Three Methods to Worker Ownership

2015

Michelle Camou

Imagined Economy Project

8/10/2015

Three Methods to Worker Ownership

About the Imagined Economy Project

The Imagined Economy Project was started in October 2014 to promote, examine, and reflect

on the project of market change in the United States. The disadvantages of American-style capitalism

are plenty: structural poverty, inequality, job insecurity, the debasement of work, overconsumption,

community dislocation, and environmental destruction. For decades, a main way of addressing these

disadvantages has been through public policy, but the limits of government effort may be intensifying in

an increasingly global economy and a political culture of retrenchment. Instead of laws and regulations,

communities and other change advocates are trying a new tactic. They are experimenting with ways of

transforming the market from the inside. Worker cooperatives are one of the key ideas gripping

imagination about market transformation. This inaugural report of the Imagined Economy Project

reflects on some of the dominant ideas for growing worker cooperatives into distinct sectors of urban

economies. We hope it helps inform your thinking on worker cooperatives and their development in

useful ways.

Author

Michelle Camou

Distribution

Three Methods to Worker Ownership is provided at no cost in pdf version at

www.imaginedeconomy.org.

To submit comments, feedback, or questions

Please send email to Michelle Camou at imaginedeconomy.org.

Copyright

Copyright © 2015 by Michelle Camou

http://www.imaginedeconomy.org/

Summary Overview

Worker cooperatives may be a big part of local efforts to resolve the labor market and

environmental struggles likely in the coming decades. Suddenly more familiar in the United States,

worker cooperatives are democratically-run, for-profit businesses owned by employees, or worker-

owners. Advocates think that worker-ownership can help change the market, making possible greater

wealth and income equality, better job quality and security, the greening of products and processes, and

sustainability for urban communities. Currently, there are about 400 worker cooperatives in the United

States. To make good on their potential, they must first get to scale.

With this report, the Imagined Economy Project humbly supports this effort by studying and

reflecting on the strengths and limits of three commonly-proposed methods for growing the worker co-

op sector. These methods include:

Anchor Institutions Leveraging the purchasing power and slack investment dollars held by civic institutions to form worker cooperatives that sell to those institutions.

Business Conversions Transferring business ownership to employees, sometimes through seller financing.

Spinoffs Creating new worker-owned ventures related to existing worker cooperatives via product diversification, supply chains, or franchising.

Each of the methods profiled holds promise for cities, communities, and other proponents

interested in developing worker co-op sectors in their areas. Importantly, the logic or theory behind

each method includes ways to mitigate entrepreneurial risk and to generate a certain amount of

financial resources beyond conventional loans, the sale of company stock, and grants.

The strengths of these methods are accompanied by certain limits or disadvantages, however.

The available evidence shows that:

Anchor institutions certainly allow worker-owned businesses to tap into some of the

resources of vast institutions. But, anchors are not necessarily enough to propel sales or to

be the primary customer of new worker cooperatives developed around their demand. The

method requires existing vendors to be supplanted and may also be “too” local in outlook.

In limited practice, worker co-ops tied to anchors have been most successful selling to those

anchors when offering a new good or service not already supplied by other vendors.

Business conversions allow worker cooperatives to occupy an existing position or niche in

a market. However, they require the transformation of an entrenched corporate culture

most likely inexperienced with workplace democracy. In cases, employees have been

reluctant to become worker-owners, and conversions may not be an easy fit for strict place-

based community development projects. In practice, converted co-ops seem to get over the

hurdles of transition; employment and/or sales growth is typical for them.

Spinoffs play off the market strength and surplus resources of established worker

cooperatives. But, interdependence among parent/child companies may increase financial

vulnerabilities during downturns, as well as prolong the time horizon to new start ups. The

evidence internationally and in the United States suggests that spinoffs are able to

withstand downturns through coordinating institutions designed to help struggling ventures

gain or regain strength.

The Imagined Economy Project recommends a multi-method approach to worker co-op

development when worker-ownership is part of a multi-year community development initiative or plan.

Instead of planning worker-ownership initiatives around a single method, developers and incubators

could instead hedge their bets. Initially, they could pursue ventures driven by anchor institutions and

business conversions simultaneously. Over time (perhaps within a decade), they could initiate spinoffs

from the strongest businesses in the earlier group. Ideally, the worker co-op sector resulting from

incubation or other development projects would include a mix of worker cooperatives attached to

anchors, converted businesses, and spinoffs.

A multi-method strategy may require stakeholders to re-conceive community benefit. It may

also allow an easier way to plan for the career ladders of worker-owners first entering the worker co-op

sector at the entry level. Multi-methodism may be challenging or even impossible if a stream of

financing is unavailable, and it would also benefit from an expanded infrastructure to help incubators

with technical, research, and policy assistance, as well certain tasks of coordination that could bolster

development efforts.

Worker cooperatives are re-energizing the social imaginary and pointing in a direction away

from an economy that is less and less workable for a greater and greater number of people. There is a

lot of thinking to do and dialog to be had, but workers, communities, and the planet may get stronger

for it.


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Introduction

How can the economy become more responsive to workers, communities, and nature? The

“discovery” of inequality, malfeasance on Wall Street, and constant hits to the natural environment has

made that among the most salient questions today. Of course, there is no single answer to such a

complicated problem, but worker cooperatives are likely to play a part in early 21st century attempts at

facing the challenge. To be a part of the solution, they must get to scale.

This report aims to support the project of expanding worker cooperatives throughout the

United States. It is not intended as technical assistance. Rather, it is as an attempt to reflect on the

theory or logic of a subset of methods shaping imagination on worker cooperatives as a strategy of

community development or (possibly) social change. These methods include 1) anchor institutions, (2)

business conversions, and (3) spinoffs.

A widespread expansion of worker cooperatives is not likely to be a panacea to all of the labor

market, community, and environmental problems connected to competitive capitalism, and any payoff

will likely be decades away. Nonetheless, a scaled-up worker co-op sector holds promise for addressing

matters like wealth inequality, labor conditions and work/life balance, job insecurity, occupational

health and safety, greening the economy, and community welfare. The momentum for a more

cooperative economy continues to build, and it is exciting to think about the possibilities. A challenge for

co-op incubators, planners, and advocates is finding ways to get started and make broad impacts, while

also taking time to reflect on key concepts guiding current practice. Such reflection can aid in learning,

planning, and project design.

What are Worker Cooperatives?

Worker cooperatives are businesses owned and self-directed by employees that share in

decision-making, production, and profits. In many ways, they resemble typical firms. They produce

goods or services for sale to clients or customers, and their success hinges on profitability.

Yet, in other ways, worker cooperatives turn the typical business model upside down. Worker-

ownership means that employees have a dual role at work; they both carry out specialized tasks as part

of a broader production process but also have an equity stake in the firms that employ them.

Profitability is for the benefit of worker-owners, so the expectation is long-term employment. The

governance model is a democratic one. This means that worker-owners are trained as members of a

production process as well as owners needing to make financial, policy, and management decisions.

Oftentimes, explains the U.S. Federation of Worker Cooperatives, these decisions center on “what’s

called a ‘multiple bottom line’- that is, they evaluate their success not just by the money they make but

at things like their sustainability as a business, their contribution to the community, and the happiness

and longevity of their workers.”1 The University of Wisconsin Center for Cooperatives estimated that, as

of 2009, there were 223 worker cooperatives operating in the United States with close to $1 billion in

1 US Federation of Worker Cooperatives, 2007, “What is a Worker Cooperative?” <http://www.uwcc.wisc.edu/pdf/What%20is%20WC.pdf>


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revenue.2 There may be 400 today.3 They are present in a variety of sectors and industries but may be

more common in low capital, low-margin sectors with few employees.4

TABLE 1: STATISTICS ON WORKER COOPERATIVES

Total Number Firms in United States 300-400

Total Number Employed 7,000

Average Employed Per Firm 50

Median Employed Per Firm 10

Total Annual Revenue $400 million

Average Annual Profit Margin 6.4% From: Democracy at Work Institute, Worker Cooperatives Facts and Figures5

The small number of worker cooperatives in operation belies their flourishing appeal. On the

heels of recession and the subprime mortgage scandal, when faith in capitalism has plummeted 6 and

even conservatives are searching for alternatives to neoliberal policy,7 advocates offer worker

cooperatives as a model of market change. Fifty-five percent of current worker cooperatives were

established in 2000 or later,8 and that trend is likely to continue.

That is because community leaders and change advocates are intrigued by the prospects. There

is a growing patchwork of co-op associations, incubators, think tanks, and civic institutions taking the

lead in local markets and doing what they can do to help more worker-owned ventures get off the

ground in their respective cities or regions.

For instance, the Democracy Collaborative, in concert with the Cleveland Foundation , was

instrumental in designing the high-profile Evergreen Cooperatives in Cleveland that launched its first

worker-owned business in 2009 as a “community wealth building” initiative. It has inspired planning for

similar initiatives in Atlanta, Jackson, New Orleans, Rochester, Austin, Richmond and elsewhere. There

are numerous co-op incubators operating in various cities,9 as well as associations, federations, and

think tanks offering technical assistance and/or policy advocacy. Several of these have developed since

2000 including, but not limited to, the U.S. Federation of Worker Cooperatives, the Center for

Workplace Democracy, the U.S. Solidarity Economy Network, California Center for Cooperative

Development, Valley Alliance of Worker Cooperatives, and New York Worker Cooperative Coalition.

City governments are beginning to ramp up their support of worker-ownership. The City of

Richmond (California) established the Richmond Cooperative Revolving Loan Fund in 2010, making small 2 University of Wisconsin Center for Cooperatives, 2010, “Research on the Economic Impact of Cooperatives”

<http://reic.uwcc.wisc.edu/issues/> 3 Democracy at Work Institute, 2015, “2015 Press Kit” <https://www.usworker.coop/sites/default/files/PressKit_1.pdf> 4 Carla Dickstein, 1991, “The Promise and Problems of Worker Cooperatives: A Survey Article”

<http://american.coop/sites/default/files/Dickstein%20-%20The%20Promise%20and%20Problems%20of%20Worker%20Cooperatives.pdf> 5 Democracy at Work Institute, pg. 2.

6 “”A Global Poll Shows an Ideology in Decline,” Economist, April 7, 2011 <http://www.economist.com/node/18527446>

7 Michael Gerson, “Enter the Reform Conservatives,” Washington Post April 13, 2015 < http://www.washingtonpost.com/opinions/enter-the-

reform-conservatives/2015/04/13/8f7c3a2e-e209-11e4-905f-cc896d379a32_story.html> 8 Hilary Abell, 2014, “Pathways to Scale” <http://www.uwcc.wisc.edu/pdf/WorkerCoops-PathwaysToScale.pdf>

9 A partial list at Nina Misuraca Ignaczak, “It Takes an Ecosystem: The Rise of Worker Cooperatives in the U.S.” Shareable July 16, 2014

<http://www.shareable.net/blog/it-takes-an-ecosystem-the-rise-of-worker-cooperatives-in-the-us>


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loans available for worker-owned business creation. In 2014, New York City allocated $1.2 million to

eleven cooperative developers as part of its New York City Worker Cooperative Development Initiative.10

The Madison (Wisconsin) Common Council approved $1 million annually for five years to support the

formation of worker owned businesses with job creation potential.11

What’s Possible with Widespread Worker Cooperatives?

While not naïve to the difficulties, proponents of cooperatives are betting that the market could

change for the better if worker cooperatives became more widespread. The idea, as expressed by

progressive media commentator Jim Hightower, is that cooperatives at scale would constitute a

structural change. 12 Gar Alperovitz, a prominent expert on economic alternatives, considers worker

cooperatives a large part of a “new economy” likely to transcend the capitalist/socialist dichotomy that

has long dominated understanding of how to organize the economy.13 The principles underlying the

cooperative economy include solidarity and democracy, according

to solidarity economy activist Ethan Miller, making it a mechanism

of a more just economy.14

The theory of change is this. Worker-ownership places

authority and control in the hands of employees. That is likely to

change the decision calculus from one prioritizing profits above all

else as is now typical in business to one balancing the drive for

gains with the safety, security, and well-being of the people whose

livelihoods depend on the co-op. Core business principles and

solidarity in the work culture translate to a greater balance

between “people and profits” in theories of worker cooperatives,

but so does self-interest. Compared to the typical business model,

the distinction is that self-interest in a worker cooperative is multi-

dimensional, leading to a wider range of considerations becoming

standard parts of the decision process.

The kinds of practices that can change through cooperative

business are not limitless. Worker-ownership at scale will not

resolve every problem, disadvantage, or negative externality associated with capitalist enterprise or

consumer culture. Conceivably, the spread of worker cooperatives could produce impacts in areas

including the wealth distribution, labor standards and conditions, the greening of products and

10

Ajowa Nzinga Ifateyo,“A Co-op State of Mind,” In These Times Aug 18 2014 <http://inthesetimes.com/article/17061/a_co_op_state_of_mind 11

Ajowa Nzinga Ifateyo, 2015, “$5 Million for Co-op Development in Madison” Grassroots Economic Organizing,

<http://www.geo.coop/story/5-million-co-op-development-madison> 12 Jim Hightower, “Cooperatives Over Corpprations,” Truthout, Feb 24, 2014 < http://www.truth-out.org/opinion/item/6862-cooperatives-

over-corporations> 13

Gar Alperovitz, “Worker-Owners of America, Unite!” New York Times, Dec 14, 2014 <http://www.nytimes.com/2011/12/15/opinion/worker-

owners-of-america-unite.html> 14

Ethan Miller (2006) “Other Economies Are Possible,” Dollars & Sense

<http://www.geo.coop/sites/default/files/Other%20Economies%20Are%20Possible_GEO%20Section%20of%20D&S.pdf>

In the Words of Advocates

“Cooperatives are a big, structural reform

that ordinary Americans can implement

right where they live.”- Jim Hightower

“We may, in fact, be moving toward a

hybrid system, something different from

both traditional capitalism and socialism”-

Gar Alperovitz

“Thousands of grassroots solidarity economy initiatives are sprouting and

thriving… to reclaim the power of citizens and communities to build just, democratic, and sustainable livelihoods.” – Ethan Miller


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processes, and community well-being if certain barriers could be overcome. Table 2 summarizes the

anticipated impacts of worker cooperatives in four areas, as well as some of the limits.

TABLE 2: SUMMARY OF POTENTIAL IMPACTS OF WORKER COOPERATIVES

More Equitable Wealth Distribution- Worker-owners control pay scales as well as the distribution of profits. Of course, wage offerings are constrained by competition and industry standards, and the wages at worker owned companies are not necessarily higher than industry averages.

15 However, the available

evidence suggests worker-ownership translates to equitable pay schemes, with the top to bottom wage ratio rarely exceeding 4:1 in worker cooperatives versus 344:1 in Fortune 500 companies.16 Plus, profits are distributed as bonuses or in savings accounts. Such practices are a departure from business as usual in U.S. firms and could help reverse trends toward growing wealth inequality if worker cooperatives ever reached wide enough scale.

Greening Products and Processes- There is no particular reason a worker cooperative needs to be a “green” business, but sustainable business development is a core value of many existing worker-ownership incubators. Also, there may be intrinsic pressure for worker cooperatives to limit pollution and emissions, as well as respond to external pressure to clean up production practices.

17 Through incubation as

well as the natural proclivities of worker-owners, the greening of business is likely to go hand in hand with the growth of the worker co-op sector. Nonetheless, there are certain limits since worker owned enterprises may fail to secure the capital needed to adopt greener technologies, and they must stay competitive with businesses that are anything but green.

Job Quality and Labor Conditions-Compared to typical owners, worker- owners have extra incentives to provide themselves safe, nonhazardous, and stable conditions on the job. There are instances of worker-owners finding ways to offer themselves regular hours in industries where the norm is part-time or irregular work,18 of replacing toxic work materials with green ones,19 and less inclination to lay-off workers during downturns.20 The capacity to improve labor terms and conditions is not guaranteed, however, as there are reports of self-exploitation in some worker cooperatives, involving long hours, monotonous work, and poor safety records.21

Community Well-Being- Worker-owners are unlikely to offshore their own jobs, so the spread of worker cooperatives can help keep business rooted locally. However, features of contemporary life may complicate an easy relationship between community benefit and worker cooperatives. Residential mobility means wealth might not be retained in the immediate communities surrounding worker owned firms. If worker-owners use savings to move and disperse across a metropolitan region, city cores may not see the benefits associated with growth in the number of taxpayers and homeowners.

It is impossible to predict whether a substantial increase in the number of worker cooperatives

would lead to the sort of structural change proponents hope for, simply produce desirable reforms for

some workers within capitalism, or none of the above.22 The first scenario seems most likely in the

presence of a supportive infrastructure capable of coordinating cooperative-focused lending, mutual

15 Chris Wright, 2014, Worker Cooperatives and Revolution: History and Possibilities in the United States, Bradenton, BooLlocker.com, Inc, p. 46. 16 Ibid, p. 27. 17

Sushil Jacob, 2011, “Growing Green Wealth: Investing In and Enabling Worker Cooperatives as a Green Jobs Strategy”

https://www.academia.edu/1480592/Growing_Green_Wealth_Investing_In_And_Enabling_Worker_Cooperatives_As_A_Green_Jobs_Strategy 18

Laura Flanders, :How America’s Largest Worker-Owned Co-Op Lifts People Out of Poverty,” Yes Magazine Aug 14, 2014

<http://www.yesmagazine.org/issues/the-end-of-poverty/how-america-s-largest-worker-owned-co-op-lifts-people-out-of-poverty> 19 http://itsoureconomy.us/2014/08/against-the-odds-four-nyc-worker-owners-talk-co-ops-family-and-jobs-with-justice/ 20 Corey Rosen, 2013,”The Impact of Employee Ownership and ESOPs on Layoffs and the Costs of Unemployment to the Federal Government,” <http://community-wealth.org/sites/clone.community-wealth.org/files/downloads/paper-rosen-et-al.pdf> 21

Dickstein, p. 8. 22

In instances, worker cooperatives have lost their social vision over time and have come to behave more like typical capitalist firms. For one

author’s discussion, see Dickstein, pp. 13-14.


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aid, laws, and cultural frameworks supportive of “social” ownership . This infrastructure is most certainly

emerging,23 but its advancement can only strengthen worker-ownership as a viable option.

Three Methods for Increasing the Prevalence of Worker Cooperatives

Some worker cooperatives develop organically, but incubators have been instrumental in

getting many others off the ground. As incubation projects continue to launch, it may be helpful to

consider the advantages and disadvantages of various methods for growing worker-owned sectors of

urban economies. The remainder of this report discusses the strengths and limits or opportunity costs of

three commonly-recommended methods for spearheading worker cooperatives in cities across the

United States. The report concludes by arguing for multi-method approaches as incubation projects are

developed locally or regionally.

Method #1: Anchor Institutions

Building worker-owned businesses to leverage the purchasing power of major civic institutions

like hospitals, museums, universities, libraries, etc is the crux of the anchor institutions approach to

expanding worker-ownership. The main example of this in practice is the Evergreen Cooperatives in

Cleveland, Ohio. The Evergreen Cooperatives have been studied extensively, so it is enough to say here

that it was designed as a community development strategy to build wealth in an impoverished area of

the city. It attempts this through green business, living wages, and worker-ownership. Since 2009, it has

launched three businesses including a commercial laundry, an energy company, and a hydroponic

greenhouse employing about 115 “hard to employ” people in total. The land where the businesses are

located is held in trust by the Evergreen Land Trust, in order to preclude worker-owners’ hypothetical

decisions to sell to conventional buyers and also to avert possible foreclosures in the event of business

failure.24 There is also the Evergreen Cooperative Development Fund, which provides seed funding for

the cooperative businesses.

The Advantages of Tying Worker Cooperatives to Anchor Institutions

1. Capital Immobility

Anchor institutions are not going anywhere. Traditional urban development models have been

stymied by the reality that outside corporations, lured by subsidies and tax breaks, may

eventually close up shop and move to another location, whether offshore, to another state, or

to a suburb. Anchor institutions are locally-identified, in some cases are public entities, and are

unlikely to leave or fail. Becoming part of the supply chain for anchor institutions eliminates the

risks of labor market disruption owing to capital flight.

23

Rachel Tanner, 2008, “Worker Owned Cooperatives and the Ecosystems that Support Them,” Massachusetts Institute of Technology,

<http://institute.usworker.coop/sites/default/files/resources/107%202013_Tanner_Worker%20owned%20cooperatives%20and%20the%20ecosystems%20that%20support%20them.pdf> 24

Marc Lane, 2015, “The Mission Driven Venture: Business Solutions to the World’s Mist Vexing Social Problems,” Wiley

<https://books.google.com/books?id=W6CdBQAAQBAJ&pg=PA103&lpg=PA103&dq=evergreen+cooperatives+land+trust&source=bl&ots=nKGEtgpR_y&sig=YrJeCATP7mJ9MBAR1Gr4PR9tjvQ&hl=en&sa=X&ei=wA5UVcfJJsWrNuDwgLAO&ved=0CFcQ6AEwCTgK#v=onepage&q=evergreen%20cooperatives%20land%20trust&f=false>


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2. Source of Capital

Anchors control billions of dollars in purchasing power and billions more in real estate. In 2008,

for instance, inner city anchor institutions spent $200 billion on goods, services, and pay.25 Also,

they tend to have considerable holdings in real estate, and the record shows they are

sometimes willing to leverage those holdings in local economic development projects.26 The

anchor institutions in the Evergreen Cooperatives’ targeted territory control $3 billion in

purchasing, and invested $2.5 million total in the start ups (out of an approximate $30 million

total).27 Financing is a top barrier to starting worker-owned ventures, and anchors are a

potential way to ease this problem.

3. Risk Reduction

Starting a business is risky, but forming a business around a known market minimizes some of

the risks of entrepreneurship. In Cleveland, the anchor institutions worked with Evergreen

Cooperatives founders and other key stakeholders on business selection. It is unknown what

percent of the anchors’ procurement dollars is captured by the Evergreen companies. However,

according to a series of Greater University Circle Initiative reports out of the Maxine Goodman

Levin College of Urban Affairs, the three local anchor institutions have contracted with

Evergreen Energy Solutions consistently since inception, purchasing an array of services

including solar panel installations and LED lighting conversions. There has been less consistent

anchor purchasing at the other Evergreen businesses. For instance, the laundry saw its first

orders from an anchor in 2014 when University Hospitals negotiated a subcontract for

Evergreen Cooperatives Laundry with its main laundry vendor.28 While sales to anchors have

been uneven across the three Evergreen c-ops, the relationship has helped mitigate the

unknown and provided entry into a market.

The Disadvantages or Opportunity Costs of the Anchor Institutions Method

1. Business Selection

Cooperative business ventures are developed to satisfy the demands of anchor institutions, but

these may or may not be long term revenue generators, easily marketable to a broader

customer base, or modest in terms of capital requirements. In Cleveland, for instance, a hospital

drove the selection of the solar panel installation business that cost $10 million to start. While

profitable quickly, the company became so through diversification into weatherization,

handyman services, and (eventually) LED lighting installation,29 partly because of the elimination

of federal subsidies for solar. Similarly, anchor hospitals did not contract with the Evergreen

25

Initiative for a Competitive Inner City, 2011, “Anchor Institutions and Urban Economic Development: From Community Benefit to Shared

Values,” Inner City Insights 1:2, <http://www.icic.org/ee_uploads/publications/ICIC_RESEARCH_anchor_institutions_r2.pdf> 26 Ibid, p. 4. 27 Candi Clouse et al, 2013, “Living Cities Integration Initiative: Cleveland, Ohio- Greater University Circle Community Wealth Building Initiative

Year 2 Programs and Project Report,” Maxine Goodman Levin College of Urban Affairs <http://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=1694&context=urban_facpub> 28

Ibid 29 Ketih Epstein, “Rebuilding the Rust Belt,” Politico Feb 19, 2015

<http://www.politico.com/magazine/story/2015/02/what-works-cleveland-115324_Page3.html#.VVY-ffBenIU>


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Cooperatives Laundry in the first several years, so the venture developed an alternate customer

base among nursing homes and hotels; it finally reached profitability for the first time in 2014.30

A preliminary lesson may be that anchors, while in control of substantial purchasing, are not

necessarily going to generate a majority of sales or be the primary market, despite commitment

to the vision.

2. Existing Procurement Commitments

Anchor institutions have existing contracts that worker cooperatives seek to supplant. Even if

the heads of anchor institutions are on board with the mission, the practicalities of achieving the

transition at the same time as a new business launch can be tricky. The business launch needs to

be timed for when procurement contracts expire,31and there can be no delays in the launch or

else anchors will be forced to find another vendor. This may be even more difficult for start-up

ventures attempting to take over procurement for a number

of anchors at the same time. Practicalities like these can

complicate a launch, and the Evergreen experience suggests

that winning procurement dollars from anchors may be easier

when involving new product lines rather than those already

being supplied by vendors.

3. Local rather than Industry Linkages

Making anchor institutions the reference for conceptualizing

cooperative ventures necessarily territorializes a market and

closes off other references, such as the existing community of

worker cooperatives in a larger (possibly even multi-state)

market. Rooting the business in the local necessarily

precludes a focus on opportunities and linkages elsewhere, an

opportunity cost.

To sum up, the logic of the anchor institutions method is

rooted in understanding of the longstanding challenges to urban

economic development. It seeks to overcome those challenges

creatively and in ways that prioritize workers and their geographical communities as the main

beneficiaries of efforts to promote economic growth. In practice, some of the assumptions of the

strategy- i.e. anchor institutions can and will replace existing vendors with locally-rooted worker

cooperatives- have not borne out entirely in Cleveland where it was first attempted. Continued

experience may provide a guide for future practice and refinement of the method. However, the existing

evidence suggests the risks of entrepreneurship are not entirely mitigated, even when anchor

institutions are in your corner.

30

Ziona Austrian, 2015, “Greater University Circle Initiative: Year 4 Evaluation Report,” Maxine Goodman Levin College of Urban Affairs

<http://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=2290&context=urban_facpub> 31 Interview with Roy Messing, Executive Director, Ohio Employee Ownership Center, February 23, 2015

Anchors On Balance

Anchors are able to direct spending

to community-rooted start-ups.

Anchors alone do not necessarily

float cooperative businesses.

Diversification of products, services,

and customers may be necessary to

keep start-ups profitable.

The risks of entrepreneurship are not

entirely mitigated by the anchor

institutions method.


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Method #2: Business Conversions

Privately owned businesses can be converted to worker-owned cooperatives, either because an

owner wants to sell a business; an owner develops a preference for shared ownership; employees leave

a workplace together to start a cooperatively-owned venture;32 or a union buys out a plant slated for

closure. In many cases, worker-owners maintain existing capital, contracts, customers, suppliers, and

market position of the converted company; the main difference is that they assume new roles in setting

corporate policy and management in addition to playing their parts in a production process. Some of the

main advocates including the Ohio Employee Ownership Center, the University of Wisconsin Center for

Cooperatives, and Project Equity propose conversions as a strategy for business retention as baby

boomers are expected to retire en masse in the coming decades.33

The Advantages of Turning a Traditional Business into a Cooperative One

1. Risk Reduction

Employee buyers are more likely to buy profitable businesses. That means, converted

worker cooperatives enter the market as established players, most likely in good shape, with

capital reserves, stable income, and a trained workforce. All of those features diminish the

risks of entrepreneurship considerably. Available evidence suggests converted worker

cooperatives continue to perform well. Recently, Project Equity published twelve case

studies of converted worker cooperatives. Of the twelve businesses profiled, there was

after-conversion employment growth in four (revenue trends not reported), revenue growth

in two (one of these cut staffing to stay afloat during the recession), employment stability in

two, job loss in one, business closure in one, and two unreported.34 While there is room for

more research, the limited evidence suggests that growth, while not guaranteed, is the

norm after business conversion.

2. Multiple Options for Capitalization

Access to capital is an oft-cited challenge to starting and growing worker cooperatives.

Starting a cooperative through business conversion may open financing strategies closed to

start-up ventures, especially in the form of internal financing. There are several examples of

owners financing the sale of their businesses to their employees. In other instances, owners

have cosigned traditional bank loans, or employees borrowed against existing reserve

capital.35 Such options make financing an easier proposition for conversions and may also

allow for the purchase of a more diverse mix of businesses than could be initiated as start-

ups. Business diversity could help build a spectrum of opportunities into a local worker co-

32

“Typology of Coop Conversions,” 2015, Project Equity <http://www.project-equity.org/business-conversions/typology-of-coop-conversions/> 33

“Cooperative Conversions and Employee Ownership,” 2015, University of Wisconsin Madison Center for Cooperatives

<http://www.uwcc.wisc.edu/issues/Conversion/> 34

Alison Lingane and Shannon Rieger, 2015, “Business Conversions to Worker Cooperatives,” Project Equity

<http://www.project-equity.org/wp-content/uploads/2015/04/Case-Studies_Business-Conversions-to-Worker-Cooperatives_

ProjectEquity.pdf> 35 Ibid, p. 13.

http://www.project-equity.org/wp-content/uploads/2015/04/Case-Studies_Business-Conversions-to-Work


9

op sector in ways to support career ladders for worker-owners wishing to advance after

starting at the entry level.

The Disadvantages of the Business Conversions Method

1. Changing the Culture and Institutions of a Workplace

Converting a hierarchical private business to a democratic worker cooperative necessarily

means changing the way decisions are made, policies are set, and workers interact. Of course,

worker-owned start-ups must also develop democratic processes and culture. This exercise is

logically more difficult in a conversion that involves employees simultaneously un-learning and

learning roles at work. Hilary Abell, in her report Pathways to Scale, explains that instituting

workplace democracy involves creating decision-making structures (whether majority-based,

Board-driven, committee-drive, or consent-based) as well as employee training in business

principles, entrepreneurship, and cooperation.36 This adds to the costs of the conversion.

2. Employee Reluctance

The Project Equity report on business conversions indicates that

employees sometimes hesitate in converting to a worker-

ownership model. Of the twelve companies profiled in the report,

two encountered challenges introducing conversion to employees;

a second faced a challenge as it expanded its counseling practice.

The company Namaste Solar resolved employee hesitance through

meetings, education, and awareness. Yet, employee reluctance

proved harder to resolve at other workplaces. At the company Real

Pickles, line workers were disinterested in ownership stake in a

company that might relegate them to manual work for their

lifetimes. At the opposite end, Center Point Counseling was unable

to convince medical doctors to join as owners given the great wage

disparity between themselves and lower-paid counselors.37 While

only two cases, these experiences might indicate greater obstacles

to converting businesses to worker-ownership at the extreme ends

of the skill spectrum.

3. Less Geographic Control

Business conversions often happen when existing businesses come

up for sale. Businesses that are good candidates for conversion are not necessarily likely to

become available in very targeted or very localized areas, such as specific neighborhoods.

Similarly, positions will already be staffed, so attempting to hire residents from particular

communities must be delayed until positions come open or are created. Making business

36

Hilary Abell, 2014, “Worker Cooperatives: Pathways to Scale,” Democracy Collaborative

<http://democracycollaborative.org/sites/clone.community-wealth.org/files/downloads/WorkerCoops-PathwaysToScale.pdf> 37 Lingane and Rieger, pp. 36, 57-8.

Conversions On Balance

Conversions allow worker

cooperatives to enter the market from

a position of strength and with

expanded financial options.

Conversions involve education,

training, and awareness for

employees.

Workplace culture and systems must

be altered to support democratic

decision-making.

Conversion may not work as a

locational development strategy.


10

conversions part of a locational development might require flexibility in the concept of

community benefit, unless a converted business can be moved easily.

To sum up, as a method, business conversions capitalize on a firm’s existing market position and

creative financing options to establish worker cooperatives in ways that minimize entrepreneurial risk.

Conversions add to the costs of doing business, however, as employees sometimes require education

and training to facilitate their new roles as owners and as new governance structures must be designed

to implement workplace democracy. Nonetheless, these costs are unlikely to jeopardize long-term

profitability. While more research is desirable, some preliminary evidence suggests that a majority of

these ventures continue to grow after conversion.

Method #3: Spinoffs

Worker cooperatives yield additional worker cooperatives by spinning off related businesses.

Spinoffs may develop in a variety of ways, including (1) establishing new businesses (rather than

corporate divisions) as product lines diversify, (2) forming ventures to supply inputs and business

services to existing worker cooperatives, and (3) franchising successful worker-owned businesses in

other areas or markets. Large-scale cooperative sectors in the Basque region in Spain and the Emilia

Ramagna region in Italy each grew this way. David Ellerman suggests that spinning off might be a

tendency in cooperative enterprise. This is because, unlike competitive firms, worker cooperatives have

less motivation to dominate the market, expand perpetually, or get large.38 Perhaps the best known

example of growth through spinoffs in the United States is the Arizmendi Association of Cooperatives

that expands worker-ownership by incubating Arizmendi Bakery franchises.39

The Advantages of Growing through Offspring Ventures

1. Risk Reduction

Much like other methods for growing cooperatives, spinoffs may mitigate some of the risks of

entrepreneurship. For instance, worker cooperatives organized up and down the supply chain of

other worker cooperatives have a built-in customer base. Additionally, franchises are able to

capitalize on the good name or reputation of existing products or companies, as well as a

working business strategy for success and growth in the market. “Cooperation among

cooperatives” is one of seven core principles guiding cooperatives, according to the National

Cooperative Business Association.40 The co-op culture supports the idea of such firms privileging

other co-ops in the requisition of products and services that facilitate business.

2. Capitalization

When companies spinoff, the parent and child companies can be connected through some sort

of corporate or other organizational structure. Linked groups of companies are able to pool

38 David Ellerman, 2006, “Three Themes about Democratic Enterprises: Capital, Structure, and Spin-Offs,” IAFEP Conference, Mondragon

<http

://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.404.9573&rep=rep1&type=pdf> 39

Joe Marraffino, 2009, “The Replication of Arizmendi Bakery: A Model of the Democratic Worker Cooperative Movement,” Grassroots

Economic Organizing 2, 3.< http://www.geo.coop/replication-of-arizmendi> 40 <https://www.ncba.coop/7-cooperative-principles>


11

profits and implement internal financing of sorts. The Mondragon Corporation, for instance,

established a variety of financial institutions and practices to self-fund entrepreneurial growth,

including a bank and profit pooling. Through profit pooling, each Mondragon cooperative pays

15-40% of surplus, primarily for venture capital and secondarily for job training and cash

infusions to struggling Mondragon companies.41 Efforts by groups of related cooperatives to

self-fund spin-offs are not as extensive in the United States, but they exist. For example, the

Arizmendi Association of Cooperatives requires member bakeries to contribute to franchise

development. Newer bakeries pay the lower of 4% of gross revenue or 25% of profits, while

long-lived bakeries pay the compensation and benefits of a typical worker for every 20

employees. Currently, these payments do not generate enough to fully fund Arizmendi start-ups

but instead cover the technical costs of opening a new business, provide collateral on bank

loans, and contribute a small amount of cash.42

3. Promotion and Opportunity for Worker-Owners

Worker cooperatives do not inherently produce job opportunities allowing for continued

advancement at work; much depends on the particularities of the field or industry and the

business trajectory. In those worker-owned firms with a flat occupational structure, spinoffs

may offer worker-owners opportunities to travel up a career ladder- without having to exit the

worker-ownership model or relinquish equity. The Mondragon Corporation, for instance, allows

for the reallocation of worker-owners across cooperatives.43 With some ingenuity and the right

coordinating structure, a principle of reallocation could be implemented across unrelated

businesses as well.

The Disadvantages of Spinning Off as Method

1. Too limited a Market

Spinoffs may encounter difficulties in finding a market large enough to reach profitability if

focused too narrowly on providing products and services for a parent company. During the

initiation phase, spinoffs may benefit from planning around multi-year contracts with their

parent, but they should anticipate needing to cultivate a larger customer base if they plan to

grow and remain viable.44

2. Interdependence may Exacerbate Vulnerabilities

Spinoffs, especially the supply chain forms, create interdependence among companies within

the chain. While this aids in building markets, it may prove a liability in the event of business

41 Saioa Arando et al, 2010,”Assessing Mondragon: Stability and Managed Change in the Face of Globalization, William Davidson Institute

Working Paper #1003 <http://wdi.umich.edu/files/publications/workingpapers/wp1003.pdf> 42

Tim Huet, 2013, “From Mondragon Networking to Franchising: The Arizmendi Association Model of Financing,” Grassroots Economic

Organizing 2, 12 <http://www.geo.coop/story/mondragon-networking-franchising> 43

Ramon Flecha and Ignacio Santa Cruz, 2011, “Cooperation for Economic Success: The Mondragon Case,” Analyze & Kritik 1

<http://burawoy.berkeley.edu/Public%20Sociology,%20Live/Flecha&Santacruz.Mondragon.pdf> 44 Ellerman, p. 13.


12

failure somewhere along the chain.45 In the worst case, the loss of one worker-owned business

can lead to the loss of many when they are linked. Moreover, franchising can also pose risks to a

group of worker cooperatives due to industry concentration.

Certain industries may be less robust during economic

downturns so, if worker-owned franchises are in such

industries, consumer cutbacks may jeopardize multiple worker

co-ops at once.

3. Long Time Horizon

The product diversification type of spinoff is only possible

when the parent company has matured enough to begin

investing in new product development, and this may take

years. Theoretically, it may be possible to start supply chain

businesses simultaneously with parent companies, or to open

multiple franchises at once, but logistics and financing make

that improbable in practice. Spinning off new ventures is a

long term method for growing the number of worker

cooperatives in a market. While trajectories are likely to vary

across cases, the Mondragon Corporation spun off its first

product diversification enterprise (Fagor Electronica) in 1965,

or nine years after starting the parent company Ulgor.46 The

well-known Arizmendi Association of Cooperatives opened its

five Arizmendi Bakery franchises in the California Bay Area

between 1997 and 2010, or a little more than a decade.

To sum up, spinoffs may be structured as parent companies diversify products, up and down a

supply chain, or as a franchise. On balance, they can aid in the expansion of a region’s worker

cooperatives in ways that ease entry into a marketplace, as well as allow for labor upgrading for worker-

owners. While interdependence among parent companies and spinoffs may be strengths for start-ups

developing a customer base, it may also exacerbate the entrepreneurial risks of business failure or

process delays for an entire group of worker-owned ventures. As a method for scaling up worker-

ownership, spinoffs involve a long time horizon and depend on the presence of mature or stable worker-

owned businesses capable of paying for business services, investing in new product lines, or capitalizing

franchises.

Conclusions and Possibilities

Worker cooperatives are becoming a focal point for optimism about creating a more just and

workable 21st century economy. Big cities are leading the charge, with worker co-op developers,

45

“When the Chain Breaks,” The Economist June 15, 2006 <http://www.economist.com/node/7032258> 46 “1956-2012 The Mondragon Co-operative Experience,” IRED

<http://www.ired.org/modules/infodoc/cache/files/mondragon_1956_2012.pdf>

Spinoffs On Balance

Spinoffs may be structured with a

parent company’s product

diversification, up and down a supply

chain, or as a franchise.

Spinoffs facilitate entry into a market

and may produce career pathways

for worker-owners.

Parent companies on their own are

unlikely to sustain spinoffs, and

interdependence may exacerbate

regular entrepreneurial risks.

There is a long time horizon to

expanding worker-ownership

through spinoffs.


13

municipal governments, and civic institutions making considerable strides in developing and

implementing methods of worker-ownership. We do not yet know how, whether, or to what extent

worker cooperatives can help achieve a more equitable allocation of wealth, wealth retention in low-

income communities, improvements in job quality, greater security in livelihood, or the greening of

industry and consumer products. Even with uncertainty, there is tremendous value in economic

experimentation through worker cooperatives. With the planet on the brink47 and secure employment

going extinct,48 inventiveness is an imperative, not something that can wait.

Attractive methods for spreading worker-ownership both mitigate entrepreneurial risk and

generate access to capital over and above bank loans or common stock. Methods centered on anchor

institutions, the conversion of existing businesses, and spinoffs possess these attractive qualities but

also involve certain limitations or opportunity costs to work through. Table 3 summarizes the strengths

of the three methods to expand worker ownership profiled in this report, as well as some of the most

pressing limits or opportunity costs to resolve.

TABLE 3: SUMMARY OF STRENGTHS AND LIMITATIONS OF THE METHODS

Anchor Institutions Method

Mitigates Entrepreneurial Risk Leverages purchasing power and slack investment dollars

held by civic institutions

Hyperlocal in outlook

Concentrated in neighborhoods with major institutions

Supplants existing suppliers Requires timing business launch with contract expirations

Products determined by limited number of customers Anchors as customers are numerically limited

Business Conversion Method

Mitigates Entrepreneurial Risk Transfers business ownership to employees,

sometimes through seller financing

Transition incurs unique costs Need to educate workers and change entrenched

corporate culture Geographic Dispersal of Saleable Businesses

May preclude targeting opportunities in specific communities

Spinoffs Method

Mitigates Entrepreneurial risk Creates new ventures from existing worker cooperatives via

product diversification, supply chains, or franchising

Time horizon extended Requires profitable ventures before spinoffs possible

Interdependence increases vulnerability A business failure may spark chain reaction

47

Elizabeth Kolbert, 2014, “The Sixth Extinction: An Unnatural History,” Henry Holt & Company. 48 Elaine Pofeldt, “Are You Ready for the Age of the Supetemp?” Forbes, July 10, 2012

<http://www.forbes.com/sites/elainepofeldt/2012/07/10/survive-and-thrive-in-the-supertemp-era/>


14

Possibilities: Planning Multi-Method Initiatives

There may be numerous ways for incubators and planners to address or resolve the limitations

attached to each method. An obvious possibility is to plan multi-year worker-ownership initiatives as

multi-method projects from the outset, and this is the solution recommended here. When a multi-year

project has been planned and funded, incubators or developers could simultaneously establish worker

cooperatives tied to anchor institutions as well as initiate conversions. Experience shows financing

should be allocated for venture capital but also for cash cushions to cover any bumps in the road,

needed experimentation with product lines, or failure to meet sales targets from intended consumers.

Then, a few years down the road, it might be possible to initiate spinoffs from the strongest businesses

in the emerging group of cooperatives. A multi-method approach might allow planners and coordinating

organizations to play on the unique strengths of each method while also hedging against their inevitable

limits.

In practice, this has a few implications to be worked out among stakeholders.

1. Expanding the concept of community benefit. Development projects using the anchor

institutions method define local benefit quite strictly- ideally, business ventures are to be

located in a specific territory, worker-owners are to be residents in that territory, and

wealth is to stay there, too. But, it may be possible to ease concepts of local benefit so that

business conversions and solidaristic (cooperatives serving cooperatives) ventures can be

made consistent with targeted community development. Even if a certain number of

ventures need to be located outside targeted community boundaries, some ideas may be to

build connectors between job seekers of particular areas with worker-ownership

opportunities in outlying areas, or to use a portion of profits to target mutual aid or lending

to worker-owners meeting residency requirements. Such flexibilities could address the

conundrum of economic inclusion in a de-centered metropolitan economy.

2. Continuing to create structures for coordination across incubators. Advocates and

practitioners continue to develop an infrastructure to promote and incentivize worker-

ownership. Incubators might benefit from additional infrastructure to service their

professional, research, and policy needs, while also helping with various tasks of

coordination. Support organizations could do many things, including creating guidelines for

business selection; scoping out companies for sale that are a good fit for worker-ownership;

identifying gaps in the supply chains of worker cooperatives that could be filled by spinoffs;

establishing venture capital and other funding sources for incubators; pooling insurances

and overhead; and creating pre-employment education and job training/placement

pipelines for various communities targeted for worker-ownership. Coordination may help

overcome some of the barriers to incubating more worker-owned ventures.

3. Filling out the Career Ladder. Much of the conversation on worker cooperatives centers on

producing opportunities and wealth for low-skilled, low-paid workers. While this is certainly

necessary and appropriate, exclusive focus there could (1) close off opportunities for

business conversions or supply chain-focused start-ups that might exist outside of low-

skilled industries and (2) neglect worker-owners’ (potential) desire for


15

advancement/promotion along a career ladder. It might be possible to conceptualize benefit

for economically vulnerable populations in a way that plans for career ladders; this might

involve including ventures in middle or higher skilled occupations in the beginning decade of

a co-op development plan. The Mondragon Corporation established a precedent for

employment transfer, or allowing worker-owners to switch jobs within the Mondragon

network. Such an idea might be adapted in the United States. Through coordinating

structures, co-op developers might devise career planning, promotion, and transfer

programs across groups of independent “cooperating” worker co-ops, thus helping worker-

owners that start at the entry level maintain equity as they move upward and onward in

their professional lives. It could also help groups of worker cooperatives retain worker-

owners that are knowledgeable and trained in the various facets of worker ownership.

Worker cooperatives are re-energizing the social imaginary amid declining faith that standard

capitalism is the only way to meet the material needs of the many on the one and only Earth we have.

The outcomes are uncertain, but cities and communities are excited to try something new, something

that places people, communities, and nature front and center.

As incubators and community developers undertake their work, a multi-method approach

combining anchor institutions, business conversions, and supply chains may be a way to expand worker

cooperatives in their communities, cities, and regions, while shielding against some of the limits

inherent in any method alone. A facilitative institutional structure providing technical and research

support for incubators may advance the planning and coordination involved in a multi-method approach

to expanding worker ownership. There is a lot more thinking to do and dialog to be had, but workers,

communities, and the planet may get stronger for it.

Documents

Three Methods to Worker Ownership