28 Mar 2013

The strange rebirth of co-operative Britain

Dave Boyle is a consultant on mutuality, adviser for the Co-operative Enterprise Hub and a former member of the Co-operatives UK Business Development Panel

The Co-operative Group recently celebrated a landmark: its Co-operative Enterprise Hub has now helped 1,000 co-operatives, with 75% of those start-ups. They fall into many different sectors, from childcare to community pubs, wind farms to worker co-op design agencies, and have a collective turnover of over £40m – part of a co-operative economy worth £35.6bn last year.

It’s a far cry from the 1990s, when the number of co-ops and mutuals was dwindling as they either merged in distress or were demutualised, and people began to view them as soon-to-be extinct creatures of the corporate jungle.
This rebirth has been spearheaded by some clear thinking and common purpose, best seen in the replacement of local logos and fascias with the new Co-operative branding. That unity has been driven in part by the growth of the Co-operative Group through mergers with Britannia and United Co-operatives, and the purchase of Somerfield and – potentially – the Lloyds “Verde” branches.

The Group will celebrate its 150th anniversary this year when it moves into a new £100m office suite, which dominates the northern entrance to Manchester city centre. The business similarly prevails over the co-operative landscape, where it accounts for over 75% of the sector’s trade.

As helpful as strategy and purpose has been, the ethical dimension that co-operatives stand for has been just as important. Ed Mayo, secretary-general of Co-operatives UK, the movement’s trade association, says: “Co-ops are a trusted brand, much more than PLCs have been.” Pointing to research his organisation commissioned, he says people strongly associated co-ops with terms such as “fair”, “trusted”, “local”, “open”, “honest” and “for the public good”, while PLCs were linked with “cut throat” and “greedy”.

Increase in turnover in the co-op and mutual sector since 2008

It wasn’t all good news, though. PLCs were seen as “profitable”, “modern” and “innovative” while co-ops were not. Having arrested the decline, then, the co-operative sector’s next big challenge is to transform those negative opinions that have been decades in the making.

A key theme for Co-operatives UK for the next few years is to promote the co-operative option, which Mayo says is about helping professionals who advise businesses on how to better understand the co-operative business model and to see how it might benefit them and their clients: “We know that one of the reasons people don’t recommend them is because co-operatives and mutuals don’t feature in law courses, management degrees and professional development. The diversity of our corporate sector has suffered as a result.”

Co-operatives and mutuals have performed impressively in the recession, with turnover across the board up 9.6% since 2008, compared to a shrinkage of 1.7% in the UK economy. That resilience is also seen in start-up success: 98% of co-operatives are still trading three years after formation against 65% of ordinary companies.

Some of that success is a consequence of the longer time horizons that exist when organisations don’t have pressure from short-term investors. The way John Lewis is set up means it can continue to invest in a recession as competitors scale back, while the Co-op Bank can look at the benefits to its business in 10 and 15 years rather than three to five. Employee-owned firms can work collectively to support a business – taking salary deferrals to retain staff rather than making people redundant – thereby preserving the key skills and experience that they’ve invested in over the years.

But what defines a mutual or a co-op? They are businesses that, like any other, focus on being competitive and making a profit, but are unique in two respects. They are owned and controlled by members, not outside investors. Those members can be employees, customers or businesses collaborating for mutual advantage. They also, and to different degrees, are guided by an ethos of participation and engagement with their members and the wider community.

Some definitions are built along a strict line in the sand, but Co-operatives UK has moved to a more inclusive concept based on these key elements of ownership structure and ethos. It speaks of a scale of co-operation and says that some businesses will have a co-operative ownership structure without the ethos but other businesses, not formally structured as a co-op, might have a more co-operative ethos than an avowed mutual.

Mayo acknowledges that not every business will be a co-op, but he does think they can all benefit from being more co-operative. “The essence of any company is people working together for common goals. No company could survive if its employees didn’t co-operate with each other and their customers,” he says.

Management commentators such as Simon Caulkin have argued that businesses able to convince employees and customers they’re there to do more than simply generate shareholder returns do better, as do companies within which employees feel valued and involved. Co-operatives have always existed to fulfil common needs through profitable trading, not vice-versa. Purpose is baked into their DNA, be that creating a happy and respectful working environment, getting a better deal for producers in farming co-operatives or ensuring a community has a pub or shop.

That common purpose is crucial in the kind of employee buyouts that people like David Erdal at Baxi Partnership help deliver, where the owners (often families) have instilled an ethos that’s a critical factor. Those owners want to know

As well as raising longevity, co-operatives have their own ways of raising equity

 their firm is owned by people who understand how to keep it going for the long-term, which isn’t always the case with management buy-outs, where new owners often take on the business for a short time before cashing in. Employee buy-outs can be structured in a tax-effective way for both employees and existing owners, but winning over employees and getting the financing structured properly can take a while longer; it’s not for those looking for a quick sale.

As well as advising businesses on employee buy-outs, Erdal has written a book about employee ownership, Beyond The Corporation. In the course of his research, he looked at small towns close to each other in northern Italy with similar demographics, economies and so on, where the only significant difference was that one, Imola, had lots of employee-owned businesses and nearby Sassuolo had none.

Erdal found that life expectancy in Imola was two and half years longer than it was in Sassuolo. He attributes this to the fact that employee-owners are less likely to be made redundant and more likely to be better paid, both of which have major impacts on health and wellbeing, which in turn are crucial to longer life expectancy.

Intrigued, he mentioned the finding to the chair of the John Lewis Pension Fund, then using standard actuarial tables to calculate its future liabilities, assuming its partners would be just like the rest of us. But they weren’t. It was discovered that, on average, employees at John Lewis lived longer than people who’d worked in retail for non-mutual rivals.

Patrick Lewis, partner director at John Lewis, says: “Co-ownership leads to increased levels of productivity, low absenteeism, low staff turnover, higher levels of commitment and higher levels of wellbeing. Employees within our business enjoy a higher wellbeing at work than the national average.”

As well as raising longevity, co-operatives have their own ways of raising equity. Lewes Football Club was a private company until two years ago, when a new consortium came in with a mission to raise capital from the community to rebuild the balance sheet.

The consortium’s advisers settled on an Industrial and Provident Society (IPS) model because it was exempt from the regulations that apply to normal companies making public offerings of shares, saving them the six-figure sums it often costs to go through the process. Those costs rule out share issues from most small and medium-sized businesses but make it eminently possible for an IPS.

FC United of Manchester (turnover £800,000) is building a stadium for the club and raised £1.6m from 1,000 investors, all with one equal vote. Taking the same route, Ethical Consumer magazine raised £200,000 from its readers with the promise of 4% interest each year.

The market in Community Shares is growing and now stands at £15m, supported by the government-funded Community Shares Unit at Co-operatives UK. Jim Brown, strategic adviser to the Unit, says that co-ops specialise in “delivering value based on the inherent profitability of the business, rather than based on what someone thinks or hopes the business might one day be worth”. Brown says that’s because IPS shares are withdrawable rather than transferable, so there’s no role for speculation about future value that may or may not be realistic; an IPS can only deliver financial returns from the profits it generates and which it uses to pay interest to investors.

The Co-operative Group is putting another £1m into the Enterprise Hub this year and there are an increasing number of public sector spin-outs, from childcare co-operatives through to part-mutualised health providers. It all contributes to a growing sector that is already under-served by accountants and finance professionals, many of whom focus on how co-ops and mutuals differ from their standard corporate work and conclude it isn’t worth the hassle.

As a result many co-operatives find it difficult to find professional practitioners who understand them, and there’s a growing market that needs better professional support on accountancy, compliance and tax advice.

That brings us back to Mayo’s co-operative option. “We need to take co-ops out of the realm of the exotic and into the prosaic,” says Mayo. “It’s not a way to do business that will suit everyone in every circumstance, but it can benefit an awful lot more people than at present.”