Worker-owned cooperatives like Mandela Foods can deliver a variety of social and economic benefits to local communities. (Image via Yelp)
Oakland, California non-profit Project Equity has an ambitious mission: to fix what is broken in the United States economy, one worker cooperative at a time. The organization specializes in education and outreach about the benefits worker ownership can bring to low-income communities, with a special focus on coop conversions whereby a business owner sells out to employees. A set of case studies of coop conversions just released by Project Equity illustrates these benefits, and aids in the broader project of demystifying worker cooperatives.
I spoke by phone to Project Equity co-founder Alison Lingane about some of the incorrect assumptions about worker cooperatives, the relationship between worker ownership and economic resilience, and the reasons why now is the time to be talking about coop conversions. We also talked about Project Equity's upcoming projects, which include an educational campaign and a how-to guide for coop conversions.
For a list of resources on worker cooperatives and coop conversions, see below.
Anna Bergren Miller: Tell me about Project Equity.
Alison Lingane: Our name is a double entendre by design. Equity in terms of equitable, and social justice and racial justice; and equity in terms of capital ownership of businesses. We're focused on: How do we use the tool of a broader base of business ownership, through employee ownership—[specifically] worker cooperatives—to transform, at the community level, an economic model that just isn't working for people?
Project Equity comes out of the twenty-year career history of each of our co-founders, myself and Hilary Abell. Hilary Abell's background is deep in worker cooperatives. She was a worker-owner herself in Equal Exchange, which today is one of the largest worker cooperatives in the United States, many many years ago, and has spent the 11 or 12 years since in worker-cooperative development in low-income communities. She was the executive director of a non-profit in Oakland called WAGES [Women's Action to Gain Economic Security]—it's recently been renamed Prospera—focused on creating worker coops, working with Latina immigrants. Under her leadership, the organization was able to grow the number of coops and increase the jobs to nearly 100 worker-owners within their network of green cleaning cooperatives. She's also done some training with the Cleveland worker coop Evergreen Cooperatives.
My background is in scalable businesses that are mission-driven; social ventures or mission-driven companies. I've held leadership roles in and been on the operations side of businesses that are designed to have human impact at scale—in particular, companies focusing in the education space, or the human development space.
[We brought] those two pieces together to say, "Okay, knowing what we know about how the economy is broken"—and we know that on a big-picture level, wages as a percentage of GDP are at the lowest level since 1948; we've seen the decline of unions, we've seen the replacement of middle-wage manufacturing jobs with low-wage service jobs. Even in our most recent recovery, most of the jobs that came back were low-paying jobs. So: How do we take the power of business and make it so that we're creating businesses that are locally rooted in our communities, and that are making business decisions through the lens of what's right for the bottom line and what's right for employees, families, and communities.
Our mission is, ultimately, to foster economic resilience in low-income communities by demonstrating and replicating strategies that increase worker ownership.
How can worker-ownership positively impact local communities?
Worker-owned cooperatives are a powerful business model. We know that they provide high-quality jobs. Worker-owned cooperatives have above-market pay and benefits, if you look at coops that are in low-wage industries. Take Arizmendi Bakery in the San Francisco Bay Area. Their pay is significantly above market. Or the WAGES cooperative that Hilary was executive director of; again, significantly above market. Look at Cooperative Home Care Associates [CHCA] in the Bronx, which is the largest worker coop in the United States; also above market. And it's not just the pay, but also the benefits.
Now you start to layer on what makes a democratically controlled workplace interesting. You've got a voice in key decisions—enhanced control over conditions that directly affect me, as an employee, as a worker and an owner. You've typically got more skill-building and professional development. And access to shared business ownership and, of course, asset-building.
If you're a worker-owner where your other option would be to be work at a minimum-wage job, you wouldn't over time have a capital account that's accruing within your company that you could tap for short-term loans, or take with you when you leave and have a little nest egg.
As we think about the difference [between worker coops and conventional businesses], the fact is that we have wage stagnation—people are really going backward in terms of just their financial ability in the world. So that's one important piece that worker coops can bring.
Another is enhanced business performance. Studies have shown that businesses that are employee-owned have reduced employee turnover, which can be a huge issue, especially in low-wage industries. Take CHCA in the Bronx. They have something like 10-11 percent annual employee turnover in an industry where typical numbers are 40-50 percent. That's dramatic. That means, in part, that the job is good—people want to stay. But think about the bottom-line impact of that type of difference. Just the churn of employees, it's very costly. It means quality of care in their industry, where you're talking about real human beings.
Employee-owned businesses last longer, they outperform other businesses in recessions, they outstay them in recessions. Enhanced productivity, enhanced growth. The businesses are actually stronger and better.
We don't have the scale of worker-owned business in the United States, which is why Project Equity is here—we're one of the many folks who're trying to work on that. But we do in other parts of the world. For example, there was a study done in northern Italy where they looked at [places] where there are a lot of cooperatives. They compared two towns, one that had a lower portion of worker-owned businesses, and another that had a higher portion of worker-owned businesses. [They found a correlation of] more worker-owned companies with a number of social benefits, including health, education, crime, social, and political participation.
When you think about creating societal change, we're talking about people being empowered in their businesses, people having a voice in their workplace that actually does translate to people having more of a voice in their community [through] higher voting rates. People have improved self-advocacy skills—there is a ripple effect that takes place at the community level when you have a larger number of these businesses.
With Project Equity, we really care about this place-based focus, about how do you, within a given place, unlock scale, and what does that look like? We're getting ready to release some information about a 12-month project to create a blueprint for increasing worker ownership in low-income communities. What we looked at is: What are the different ways to get to that end goal of [upping] the numbers in a given place? You can do it through small business, you can do it through growth-oriented startup businesses, and you can do it through conversion of existing businesses.
The last two are scale strategies—growth-oriented startups, and conversion of existing businesses. When we looked at which one Project Equity—[as] a small organization—should tackle first, we landed on the conversions piece.
Cooperative vegan bakery Pattycake Bakery is based in Columbus, Ohio. (Pattycake Bakery)
Why did Project Equity choose to focus on conversions?
We thought about the difference between a startup business versus an existing business, and what the risk factors might be to transitioning ownership to the employees. If you were to make a laundry list of the risk factors, the laundry list is a lot longer for startup businesses. Not only do you have to come together as a group of individuals and figure out how to democratically govern this entity—you have to do that in conversion, also—but you also have to make sure you're actually getting up and running operationally, that you have a good match between the market need and your products and services, that you're growing effectively—as you get through different growth stages there are all these bumps in the road for startups.
When you look at the conversion opportunity, the assumption is that you're talking about a business that is stable, and that is doing well financially. A lot of those risks have gone away. Now what you're really honing in on is: What does it take to get this group of people to function together effectively, to democratically govern this new organization? That's one piece—the risk is lower.
The second piece is this demographic change that has already started and is going to continue to happen with baby boomers retiring. I'm sure you've heard about the "silver tsunami," and all the stats on that. It's really important that we don't lose those businesses. In fact, only 15 percent of family businesses actually succeed to the second generation. This is a 2004 study, so it's probably even worse than that at this point. And only 5 percent to the third generation.
Most businesses don't even have a succession plan in place. We want to keep those businesses, first off. And second off, privately owned businesses are typically much more community-involved, spend locally, and know their suppliers, customers, employees. Let's jump on this opportunity to keep them, keep them local and, for the ones where it's a good fit, transition them to employee-owned to reap the other, broader benefits that employee ownership brings. That's the second reason.
Being located in the San Francisco Bay Area, we're very lucky to be at one of the epicenters of [mission-oriented business], whether it's a mission-driven company, social ventures, or impact investing. A lot of the network organizations that were started to help these movements are based in the Bay Area. We have Social Venture Network; we have SOCAP, which is all about impact investing. Impact Hub is here, and Net Impact, which is for business school students to put their businesses to good use in the world. The Global Social Venture Competition was founded at the [UC Berkeley] Haas School of Business.
We see this as a beachhead of opportunity for making the model of employee ownership more broadly known. Those are folks who are already thinking about how to optimize impact for each of the different stakeholder groups. [But] most of the impact around stakeholder groups today does not incorporate employee ownership. It is a wave that hasn't happened yet. That for us is the third reason: In the San Francisco Bay Area, there's this opportunity to engage with companies that are already thinking about their mission, and to deepen it further through worker ownership.
Why isn't there more awareness of worker-ownership in the United States?
Every time I talk to one of my business school friends about what I'm doing, and they get their head around it, they're like, "Worker cooperatives need re-branding." Folks in the worker coop space would shudder to hear that; it makes me shudder to hear it when I say that. So I'm not intending to go out and start a rebranding [campaign]. But I think that's the crux of the problem.
I think that, number one, people don't know what worker coops are. If they do have a sense of what they are, they don't think they're businesses. And if they do think they're businesses, they think they're run by hippies in garages with incense and candles required.
Then if they get beyond that, they think they're all collectively managed. By that I mean that there is a flat, totally non-hierarchical management structure. For a lot of people, that's really foreign and therefore scary. [If] you have those assumptions—which are false assumptions—in your head, then you're not going to want to think about it.
In the United States, we do have a good number of employee-owned companies that are under a ESOP, Employee Stock Ownership Plan. ESOPs took off due to a change in federal tax incentives that made it a tax-positive way for business owners to sell their company. In a nutshell, the way it works is—and this may not be 100 percent correct—say I'm a business owner and I'm looking to retire. If I sell at least 30 percent of the stock in my business to a retirement plan for my employees, then I get significant capital gains tax benefits from doing that. That's money that you'd be leaving on the table if you didn't go that option. It unlocks a lot of companies going that route—which is fabulous, right? It's a piece of the equation in terms of financial ownership.
[Employee-owned companies] are different from coops in a couple of key ways. One is that they don't have to be 100 percent employee-owned. There are definitely some ESOPs that look and smell and feel very similar to worker coops, in that they're 100 percent employee-owned, and they're very high in terms of participatory management.
Worker coops have an additional layer on top of that, which is that they are democratically governed. The board of directors is either the membership, in a small coop, or is democratically elected to govern the business. So two major differences: 100 percent ownership, and democratically governed.
In terms of why we don't have the scale, we've been doing focus groups and one-on-one interviews to get a sense of: What do you know about it? What makes you run screaming in the other direction? What questions do you have? What excites you? We're trying to get a sense of: What are the barriers, and what are the opportunities here?
Business owners—especially if there's a founder as owner—care deeply about their business. For them, it is mission-driven, even if it's not, "We have a mission to save the environment through our business." It's very mission-driven, because they've got a product or a service or something that they really believe in. When the day comes for them to leave their business, they want that business to continue to be successful, to continue to deliver on that mission, whatever that mission looks like. They want their customers to be well taken care of, they want their employees to be well taken care of, they want their partners, vendors, and suppliers to be taken care of. Which are all things that employee-owned business do really well.
When I talk to these business owners, they're like, "Gosh, we could do that!" We just need a marketing campaign. If people knew that this was an option, and they saw successful examples of this happening on a regular basis, it would be in their brains. It doesn't even cross people's minds, because people don't know that it's an option. When I talk to people and say, "Do you know anything about employee ownership?" they know maybe a little about ESOPs. Maybe they even looked at an ESOP, and considered it. [But] they know pretty much nothing about worker-owned cooperatives.
Again, if you look outside the United States, there are plenty of examples of parts of the world where it does reach scale. It's just a part of the way we grew up. Whether it's elementary, middle, high school, or college, [when] we learned about business, and how business works, none of those examples were ever employee-owned businesses. It's just not in our brains.
People are intrigued by it, I would say, especially given this beachhead of mission-driven companies. It's up to us now to help people understand what it's all about. And to make it feel accessible, and make sure people know that it's not this preconceived vision that they may have of it.
Stonington, Maine-based Island Employee Cooperative is an umbrella cooperative of three grocery stores. (Cooperative Development Institute)
What is Project Equity doing to get the word out about worker-owned cooperatives and, more specifically, coop conversions?
[I'll] start with the case studies that we're getting ready to release [Update: the case studies have just been released here]. We're on this mission to demystify cooperative conversions—to help people understand that it can be done, and then how it can be done, and that [it can] feel very accessible, and not scary, and not super-hard.
When we [thought] about how to do this, everyone says, "I just need to see examples." If you go out there and try hard, you can find some case studies, here or there. But we wanted a set of case studies of businesses that showed a breadth of different ways that people went about it and called out, in a fair amount of detail, the how. How did they do it? When they went in, they had specific goals; how did they meet those goals? What were the ways that they set up financing? What were the ways that they set up decision-making in order to accomplish those goals?
We're getting ready to release about a dozen case studies. What we've done is look across those case studies, and pulled out for each: What's the background? Why did it become a coop—what was the driving or motivating factor? What were the actual logistics of that coop conversion process? And what were some of the nuts and bolts of the coop itself when it got up and running? [We identified] some of the challenges, and key lessons and and effective practices.
Then we've pulled out of that, at a very high level: What are the motivations of why business owners and employees choose to found worker coops? We have this typology of business conversions—there are four different types of conversions. And then: What are the readiness factors for businesses? As businesses are considering it, how do they know, "Am I good candidate?" What does that look like? What is the checklist for them to think through, "Do I have this in place now, and can I get it in place if I don't have it now? Or am I just not a fit for this?"
What else is Project Equity working on?
[The case studies are] the first of what we're releasing in terms of resources for businesses. We're also working on, with two of our great local partners—one is the East Bay Community Law Center, and the other is the Sustainable Economies Law Center—a step-by-step guide for how to convert your business into a worker-owned cooperative.
If you go to the library and you look for a how-to guide for creating your LLC, or your sole proprietorship—that's the style we're [aiming for]. No-nonsense, conceptually. Digital tear-out forms. Again, demystifying this process, [showing] that it's easy to do.
This combination of these case studies and this guide will enable us to go to business owners and say, "Look, it's fairly straightforward." Obviously, like anything, you have to put some thought into it, and there are some important questions that have to [be asked]. But let's go through these readiness factors, and think about: Are you a good fit?
We'll also be launching an outreach campaign, to focus on the San Francisco Bay Area, but with some national reach. We're open to supporting companies nationally who want to make the conversion. [But] we're going to put most of our elbow grease in our local area for that place-based development reason.
For Project Equity, our lens on this work is low-income, low-wage workers. So though it's interesting and exciting when, say, a technology company wants to become a worker-owned cooperative, that's not our playing field. Our playing field is service companies, manufacturing companies, food businesses. Any sort of low-wage industry where you've got businesses where the owner is either looking to sell because they're retiring, or they leave for other reasons, or where the owner is really wanting to deepen their mission and stay on as a worker-owner in that business.
We'll be doing some campaigns through industry partners, locally. We'll be doing some campaigns through targeted business membership groups—thinks chambers of commerce and Lions and Rotary clubs—as well as through networks of mission-focused companies like Social Venture Network, like BALLE; one of our partners is our local BALLE affiliate, Sustainable Business Alliance. To first do that piece of education awareness: "Here it is. This is a possibility."
We think of it as a pipeline. [From] education awareness, people go through the pipeline stages to interest in learning more. Then from interest in learning more, they go into an assessment of: Is this the right fit? And then from there you go into, "Okay, let's roll up our sleeves and see how we would really do this, if we were going to do it." Then you make an explicit decision to move forward. And then you start pulling together the documents, and the financing, and all of the pieces that you need to make it start happening.
Design/build construction firm Big Timberworks, located in Gallatin Gateway, Montana, converted to a worker-owned cooperative in 1999. (Big Timberworks)
Do you have a sense of timing on any of this?
The conversion guide itself, I'm guessing, will be later in 2015. We're pulling together some drafts of it right now, but we want to do a good job of getting input from the field before we release it more broadly, since it's going to be a combination of both a business guide and a legal guide.
What about the campaign?
We're going to get the campaign up and running sooner rather than later in 2015. Right now we're wrapping up a bunch of work on the blueprint. As soon as that's done, our next big push will be the campaign. We're already working on a number of fronts on that. For example, at the national conference of the National Center for Employee Ownership, the Democracy at Work Institute is running a half-day session on conversion to worker cooperatives; we'll be participating in that. We'll be doing a presentation at America's Small Business Development Centers' national conference in early fall, talking about business succession and employee ownership.
So we've got a number of things already in the works, and we'll be starting in a more focused way in April and May.
What else would you like us to know about coop conversions?
I want to touch on this question of readiness factors for businesses. One of the myths that often comes up is, "The business is failing, so let's turn it into a worker-owned coop." That's absolutely not a situation that we recommend. A business that is a good candidate for a transition to worker-owned business, one, is financially sound.
Worker coops are just like any other businesses, and they need to be based on sound principles. We're talking about a sales transaction from one business owner to a new set of business owners, the workers. That new set of business owners is going to want to buy an asset, a business, that is a good purchase. And oftentimes the financing for this transaction is based upon the future profits of the business. If a bank is going to come in and be a loan provider for that sales transaction, they want to know that the business can pay them back. So it has to be financially sound today, and then have a strong future financial forecast.
Another piece: The workers have to be excited about it. You can't come into a business where the employees are like, "Actually, no, I'm not interested." That's not going to work. If the owner is leaving, it's less important for the owner to be excited about it. That said, there are many examples in the case studies where the owner's willing to be patient with the timeline. In some cases, [they're even willing] to help finance or secure the loan that enables the transaction. [In those ways] the owner's interest in helping to support that transition can be very helpful.
The other piece I want to mention is the culture fit. People within the coop world will talk about "cooperative culture." People in the business world would think of it more as "participatory management." If you've got the opposite of that, which would be a command and control culture, either you have to be willing to change that, and have a plan in place, and have real support for making that transition; or you have to already have some elements of participatory management in order to be able to make the transition to democratic management.
One other thing is the role of investors. I think this is a real opportunity in terms of unlocking scale. [We come] at this question of this conversion opportunity—the window of baby boomer retirement and the opportunity that it presents—both from the end of going out and finding the businesses that are good candidates, and helping them through that process, and from the end of coming in with financing and being able to make offers to purchase businesses from retiring business owners. That's an important piece of the puzzle—really identifying, yes, banks and other lenders, but also investors who see this as a way to create impact.
Viroqua, Wisconsin's Center Point Counseling is a cooperative of mental health professionals founded in 2011. (Center Point Counseling)