Cooperatives need bottom-up thinking

I’m at the early stages of working on an idea to see many more cooperative businesses in Brighton. I’m at the International Summit of Coops in Quebec to learn more and make some new connections in this area.

Coming from the traditional private ownership business world – even though I have long been a fan of democratic business – I’ve realised how I naturally gravitate towards top-down thinking. People smarter than me keep correcting me and getting me to think bottom-up. Here are two examples:

1) Thinking about how to go about building a network of cooperatives (like the enormously successful Mondragón in Spain) I thought I needed to put together a group of people to work on a constitution, then recruit or set up coops to join the group. Classic top-downness. I did have a nagging doubt about the approach – it felt like I was creating a bureaucracy. Actually, the best way to do it is to start with people: The needs of the people in the local community and with people in existing and potential new coops. Once you are fully engaged with the people involved you can start setting up a network from the bottom, with one coop, linking to the next one and so on, and eventually build whatever group structure might be needed.

2) Ownership & Finance. I’ve mused about innovating business ownership models before – how you can structure ownership of a business in a combination of employee, customer, community and private ownership. In top-down fashion, I’ve been trying to figure out the most optimal model which could then be applied to coops in Brighton. Again, the far better approach is to accept that there’s a lot of flexibility and many possibilities and to work with the people involved to find the best route as needed. For example, more capital intensive businesses like manufacturers may require more private investment; those in service sectors could be more employee-owned; and those selling to consumers may benefit from greater customer and community membership.

I’m sure there are many more examples of where bottom-up thinking will provide a better approach, and although cooperatives may formally delegate power for some centralised decision-making which at times may be more effective, I’m going to make it a rule to make bottom-up my default approach.

The state we’re in and the call for a new economy

I’m at the Imagine 2012 conference on cooperative economics in Quebec City. Here are some thoughts after the first full day. It’s a pretty frightening picture, folks. But there is hope.

The industrial age economy, and indeed the neoclassical model of economics underpinning it has reached the end of its useful life. Whilst it helped lift many millions out of poverty, we are now seeing greater inequality between rich and poor countries and even between rich and poor people within countries. A model of business based on maximising shareholder value in a world where only a tiny proportion of people are shareholders will only cause rising inequality. This is not just bad news for the poor. In unequal societies, the rich suffer from many more social problems than in more equal ones.

GDP growth brings about improvements to wellbeing, but only up to a point before tailing off and in many cases declining (for example, increasing obesity and mental illness in the United States.) Research by Manfred Max Neef suggests that this tailing off happened around the 1970’s or 80’s for most developed nations.

The economy is a sub-system of planet earth – an inherently closed, finite system, therefore the economy cannot keep growing indefinitely within it. This can be easily explained to young children. Yet this inconvenient truth is ignored by all large political parties who argue about whether growth needs investment or austerity, and we still have an economy based on ever-increasing, unsustainable consumption. There are about 1.8 hectares of workable land to support each human being on the planet. In rich countries like the US, the use is in excess of 4 hectares and growing. Not to mention the hundreds of millions of people in the newly developing middle classes in India, China, Brazil and others who are now joining the consumer party.

The key message is that we have to move away from a fixation on growth (getting bigger at any cost) and towards development – becoming happier, healthier, wiser, safer and with better relationships.

This is not a call for left-wing politics. Far from it. Socialism and industrial age capitalism have both failed. Capitalism, for all of its fundamental shortcomings is the best way humans have come up with to organise ourselves to produce the things we need. But we need a very different capitalism.

The cooperative movement – businesses based on ownership of members (be that customers, employees or other stakeholders in the community) offer an alternative to maximising shareholder value. Instead, they use capitalism to maximise social outcomes – in other words, the things that really matter to humans and the planet now and for future generations. This is the concept of development rather than growth in action.

This view of capitalism is remarkably well established. Cooperatives world-wide have 1BN members and the largest three manage assets in excess of 1.6TN (and guess what, they have been extremely resilient through the recent economic turmoil because they did not engage in the insane activities like shareholder-owned banks.) It’s extremely worrying that despite the size of the cooperative movement and the promise it holds in playing a part in a development rather than growth based new economy, there is no representation of the cooperative movement on the B20 - the business forum that advises the G20. Business as usual, the old model is there in abundance.

We have an economy and consumption that cannot grow indefinitely. We are close to irreversible climate change together with huge natural resource depletion and energy shortages. We have to act now to protect the planet for future generations, and we need to start by creating a new economy, and fast before it is too late.

Going beyond the inverted org chart

The traditional org chart has the CEO and directors at the top, with power cascading downwards through managers and eventually to the people at the bottom who actually do the work and create all of the value.

A popular idea in the design of democratic companies is to turn the org chart upside-down. In an inverted org chart, it’s the people who do the work, deal with customers, make the product and deliver services who are the VIPs at the top, and the org chart has the layers of management beneath them to support them to be happier and more productive. The CEO is right at the bottom, since they’re furthest from directly delivering value to customers, but have to provide the foundation to the support structure for employees.

An inverted org chart isn’t just a piece of fakery to make the employees feel important. Viewing the organisation structure in this way can lead to innovations that get new levels of performance from more engaged employees. For example, at HCL Technologies (Multi billion dollar IT outsourcing giant,) when they inverted the org chart, they came up with the idea of creating something similar to a customer support ticketing system, but with the regular employees as the customers, and the managers as the support agents. Any employee can open a ticket on the system about anything from a problem with their pay, to a faulty chair or a complaint that their boss smells. The issue is then routed to managers who have to resolve the issue and only the original employee can close the ticket. This system has helped HCL employees to be happier, more productive and therefore provide better service to customers and generate profit.

However, there is another group of people who hold more power than anyone else in the org chart, yet are rarely featured on it. Shareholders. Even in an inverted org chart, the only people who have deep, permanent rights and power are the shareholders, because they alone can remove the CEO, board and in effect do whatever they like to the org chart as is suits their interests, short- or long-term. They alone are the people with rights to the profit made, and they can sell their rights wholesale to anyone they choose without needing any kind of consent from anyone working in the business.

Even in very progressive and democratic companies (even those with innovative, networked org charts) it’s often just taken as ‘the way things are’ that there are shareholders who have all of the power, rights, and entitlement to profit. Even high-performing employees accept that they are ‘hired’ by the company, and effectively rented just like a piece of machinery.

But employee-ownership offers a real alternative to the status quo. Employees who are also owners hold the real power in the company and they have the rights to hold the CEO and board to account and to the profit that they make. This is why employee owned companies like John Lewis in the UK and the Mondragón network in Spain are so successful, because rights, power and profit are tied to the people who deliver the value.

So is this a threat to traditionally owned businesses? Yes and no. Employee ownership (like John Lewis rivals Marks & Spencer and Debenhams know) can create fierce competition. However, there’s a route for founders and other owners of traditional businesses to transition their companies to employee-ownership. This is not altruism and they don’t have to give their shares away. It’s possible to finance all-employee buy-outs which create a fair and exciting legacy to be enjoyed by all future generations of employees, and it gives the old shareholders a fair return for what they have put in.

Check out this short video that gives a flavour for what life is like inside employee-owned companies. It’s hard to fail to see why this model gets the best out of people.

SHIFT CHANGE – preview from Mark Dworkin on Vimeo.

How to protect a great democratic company from destruction

WorldBlu’s list of the 10 principles that come together to make a democratic workplace is one of the pages I link to the most from this blog. It served as a guide in making my previous company more democratic and it’s a very easy way to explain what organisational democracy actually means. However, I believe that there is something incredibly important missing. Not an 11th principle, but a wrapper for the full set of existing principles.

This wrapper is constitution. It means that the other 10 principles are protected and enduring. Like a democratic nation state, a truly democratic organisation will be one forever.

This isn’t just an academic point. We already know that buy-in from senior leadership is key to building a democratic company. So what happens if a democratic company is sold to new owners and the founders who built the democracy eventually leave? Take Zappos for example which was started by (a business hero of mine and awesome dude) Tony Hsieh. Clearly Tony has been a driving force for their culture of happy employees who create happy customers, and how they use democracy to help them achieve that. It’s worked spectacularly well, so much so that Amazon.com bought them for close to $1BN.

Of course, when the company was sold all parties said the right things: Amazon wouldn’t want to change Zappos because their way of doing things works. Tony said he had no immediate plans to leave, that they are as committed as ever to doing things the Zappos way, and even hopes that the culture rubs off on Amazon a little. So far so good. But things can and do change.

I want to be clear that I have heard nothing to date about Zappos heading off-track. It’s the future I worry about. Tony Hsieh will not be there forever. Management at Amazon will change over time. New competitors may disrupt their business and put enormous pressure on them in the same way that Amazon and Zappos disrupted the retail industry. Who knows what the future looks like? As a democratic (and brilliant) company, Zappos is far better placed than most to be resilient through tough times. But the company is only ultimately accountable to one master: Amazon’s shareholders. They, not the employees hold the ultimate power.

Shareholders of public companies like Amazon – mostly hedge funds and pension funds – buy-in to a company culture only when it supports their goal of financial value creation. The big tension is that a democratic workplace is a long-term game. But the stock market in comparison is too often driven by next quarter’s results, and it’s easy for investors to jump ship at a moment’s notice if the share price is going in the wrong direction. They don’t have to be invested for the long-term. In tough times, or simply with enough short-termist shareholder pressure, changes can be made to drive profit now at the expense of democracy and financial performance in the future.

We’ve seen what can happen when a great company ‘sells out’ in both senses of the expression. When hyper-ethical clothing brand Howies was bought by Timberland, the founders were told at the time: ‘Keep doing things your way. Become even more Howies.’ Exactly what Amazon told Zappos. Howies now had the cash of a larger parent to drive the business forward and a green light to stay true to themselves. All good. Until it went wrong. Founder David Hieatt later wrote:

A year or so after selling to the ‘current owners’ I was in a meeting in Boulder, Colorado. I was told that I had to move ‘this bit’ of the business to this country and ‘this bit’ of the business to this country, or they would ‘spin us off’. I had to ask what ‘spin you off’ meant. (It means to sell you.) Those kind of meetings are called ‘Dream Breakers’ for good reason. I emotionally left the company at that meeting.

Eventually he left the company for real. Apparently selling out really did mean selling out. Timberland was later bought out by investment group VF so Howies changed hands again. Since they’d already ‘sold out’ there was nothing they could do about this. And now the latest news is that the Howies management put in place by Timberland have bought out the firm to take it back into private hands. What a huge waste of time, effort and emotion. And the employees – you know, those people who actually do all of the work and generate 100% of the value – were merely powerless pawns in the whole story.

The enormously successful, democratic company SAIC with revenues in the billions of dollars was owned by its employees and enormously profitable. In employee ownership, its share price had doubled every five years. But its achilles heel was a lack of a constitution that protected its ownership. Under a new CEO, the employees were persuaded to take the company public. Once it did so, growth tailed off, and employees came to deeply regret the decision. Current and future generations of employees lost ownership of their company forever.

Just because Howies and SAIC ‘went bad’ that doesn’t mean the same will happen to Zappos. But the point is that Zappos is a wholly owned subsidiary of Amazon, so the employees have no rights to prevent dramatic changes to their workplace or the destruction of the democracy that they enjoy there. While things are going well I’m sure they’ll be left alone, but if in the future Amazon feel like the interests of the shareholders (which may be short-term) point to a change of direction, then make no mistake – it will happen. Remember, shareholders are the only people who have the power to remove and appoint the board of directors.

I feel like I’ve picked on Zappos in this post. Sorry Tony! It’s not really about them – they are just one example of a fantastic democratic company that has the potential to go bad. I hope it never happens. The point is that truly democratic companies need to have their principles enshrined in a constitution that cannot be easily overturned by new masters, especially those seeking to generate short-term results over long-term value creation and the wellbeing of the employees.

There are a number of ways that a constitution can be made real. For example, you can do something similar to B Corporations who have clauses in their Articles of Association stating that the primary purpose of the company is to deliver social or environmental benefit and not just make money. The online social network Couchsurfing became a B Corp before taking venture capital to protect its higher purpose.

However the most powerful way of protecting a business against short-term-driven new masters with the potential to wreck a democracy is to remove the possibility of having new masters entirely. This is done by making the business employee-owned. It doesn’t mean that entrepreneurs like Tony Hsieh have to give away their baby. The company can raise finance to buy out the founders and the shares are held in a trust for the employees using a mechanism similar to a leveraged buy-out. Or the founders can simply be paid off over time out of future profits. When it becomes employee-owned, a constitution is drawn up that protects the shares, and therefore the ultimate power of the employees, forever.

The UK retailer John Lewis is one of the most successful democratic, employee-owned companies in the world. When John Spedan Lewis sold the company to its employees he had the foresight to create a solid constitution. Not only does this protect ownership of the business for future generations of employees, it also sets out how the directors are accountable to the employees as well as other principles such as an internal ‘free press’ (the company newsletter is obliged to print all letters from employees with a response from a director.) The company cannot be taken public, protecting its successful model, and the rights of employees now and for all future generations.

Employee ownership is the only sure-fire way that selling out doesn’t lead to a sell-out of the rest of an organisation’s principles further down the line, and that founders can leave a legacy to be proud of. I hope that more founders will choose this route.

Video: We the owners

Check out this trailer for up-coming documentary We The Owners, about employee ownership. Really gives a sense of what employee ownership means on an emotional level. It’s hard to fail to see why this is such a successful model for business. It features one of Worldblu’smost democratic workplaces‘ – Namaste Solar too. Looking forward to seeing the finished film.

Innovating business ownership models

Something I like doing for fun is sketching pie charts of ownership models for businesses. Yes, I am a business geek!

In the standard model today, the ownership of a business is something separate from its operations. The role of investor/owner doesn’t necessitate any involvement in actually running a company or delivering any value for its stakeholders. Owners have a right to appoint the directors and have the right to all of its profits. As I’ve written about before, this doesn’t do much to create fair and happy societies but as an entrepreneur, I am excited about how we can evolve new business ownership models. The goal is to engage more stakeholders to create better businesses that innovate more; provide better service and more value to customers; create better jobs; deliver more value to society as well as outperform traditional businesses in financial terms. I think we can do much better than today’s status quo.

Most of the pie charts I’ve been sketching are for new start-up businesses and combine three types of owners:

1. Private investors: This group is fairly traditional, but there’s no doubt that private investors can provide the capital necessary to get new ventures off the ground, especially in today’s market where lending to start-ups is difficult. However I see two key changes to the norm. Firstly, a commitment from investors to ALL of the outcomes of the enterprise (in terms of human, social and environmental capital, as well as financial returns.) And secondly, a commitment to eventually sell their stakes to the following two groups of owners, once they have accumulated a fair return for their investment and risk. On the surface this may look like sacrifices compared to investment purely for capital gain, but I believe that businesses with these more innovative ownership models will outperform traditional businesses, more than making up for the restrictions places on private investors.

2. Employee-owned trusts: Giving the employees a meaningful stake in the business from day one sends a powerful message that they are not working for someone else’s benefit, but they are true owners, partners and stakeholders in the venture. This changes the mindset of an employee who will see it as their business. This increases motivation and productivity. I reckon 30% is about right, to leave enough room for other investors.

3. Crowdfunding: There is a huge amount of innovation going on right now around sourcing finance in small chunks from large groups of people. Popular platforms like Kickstarter are helping new ventures to raise anything from hundreds to millions of dollars from future customers, friends, family and supporters. I think there’s something particularly powerful about having customers as part owners in a business. Imagine a customer in a restaurant who has bought a very small stake in the business. Perhaps they don’t have a great experience there one day, but instead of feeling like an annoyed customer, they feel like a disappointed owner. Very different mindset that wants to focus on making sure the problem is fixed for next time.

Putting it all together

Say a new company is founded with an initial £50,000 of capital from private investors. These shareholders own 50% of the company, valuing it at £100,000.

Next, an employee-owned trust is set up. This is a separate legal entity from the company and it owns 30% of the shares, including all voting and other shareholder rights. Employees can elect board members, giving them real power and influence right from the start. A very powerful way to attract and motivate employees.

A second trust is set up (I call this a Community Trust) which owns the remaining 20% of the shares. These shares are purchased by way of a loan from the company, so the Community Trust initially owes the company £20,000. The Community Trust then sells a limited number of memberships, say 500 at £40. This may take a few years, or it could use a platform like Kickstarter to sell the memberships before the company launches. This repays the loan and adds capital to the business as well as building a loyal base of fans. Once the memberships are sold out, the members can elect their own board member and receive ‘dividends’ – a share of the company’s profits in the form of vouchers that can be spent there.

From the outset, the private investors agree that they can only sell their shares to either the employees or the Community Trust. This aligns their interests with those of the other stakeholders.

The obvious objection to a model like this is that the traditional investors on the face of it appear to be giving up a lot of equity and control. Yes, they hold a smaller slice of the pie, but the pie could grow much larger with an engaged base of fans and motivated employees. Plus they have a new route to liquidity for their own investment, by selling their shares over time to the Community Trust (which creates new memberships at a higher valuation) or the employee-owned trust (which pays for the shares out of future profits.) I believe that it will also form a much stronger base of power in the company, with representation from employees and customers, sharing the ups and downs with everyone involved. Finally, for entrepreneurs and investors who want to do something more special for the world than just make some money it creates an opportunity to build a legacy that lasts beyond their personal involvement.

Building a better economy with more employee ownership

Iain Hasdell, Chief Executive of the Employee Ownership Association has written an excellent call to action for government to facilitate building a better economy with more employee ownership.

In the UK and most of the rest of the advanced world economies we are dominated by publicly traded companies which don’t lead to a fair distribution of wealth. Hasdell writes that 50% of the people in the UK own 1% of the wealth, with the wealthiest 20% owning a huge 84% of the wealth. This isn’t just bad news for people outside of the wealthiest brackets. Other studies have indicated that more equal societies have a higher quality of living for everyone, including the richest. So this isn’t about taking from the rich and giving to the poor – all of society would benefit.

The disconnect between ownership and doing the actual work also creates unhelpful and distracting tensions such as pressure to please analysts and deliver quarterly results rather than building an environment for the long-term that brings the best out in employees and delivers value to customers and society. Employee owned companies are free to do the opposite.

Not only would an economy based on more employee ownership be fairer for the masses who actually do the work, but based on the evidence from employee owned companies today, they are likely to outperform traditionally owned rivals though higher employee engagement, motivation and innovation. This presents a new opportunity for growth at a time when our current capitalist system is failing miserably.

So what can we do about this?

Hasdell wants government to remove red tape and tax disincentives that currently hamper wider employee ownership and also take an active role in educating the business community about the potential of employee ownership. This really rings true for me as someone who has started a business. At various times we considered selling the business, but never even considered selling it to the employees as an option purely through our own ignorance of this being an option, and when we eventually did look into it, the process was off-putting (although not impossible, and I still hope the business will eventually become employee-owned.)

I know that there are many entrepreneurs and other business owners who want to realise some value for their investment, risk and hard work in building their businesses. I also know that many of these people fear the implications of ‘selling out’ – the impact on the employees and fear of the fate of their ‘baby’ falling into the hands of new owners who care only about financial return on investment. I urge these people to consider selling the company to the employees instead. There’s help available from consultants like Baxi Partnership to explore this option and help you through the process.

If you are an employee working for owner-managers, then why not plant the seed about employee ownership? There’s a good chance that they will have never even considered it, but it could open their eyes to a way to realise some value for themselves whilst leaving a real legacy for the employees who helped them to build the company.