Worker Cooperatives

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

Worker cooperatives, or employee-owned cooperatives, are relatively rare in the United States, making up around 1 percent of all cooperatives. This form of cooperative is more common in Europe and Canada. In the United States, most worker cooperatives are located in urban areas and operate in retail operations.

To become a member, the employee/owner must make an initial investment, which is sometime financed through payroll deduction. In some cases, the investment is substantial. Isthmus Engineering, a worker cooperative in Madison, Wisconsin, requires a $10,000 investment, which must be financed by the member.

Profits are allocated on the basis of patronage, which may be calculated as hours worked, earnings or a combination. Governance is usually on a one-member, one-vote basis. Small worker cooperatives typically operate with all of the employee/members serving as a board of directors. Larger firms have a board and management structure similar to that of agricultural cooperatives. Some worker cooperatives do not allow the CEO to be a member because they believe that management is a separate role.

Worker cooperatives are formed as start-up businesses and as conversion of existing firms. Some firms have converted to a worker cooperative when they were unable to acquire traditional financing. Another common rationale for conversion is when a long-time owner/manager decides to retire and transition away from the business.

Data on employee well being at worker cooperatives relative to other comparable firms is scarce. The evidence seems to suggest that employee/members enjoy higher job satisfaction and job security, and perceive more access to training and development. On the other hand, they face additional risks because their earnings are linked to the cooperative’s profitability.

Employee-owned cooperatives are another interesting example of the cooperative model and could be a vehicle for business development in rural areas.

 

Myth Buster: A Cooperative Shouldn’t Make a Profit

By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

One of the most long-standing myths about cooperatives is that a cooperative should not make a profit. The statement typically comes from a member who is unfamiliar with the cooperative business model. However, from time to time, even cooperative managers and board members fall prey to misconceptions about profits. Cooperative firms do have a unique set of objectives and benefits. Members can potentially benefit at both the farm level and the business level. The collective effect of cooperatives can be to keep the market place more competitive. Concern for community is also part of the cooperative principles as compiled by the International Cooperative Alliance.

While profits are not the only benefit of a cooperative, they are critically important at the individual firm level. The service at cost principle means that a cooperative should make all of the profits the marketplace allows and then share those profits with their customers through patronage. Favorable prices force the competition to respond and end up benefiting non-members as much as members. This concept seems obvious but is often violated in subtle ways. A cooperative that had the good planning (or luck) to purchase inventory before a price run up sometimes sells the product below replacement cost. Cooperatives receiving a high amount of profits from regional cooperatives take their eye off the ball of local profits. Perhaps the most common profit failure is to maintain and fail to fix an underperforming department or enterprise that is in effect subsidized by other departments and other patron group.

The worse profit-killing practice is for neighboring cooperatives to beat each other up in the market place. A price war between cooperatives is a blood sport and the only blood being spilled is farmer blood!

Myth: A Cooperative Shouldn’t Make a Profit

Status: Busted!

 

12-8-2011