Partner Article

Worker Cooperatives: A Route To A Fairer, More Productive Capitalism?

There used to be an unspoken bargain at the heart of western capitalism: bosses happily raised wages, which were then spent on goods and services, thereby boosting bosses’ profits.

Income inequality in the industrialised economies shrank sharply between the end of World War Two and the 1970s.

However, that trend has since been in reverse – albeit inequality has narrowed slightly in the last two years, according to the Office of National Statistics – and the tacit economic consensus has been vulnerable to fracture since the financial crisis.

Since 1979 the UK’s Gini coefficient – where 0% would denote perfect equality and 100% a single individual owning all the nation’s income – has soared from 25% in 1979 to 32.3% in 2012.

While leftists pin blame on the pursuit of profit, those on the right say the absence of a profit motive will ultimately enfeeble the economy and make everyone poorer.

“If not capitalism, what?“

Such age-old ideological tropes continue to exercise policymakers in a post-Cold War world where socialism is discredited and capitalism suffering an identity crisis. Where left-wingers are stumped by the question “If not capitalism, what?” then stagnating median wages and soaring executive salaries are discrediting trickle-down economics.

Progressives cite social-democratic Sweden as a model – but good luck building a consensus among middle-income earners for paying upwards of 49% income tax.

In a world where capital can cross borders to low-tax jurisdictions so readily, achieving a ‘more responsible capitalism’ seems a forlorn hope.

Commissioning private enterprise to provide public services has met with mixed results – but that’s for another article.

Let’s ask instead not what private enterprise can do for the public good, but what a cornerstone of socialist philosophy – mutualism – can do for private enterprise.

Mutual enterprises, which are owned and managed by their customers or employees, have long been touted in some quarters as the antidote to shareholder capitalism and the soaring executive salaries it spawns.

Owning part of the company as well as salaries, staff have a greater stake in the company’s success. In theory this creates a more motivated, satisfied workforce less riven by the office politics that arise when personal advancement trumps the common good.

In practice too, according to a 2010 study by Cass Business School, which found that employee-owned companies are more productive and robust in a recession,.

Worker cooperatives, as they’re also known, help redistribute equity further down the income chain too.

Moreover, worker cooperatives still vie with conventional businesses for custom, so competition, capitalism’s ace card, remains part of the dynamic. Implemented well, mutualism arguably combines the best of both capitalism and socialism.

Higher productivity

John Lewis is undoubtedly the UK’s most celebrated mutual. Made into a partnership in 1928, the venerable department store is part-owned by its 76,500 staff.

“What we have discovered at John Lewis is that co-ownership leads to increased levels of productivity, low absenteeism, low staff turnover, higher levels of commitment and higher levels of wellbeing,” says Patrick Lewis, Director of Partnership Services at John Lewis.

An upmarket retailer when incomes are being squeezed faster than at any time since the Second World War, the partnership, which also includes Waitrose supermarkets, nevertheless reported pre-tax profits of £409m last year – a rise of 15.8%.

Meanwhile, Spain’s Basque region is home to the world’s largest federation of worker cooperatives. Employees at the Mondrago Corporation make decisions collectively, including the appointment of a managing director, at an annual general assembly.

One of Spain’s 10 biggest corporations, Mondrago comprises cooperatives in retail, education, manufacturing and financial services.

The group, which has expanded globally, has devised novel solutions to two of Spain’s most intractable crises.

Mondrago has not contributed to the country’s 26% unemployment rate, but not because it’s insulated from challenging trading conditions.

Workers vote to absorb financial shocks by cutting their own wages – and those of their bosses. The salaries of the best-paid Mondrago employees are never allowed to exceed a ratio of 6.5 times that of its lowest-paid workers.

Moreover, co-op members are transferred between co-ops, where practical, to address labour surpluses and shortfalls. The same principle is applied to credit: successful co-ops lend money to cash-strapped counterparts.

Small wonder, then, that the idea of workers’ cooperatives has seduced politicians of both left and right.

And yet it hasn’t seduced the entrepreneurial class; the vast majority of large and small businesses, still cleave to conventional models. So why no stampede to emulate John Lewis, whose profits recently surged 16% on an otherwise floundering high street?

Because the executive class are loathe to share the spoils more equitably? Perhaps.

Expect that the model does pose risks for staff too. Were their employers to fail, they lose equity and a pension as well as their income. Eggs and baskets come to mind.

Share ownership

However, while full-blown member ownership remains rare, share-ownership schemes have become commonplace. More than 1,300 companies offer some type of share-save scheme, many through the Save as You Earn (SAYE) scheme launched in 1980.

Meanwhile, 10% of the Royal Mail’s shares will be distributed among its staff after it floats on the London Stock Exchange later this financial year.

Popular in retail and professional services, the cooperative model doesn’t suit all sectors. Low staff turnover – the John Lewis partnership’s turnover rate of 17.7% is low compared to its competitors – might seem inherently beneficial, but staff mobility promotes innovation and many companies need a flexible capital base to expand.

But the story of Mondrago, where 110 of 111 cooperatives survived Spain’s worst economic crisis since the Second World War, is a powerful riposte to the naysayers.

John Lewis and Mondragon prove that cooperatives can outperform their shareholder-owned rivals. And the prospect of happier, more equity-rich employees can help remedy some of the western world’s most intractable problems: stagnating consumer demand, high levels of personal debt and inadequate pension provision in an ageing workforce.

Mutualism is no panacea for our economic woes. However, the economy would be healthier and more equitable, in this writer’s opinion, if the cooperative model was adopted more widely.

By Adam Bannister, Managing Editor of BusinessesForSale.com. Adam also manages content for other titles in the Dynamis stable as well as being an occasional contributor to the Huffington Post, Talk Business magazine and Start Your Business Magazine.

This was posted in Bdaily's Members' News section by BusinessesForSale .