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In praise of cooperative thinking

15 February 2012 By Edward Hadas

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.

 

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