Recasting company models will take ‘popular capitalism’ off the ground, says ResPublica's Winston Mak
Against the
‘predatory capitalism’ that anguishes lots of working people today,
co-operatives are a viable business model that puts money back into the
people’s pockets. Announced in the Queen’s Speech, the new Enterprise and
Regulatory Reform Bill, which aims to remove barriers to British companies and
boost economic growth, would be the first step towards realising this.
Alongside the introduction of the bill, I would expect a lot from the reviews
of tax and regulatory treatment for employee-owned businesses that HM Treasury
and BIS will conclude later this year.
In my last
blog article, I mentioned ‘social franchising’ can make this happen much
sooner. But before it does, we need something that can plug into the ‘normal’
system to gain co-ops a solid footing. The Government in the Enterprise and
Regulatory Reform Bill could go further with a recast or hybrid company model
for easing incorporation and seeking finance.
At a recent ResPublica
event, Lord Newby recognised the need to tidy up the current legislation
for co-ops as it places excessive barriers for their set-up and ownership. In
my research on the capacity of some existing company models in delivering an
environmentally, socially sustainable economy, by considering IPS and CIC
models in England as well as their counterparts overseas, I have distilled six
major principles for new legislation, some of them being social purpose
supremacy; enabling economic activities; and stakeholder involvement in
corporate governance. Currently, if I wished to set up or convert a business to
a credible one with all these objectives by law, it would be a mission
impossible.
Under the Industrial
& Provident Society (IPS) Act and Companies Act, people who
want to make a difference in their communities may be subject to too many
‘trade-offs’ in their choices among bona
fide Co-operative Societies (Co-ops), Society
for the Benefit of the Community (BenComm) and Community
Interest Company (CIC). In anticipation of the Co-operatives Bill, due to
pass before the next general election, there are a few issues that Downing
Street should mull over to facilitate more co-operatives as a vehicle to bring
in more pecuniary capitals for the wider society.
First, with
regard to the co-op versus BenComm model, social entrepreneurs face a
trade-off between attracting capital and redeploying a portion of the profits
for non-members, i.e. for wider community benefits of a social or environmental
nature. Allowed to distribute returns among members, co-operatives are not
required by law to benefit non-members/community. Just the opposite, BenComms
forbid the distribution of surpluses as dividends among members. So in theory,
a BenComm would attract less investment capital. Here, it constitutes a
compromise between going for a blue chip and de facto donation for social
returns.
Second, although the rationale of democratic (local) control is acknowledgable, a legal cap of
£20,000 per-unit investment in both IPS vehicles means that a co-op must
achieve large size by number of members. There may be another
trade-off with the economies of scale enabled by the much larger units as with
CICs which is possible under Company legislation. If a
co-operative business has to seize the opportunities from the Localism Act to
be a better community player, it requires swift actions at a very large scale,
which is not always feasible. Thus, the level of investment cap may require a
review.
Then, a group
committed primarily to non-member/community benefit would struggle between
BenComm and CIC, tailor-made for social enterprises, if they aim at local
involvement via a one-person-one-vote system while raising more capitals of
larger units. They could be a CIC limited by guarantee that doesn’t permit
issuance of equity. With an apparent ‘dead loop’ in company law for social
entrepreneurs and investors, it’s time to cut the Gordian knot
for co-ops in
order to get a ‘popular capitalism’ off the ground.
That said,
co-ops also face troubles in seeking finance from the banks. It is the issue of
‘bankability’. In the event, Kate Bull of the People’s Supermarket grumbled
that nobody knew what they did as a co-op. On a bank loan application form,
there was no tick box for co-operative but ‘others’, which did not qualify them
for overdraft facility or equity capital. An epitome for ‘socially responsible
investment’, it is true of many co-ops as 86% of social franchisees found
themselves not ‘bankable’ owing to the banks’ lack of understanding of social
enterprises and the requirement of personal guarantees. These are all
attributed to the traditional economics that bankers believe in, and which have to change by counting in economic as well as social capital.
In Sweden and
France, social franchisees use standard finance methods in innovative
approaches, including networking guarantees, quasi-equity/debt, division of
investments and operations. Notwithstanding all these examples, to restart a
‘different’ economy, we need a new vehicle: a tailor-made legal structure for
franchised co-ops paralleled with (1) a fully-fledged community re-investment
regime that is as accessible as obtaining car loans; and (2) an enhanced ‘right
to challenge’, entitling employees of larger enterprises to run business
services as a co-op in a way they are allowed to do for local council services.
If delivered
holistically, the above agenda could transform an economy of opulence to one of
human flourishing. The legal and financing challenges facing co-ops today represent
the imminent need of a fundamental paradigm shift if we are to mainstream them
to revitalise our communities in an ill-fated economy.