The Advantages and Challenges of Worker-Owned Cooperatives

The concept of a worker owned cooperative is unfamiliar to most Americans. We’ve all been sold on the standard management/labor structure we learned in business school and read about every day in the Wall Street Journal. But times are changing, and now just might be the time to consider something different. Worker owned cooperatives have been around for a long time, but they are finally getting the attention they deserve. Italy leads the world in total number of worker owned cooperatives, at 25,000, while the United States lags far behind at just over 300. But thanks to the leadership of Democracy at Work, the University of Wisconsin Center for Cooperatives, and many other groups, worker owned cooperatives are gaining ground.

First of all, what is a worker owned cooperative? There are various definitions, but most experts agree all worker owned cooperatives must have the following characteristics:

  • All or most of the business capital is owned by the employees (members)
  • All employees are eligible to become members (this includes secretaries, administrators, and all other employee categories)
  • Most employees are members (it is not an exclusive club where just a few become members)
  • Each member has an equal vote (one person one vote, independent of title, position, or capital)

Advantages of Worker Owned Cooperatives

Worker owned cooperatives have several clear advantages over the traditional business structure we are all used to. According to Virginie Perotin, a Professor of Economics at Leeds University:

  • Worker cooperatives are larger than conventional businesses and not
    necessarily less capital intensive
  • Worker cooperatives survive at least as long as other businesses and have
    more stable employment
  • Worker cooperatives are more productive than conventional businesses,
    with staff working “better and smarter” and production organized more
  • Worker cooperatives retain a larger share of their profits than other
    business models
  • Executive and non-executive pay differentials are much narrower in worker
    cooperatives than other firms

So What?

The reason we are talking about worker owned cooperatives here is that they represent another option for business owners who want to exit their business. Instead of losing all control over the business, and risking the possibility that all your employees will be fired by the next owner, a transition to a worker owned cooperative provides the opportunity to sell the business to your employees. It affords the opportunity for an orderly transition to a more democratic and more sustainable business structure without sacrificing any value to the original owner. In some cases, the original owner actually makes more money through a worker owned cooperative conversion than he or she would through a traditional business sale.

The Challenge

But there’s a rub. While it sounds nice, converting to a worker owned cooperative requires patience and dedication. It is definitely not for everyone.

  • Culture Shock. Most business owners are so concerned about just keeping their business alive that they have not invested in developing an employee ownership culture. And while many employees dream about owning their own business, few have ever thought it was really possible. So education is usually a big part of the conversion process. The owner has to give up a lot of control, and the employees have to learn a lot about business management. This usually takes years, not months.
  • Financing can be complicated. A typical worker owned cooperative conversion involves multiple financing sources: banks, Community Development Financial Institutions (CDFIs), vendors, the selling owner, members, and even individuals from the community.
  • Planning. One of the advantages of worker owned cooperatives is that they are extremely flexible, and relatively free of regulation. In practice, this means the owners and employees have a lot of choices to make. How much money will employees have to invest to become owners (members)? Will there be a minimum employment requirement before employees can apply to become members? How will salaries and compensation be determined? What happens if a member decides to leave, retire, becomes incapacitated or dies? Who will manage the business on a daily basis? Is everyone on the board, or just a rotating subset of members? All of these questions, plus many, many more, will need to be thought through carefully before formally executing the final conversion documents.
  • The conversion process takes time — usually a few years.