives, like I am, then what follows in this article might surprise you. We’ll explore the problems with the modern workplace, what cooperatives are, their benefits, how they work, and why we don’t see more of them in society today. Armed with this information, you can draw your own conclusions about whether they are a viable and attractive alternative to the modern workplace dynamic.
The Fundamental Problems with Today’s Workplace
Elizabeth Anderson is a prominent philosopher and scholar who studies economic justice and democratic theory. In her book, Private Government: How Employers Rule Our Lives (and Why We Don’t Talk about it), she characterizes the typical workplace as an authoritarian dictatorship, where its subjects are fundamentally unfree. In the following passage, she defines what it means to be under “private government”:
“A government is private with respect to a subject if it can issue orders, backed by sanctions, to that subject in some domain of that subject’s life, and that subject has no say in how that government operates and no standing to demand that their interests be taken into account, other than perhaps in narrowly defined circumstances, in the decisions that government makes. Private government is government that has arbitrary, unaccountable power over those it governs.” (44–45)
Sound familiar? She notes that there are very few worker protection mechanisms in our workforce outside of collective bargaining, unions, and legislative protections against harassment or discrimination. Beyond that, management has full discretion to demote you, withhold bathroom breaks, decide your work schedule, give you menial or dangerous tasks, and of course, fire you. Yes, you can quit, but 1) the next job could be just as bad, and 2) this option can range from undesirable to impossible if you are dependent on your workplace for health insurance or to support your family. Anderson puts it aptly when she says, “This is like saying Mussolini was not a dictator because Italians could emigrate” (55).
This dynamic was not always the case — businesses managed by their workforce were seen as an appealing structure in the U.S. when Jefferson and Hamilton introduced legislation after the American Revolution to give cod-fishers majority ownership in their fleets to revitalize the industry. Self-employment and craftwork were the norm for decades.
It wasn’t until the Industrial Revolution that we saw a major formal separation between capital, those who own the means of production, and labor, those that work to produce. In this era, where high levels of investment were needed to build factories, and worker were given specialized tasks, we saw much higher levels of production and economic growth. During this time, we set the precedent for the following decades of capital-first policies and priorities, resulting today in extreme wealth inequality, flat wage growth, and work devoid of meaning.
What Is A Worker Cooperative
The companies described above are Capital Managed Firms (CMF), meaning that owners, management, and outside investors retain the right to set policy, make decisions, and receive a financial return on their investment. In a CMF, it is capital that hires labor. In other words, the owners of the company pool together their money to rent the time and skills of their employees, paying them a wage in exchange for their efforts in building the company.
A worker cooperative, also called a Labor Managed Firm (LMF), is a business in which workers, often referred to as members, hold the ownership of the company. They function as an economic democracy, where worker-owners have a right to information, make decisions through a voting system, and share in the company’s profits. An LMF reverses the dynamic of a CMF: labor hires the capital. This just means that those creating the value in building the company acquire capital by borrowing it rather than giving away ownership of the company.
Both CMFs and LMFs can participate in a free market economic system, but the difference between capital hiring labor and labor hiring capital is profound. CMFs have a strictly transactional relationship with their workforce: we pay you a wage, you come to work. If the workers are easily replaceable, there is no incentive to make the work itself interesting, or to pay a penny more than the market rate, even if that market rate is insufficient to live off of. Owners and investors take on financial risk, and in return, they keep the financial rewards.
In contrast, in an LMF the worker-owners have a transactional relationship with capital: we take out a loan, we pay back interest. Increasingly, cooperatives are accepting silent investors, meaning they give up some equity, but do not give up any formal influence over day-to-day operations. In this model, the power and authority normally reserved for the C-suite and investors is democratized, allowing workers to create the workplace that they want to come to every day, and aligning their efforts with the company’s performance.
In this model, the power and authority normally reserved for the C-suite and investors is democratized, allowing workers to create the workplace that they want to come to every day.
And worker cooperatives are already part of society more than you might have realized. Have you ever had a Fat Tire beer? Well, New Belgium Brewing is 100% worker-owned. Employees and former-employees in the successful grocery chain Publix own the majority stake. There is an entire town in Spain made up of a network of over 100 worker cooperatives. Equal Exchange is a Boston-based worker-owned fair-trade coffee company that has been around since 1986.
The Benefits of Worker Cooperatives
So what changes when workers own and manage production? Below is a short list of findings highlighting some of the measurable benefits to labor managed firms:
- Higher productivity levels than similar capital-managed firms (Nuttall, 2012)
- Greater resilience during economic downturns (Lampel et al., 2014)
- Equalizing impact on wage distribution and lower wage inequality (Bernstein, 2016)
- Lower turnover and absenteeism (Blasi et al., 2017)
- Positive effect on local community welfare (Erdal, 2000)
- Provide good, stable employment (Pérotin, 2014)
What this list does not quite capture is the human effects of having agency in one’s work. Linguist and philosopher Noam Chomsky describes this phenomenon saying, “you have a different mentality when you are participating in a cooperative firm.”
Having a stable job where you have a voice in the conversation is a complete paradigm shift for the workforce. You have a stake, so there are tangible benefits for hard work. Management is accountable to you, not the other way around. Just listening to interviews from members of worker cooperatives, you can hear the pride and enthusiasm for their companies.
How Worker Cooperatives Are Organized
If every job you’ve ever had has been a capital-managed labor system, it can be challenging to picture any other way of working. You’re probably used to the following:
At my traditional firm there is a leadership team that sets priorities and rallies the company behind those priorities. If I don’t get along with my boss, I can suck it up or try to elevate the issue to other leaders. I might be lucky enough to have a tiny and ever-diluting stake in an employee option pool, but this doesn’t necessarily motivate me to try to improve the company’s performance.
Well, let’s explore an alternative.
The cornerstone of a cooperative’s internal decision-making system is found in its bylaws. The bylaws formalize how the cooperative is to be governed, including the rights and responsibilities of its members. Most importantly, they define the parameters of membership, finances, and how information is to be shared. You can see a few examples here.
The Hiring Process
It’s important to note that not everyone working at a cooperative is automatically a member. There is usually a percentage of the firm that is just a regular employee collecting wages. There is a lengthy process and investment required to become a member.
One thing the bylaws will be sure to cover is how to accept or deny admittance to the cooperative. You’re not just getting hired to do a job, you’re getting hired to be a co-owner, so the process is selective and rigorous. Burley, a bicycle-trailer cooperative, serves as an example for the consequences of a rushed hiring process. When the cooperative was growing quickly, they hiring quickly to meet demand, ultimately hiring too many people who were not a good fit. The workers sold the cooperative in 2006 to an investor who laid off many employees.
The process of becoming a worker-owner in a cooperative can be a 6-month to year long process, with the goal of seeing if there is a mutual fit. Current members will review the candidate in a variety of measures, from performance output to ability to communicate well on a team, culminating in a vote.
Profit Sharing Structures
Being accepted as a member means that you now have the opportunity to purchase member equity. Most cooperatives mitigate the potential cost barrier by offering a variety of payment options, such as payment plans, loans, or allowing the new member-owner to deduct the costs from their wages. To preserve the democratic nature of this structure, owning more equity does not mean you get additional votes.
Another option is an Employee Stock Ownership Plans (ESOPs), which can be used to grant option rights in a labor-managed firm, or even to convert from a CMF to an LMF during a succession process. This is especially common for family-owned companies that want to leave their business to the workforce that enabled them to thrive. New Belgium founder Kim Jordan used ESOPs to sell the company to her workforce, starting the process in 2002, and eventually selling her family’s controlling shares by 2012.
Net margins are distributed to member-owners, with some going into what are called collective reserves. These funds are kept on-hand to support the needs of the business during hard times, supporting continued employment and protecting the cooperative from needing outside investment.
Meetings and Voting System
A core element to keeping members informed and engaged is regular meetings to share updates and debate new initiatives. These meetings have a preset agenda, made up of points submitted by the members and refined by the agenda committee. They include time for open forum discussions, as well as time to debate proposals. The entire company meets regularly for an All Staff meeting, as well as annual meetings. If there are major decisions to be made during these meetings, the members will vote on that item.
It would be incredibly inefficient to have every member of a large cooperative vote on every decision that needs to be made. For this reason, members-owners elect representatives to advocate for their interests on various committees. These committees aren’t necessarily made up of managers, but representatives of each operations group. Members are still given just one vote, but the committee’s votes are supposed to represent the votes of their peers.
Why We Don’t See More Worker Cooperatives
If worker cooperatives really are a viable alternative to capital managed firms, then you might be asking, why aren’t they more popular? Cooperatives only contribute between 3–6% of GDP in most economies, so what’s wrong with them? Well, they certainly aren’t a perfect system — they have their own inherent problems and weaknesses. In addition, there are capital forces at play that make it difficult for cooperatives to start and to compete. Below is a list highlighting some of the barriers to success with labor managed firms:
- Financing: most businesses require external finance to be successful, but LMFs are limited in what types of financing they can accept. If they do not sell any shares to outside investors, they rely exclusively on debt financing, which poses much more risk. As mentioned earlier, some cooperatives do sell shares to “silent investors,” who have a small equity stake, but no formal influence in the decision making.
- Degeneration: If a cooperative is starting to do well, and members shares are of significant value, a group might come together and vote to start selling their shares to outsiders, or hire workers who are not members to the extent that they make up the majority of the business. In other words, degeneration is the process by which a worker cooperative transitions to become just another traditionalist capitalist firm.
- Democracy is slow: consensus takes patience and requires compromise. As described above, there are many meetings involved and all stakeholders have a right to share their voice. Our own democracy in the U.S. might have started out like an idilic cooperative, but has evolved to be full of inefficiencies and bureaucratic red-tape. Therein lies the appeal for quick-moving top-down authority. Cooperatives are not designed to move fast and break things, they’re designed to move slow and stick around.
The last reason why we don’t see more worker cooperatives today is one that was the driving force behind this article: lack of exposure. Have you ever been taught about worker cooperatives in school? Do you have friends that work at one, who have told you all about their experience? If you’ve tried to start a business, were there many cooperative-focused resources to support your endeavor? For most of us, the answer is no.
We’ve been taught that a business is a specific thing that follows a specific set of rules. But that’s not the case. There exists a system that gives the power to the workers, and makes work meaningful. A capital-managed firm structure doesn’t have to be the default.