A commentary on recent democratic enterprise research and academic articles.
Leung, M. 'Worker Cooperative Startups: Capital and CooperativeValues' Draft paper, 2011.
One of the most thought provoking papers I've read on thetopic of co-operative entrepreneurship, Leung challenges the, perverse from hisperspective, existing investment outcomes forced upon founding members ofworker co-operatives. His working paper is concerned with the type of investmentfounding members must make; unlike every other financial investment, the capitalprovided by founding members to the co-operative is not expected to produce areturn and invariably results in a loss. Take for instance the case of afounding member who provides £5000 startup capital to the co-operative. Afterincurring startup expenses, his/her capital has been reduced to £2000,representing a net loss of £3000. Members who join the co-operative at a laterdate may still pay a fee to join but are not required to suffer this loss oninvestment.
To solve this inequitable practice, Leung proposes a modelcomprising of two elements: compensation matching and loss factor. Compensationmatching involves setting the pay of new members in line with that of the foundingmembers before the co-operative made a profit. For example, say a co-operativewas founded by three members and took 2 years to achieve a profit. The foundingmembers' pay was £10 the first year, £15 the second year and is now at £20. Amember who joins the co-operative in the present would have his/her pay set at £10for the first year and £15 for the second. This allows the founding members torecoup the loss made on their investment through higher compensation. This actsas an incentive to existing members to hire additional members.
The loss factor is a somewhat subjective yet effective wayof addressing a loss incurred by a founding member. Let's take our foundingmember from earlier, the one who suffered a loss of £3000 on his/her originalinvestment. Under the loss factor model, this member would recoup this amountthrough payments made from the profit generated by the co-operative. Not onlywould he/she receive what they lost, they would also be compensated for the riskthey took initially by receiving a little bit more than their net loss. This iswhere the loss factor is utilised; a factor of 1.5 or 2 (completely subjectivenumbers - could be any figure) is applied to the net loss. In our example, a loss factor of 2 wouldresult in the member receiving £6000 instead of £3000, bringing their totalinvestment in the co-operative to £8000. So now we have a situation where individuals are materially incentivised to establish a worker co-operative, unlike the current situation. Co-operators might be wary of this method however, as it may lead to the co-operative being run for the purpose of generating a return on capital, not for the benefit of members. On the other hand, founding members do face the prospect of suffering what is almost a guaranteed loss on their investment.
A number of questions arise from this paper:
- Are co-operative enterprise founders treatedunfairly under the current system of member investment?
- Would a Loss Factor approach encourage greaterlevels of worker co-operative entrepreneurship?
- Does compensation matching exploit non-foundingmembers?
I would suggest that interested academics and co-operatorsfollow Leung's subsequent developments in this area as there is the potentialto radically alter the worker co-operative entrepreneurial process. The authoris also involved in a project in the US, establishing a credit union for workerco-operatives.