What is a cooperative? 

I have talked to many business lawyers, CPAs and MBAs who could not answer that question. They say something like “isn’t that some kind of a non-profit?” No, cooperatives are not non-profits. The fact that so many “experts” in business cannot define an entire category of businesses is a real crisis facing the cooperative movement, and I would argue society as a whole. It’s as bad as doctors not taking a single class in nutrition or farmers not knowing anything about soil science. Why is this the case? For the same reason, the universities are funded by big corporations who don’t want students to know about things that might harm their profitability or create competition.

So, what are cooperatives? They are businesses that are designed to create value for their members. Members must be doing business with the cooperative as either workers, customers, or producers. Most cooperatives also define a purpose to provide a specific good or service, or have a positive environmental or social impact. However, cooperatives are fundamentally designed to serve their members economically, and any other needs appropriate to the cooperative’s function.

For example, a worker-owned cooperative provides its members with well-paying jobs, good benefits, and a healthy workplace. It may also also fulfill their sense of purpose, such as operating in an environmentally and socially conscious way, like Equal Exchange. A producer-owned cooperative helps business owners who produce goods or services make consistent sales at a good price. It might also help those producers to have high standards and market them as sustainable, like Organic Valley.

You can also create a multi-stakeholder cooperative, combining two or all three of these membership classes. However, care must be taken since these groups can have conflicting interests. For example, customers want lower prices and producers want higher prices.

Profits are returned to the members based on how much business they did with the cooperative in that year. These are called patronage dividends and are considered a kind of refund by the IRS. Because of this, cooperatives get a tax advantage of being pass-through entities for patronage dividends, only paying taxes once on the individual’s taxes, not at the corporate level.

This financial relationship means that the people who control the company have more interaction and are personally impacted by the choices of the company. It is very different from a publicly traded corporation where the owners are playing a casino game on the stock market, completely disconnected from the non-financial consequences of the company’s decisions. Non-member investors can own preferred shares in a cooperative, but these do not usually come with any voting rights.

Decision Making Structure

The other aspect of cooperatives that is different is the decision making structure. We say that cooperatives are “democratically controlled by their members”. What this means is that each member may own one membership share, which gives them one vote for ownership-level decisions. One person, one vote, so no one person can control the company like in an LLC or corporation. Ownership-level decisions include voting for the board of directors, acquisitions, mergers, issuing new stock, changing the bylaws, etc.

What it does NOT mean, is that the cooperative is managed democratically. Most successful cooperatives have a fairly typical management structure, though some tweak the rules to make it a bit more egalitarian. There is also the option of using a distributed-authority management structure like Sociocracy or Holacracy. 

Only a few small cooperatives, such as housing co-ops, use a democratic or consensus-based management structure. Even there, it tends to cause problems. Diana Leafe Christian, the author of Creating a Life Together, the 2003 manual on creating Ecovillages, wrote an article in 2012 titled “Busting the Myth that Consensus-With-Unanimity is Good for Communities” basically apologizing for recommending consensus and describing all of the problems it had caused in communities she had consulted with around the world. 

In 2015 I invited two representatives of the Zegg Ecovillage in Germany to give a talk at the Integral Center where I worked in Boulder, CO about how they had switched from consensus to Holacracy for their business operations. Achim Ecker explained that he “wanted a way to block the status-quo.” Basically, older members were blocking all new ideas and not allowing the organization to evolve, a common pitfall in such communities.

This misconception is, I believe, the second biggest problem facing the cooperative movement. Not only do the general public tend to hear “democratically controlled” and automatically think “democratically managed,” but even those ignorant business professionals I mentioned before tend to think co-ops are democratically managed. That’s why if you talk to a lawyer, or someone with an MBA and say “I want to start a co-op” they will often say “Why would you want to do that? That’s silly, just start an LLC.” For one, they’re covering up for the fact that they don’t really know what you’re talking about. Ever tried to talk to your doctor about herbal medicine or restriction diets? They may also think co-ops are always bogged down in decision-making by committee. That just isn’t the case.

Unfortunately, this misconception even exists within the cooperative movement. Of course, the cooperative experts in the few educational non-profits and co-op law firms that exist know that you need an effective management structure, and they try to educate people about that. However, new people are coming into the cooperative movement all the time from the non-profit and community organizing sector who have the idea ingrained in them that every decision has to be made by consensus, and they have a really hard time giving that up. I have tons of (mildly traumatizing) personal experience with this if you ever want to hear about it.

In the first few meetings when you’re forming a team and figuring out what you’re doing, you want to “build consensus” on the purpose, vision, and business model, but at some point you have to adopt an operational management structure. Helping co-op founders do that at the appropriate time is also a big reason that we need to work together to help the cooperative movement.

Why are cooperatives important? 

As part of my Master’s Degree in Regenerative Enterprise Design and Consulting from Gaia University, I came up with 16 design principles for Regenerative Enterprises that I call Regenerative Dynamics. My definition of a Regenerative Enterprise is an organization that is designed to constantly improve its impacts on ecosystems, communities, and economies in which it operates. Being a cooperative does a lot to fulfill these design principles. Here are eight Regenerative Dynamics and how co-ops fulfill them just by being a co-op…

Responsible Ownership – Cooperative members are more likely to steward the organization in a responsible way because they are involved in its day-to-day operations and are affected by its decision directly.

Labor-Employed Capital – Rather than thinking of a company as capitalists employing labor to make them more money, co-ops are designed to empower labor to employ capital to fulfill the purpose of the company.

Purpose-Driven Decision Making – Cooperatives not only have an incentive to put purposes that the members care about over profit, they also have the legal protection to do so. Corporations have a fiduciary duty to maximize profits for their investors. Corporate investors can sue a board of directors for fulfilling the stated mission or purpose instead of making them a profit. There is no legal precedent for that in cooperatives.

Transparency & Accountability – Cooperatives usually share detailed financial information and other metrics with members. Members should know what is going on and feel the consequences of actions both in their experience with the cooperative and in their dividend check at the end of the year.

Worker Autonomy – In worker-owned cooperatives, workers have a say in their own working conditions and can control things like dress codes, work-at-home policies, vacations, and workplace rules.

Resource Efficiency – With more transparency, workers can see and respond to wastefulness and are incentivised to do so. From a financial perspective, investors may be more likely to invest in a cooperative rather than donating to a non-profit because they still own the shares, which is a more efficient use of their money. Cooperatives may also be more fiscally responsible than non-profits because they have to generate a profit, or at least break even.

Community Investment – Cooperatives are more likely to invest in their communities because their members are part of a community. Worker-owners also tend to stay in the company longer, so they can build and maintain relationships for lasting community programs.

Network Building – Cooperatives are part of a tight-knit movement, communicating and collaborating with each other through various non-profit associations. Creating a real cooperative federation would be an even more solid way to build a network that can support its cooperatives in many ways.

Cooperatives could also solve many of the economic challenges we are currently facing. Here are a few…

Succession – Baby boomers are retiring and many of their small companies are going out of business. If these business owners had thought to convert their businesses into cooperatives, they could have transitioned their business to employee ownership before they retired and they would still be up and running. Some organizations like the Rocky Mountain Employee Ownership Center in Denver, Colorado are working with investors, including the state government, to provide funding to buy out retirees and convert some of these businesses into co-ops. We could do this here in Oklahoma.

Platform Cooperatives – What would it be like if Uber was cooperatively owned by the drivers or Etsy was cooperatively owned by the craftsmen? What if there was a cooperatively owned social media platform? Maybe we wouldn’t see so much exploitation happening?

Unions – Unions are an imperfect solution. They have expensive dues and some workers don’t want to join. It also creates an adversarial relationship between the union and the company. This is completely unnecessary if you simply combine the company with the union to form a cooperative.

Social Services – Employee benefits and community programs can be expanded to the point of providing social services including schools, hospitals, homeless shelters, elder care, etc. A Federation could do this at a scale that could slowly replace reliance on the government with a voluntary system that creates market pressure to make these services better. In case you’re wondering, this is called anarcho-syndicalism.

So, that’s why cooperatives are important. Now, let’s talk about exactly how we could work together to support the cooperative movement and create more cooperatives through forming a cooperative federation.

The following is my pitch on the cooperative federation that I have been working on for 25 years now. It was the topic of my Master’s Degree from Gaia University in Regenerative Enterprise Design and Consulting. This is a starting point that would evolve as we experiment and see what works and what doesn’t. There are more details on my website at regenerationfederation.coop. 

Why do we need a cooperative federation?

If you look at this map of organic brands, you can see that many of the brands that started out as small, conscientious businesses, have been bought up by large corporations who also own many of the brands we know are toxic and exploitative. One reason that this happens is the problem of succession; the founders don’t want to keep running the company but haven’t created a means to sell it to the workers. The other reason is that this large, conglomerate structure is very powerful and efficient. Why can’t cooperatives also be powerful and efficient? With a cooperative federation I believe that we can copy the efficient aspects of this structure while leaving behind the extractive aspects.

How?

The Regeneration Federation is a cooperative of cooperatives that acts as a business accelerator. It provides ongoing support for the regenerative cooperatives and other enterprises that it starts, acquires, and supports. It provides 3 things.

• Funding Mechanism
• Regenerative Enterprise Certification
• Ongoing Consultation, Education, and Collaboration

Some of its member cooperatives would have other types of businesses as members. For example, a farmers cooperative that has small regenerative farms as members, or a cooperative business incubator for any type of Regenerative Enterprise. These business members would also be part of the federation and would have access to the funding, certification, and business consulting. Each co-op could decide how it distributes these resources and if it makes the certification required or optional for its members.

The funding mechanism involves the federation selling preferred shares to investors to create a rotating fund. That fund would be loaned to the member cooperatives, mostly using income share agreements. Income share agreements differ from regular loans because instead of paying a flat monthly payment, the business pays a percentage of gross income or sales until the agreed-upon amount is repaid. The total interest is agreed upon up front and doesn’t change depending on how long it takes to pay back. This gives the company plenty of room to grow at its natural pace without worrying about defaulting on the loan. The federation would need to strategize making more loans that can be paid back quickly to ensure a good return on investment. A member cooperative could also take out a loan and then loan it to their members, such as small farm micro-loans.

The cooperatives that are direct members of the federation would be required to get our in-house Regenerative Enterprise Certification. This is a design-based certification rather than a rules-based or metrics-based certification. A rules-based certification like Organic has a list of rules that you have to follow; don’t use synthetic pesticides, don’t use synthetic herbicides, don’t use synthetic fertilizers. If a company follows all the rules, they get certified. A metrics-based certification like B-Corp requires measuring hundreds of different variables, which is extremely expensive, and then calculates a total score. If the score is high enough, the organization gets certified. They can be very low in some areas and high in others and still pass.

I see problems with both of these approaches. Doing things regeneratively is not a one-size-fits-all proposal. Each organization is going to have very different ways to be regenerative. I also want to focus on what matters, provide radical transparency, and encourage constant improvement instead of creating a benchmark that organizations reach and stay at. It also needs to be affordable and not easy to game in a negative way.

My proposal is the Regenerative Enterprise Certification, which requires a one-time assessment where the company describes how it is currently fulfilling or not fulfilling each of the 16 Regenerative Dynamics, listed below, and how they imagine that they could optimally fulfill each of the principles in the future. 

Then they create a yearly plan to reach at least 3 goals to significantly improve in one or more of these areas. They submit their plan, then they send one or more representatives to be publicly interviewed. I’m imagining using YouTube live and inviting everyone to join the chat. Workers, customers, producers, community members, and others in the industry could attend and ask questions or challenge the plan.

After the interview, the company would have a chance to revise their plan and then submit it to a panel of experts to approve it. If each goal is found to be addressing the design principles and making a significant improvement, the plan is accepted. If the organization can reach its own goals by the end of the year, they get the certification. The 3 goal planning process repeats each year.

I think it would work. What do you think?

Lastly, the Federation would provide business consulting, education, and opportunities for collaboration in the following areas:

• Legal & Financial
• Management & Governance
• Environmental & Social Impact
• Employee Training & Benefits
• Technology
• Marketing

I’m imagining that the yearly membership dues would cover the certification and one hour of consulting per month in any of these areas. Additional consulting and support would be available a la carte. Our staff of best-in-the-world expert consultants would hold regular educational events and find ways for the co-ops to work together and support each other. Some of that collaboration could include sharing employee benefits and community programs that could grow and become very powerful, as I mentioned before.

So, that’s it. This is all that I want, no biggie. If you would like to help, please reach out to me and Bridget at info@redbudfood.coop. Thank you very much for reading. Feel free to leave questions and comments below.