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Building a Co-operative Economy

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.

Comments on: Building a Co-operative Economy

Gravatar Reality 37 22 May 2012
My dear Winston, have you run a company? Have you set up a company? Have you invented anything worthy of a new start-up?r/>Or, I apologise if I am wrong, just a student/academic standing on the sidelines enjoying telling others what they should be doing. And not practising what you preach. Could we for example ask if Respublica is a co-operative. Does Philip Blond share all income equally amongst you in a cooperative manner? r/>Your prescription for we businessmen, while interesting is utterly delusional. Tell Martin Sorrell for example to turn his business into a coperative. He will laugh at you. As will the bosses of every FT 100r/>company. Tell Mark Zuckerberg who has just floated and kept 55% of the voting shares in his own hands. With respect your thinking is the thinking of a juvenile with no experience of how businessmen think. Its largely utter nonsense.

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Detailed Summary

Date Published
18 May 2012

New Economies, Innovative Markets

About The Authors

Alastair Marke

Alastair Marke is a Research Associate at ResPublica, working within the New Economies, Innovative Markets workstream....