Opinion

Edward Hadas

In praise of cooperative thinking

By Edward Hadas
February 15, 2012

Nothing stimulates anti-capitalist feelings like large sums of money changing hands in the hope of huge profits. A recent example: the prospect that Facebook could be worth some $100 billion to its shareholders. The website’s users might prefer less advertising and a lower valuation. But no one asked them. This inspired my Reuters colleague Paul Smalera to suggest that Facebook go co-op. Smalera won’t get his way, but he’s right to wonder whether the hunt for shareholder profits makes the world a better place.

In modern economies, most companies are supposed to be run for the benefit of the providers of equity capital, the shareholders, considered co-owners. Cooperatives and mutuals are owned by and supposed to be run for different groups: customers (the Cooperative Wholesale Society in the UK and American credit unions), suppliers (Sunkist citrus growers in the United States) or workers (the Mondragon group of companies in Spain and the UK retailer John Lewis).

The original thinking behind almost all these organisation was idealistic, even utopian: greedy capitalists had polluted the economy. Their exclusion would help promote the best aspects of human nature.

The idealism has not borne rich fruit. Co-ops and mutually owned enterprises (another name for this type of organisation) do not play a big role in the industrial economy. In the United States, the 100 largest employee-owned companies now account for only 0.5 percent of all workers, according to data from the National Center for Employee Ownership. Mutuality is doing less badly elsewhere – the largest dairy in India is a cooperative – but around the world, the movement’s boosters are losing their power.

The idealism and the lack of success are related. Cooperatives were designed without much thought about what would happen when managers and workers lose their initial energy and enthusiasm. Outside oversight was scanty. The founders promoted corporate cultures which became more complacent than collaborative. Managers were weak, and companies stagnated.

Yet the limited success of the cooperative movement does not equate to a resounding triumph for its ideological opposite – the shareholder value cult. If profits were all that mattered for the economy, then more than a quarter of all American workers would not be employed by enterprises that function, often quite well, without profit motive – 17 percent by governments and another 11 percent by private, not-for-profit, organisations.

Indeed, something like the cooperative spirit can thrive within profit-seeking companies. Workers think more about doing a good job for their team, and for their customers, and don’t obsess about the bottom line. They may behave this way for unselfish reasons. But self-interest can also make them focus on the opinion of bosses, who like teamwork, more than on returns to shareholders.

So neither cooperatives nor shareholders hold the secret to modern economic success. Profits for shareholders are less important than either their enemies or their fans would like to believe.

But shareholders do matter. Facebook is a case in point. Without the ability to raise money from outsiders, the company wouldn’t have developed so fast. Without the discipline provided by the search for profits, its workers could have spent too much time developing user-friendly features, for example, at the risk of leaving the website clever but broke.

Still, Smalera has a point. Exaggerated profit maximisation has made social networking less social. Facebook founder Mark Zuckerberg seems to be aware of the danger of too much profit-seeking. Like many media magnates before him, he will take super voting-rights, in his case to ensure the company stays loyal to its “social mission – to make the world more open and connected”.

A more cooperative corporate structure might be preferable to the trust-Zuckerberg arrangement. But the need for less aggressive shareholders is greater in finance than it is in media. Mutuality is the most natural structure for banks and insurers. Since their funds come directly from depositors, they don’t need to raise capital from outside shareholders. Arbitrating the conflicting desires of savers and borrowers should be enough to keep management busy, honest and efficient. As recently as three decades ago the financial system in Europe was mostly not-for-profit, and mutuals also played a major role in the United States.

Promoters of demutualisation said private shareholders would bring capital and discipline, but there was no good reason to change the old structures. Indeed, the introduction of the culture of profits into formerly mutual institutions was a significant contributor to the recent financial crisis. Such banks proved easy prey to the schemes of greedy schemers.

In organising the economy, greedy schemers and utopian dreamers are not the only alternatives. Like well-run government agencies and prudent shareholder-owned companies, well-designed cooperatives can be efficient servants of the common good. Hard-headed bankers and regulators should catch on.

Comments
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One of the major sources of failure for coops and credit unions in the USA is that they are too easily hijacked by financial tricks and maneuvers that leave the purported “owners” of the organization with greatly reduced or vanished equity and that leave “managers” with all the equity capital. And through maneuvers which are “legal” under American “law”. Such frauds in other countries land the perpetrators in prison rather than in the Hamptons.

The flaw is with corrupt laws and courts in the USA. Such corruption can be found easily abroad, but almost always in countries we refer to as “Third World”. As with most other American industries, organizations will find themselves treated better in other countries than by the American legal and financial industries. Losing organizational homes will deliver to Wall Street what it deserves. Who wants to deal with corruption and fraud that deprives you of your equity?

Posted by txgadfly | Report as abusive
 

“If profits were all that mattered for the economy, then more than a quarter of all American workers would not be employed by enterprises that function, often quite well, without profit motive – 17 percent by governments and another 11 percent by private, not-for-profit, organisations.”

The 17% of American “government” workers is far more than justified to accomplish government’s legitimate purpose with even average efficiency. When government earns it’s proper place in a meritocracy the present 17% should be about half that, and another 8+ percent will be contributing to the economy and not taking from it.

Posted by OneOfTheSheep | Report as abusive
 

Every man for himself will lead to a repeat of 2008. Every man for society will rebuild communist USSR. What is needed is something inbetween. The moment any community is more than 50 people it starts losing the sense of community. Any sort of structure should recognise this. Another thing – a system that works needs a way to keep business and government seperated.

Posted by BidnisMan | Report as abusive
 

Excellent article – reminiscent of your piece about the German “social market” philosophy.

IT appears that Blood and Gore’s work on making capitalism sustainable is in harmony with what you’ve been thinking and writing about:
http://www.reuters.com/article/2012/02/1 6/us-sustainablecapitalism-idUSTRE81F1D0 20120216

LET’s hope for America’s and Europe’s sake that centrist politics form a resilient & growing consensus over the next decade.

Posted by matthewslyman | Report as abusive
 

I like this approach. I’ve been recently thinking that it is the cooperation in the free market that creates efficiency. Where as it is the competition that weeds out inefficiency. Both are needed for balance and neither is effective for long on its own.

Posted by LEEDAP | Report as abusive
 

I would like to see where @txgadfly and @OneOfTheSheep get their information. Seems like they are on opposite sides of the political spectrum. Accepting either of their arguments requires accepting their facts.

Posted by LEEDAP | Report as abusive
 

This is an interesting article and I agree some healthy mix of the two approaches. However I don’t get the 17% US public workers issue (rather more in Europe of course). The purpose of the public sector in any society is to serve society. So the police, teachers, nurses etc who work for the state are in people-facing posts which need people. That is not to say they should not be 100% efficient and use the best business practices.

The purpose of the private sector, not-for-profit excepted, is to make a profit, not to employ people. They do employ people but that is in order to make a profit. So the idea that you can compare public and profit-making sectors is not really appropriate.

In the public sector, particularly since the 1980s in the UK, there has arisen the idea that the more you pay people, the better service you will get. However this only appears to apply to senior staff who seem to imagine they are running a big business. But there are no sanctions and the only stakeholder – the government – is relatively ineffective and easily persuaded of this myth.

Therefore I would like to see the John Lewis model applied to large swathes of the public sector.

Posted by MoneyPrinciple | Report as abusive
 

Interesting article
…of course the John Lewis Partnership including the food chain Waitrose is a very successful enterprise in Britain and one of the retail businesses that I think is doing well even in this economic climate.
They combine excellence of quality ,reliability and good customer care along with value for money ..and the John Lewis brand is also renowned to be an ethical organisation with a strong social conscience .
It is my shop of choice for many items ..

Posted by lizzyfa | Report as abusive
 
 

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