This paper has been prepared as a background paper tr the

World EmploY' ent Report 204-5

Productivity in cooperatives
And worker-owned enterprises:
Ownership and participation
1_ake a difference!

John Logue and Jacquelyn Yates

Ohio Enlploye Ownership Center
Kent State University
2005: 1

Prepared for:
Employment Sector
International Labour Office , Geneva

ForeTord

This volume has been prepared as a background pa');:r for the ILO'g
World Employment Report 2004: Emp/'ment Producthity and Pmr)
Reduction. It examines how the ownership structure and the active
participaton of workers and membrs m cooper atves and worker-owned
enterprises impact on th productivity of such enterprises.

Employee-owncd fmns and cooperatives 3re commercial

organizations that oprate accordng to a broad sct of values that govem their
pursuit of economic gain. As dcmocratic member- or worker-controlled
cnterprises , they Y to balance diverse goals such as job and income
security, democratic control and participation, safety and h::alth at the work
place , profit sharing and patronagc dividnds and C(l ncem for ther
communities. The conventional definition of productivity as value added
per worker' is therefore not fully satisfactory when we xaminc it in the
context of cmployee-owned firms and cooperatives, because these
organizations typically dliver a combination of econonc 2nd social returns
to their mmber-owners and the community at large.
John Logue and Jacquelyn Yates of th Ohio Empl yee Ownership
Center at ent State UIversi have found that employt ownership by
tself does not necessariJy have a postive mpact on productivity. However,
a combinatin of employee tnancial ownrship with real participation in
decison-making at the enterpris level does improve lahour l:lroductivity and
other aspects of business performance. In addition , employe ,;!-ownership and
participation generate collatcral benefits'" in terms of social participion
and living standards

In th casc of agricultural and small business cooperatives ,

productivity has to be measured at two levels: the level of the cooperative
enterprise , and the level of the membr farm or business. Logue and Yates
have found that farm and business coopratives have a net positive impact
on productivity whn both the cooperative and its member units are taken
into account. Moreover, Co(ratives too produce a broad range of
collatera1 benefits" for their members, workers and the community. These
may not be direct1 y related to productivity, but are clearly ilssociated with
key elements of the ILO s Decent Work Agenda and to pOVCl1y rduction.
The authors propose a range of activities in the fields of reS: ;~xch promotion
of cooperatves and technical assistance and training that lthe ILO and its
development ptners could undertake to hamss the positive impact on
productivity and the quality of work of ownership alld participation in
employee-owned firrns and cooperatives.

11

The Cooperative Branch 1S grateful to Mark Lvm Ibr reviewing the

text, to Geraldeen Ftzgcrald for editing it and to Juliet Pi:)lt': f for the cover
design and for preparing th text for publication. The auth I}fS express their
own views, whieh do not necessarily comspond to official ]LO poliey

.Tqn

Schwcttrnann
Cooperative Branch
Job Creation and Enterprise Developnnent Dpartment

111

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Abbreviations

AAFCOOP
%

Association des Auditeurs et F OlmateUr::: des

Coopratives
Cooprativ des Ouvriers de Btiment
Employee Stock Ownershp Plans
European Union
General Accounting Office
Gross Natonal Product
International Labour Organization
Jnvestor Owned Firms
Non Governmenta] Organization
Small Busmess CooperativS
TOVl'1lship and V i11age Enterprises
Unted States
United States Department of Agriculture
United States Agency for Intmtional Development

Executive summary
Productivlty is the baseline measure of the econolic efficiency of
firms. It s typical1y reported as value added per worker, va]ue added per unit
of investment or valu added per unit of assets Enterprises vll fail to thrive
in a market economy if they eannot meet or exceed the productivity of other
finns in their sector.

The surviva1 rate of worker cooperatives and employee-owned firms

in market economis appears to equal 01' surpass that of conventional f lms.
But they yp1cally return a different combination of econmnic benefits to
thcir member-ownTS than do conventional :finns, because they place more
emphasis on job security fr employee-members and employees family
mmbers pay compettive wages (01' slightly betler than their sector),
provide additonal variable income through profit-shari dividends or
bonuses, and offer better fring benefits. They a180 support community
facilities such as health clinics or schools.
111 the developing world, cooperatives and ernployee-owned fins
have usually been supportd as parastatals , to irnp lement various
govemmental goa]s. When governmental support was wthdrawn due to
budgetary shortfalls or structural adjustrnent polices , most parastatal
cooperatves failed~ because productvity had been of littlt: or no concem,
and they were not prepared to compete 1n a market economy.
However, these failures were not due to any intri11Hlc shortcomings
ofemploye ownership. COl1B derable eviden om 1e devdoped coulltries
shows th 3.t pruticipative worker cooperatives and employe- wned firms can
match or xceed the productivity of conventional f1l1l1S. Mm;t evidnce frorn
the form r centrally planned countres s confounded hy exceptional
conditions. Evidence from much of the developing wor1 d 1S slim, in part
because basic ecol1omic and political conditions are often ab:(~nt.
For agriculturaI and smaI1 busincss coopratives th research is less
voluminous , but leads n the same dircction. Well-mn cooperatives can
compete with traditional frrms and can effectively inerease the productivity
of thcir members. But their profits are distributed differently: the farm and
business cooperatives charge ]ower prices and return patronage dividends to
members. The dearth of research on the productivity of agric u1tura1
cooperatives may possibly be explained by the widespread assumption that
they create benefits for their member-owners. Emprical st Ll des and stock
markJt data suggest that agricultural cooperatives regularly generate
ecollomic benefits for thir members that equal or surpa:;s comparable
pnvate sector retums to shareholders. Promising new forrns of the
cooperative include small business cooperatjvcs and shared service
Vl

cooperatives 1hat provide brandng, marketing and other :msness services

for producers.
In sum, 1here is no great accumulation of eridencl:~ to sugg8t that
and employce-owncd enterprises are less productiv than
conventiona1 fitms , and substantial evidenc that they at least equal , and
probably exceed, the productivity of their conventional eounterparts. ln
addition , they create co l1atera1 benefits for ther communitie!., and societies.
coopratives

VJl

1. Introduction, Conceptualizing broadenerll ownership

and Productivitv
How does broadned ownership of enterprises by workers , by
agricultural producers, or by small businesses aft' ct enterpIi:;e productvity?
Do agricultural and small business cooperatives and various fonns of
worker-ownership measure up to convntionally o\ined finl1s?
The present analysis focuses on five specific questions:

Does ownership of capital assets by employees an d/or workermcmbers n the entrprises n which they work (whether employeeowned companies or workers cooperatves) have a positive effect
on their productivity as a result 0 increased motvation and workr
satisfaction?

Does ownership , when combind with an ownrship cultur

involving meanngful participation in decision-Iluking , have a
quantifiable , positive ffect on productivity?

Do uscT-owned cooperatives (such as agricultmal supply and

rnarketing cooperatives , machinery rings and ~~hared service
cooperatives of small businesses) llable thcir ndividually owned
fann or busines.s mernbers to improve their productivity?

Do

thes
achiTing

cooperatives provide their members with a means of

economies of scale and enhancing their b:urgaining power
in the market through poo1 ng resources and und( rtaking support
services (such as the supply of agricultural inputs, jo:i nt marketing of
products; provision of credit on a group basis bral1ding and
adve11sing)? 111 other words, does the verlical i:ntegration of
functions at th level of the cooperative euablc a more spcialized
division of labour by its rnmbers that leads to higher productivity,
and does pooling these functiollS enable th indi dual member
enterpris (farm or busil1ess) to fcus energy on its core activi?

Do these various fonns of o\i'llership increas labour productivity,

create decent jobs and reduce pover?

Defining broadened ownership"

1.1

This analysis focuses on two separate but relatd arem, of broadened

ownership:

the impact of worker ownershpl (and especialJy pticipatory

worker ownership) on productivity and enterprise p c:::;rfonnance and

the impact of ownship of cooperatives by agri ~ultural producers

and smal1 businesses on both the productivity and perfomlance of
the cooperative and of the falms and businesses of 1he cooperativ s
member owners. 2 There is a subsantialliterature -s me of which is
methodologcally rigorous on the first area in the lJnited States and
Europe, but this is less true in the case of the second

The underlying concern here i8 to examine the degree to which employe

ownership (in its various legal fonTI and agriculturaJ and businS8
cooperatives enhance the opportunities for working people in both devloped
and developing countries to secure and maintain decent w;vod: ;vth adequate
;vages and benefits. Ownership , whether by workers of the companies that
employ them or by usrs of agricultural supply and market:i:ng cooperatives
and of small business cooperatives , can give working people greater
opportunity to sl1 ape their economic destiny and to acbiev individual and
oIlctve goaIs consistent with the Intemational Labour Organization's
commitment to the promotion of oppOltunities for women and men to
obtan decent and productive work, in conditions offreedom, equity, security
and human dignity" ~ Further, as will be discussed 8",: some length,
broadening ownership creates significant economic resuurces that can
provide more scure retirements for cunent worker S, and 1:1tter education
ld a more secure future for their children La8t, but certainly not least, these
forms of broader 0rnership anchor capital and jobs I)cally despit
increasingly rapid capital flows in the global economy, and provide some
benefits as well for community mernbers who are outside the ownersmp

The terms worker ownelhip" and mployee ownership" are used synonymously ,
These include a varety of differing legal forms of (' wnership: rorkers
cooperatvs; Etnployee Stock Ownership Plans (E SOPs) in the tJnited States , the
United Kingdom, and several other countries; common ovvnership in the United
Kingdom; 80ciedades labor.les in Span; People s Entcrprises in Russia; and
various forms of direct ownership using partnrship or joint-stocl !;, structures , Th
common denominator is that al1 provide ownership rights to most (1)" all employes
and that there is an element of individual ownership in which orkers receive
2 individual benefits based on the permrmanee of the eritemrisc they Wil
Productivity and employee ownership 1n which the dominant form :)[ employee
3 OW11emhip is tflrou1 stock optiOllS or penson nmds a not examind.
I

lLO , 1999.
')

circle.
Conventional wisdom has it that investor ownership is the most efficient and
productive pe of enterprise , and this fonn of ownership 1S ()l1:en credited as
the source of the remarkable economic growth of capitalst economies Yet,
one may reasonably ask, What is the evidence for the superiority of investor
ownership over cooperativ ownership?" A rough answer :::an be found in
the survival of cooperatives: if the private sector were pro' iding sufficient
goods and services at highly competitive prices , farm ancl small businS
cooperatives would not have developed and persisted. The survival of many
cooperatives into the present day and the formation of m:w cooperatives
suggests that manufacturing , retail and agricultural coopera l: ves are able to
compete in a market economy, and that overall the prnductivity they
generate must b at least comparable to that of investor. owned firms. But
they are not exactJy like them

1. 2

Defining productivity

Productivity, measured as value added per worker, value mlded per workhour, or value added per unit of investment, s the economiBt s measure of
enterprise efficiency The measures are simple to understand, and
information on productivity is rlatively easy to co l1 ect and compare among
entrprises. Howvr conventional definitions of productivllty cause some
difficulty in comparing cooperatives and employee-owl d firms with
investor-owned rms (IOFs). Because cooperativs and t: :mployee-owned
firms pursue dif:firent goals and allocate their profits lifferently from
conventional finns , the standard definitions are less appropriat for
comparing TOFs and cooperatives. The benefits to members and cornmunity
created by cooperatives must be considered in assessing pro c. uctivity

1.3

Defining productivity in worker cooperatives :8md employee

owned enterprises

First, employee owners and members in workers' coop ;;:mtives have a

dfferent relationship with the business than outside shareholders do
Employee owners livelihoIs depend on continuing employment through
the success of the firm they own. This is far more important for them than
the return on investmnt. Consequently, ernployee-owned companies may be
wi l1 ing to accept a lower rat of retum on their capital and a lower rate of
ovrall profit than an investor-owned company.
,

Second, profitability, the usuaJ standard for business succS !;, may not be a
vely good measure of the productivity of the worker-OWfl:d business. 111
Piods of slack demand , workers' cooperatives may pay thei r meI ers only
a baSlC wage comparable to what is paid in traditional firn . But in more
prosperous periods, they often raise compensation with an additional ,
3

variable wage, paid as a bonus, dividend or pro fi_t-sharng. TI.X law plays an
mportant role in how varable compensation is implem::nted, bcause
enterprises w i11 normally sek to minimize tax liabilities aB they direet
additional income to the employees. The method of variab k: compensation
may affect conventional measures of nterprise productivity.

Third, the sources of productivity in employee-owned fmns :'1 ay differ from

th )se in conventional frrms , so the measure used matters. Employee 0\1ers
may arrive at competitive levels of produetivity tlucugh diffrent
combinations of labour, capital , skill and initiative than
conventional
firms.

Fourth, th risk picture for ernployee owners is difrent. ]1 1; risk they run
by keping their assets n thelr own firm is greatcr than if t l:l ey investd an
equivalent amount in the stock market or a bank account: but ownersh:ip
aUows them to influence the return to inrestment by t.heir own efforts , rather
than depending on the less well understood and less controllable services of
investment professionals and movements n the stock mar1t

l 4

Defining producdty ll agricultural or small business

cooperatives

The standard definiton of productivity also causes problem: fo1' measuring

the productivity of agricultural or small businS8 cooperatives. Bcause
cooperativs are designed for use" of members , rather tharl for profit, thy
try to sell nputs to members at a lower price and buy produGts ftom them at
a hgher price , enabling member s to reap hgher retll'i in their own
businesses or farms , rather than retaining profits in the COOpf: rative IOFs, by
contrast, tr to sell high and buy low. The success of a fann cooperativc js
more appropriately measured by the success of i member s than by th
profitability of the cooperative itsel f. For example, a farm eooprative that
sel1 s supplies to its members for slightly less than the pric1; at an 1F and
which pays members slightly more per bushe1 of grain de J::vered will have
less value added er transaction than the IOF, but will inClas the rate of
return to its farmer-owners in ther own agricultu1'al production Likewise a
small business cooperative , run on a for use" rather than a 'f'Or profit'~ basis
is not necessarily trying to maxirnize the value per work-hour worked by
cooperative employees. On thc contra it tries to keep prices for its
mernber owners down rhil spending on brd adverti s.ing and other
servlcs to increase th member owners sales

The standard definiton of productivity at the level of the cO (l!perative ignores

the impact that cooperative enterprises have on their membrs productivi
ls is a serious problem. After a11. fannIS 0 1' small bus nesses that join
cooperatves do so to achieve the economies of scale that their small size
othrwlS denis them. The cooperative (1) cuts the costs of their inputs nto

theit own operation; (2) provdes services (application of fertilizer ,

peicdes and herbicides for fanners , veterinat services and branding (e.g. ,
Land 0' Lakes, Ace Hardware) that fanners and small business people could
not otherwise obtain; (3) buys members outputs at a higher price and
markets them where the members otherwise would not be abll~ to; (4) rebates
most of its eamings to members n c h payments and capital accout8; and
(5) prodes a sheltered opportunity for investment: the cash and capital
aecount 1etums , at least to fanner members in the United 8tEltes, exceed th
historical rates f return on both bonds and stock ownrship jjJ public equity
markets. In short, it is necessary to take into account thc fact that the f1mn or
smal1 business cooperative is an extnsion of the business of the member
owners 4 Gains in productivity may be captured either at I: he level of the
fanner producer or the smal1 business, such as rtail outlets of Ace
Hardware, or at th level of the purchasing or marketing cooperative itself.
This needs to be considered when looking at the empirical 3Dhes.

1.5

Societal productivity versus enterplise produl::tivity

80 r discussion has focused on problems in defining pductivity at the

micro level of the finn and not on the broader, macro level of society. In
advanced industrial democracies running at near1y fuL employment,
maximizing the productivity ofthe enterprise may coincide .rith maximizmg
the productivity of a socie. 011 the other hand, in develop ir: g countries 01' in
underdeveloped regons of developed countries wth large unemployed and
underemployed portions of the labour force , increasing the productivity of
the fim1 at the cost of reducing employment may lower the 80cietal 1velof
productvity. Take, for example , the common strategy of mprovng firm
productivity and profitability in mult-plant companies by 8imply shutting
the bottom 20 per cent of operations Firm productivity goe:, up , but societal
productivity goes dOWl1 as laid-offworkers apply for unemp .l)yment benefits
and incur other expnses to govemment. If unemployment lS close to the
frictional level , displaced workers quickly find new (and hopeful1y more
productive) jobs, but that is rarely the case in developirl countris and
underdeveloped regions , where the costs to government ffi :.y b substanti a1
and long-tenn

Writing in 1920 as a member of the Royal Commission on Income Tax, economist

A C Pigou concluded that the retums to cooperative members in fact were not
profits of the cooperative but reflectd an overcharge to its mmhers. He reasoned
that dividends were merely an overcharge that was refuEded to membI.
Consequently they were not taxabl becausc, if taxed as income, the cooperative
e I

m
1m

ati

n
gt

hle
diV

id

en

db

)yelim

1
could simply cut its pes to members ,
ove
rc
ha
rg
(Figou? 1920). This SO1t of rationaIe encollragcs t|1fS COIlcIllsionthaI
measunng tlIe productiviw of the COOPErative (like its inCOInt) IIIllst include its
mpact on individual members

Cooperatives can also enhance social productivity by (:nabling small ,

otherwse marginal farmers and craftworkers to eapture enOl Igh of the value
of their production to stay on thejr farms or continue their businesses rather
than being forced off the land Of out of business to join the ranks of th
unnployed or underemployed In the same spirit oj creating and
maintaining productive work, cooperatlves of the t.I nemployed or
underemployed may pool small funds to buy capital equipment that
members can share to enabl them to perfonn som paymg'rork. As Bill
Winpisinger, president of the Intemational Association of .Maehinists and
Aerospace workers, was wont to say, 'There is no productivity in an
unemployment line."

Finally, as democratic enterprises, empIoye-owned firms tld user-owned

cooperatves may provide a variety of other benefits to their member owners
and to the' communites. Th ey are not compe1led to have th;~ slngle~minded
fixation on profits that
c ha

cte
rs some investorOWlld businesses,
pmticully absentee- owned conventional frrms Other bene f] ts may inc1ude
more sccure employment, health clinics , traning and education and othcr
services offered to members only or to the community at large. Exploring
these collateraI benefits of ownership is anothcr focus of thi5 rport.

2..;v ork ownersbip and productivity

We nedanewbtsness model. F'inncial pi'tic tion
schemes for workers shres share opons 01 projil-sharing
- can contribute to this. Financilprticipation shmtld not be
COlned 10 the b >ardroom bul should be n ti:. for II
11'orkers. Jf71ere the rules qf the gam re Cl}'stal ear p
.fiont nd sound, it cn be win-11'in situtionf01 b dness nd
workers llbildng coWZitlent in the 1101' f ai'ld rising
prodctivity while providing workers ith a sh ie f the
bene.t. "
Anna Diamantopoulou, European Union Commissioner for Emp I)ymentand
Social Affairs, July 11 , 2002

Wor1rs' cooperatives and employee-owned companies ar ordinft1y

business enterprises that are wholly 01' partly owned by a brld group of the
people who work in them. Not everone in the firm has to h;~ an owner, and
employees need not mV11 every share. There is 110 hard and fast shared
unde1'standing of what perce11tag of the employees must be owncrs 01' what
total share of the e:nterprse the employees must own before employ
ownership becomes meaningful , and so every resarcher must speci:fy a
definition. There is a wjdespread understanding that workc J:'8' cooperatives
are usually 100 per cent owned by the employees and that )()re than half of
the employees are owners, but thcre are enterprises that co
f

c
00

pe

ra

tjve

s that
do no
t
ft
these criteria The broader phr:l.se! 'employeeowned firm" may include companies where less than half of the employees
are owners and they own a small percentage of the stock. In many countriS
the terms are defined in law.

Confining the focus only to enterprises wth a hgh percentage of

employee ownershp and broad ownership nong most empJl oyees runs the
risk of ignoring important usS of employee millority ownenhp. These uses
include min a transition from traditional ownership to I)road eIloye
ownership, or rescuing struggling companies by taking an employe share in
exchange for wage concessions , and the impact of empl Cryees owning a
substantial minority share of their company over the long tl;::rm This report
takes the inclusive approach , with a broad survey ofthe impact of employee
ownership on entrprise productivity
The Intemational Co-operative Alliance estimates that there are more than

100 mi1lion people employed in workers cooperatives aJro.:10

The higgest and most successful worker-owned cooperatives in Westem
Europe - France, Italy, ad the internationally known Mon ]ragon group n
Span - hut most cooperative mmhers live in the devdoping wor1 d ,
e&peciaIly in Asia, with a total of twg million members i:x ll1donegia? 25
minion in IIldja, aI1d 3O minion in China- In the Unitcd State1:;, wit{1 It$ act1ve
stock market and well-developed judicial system, employet: ownership has
taken complex legal forms: nne millon peop]e ar estimated to particpate
n 11 ,000 hroad stock ownership plans or employee stock Iwnership plans
(E SOPs) , and an estimated 36 million more are enrolled lln 10,200 other
company plans fOl employee stock 0\\Iership.6 New approaches to
employee ownersbip and to agricultural and nterprise cooperation are the
subjects of activ experimentation and policy dvelopmenl particular1y in
Nortb America and T estem Europe

Despite the prevalence of cooperatives in the devU

mo
st of our empirical knowledge about worker ownership and productivity
is from experienc in Westem democracies (Th case stlH:ly evidence of
astonishing initi a1 ncreases in productivity of enterprises pr:lvatized through
probably
worker ownership or leasing in former communist COUTl
reflects other factors in addition to worker ownership.
2.1

Historical perspective on 0rnership and prod.lU ctivity

worker cooperatives and employee-led fir: lU s

.R

vorker owner
Beforeship
considering
and productivity
cunent, ]et
theory
us review
and the
research
historymof ownershlp in

a market economy Ownership has been established by pditical processes

that defl11c and enforce propey rights by balancing historic al claims~ social
values , practical realities, and technical considerations. Perhaps because the
life of a property can extend heyond that of its human owners , we are
n c1 ined to think of proprty rights as inunutahle. But a luick look at istory
proves this not to be the case. Hernando de Soto s Mystery o~ Capital (2000)
shows that property rights have often been redefind by the S tatc , sometimes
with profound economic consequences. The powerful eft cts of redefined
property rights are amply illustrated by the British enclOSU1\;: movement, the

5 Thordarson, 1995.
6 National Center for Employee Ownership 2002. Employee-owners 1n the United
States can own employer st.ock throu1 stock opons stock pmchase plans, and
401 (k) matching grants. They, li.ke the tjority of employees in ESOP penson
plans, canot be considerd owners in the sense of coH;:tively holding a
controlling stake in the enterprls or having the ability to participate meaning11ly
in the govemance and management of the finn. There are perhaps 2,500 firms in
th United States where there is meaningful and substantial employee ownership.
See, for example , Logue, Plekhanov and Smmons , 1995
I

expropriation of properties under communism, and in arious colonial

policies.
As a type of ownership, investor ownership is a far Ily recnt arrival
on the historical scene , developing a1011g with markct capi|ifliism- It bcgan
SlIDy as aI1 extension of individual ownership , and aPt tha rights of
ownership that had belonged to individual owner-entr:::-preneurs were
il1fl@Ijtedibv the invastors. Investor ownership was a mc 11S for creating
capjtalintSlve erprises too large for the wealth of any Sil e individ
fm diversifying individ wa1th to minimize the risk U
obtaining additiona1 value and income from the breathtaking returns of ear]y
EI1trcpr@heurial capitalism! As a rsult of investor ownersllip , th role of
ownCT manager gave way to the more remote role of owner-investor with
hired lnanagtIrlent- With this chang@, much of tl1@ obvious j nstificatiotI for
the superior efficiency of investor ownership was eroded ()wners were no
long preset1t on the prgmises to ensure the most produeliVE use of their
capital. But industrial capital could be so wildly producti~ and profitable
that moderate losses in productivity arising from hired management were
tolerable to the investor. Social and economic inequities of the early
capitalist period , far more pronounced than now , facilitated a. steady supply
of ager aI1d compliant workers and managers, and compe1 itio11 discipIiI1cd
labour.

N 0 doubt many hired workers hoped to participa i the markt

systm. But for those who lacked capital , there was little chance of realizing
such a dream. In early capitalism, most employees were so poor, so
uneducated, and so excluded from th credit systm as to have almost no
possibility of acquiring their own captal and benefiting from the economic
system. The few who parlayed their luck and talent into successful
ownership were more interested in joining the c1 ass of owner-investors than
in creating owners among their peers from the factry fl(l or mineshaft
Even Robert Owen , the storied founder of cooperati s and utopian
communities, was more a benefactor and communitarian thHn an advocat of
employee ownership of factodes.

Like poor people everywhere , workers in early cap:ltalism d.rew on

rura] and vi l1 age traditions of cooperation and engaged :.lrl mutual aid to
shelter themselvs from unemployment, job loss , illness , and the xpenses of
untimely death. From mutual aid societies sprang many 01' labour s current
institutions , inc1uding cooperatives , labour unions , workers' banks and credit
unions , and consumer cooperatives. Many workers coperatives were
created in response to strikes and lockouts, although most had no realistic
prospects of long-term survival or economic success without capital or
managerial expertise. Puny as they were , they posed a challenge to the
business class, and the history of many labour cooperativs ends with a story
of active hostility from the business cornmunity. When cooperatives failed ,
9

the business class was quick to place th blame on workers incompetence or

moral depravty
But their failures are not conc1usive evdence l.11at employeeownership is less efficient or productiv. Aside from strikes , many
nmteenth century workers cooperativcs wre creatd t l' met genume
social needs that made for bu.'lness opportunities F or exarnple, consumer
cooperatives have sold goo competitively for over a centm)' in the Unitd
Kingdom , lowering the cost of livng for working familief; , by retuming a
regu

l1a
r dividend to their rnembe
r-c

COJumer coopera
tives ellcouraed the development of workers
cooperatives to supply thm with goods. The cooperatve model was a1so
widely and suceessfully adapted to agriculture , and to an envronment in
whi :h farrners were accustomed to helpng ach other thr01.Jl:gh catastrophes
ofeveT variety

Without belabouring the point, our mod1 idea of ownership can be

seen as a bundl of rights including the right to manage the 1[[terprise to hir
and fire , to set prices , to appropriate profits , to selet suppliers and
consumers, to sell the enterprise to a buyer of one s choGe, to invest the
proceeds ofthe sale, and even to terminate or destroy the en l:erprise. 8 In most
countries, ownership a180 includes the right of access to cer:.ain public goods
(the ri 10 draw war ernit waste substances into the air, water or soil , to
use the public transportation system, or to prospect fo. l minerals)~ But
through the poltcal process , ownership rights have been unbul1dled. Some
ownership rights have been socalized" or regulated in son I.e countries for
example , rights over personnel management incJuding proca::dures for hiring
and firing , wags and hours , rights to extemalize the costs of pol1uton and
waste disposal. And some owneTp rights have been mad subject to
negotiation between the owner and trade unions lUlder col1 ective bargaining
law.

When emp\oyees or consumers OWll an enterprise , 11hey may assume

a11 the rights of other enterprse owners , or certain of thc~;e rights may b
legally dened. FOf example, cooperativs in some European countries are
)rbidden or discouraged from slling the assets of their enterprise or are
control1 ed in allocating the surplus. Because laws alld regulatiolls on
cooperative ownership may affect every stage in the fe cycle of the
enterprse , they also fect its produ(.,1:ivity In addition , wJ:!1~n employees or
consumers are owners, they exercsc their bundle of ownl;~rship rights with
reference to thr interests , and 80 different organzatiofal structures and
practices develop within coopera ve nterprises.

At every step , political dcisions played a key role in legitimizing

and failitating cooperatives. Through politics) the coopratives achieved
11

Pu tterman,

1993 , 245 ff; see also Adler-Karlsson 1969 (pp 20 ;!;!)i

-a

legal 8tatus 80 they could pa;ipate in the justice system. A::. the social d
economic value of cooperatives was recognzd governr~lents at tllnes
provided tax and pro!amme suppos The new economic fbnn introduced
healthy marlet competition into provisioning the working cl: ns As a ret
working people benefited from the impact of cooperatves on competltlon ul
the retail market, whethr they belonged to a cooperative OT no1. The retal
cooperatves and the workers' coopcrativs that supplied them could not
ha survived if they were not productvely competitive with cOllventional
enterpnses.
In the developed economies , some older cooperadves 8tiU thrive
today , and new knds of cooperative and mployee-owned enterprises are
emergig to provide goods , services and prces not available through the
investor-owned economy. New workers cooperatives and mployee-owned
companies are created to meet neds and fi11 economic nr::hes not met r
conventionally owned enterprises , arising from the retirffii;;:a( of owners of
small and medium-sized enterprises, bankruptcy, spin-offs om big finns , a
sudden burst of lay-offs, and market competition from mult.inational
compames
In the developjng world , the very conditions that created a need for
cooperatives in early capitalsm still exist
there , a shortage of
employment, of low-cost goods , of decent housing, of social security and of
social services (child care, eld1 care, health services and :ducation). There
are traditions of cooperaton from the countryside and vi1lag but linguistic ,
trbal, clan and religious diftrences can be impediments 1:0 cooperation in
national and international markets. Cooperatives in the developing world
a180 face comptition from intemational frrIDS wth rast economies of scale.

A1though criticisms of ncompetence, incapabi:tity and moral

depravi still echo in the literature (albeit under more pol . te names today) ,
the reality of successfl.ll operation and surviva1 carris a w:'lght of its own. It
is this weight of evidence that is examined here. Worker ;oopratives and
employee-owned businesses are created for a variety Df motives - by
workers to preserve jobs and spread wealth, by employers to improve
productivity, by governments to promote economic development and other
national go a1 s. But, in the end, workers' cooperatives and nterprises must
be sufficient1 y fficint to compete in a market economy, oJr thy wi1l fai1.

This implies that in the long run , cooperatv like any othcr
enterprise, must generate a surplus of income after expemS. Sometimes an
enterprise surplus is the result of luck or law, but 0 '1 ~r the long run ,
profitability depends on productivity , or the efficierlcy of the finn
Productivity arises from a combination of factors - capital, labour and
management. Il1novation and cntrepreneurship enhanct: productivity by
developing new ways of utilizing these faetors. In early industrial capitalsm,

11

as in the developing world today , productivl was strongly 'Dased in captal

goods , because machins and factorigs greatly multip1y ihe productivity of
UD.skilled labouf.
[n developed economies, on the other hand, productivl is prim~ari1y
a function of labmr: capital accounts f only about 30 pet cGnt of costs' and
many COInpanics can tinance new capital investment OIlt of profits So
capital i18 1onger holds its prel1linent plac. More than 1.ver hefor the
labour foi-cE gnhances productivity hy its training and its dilint attention to
the work procSS In a capital---rich economy, the contribuhl ,1tl of the labour
force tg productivity can be tf16 main competitive advantage paITicularIy for
service and hgh~technology finns.
Regardless of the level of economic developmenl: innovation and
entrenUrship clnce productivity by introducing ne'u methods at
materials. The many owner- employees in cooperatives and employee-owned
enterprises have a drect economic stake in productvity enhancements, and
that fact creates the potential for an effective management 5ysm ofbroad
participation for developing and implementing the ideas of those who would
otherwse be silent or ignored.

Bul none Qf the henefits can be realizd if the E:nvironment for

cooperatives and worker ownership is uiendly
2.2

The context of worker ownership: lhat is tht~ proper role

for state patronage and support of cooperati1i1es?
The State wl/
function ,]0

alw.ys pr()found~v shrpe hm C()t'peraes

"Eve cooperatie is in some wa: or another a rejection of

certain c 11r1 and political bckgrou11.d and indeed must

.fit into its ow11. society i11. or,ier to srvie This ceots r
the co11.siderbled~fence in cooperatives mOJ7.
to another ,;11

cont

Tbe context of culture, law and politcs is supremely important for

the stmcture , operation and performance of worker-owned. enterprises. J2 A
primary requirement is a secure legal basis for ownership (de Soto 2000).
For example , in th Spanish Basque country, the Falarl:gist political and
economic context was sufficient for the Mondragon cooperatves to survive ,
simply by penniing them to exist (tolerated perhaps because of ther
c01meetions with the Catholc Church) rather than shuttirl them down. By
9

Blinder 1990, (p.2).

Taimni 2001 , (p. 26).

fl Laidlaw, qumcd in Taim 2001 , p.33

2 Poutsma, de Nijs and Dooreward, 1999.
12

contrast, in Bulgaria and Yugoslavia, work1'8 self-managelmmt in the early

1980s failed because of problems in t.he larger political contl:~xt continued
politic interference , cen:a1 plamng inadequate prepara1:i:m of workers
and a dearth of financia1 incentives.

I J

Another important contextual factor is a sense of trust and identity

among employees It ca xist prior to cstablishm1t of the <: ooperative. The
limited labour mobilty and ethnic solidarity of th Basqucs , for example,
may have played a role n the success of MC?~dragon by stahlizing workers
capital investmcms in the ooperatives. High unemploymct in the
sluggsh Falangist eco l1 omy may have allowed the Mondrag n c~operatlves
to select the most stable and ooperative]y oriented mp]oy~es In Japan,
Fukuyama (1 999) found that foreignwned credit cooperaves 1992-1996
were more efficient and experenced greater productivi. Nnety per ~ent of
them were owncd by Koreans Trust and identity can ab be developed
through employee selecton , socialization, and on-the-job expericnce.
14

1he mportance of 1egal and political context i::; high1igbted in

Taimni s 2001 study of cooperatives n Asia. All Asialll countries had
parastatal cooperativ systems , resulting in the imposition i] f poltical goals
and values on cooperative organizations. 1~ The result was mlcromanagemeJ?-!
motivated by politieal goals , excessive rgulation and abuse of regulation,'
seeking of jobs and contracts for political suppOlters , an(11 fa i1ure of ape){_
organizations to recognize alld represent tbe needs ofprimary cooperatives
Moreover, bcause cooperatives and th11 apex oranizatiorl8 were receiving
resources from the State , they became targets fo 1' capture 1::1)' various etbnc
groups and soc1a1 c1 asses. 19 Where the State is playing su ::h an active role ,
the productivty of cooperatives cannot be understood or measured in the
same way as in a market system. In fact , productivity is not a central issue in
such a system. However, in the end, these paras1.atal cooperative
organizatons were caugh t" by their failure to meet a minirnum productivty
threshold. In th lat 1970s, when intemal and extemal economc pressures
began to reduce state budgets , support for cooperatives was lessened or
eliminated, and the parastatal cooperatives and apex organizations faced
scrious , even fa1 chal1 el1 ges
f

2 2.1

Stabilizing cpit li the cooper tive entelprises

On

impol1ant question that relates to state policy and enterprise

~~ Jones and Meurs, 1991; Estrin , 1982; Prnikar and Svnar 1991 (pp. 30-31)

Bradley d Gelb, 1982, 159)

5 Ibid. , pp.157 8; 165
16 Ibid. , p. 36.
17 Ibid. , p.127
18 Ibid p. 136.
19 Ibid. , p. 147
<

13

productivity s stabi1zation of the capital in the cooperative enterprise. If

employee turnover js high and depamng employees are continually
withdrawing cash from the rm this undermines i:nvestment and
reinvestment A variety of state-structured approaches to stbi1izing capital
are in usc. For example , n some European countries , law requires that the
cooperative contribute a share of ammal profits to a collectively owned ,
indivisible reserve that can be used for capital equipment 01[' other common
purposes , but can never retum to the rnembers unless the cooperativ ]3
dissolved ln some countries, the reserve can never retum tc , th members at
alL It must go to the government or be used for charitabl purposs f the
firm closes or is sold to a private ownr The requirment tllat cooperatives
create the reserve bui1 ds a fund for replacement of obsolete or worn-out
equipment and new capital investment. Without such a :1 lmd, employeeovmed cnterprises would lag in capital investmcnt and n::investment, and
they rnight closc sooner and morc often Of course, requiriIl g such a reserve
does not ensurc that it wi11 be nvested well and contrutt to productivity ,
but it does create a floor of possibi1i Some countries a:llow the firm to
raise additional capital by taking loans from employees, but often thc nterest
rate is limited by statute or redation. This means that employees may not
choose to lend money to their finllS when the rnarket interest rate is higher
than the statutory lmit? and the firm wil) be starved for capil. al. Howevcr. the
evidence suggests that employees wi11 invest in thcir firms even if they
recevc a below-market rate For example, Mondragon work1'8 decided that
they would not take any stock diridcnds out of the accounts , thus making
the capital available to their cooperatives Another examph~ is the Anjuma11
weavers who invested in thejr cooperative evn though tbe cooperative s
economic position was weakening. 20 This is not as irrationaJ as it seems. The
below-market investrnent keeps the fmn alive and employing the workerinvestor; for workcr-owners wages are always far mor aluahle than any
eventual investment retum. And there is always the hope that the investor
will eventual1y eceive substantial returns on the capital , hl)wever bleak the
present prospec t.

The United States takes a different approach to sta::r ilizing capital in

ESOPs. Employees cannot remove their capital unti1 they kave the firl11. But
when thcy do leavc; they can extract the fu l1 value of theiI .shares as valued
on the publc stock markt or by an independent evaluator. This requirement
stab Ji zes the f1011 s capital , but leaves nothing for tho company," in case of
lmantic1pated large expenses or investment oppommities- fiy not requiring
collectively owned indivisible capital , the law assigns no iillu to the future
exstence of the company and future benefits it l111t geerate. Fear ofbeng
unable to meet this 'repurchase obligation" has evn inspired some
employee-owners in the United States to dissoIve theit ES i:)P aI1d sell their

20

Couture, 2002, pp. 19 , 22.

14

shares to a prvate 01r. If the cost of capital is too high, '{hether the cost
is paid in interest, dividends or capital gains , businesses cannot invest and
grow.
Some of the most successful cooperatives have enjoyed stability of
capital because of the local identification of their employees , because they
pay wags that discourage labour mobi1 ity and by slecticn of employees
who have a good atttude toward cooperation. 21 The history I)f cooperatives
is rcplete with examples of cooprativs where the member~: decided to take
less income in wages, dvidends and interest 80 that their eompany could
nvest. 22 There ar those who argue that requiring Nnrkrs to hold substantial
amounts of their capital in the nterprise for long periods of time exposes
workers to 'eater risks and dcprives them of the opportunity to make bttcr
investments":.1 And there is the reply of Robert Oakeshott: It would be
perverse not to prefer the risky prospect of a larger share n enterprise
income wh11 the a1temativc is no prospect of any such share 3..t aU ,,24
Another possible regulatory question for the Stat~: s definillg the
role , f any, for outsde investors n the coerative enterpri.se Firms 0en
ned the flexibility of equity investments rather than debt New capital can
enhanc theI productivty Most capital in traditional cooperatives is raised
intemally frorn members. Should cooperatives and employee-owned firms
be able to take outsid equity , and what role should outsider equity be able to
play in the firm? Should this decsion be left to the enterprise, or should the
State set limits through policy? The choic has consequences: in times of
recessol1, outside investors may be able to purchase cOl1troHing interests at
bargain basement pnces , even closing firms and takng their productioll out
of country. In the newly privatized economies , outs4:1 investors are
generally associated wth largr mvstments in capital improvements, but
also N'ith gr eater lay-offs
111 the developing countries in particular, the rok of the State in
encouragmg coopratives \\'ill probably remain important Although many
cooperatives hav had some govelmental 0 1' NGO help w g started, the
survival and growth of cooperatives 1n Annenia, China Glllana Poland. the
Russian Federation, Uganda and Viet Nam attest to their bi1ity to compete
Rh private entetprise once they are estab Ji shed. 25

---.,

/--,
tl

Jm

mu

1n7 ?
t

a--

mC

iJ

HM

m
L

n B
A

15

2 2.2 Compm ing prodctivi.J in worker)wned enterp"fss nd

coventionalrms

Because context is a decisive factor, cross-cultural studies on the

productivity of enterprise forms often faiJ to illuminate the questions which
lie at the heart of the present analysis. How does the produc1:. '::.~ty of workerowned enterprises compare with that of conventional firnllo Law sbapes
the fonn and practice of the workr-owned enterprise and Ildines its 8tatus
in the po1itic a1 system. Structure and legal status in mm can a:ffect
productivity. For example, in the United States, ESOP aw al10ws the
employee to realize the value of ownership only after sep:l.J~atioll fror the
frrID through resilation trmination retirement or death. The eridence
suggests that the absence of a line of sight" from t11e employee to the value
of hi s/her employer stock erodes the potential productivit) of this form of
employee ownership) and indeed, simply establishing employe ownership ~
not associatd with productivity gains in frrms in the United States /
European law, by contrast, variously recolzes encoUIagl~s and rellates
direct stock ownership policies , cooperatives and rclativly short-tenn stock
ownership accounts (typical1y 3-7 years). Japanese employee ownership falls
somewhere betwecn the two , allowing for stock to be conv~::rted to cash only
in 100hare lots, e:ffectively making it a retiremnt plan 28 Th Japanse
ESOP a1so sems to obscure the employee s line of sight,': but possibly the
arrangement has a different meanng to employees in a natol1 of savers.

The importance of context can b seen in the f l ct that political

issucs, not productivity problems , are judged to have led to the near
extinction of Israeli worker cooperatives. Russell (1 995) attributes th
dmise of most Israeli worker cooperatives to gcnerally poor economic
condtions , the ambiguous stance of organized labour and actively hostle
attitudes and po1icies of Likud-led political coalitions after the midseventies. He rep Olts that some believe that worker cooperatives could have
26Jones and Meurs (1991) include a brief discussion ofthe main hterature on crosscultural comparisons. An excellent example of such studies is Jofstede (1 980). In
one of the best effos at cross-cultural theorizing to date, Levin~ and Tyson bring
home the importanee of context in a thought expeliment (in Blinder, 1990, pp.
214-222): in a supportive economic envronment, with lcng time- horizons ,
relativeJy mild recessions, an economy where many firm are participativ
egalitarian and non-herarchical, and debt is 110t expen8ive, a higher-Prforming
equilibrium can develop than hl the ecm101ny where lI106vation is achigVeii
through fear ofb l08s, debt is expensive, and the technology I:.epends heavily on
star producers- In the first situation, workers and employers ;re willing to invest
mOfl n education d training leading to higher productivity 1'1cause they expect
long-tem employ111Ctn-j a11d sce no reaso11 to switch jobs becau se of an egalitarIan
job structure.
GAO, ]987 , P 11
28 Jones and K~to 1993a.

16

survived with just a little rhtorical and policy support, wl lich was never
provided (or cven thought of) until it was too late The Likl~_d govemment
proactively privatized many workers' cooperatives, which was easily
accomplished because government and the labour union Hisdrut were
partial owners of many of the cooperatives. Anecdotal evidenee suggests that
intemal Histadrut politics also playd a r01e in the disappearance of most of
the Israeli worker coopratives. Today , only kibbutzim still exist in
substantial numbers , kept afloat by more supportive govemn::1~nt policies and
the strong emotional and ideologcal attachments of their members. By
comparison, two-thirds of Israel s more ndividua1 istic moshavim farrns had
vanished by 1992.

Historical experiencc has shown that selflclp ii; the strongest

foundaton for cooperatives , and that goveIlmental involvt:ment should be
kept to a minimum, because state-sponsored parastatal ::oopratives are
easily hijacked by ambitious politicians ," and in a ptnemhip between the
State and fledgling institutions , ... the all-powerful state an dJ or ts agents
w i11 ultimately emasculate and enfeeble the weaker paner lrrespctve of
the safeguards
,., 29 \That the State can do is create a political and
economc climate in wruch cooperatives can be recognized and oprate
under protection of law, formulate a c1ear policy of encouragng and
faclitating cooperative development but not interfering in operations ,
develop a reJlatory framcwork which limit;; the state role to record-keeping
and adjudication of disputcs if the ordinary courts are unavailable, and
stablish independent support and fmancing organizations to promote
cooperattves and simlar jnstitutions. In historical exper:nce successful
support organizations and financing institutions have become self-sustaining
within a decade. Jf cooperative and employee-owned companies are
productive and competitive in their markets, they will be able to repay loans
from a financing agency and contribute to their support organizations Ifthey
cannot, po1icy review is appropriate.

Because of the comp 1ications of t:he political , soc.811 and conomlC

context, and the varied organizational and practical optioJ for structuring
and managing ownership of worker cooperatives and e:mployee-owned
finns , the connection between ownershp and productivit) must be studed
mpirically There is a substantial body of literature from I:he United States
on employee ownersrup and productivity, and a smaller body of literature
from Europe. There is a lmited lteratur conceming et:doyee mvnership
and privatization in fonner communist countries, and even ]ess literature on
th developng world. Outside of the industria1 demo racies , empirical
studies flave heen fEw a-nd are more frcqlIEInly case studics of exceptional
companies rather than systematic analyses.
29Tajmni , 2001 (p. 93).
17

The evidence for the ndustrial economies is tilOW examind

followed by a cscussion of the privatizing economies, and concluding with
Evidlame from the developing world ln lght of the theoretical
P~rspectives from economics are briefly discussed.

2.3

The empirical evidence for worker ownership and

productivity in deveJoped economies

For worker ownership in the developed economies, there are four

points of departure in the empirical productvity studies. Th ;;se ar: (1) early
studies with small sampIes and frequent sample bias; (2) latl;;:':, larger studies
which usually found a relation betwen employee nwnership and
productity; (3) larger studies that identify employee i l1volvemnt and
participation as the nexus ofhigher productivity , and (4) lmge-scale studes
from data on publicly traded companies without data on management
practices.

Early studies in the 1970s and 19808, mostly from tl" IC Unitd States ,
with unifonnly low response rates , typically found that emIloyee ownership
produced improvement 1n employment, productivity, sales, or protitability.~
Companies mor favourable to employee and worker own(:rship were more
lkely to respond to such surveys, 80 these studies rarely , if ever, included
companies with negative experience or unsuccessful p ~rformance. For
example , Conte and Tannnbaum (1978) found that among 30 Arnerican and
Canadian ESOPs whih supplied profit data (in a survey 0 f 83 companies) ,
the greater the percentage of 0rnership the higher the prc:fit per capita But
1ater, better-designed small studies of employee-owned entrprises also
returned favourable reports on productivty. For exnple a matched sample
study of 35 ltalian private firms and 49 worker coope::'atives in Emilia
Romagna and Toscana found that the cooperatives had hler productivity ,
measured as value addd per employee , value added per hours worked or
value added per unit of fixed assets 31

Worker-ownd

plywood cooperatives in the Pacific :~orthvest of le

United States have been intensively examined in several independnt studies
and found t?_ be more productiv overall than their conventional1y owned
competitors. ~ Thc exceptional skiU of employee-owner-orerators of vener
peelers is dscussd in BeIlas (1972) , and is held t(l be the key to
Many of these ear1y studies wre summarized in 2002. S~e The .Journ1 of
Emplo}'ee Owner ip Law and Finance .14: 1. A recent additi.on is Kmse et a1.
2003 , which collected EmpIoyse attitude data and ecoIIHmic data on perfhnnancc
1 fro1ti l3 CQnipanies.
1 Bartlett et aL , 1992.
32 See Bennan. 1976; Bellas, 1972; Craig and Pencavel, 1992, 1993 , 1995.
30

18

understanding th high productivity ofthe plywood coopratives.

However, not all studies with small samples foum:1 benefits from
employee share ownership. A sma l1 proportion of studies h ad more mixed
:findings . .T ones and Backus (1977) found that British worka cooperatives
with co l1 ectively owned capital wre smaller and tended to j vest less than
conventional firms in the footwar industry during a perod (1 885-1970)
when the industry was in long-term decline. Without nvestment,
productivity would he xpected to decline However, they also found some
support for the idea that efency (measured as value added per worker)
improves with broader participation, as measured by pel eentage of the
management committee that we employes proporton of cooperative
members who were employees, proportion of the labour force that were
employees but not )wuers, and proportion of share capital owned by
employees. A 1978 survey of 50 British retail consumer cooperatives found
tlmt th presence of worker directors modstly increased productivity in a
regression equation predcting to ralue added , wb~reas nancial
participarion n the frrrn by employees reduced productivty .~3 Howver th
percentage of ownership by the cmployees was smaJl, as wer the financial
rwards they received , becau the customers were the pr :mary owners of
the eooratives. On balance, the net impact of the board representation and
ownl1p was smal1 but positive , around 1 per cent. In a subsequent
investigation of cooperatives in the United States, Joncs (1 79) documented
the long-tenn p.rosperity, success and surival of some cooperativS but
faulted them generaHy for underinvestment, and found that to b a common
cause of failure

The problem of low response rates and smal1 numbers was later
addressed by larger and more systematic studies comparing employeeowned companis with conventional ones. Higher response rates lent
credibility to the existence of a link bctween employee o\\<l1crship and
productivity.
Using official and comprehensive data, Estrin and Jons (1 992)
demonstrated that French worker cooperativs remained 11:a1thy over long
periods (50 years) Although survival attests to at least minimally
competitve productivity , the researchers faultd French eooperatives for
being iess productive than they might be and suffered ffoII1 Cixcessiv capitaI
acculml1atiel1 in me collectively owned assets of th nltn. Typica1ly founded
Rfl little capital, the coopetativcs struggled to acclunulatt: needed capital
but , later, as their capital accumulated and becam more than enough for
their pbVs needs, they found it difficult to sh om a building-andhoarding mentality to a growth-and-investment mindset that ould accelerate
diversification or retum on capital. Details of law and policy may have
33

Jones , 1987.
19

contributed to th hsitation

34

Another European study, of 631 Ttalian mauufacturing and

construction cooperatives found that profit-sharing and employee ownership
(sb.are of the company owned in individual accounts) had s nificant postve
productivity effects in both manufacturing and construction
, i

Rgression

studies usng Japanese govennent data with high

respons rates and surveys with moderate response rates (30 -40 per cent)
also und an association between prodltivity (measured as value added)
and employee ovvnership; Jones and Kato (1993a) found the productivity
effects of introducing an ESOP to be 6-7 per cent. In a su bs( :quent study, the
same authors , using smeys of companies traded on th Japanese stock
market in before and- after comparjsons of 324 ESOP finm! found that the
ntroduction of an ESOP had a favourable impact of 4 5 per eent increase in
productivity after a lag of 3-4 years. 36 This effect was estimated with data
from 1988 annual Survey of Stock Distribution conducted by the National
Association of Stock Exchanges (100 per cent of firms sted on eight
exchanges).

Starting with the United States General Accounting Office surv:yof

1985 ,37 a few surveys ~ith high response rates found that empJoyee
ownership by itself did not produce improvement in productivity , but
ownership combined with particpation did. J011es (1 993) found a smilar
assoCation in Polish cooperatives.
Similarly, a study in the United States by Logu and Yates (2001) ,
with responses from more than 60 per cent of a11 compani ~s n Ohio wi1:
employee stock ownershp plans, found strong and signifi::ant correlations
between a work-unitlshop f1 00r index of participation and manager-reported
asscssments of operational and finaneial performance , includng
productivity. The presence of non-management board members , whether
elected or appointed, was a1so significatly correlated wi.th management
reports of operational improvement (including productiv1:J ) and lProvd
profits relative to other firms in the same industri
Just how partidpation translates nto performance is somewhat
mysti fY ing, but some light has been shed on the :juestion. ~!jost sjmply put,
participation , combined with communication al1d training, {:aD addrss the
line of sight" problem for employee share ownership , show.ng workers how
their individual effo:s co]10ct to the botom line. Effectve partcipation
also creates a systematic process for developing , ~valuating and

3f FRh law requires an anl portionment rofits to in1

1
Jones and SV~~nar 1985.
Jones and Kato 1995
37 GAO , 1987.

:-'

-'"

20

implementing workers' ideas for better management ofthe :mterprise [t can

a180 help to overcome the disillusiomn11t that fo l1ows unn:alistically high
expectations that 0en accompany the introduction of employee
ownership .HI Logue and Yates found that participatio alon wth increased
business informatjon and the tranng to understal1d ad act on the
infonnation is strongly ld significantly) related to inerea:s in employee
interest in decison-makng, and nterest n deeision-making is in tum a good
predictor of econonc perfonnance. 39 Pendleton et a1. (1 ~I98) studying a
sample of 235 (of 650 surveyed) employee-owners om 11~)Ur British bus
companies , find a pattem of connection between a sense of ownershp and
feelings that company practices have changed. About one-third of
respondents attributed their improved work behaviour to !i; hare ownership.
Eve11 though a m 8ty of the bus company mployees d.:ld not [port a
strong sense of ownership and felt that nothing had chang ed, multivariate
analysis revealed that particlpation had a powerful impac l: 011 feclings of
o;vnership and improved attitudes towards work and toward~ 1:h e enterprse
Research on a Norwegian furniture enterprise revealed a connection
betwen ownership and attitudes even though th employees owned less than
10 per cent of the firm and were not able to vote with their sharcs. 40 Those
who liked ownership and wanted to be 0ers (as indicateI by an intention
to keep rather than sell their shares and a preference for shares over a cash
bOnll'i) hOO a stronger afctive commitment to the finn as it:licated by pridc
in the organization, caring about 1t, pleasure at working then:: md wi11ingness
to put in more work eort. Those who perceived the ownership plan to be
fair a180 showed stronger affective commitment Although the number of
l espondents was only 108 (of200 sampld from a oulation of about 1200)
thjs research, like Pendleton s, finds that for some employees, oW11ership is
intrnsically motvating.
But not eve study h a.o:; found that participation ::ombined with
employee ownership enhanc ed performance For exnple 2 study matching
enterprises fl om Sredi 8h government data, found tha:1 among finns
officalJ y c1assified as employee-ow1ed (more than 50 er eent of value or
stock owned by at least 50 per cent of the employees) , there was 1ittle
variation in the data, and 1ittle evidence that the percntage of employees
who were o~ners (a measure of participation) was related to total factor
productivity.'H Subseuent matched cas studies42 in the United States
compared particpation and ownership 1n mployee-owl'3d firms with
c011ventionally owned comparable companies. For mployment and sales

=~ Paul, Niehoff and Tley 2000.

XLogue and Yats 200f , p

Kuvass , 2003.

l-48;

Yates 2000

Lee 1989, pp. 88 and 103.

<f'<

Winther, 1995; Keogh and Kardas 1994/5; Kardas , Keogh and S::harf, 1998.
21

growth, they found either no difference between employee- o'VIled firms and
conventional finns (Winthr 1995) or a diffirence in fa10Uf of employee
ownership (Keogh and Kardas ] 994/5)

Public company stock markct performance studies h:l.ve mined frecly

availabl nformation 0 American public companies (and Dun and
Bradstret information on private companies) to determLne the impact of
employee ownership.43 While stock market perfonnance is 110 sure indicator
of productivi and thus of less interest for this research, p c'r productivity
can undermine stock values. Many of these studics cOmpar matched
samples of ESOPs and non-ESOPs. However, information arailable in the
pub1ic doman does not in c1ude the extent of employee participaton and
involvement in management, 80 it i8 hard to tcl) ifthe improved performanc
is concentrated in the most participative ESOPs, as the GAO and other
studies suggest. 44 Some researchers using public compauies have found
sharp improvements in a varity of masures of perfommnce, inc1uding
growth in mployment and 8a1es. 45 But othr public CI:;
undertaken by th08 looking at stock market performance were less
favourabl. For example , Ducy, Iqbal and Akhigbc (1997) f01md a decline in
operatng capital after introduction of an ESOP. Howevr ~itock valuc and
other public data are far from perfect indicators of productiity particularly
when investors are looking for captal gains rather than il'! I;Ome potentiaL
And not a11 studies of partcipation, ownership and share value have found a
relationship. Blas and Kruse (1997) found no relati::msp bctween
participation , ownershp and share value in their study of 82 public
compams responding to a National Centcr for Employee Ow'nership survey
in 1996.

Conyon and Freeman (2001) combined British data from the 1998
Workplace Employment Rclations Survey (with a response rat betler than
80 per cent) with a ] 999 survey of firms listed on thl:: London Stock
Exchange (;vith a response rate of 20 per cent). They :ltlVcstigated the
question of bias by comparing the stock market performance of companies
that responded and companies that did not and found only a sli1t bias
among their respondents in favour of high-perfoing companies. In this
study share ownership and profit-sharing in the form of hare ownership
wer strongly associated wth va]ue added The data yielded an estimated
advantage for employee ;vnership of 12- 18 per cnt ab (l ve conventional
flnns.

Bli and r 1991; Iqbal and HamiQ

~

Some of these are reviewed in Blasi and Kru se 1991 , pp. 181 83. Where there
are nQt negative factors , such as using the ESOP as a takovr d,::fence, the impact
4 or ule ESOP OIl share pries seen1S to be neutral or positive
5Kmse data from vnceo.orgibrar/esopperf_talhes_files/slletOOl.htm

417/03

22

For al1 overvew of tbe stock market perfonnanC'i~ of employeeowned firms , the United States employee o"Wlership index Ultperformed the
glerall stock market during 1997 , but at last report was tending toward
convergence with broad market indicators. However, the index is no longer
being reported by its originator. In the United Kingdom, a COlparabJe index
shows employee- owned frrms continuing to outperform eonventional firms ,
although it, too , shows ear]y signs of eonverging with the maJ~ket generally.46

I he gradual accumulation of empric a1 studies 1r1 the developed

eeonomies has spawned meta-studes, whch summarze ( nd compile the
conc1usions of many studis even though they use somewhat different
samples, methods and measures. 47 The weight ofthese studi:~B (but not ever
single nding) suggests that employee-owned fl1lS whether cooperatives or
otber employee-ownership fonns , perfonn as wel1 or better than traditional
frrms whether perfonnance is measUled as productivity, value added, job
stability, longrity rages and bonuses pad or benefits '10 workers. 4S A
review of the literature in 1993 found that empircal work comparing
producer cooperatives or employee-owncd frrms finds positi: ve relationships
between profit-sharing and productivity, but studies that :match pairs of
coopcratives and cO l1ventiona1 firms have mixed results This survey of
emprical research did not support the theory that coop:::ratives wll be
undrinvested a conditon which can lead to poor producdvity Howevcr
the paucity of cooperatives in th United States s noted, an the authors calJ
for further investigaton of problems or obstacles, suggest l ng that perhaps
most workers do not like the risks associated with being an (<'ilmer 49

Doucouliagos (1 995) , taking a more quantitative approach,

exarnined 43 published studies from the United States, Europe and Japan. He
concluded that the weight of the studies suggests that co determination is
negatively associated with productivity, but profit-sl aring, worker
ownership and worker participaton are all positively associated wth
productivity. In 2000 , the most recent ofthe meta-studies ws summarized in
testimony before the US House of Representatives by KnlSe , who reports
meta-analysis suggesting a gain of 4-5 per cent when an ESOJP s adopted. 50

Overall, then, the weight of th evidence comS dO\I/ 11 on the side of

greater productvity for cooperatives and substantially employee-owned
companies , whether comparisons are made with conventional finns or

46h
ttp://
www.f
fwlaw.com/equ
1:Jrincenti
ve sl contentl
'library/ukeoif/
pri12002.pdf.
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on
es
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a
n
1
d Pu

1t

u
t.erman
aI
n 19
93;00

o
ucou

Studies reporting collateraJ bnfits include employment stability See Blasi 1992;
Estrin and Jones 1992; Kardas et a1. 1998; Pugh, Jahera and Oswald, 1999; BJair et
4 aL , 2000; ScharfaI1d 1ackin 2000
9 Bonin, Jones and Puttennan. 1993.
50 :1lse 2002.
8

23

among employee-o\\led finns with different levels oJ ownership or

cooperatives with different mixes of membership and emplo: s. At the ver
least, there is an exce l1 ent probability that any form of cooperative or
collectiv ownrship wiU do no harm , and thre is a good pl obability that it
will increase productivity within a few years.
Interestingly enough, productivity performance may 1not be central to
the decision to share ownership. Research on 17 companies in 6 European
Union countries (Finland, France , Gennany , l'ethrlands Spain, and the
United Kingdom) , firms did not mphasize productvity as a goal they hoped
to achieve by sharing ownership. Instead, they viewed emp l. oyee ownrship
chiefly as a commitment mechanism and an additi Ol" lal benefit for
employes. 51

few , if any , studies have taken into consideration

employee ownership plans which were dissolved52 or c rnployee-mled
companies which faild or terminatd their ESOP plallls. There is a
substantial need for longitudinal studies to examine the roots of sales,
dissolutions and business failures of employee-owned companies. It appears
that the only extant research is one small study of 27 Jl ub1icly owned
compams with more than 20 per cent ownership in 1983 5:1 It revealed that
employee-owned companies had a slightly better survivfll rate (over 12
years) than conventional firms.
owever

2.4

The empirical evdence for ownership and pr l: ductivity in

Central and Eastern Europe

Even befor privatization of the state socialist econ: nnies in Cntral

and Eastem Europe , participation and seJfnanagement thel'~; were found to
be associated with productivity. Jones (1 993) , examini.ng 183 Polish
cooperatives in 1976-78 , found that increased worker participation in control
and shared economic returns provided positive effects ::m productivity,
particularly in clothing cooperatives , with less apparent effects in
construction and least of a11 in printing cooperatives. Estrin , Jones and Jan
Svnar (1987) found th state-mandated participation h! no effect (or
sometimes a positive effect) on productivity, but that finan ::i al participation
- esecially profit-sharing and mployee ownership - had a consistently

:1 poutsma, 2002 @ 23)

2 There is a higl ten~nation rate for ESOPs in the United S1;Ites. In 1990 , the
General Accounting Office found tl1at 30 per cent of ESOPs studied in 1985 had
terminated thejr plalls, a substantially higher" trmination rate 1han other pension
pIans ({3AO I991f P 2). ESOP tent1ination rates, however, ref1liN3t thEir character
as penslon plans, rather tha11 stmctures for employee ownership.
53 Blair, Kruse and Blasi , 2000.
24

posltlve lmpact.
Since privatization, some small-sample empirical stu.dies from newly
privatized empJoyee- owned fis in the former centrally pl mned states of
Central and Eastem Europe have found that the impa';::I: of employee
ownership , along with participation in firm manageml , has general1 y
resulted in improved finn productivity and profitabilily , despite the
uncertainties of economic transition in these economies. 54

For example , a sample of 20 of 1,200 companies r:' rivatized to the

employees by liquidation" in Poland (studid in ] 994-95) fl und that almost
a11 finns reported better profits , and a11 paid dividends that h:::lped employees
repay loans they had taken out to buy shares. However, afte Jr an initial wage
increase, the 1lUS had resisted further increases Most tended to derillvest
compared with other firms in their sector. While this might we]] lead to
lower productivity, a11 except three unprofitable firmB reported an
improvement in productiv1ty measured as value of output p:::r employee and
generally outpaced productivity growth in their sector. 55

There are some indications that foreign investors in the privatizing

economies may view employe ownership and participation as a stabilizing
and assuring factor ,56 but there is so concem that shares are concentrating
in the hands of management and outside investors Taken 8i; a whole , these
studies make it clear that economic , political and soclal contxt are
fulldamentally important, and that mploye ownership and participation are
only two of a very large number of factors that impinge on productivity. The
right combination of intemal and extemal factors 1S required. for success , but
this is a question that is generally ignored in the extant rese ch. What little
is known points up the need for further inquiry. For example , one might
think that tradability of shares would b preferred and beneficial to both
employee and outside shareholders , but researchers report at it can have
the negativ effect of reducing work effort and prodlJl{~tivity because
employees fear shar sales will result in loss of their j obs. 57 (External
conditions are also linked to the failure of employee OWll er ship tmsts in
.Tapan after World War JJ , whcn employees were able to purchase 3 1. 4 per
cent of shares in designated companies. 58 )

The conditions under which employee ownership developed in each

country have played a larg role in their productivity and success. For
example , in Russia , where privatization created th largest ~:rnployee-owned
sector in the world, most employees have enjoyed fev benefits from
~~ Uvalic and Vaughan-Whitehead, 1997 ( 28-29)
Hashi, 1998 (pp.72-78).
56 Uvalic and Vaughan-Whitehead ,1997, (p. 33).
57 Earle and Estrin , 1996.
58 .Tones and Kato 1993b.
J-'

25

ownrshp.

Economic collapse greatly reduced the value of hru'es and after

a briffrenr of selling which is belevd to have concentral);d shares under
management control, Russian insider owners (both employees and
management) hav been slow to sell their shares to outsid ,: ['8 , leaving their
firms starved for capital. Capital shortage is not only a problem in the
Russian F ederation. The debt load of Hungarian firms that bOITowed to buy
thcir companies has left them unab1e to 1verage needed fhnds for capita1
improvement. 59 Scholars and practitioners disagree ovr th:: Russian policy
of giving extra shares to management: did managrs have a greater incentive
to improve their fimls , or, with easily manipulated workers owning a
m ority of the shares , was it easer for managers to steal from the finns thao
if there were outsider ownership? It is impossible to l'E:termne if the
privatization program is enhancing productivi because of the general
Russian economic situation, cu1 tura1 attitudes toward profit, and other
factors. 60

in Yugoslavia and Poland, where workcrs selfmanagement had been established under state soeialism, the transition to
employee ownership was accompanied by legislative iniatives to limit
workers' self-management rights. Here, th question arises , 'lVill fewer rights
and oppounites to participate decrease workers' effort~; and enterprise
productivi?61 In the context of the political col1 apse of Yugoslavia, the
question is unanswerabl.
Intrestingly

In general , Central and East European studis tend to support arlier

research fmdings that employe-owned companies are reluctant to reduc the
workforce even when lay-offs might contribute to produc1ivity but they
a180 demonstrate that they will proceed with workforce I ductions rather
than al10w the finn to collapse. These studies a180 indicale that when the
economy recovers , the employee-owned business is qU1ck to restore work
and wages to men_:tbers, encouragng more work effort and a speedier retum
to full efficiency. 0
Z 5

Worker ownership in devel )piog couotries

In de reloping countries, the context for workr O\vl1l~rshp is always

difficu1t and sometimes daunting, lacking in one 01' more 01. Tainmi s basic
requirements (2001). Th ere must be a basic leve1 of order and security before
'1lud
s--0
.-
any privat business can survive, the State must take a h.'m
toward e11

1te
rprise management and cooperatives must have legal standing
and be easi1y incorporated and rgistered

59
n Brown
Galgcandi Earle, 1999.
Uvalic a Vaughan-Wh tehead, 1997 (p. 36)
9

Ibid. (pp 39 41)

<

26

Israel is an excel1 ent example of a (once) underdeveloped cnuntry that used

workr cooperatives for development Although Israeli 80cialists wer
troubled by workrs becoming owners and joining the cap: .l:alst class, they
put asde their qualms because of the necessity to quickJ y crate both an
agricultural and industrial sector and absorb many immigrants. And so the
workers' cooperative sector was created by a political deci:;:on. At its peak
in 1955 , the .vorker cooperative sectOI alone accounted for 2 per cent of th
labour force. 63 Th e labour economy of kibbutzim, m08havim, worker
cooperatives and labour-ow ned enterprises amounted to about one qU a11er of
the entire Israeli economy in the post-war era through the early 1970s. 64
However, it is difficult to evaluate the productivity of con ~ctirely owned
enterprises in Israel because of the role of outside ph1anropy and state
financing in creating them. It is clear that they provided jOb~i and established
production in a weak and underdeveloped economy that needed every kind
of service and goods and that many of them ran at a profit, which retumed to
the Histadrut treasury.

As in Israel , cooperatjves in the developing w l) rld hav been

pnm:rily parastataL As govemment support has dwindled , their economic
viabi1ity has been clarifi usual1 y to thr detriment. Many have failed
outr ight Some have serously reorganized. A few have succ;~eded. Evidence
to explain the differ ences is generally lacking. One can guess that the
economic, social and politcal context played a large ro: : and one can
sunnse that every coun is djfferent. This area clearly requires more
systematic research We now k:now that some cooperatives bave worked. For
example , Abell and Mahoncy s (1982) comparison of worker cooperatives in
lnda and Pru show that although retums to capital wer slight at best;
cooperative members N'cre willing to save and invest in their enterprise ,
perhaps because of thc difficulty of fmding work of any kind. In Latin
Amrica at least two of seven cooperatives formed to create employment
and investment with Inter American Foundation grants in 1he 1960865 are
listcd on the Intemet, suggesting that even Very poor pepJe can operate
enterprises productively over considerable perods oftime.

In Chna, workcr ;vnershp has been quite significant in

privatizatio most1y in the transfonnaton of small state-fUI l enterprises and
agricultural collectives into township and village enterprises (TVEs). The
privatization of larger enterprises presents a less encouraging pcture. As
early as 1984 , China transformcd the Beijing Tianqiao Depamn Store,
Ltd , into a share company and sold shares to the emplo) t:es. 66 This was
Russel1, 1995 (p. 45).
1976 (p.157-160)
,-' Described in fasserstrom 1985.
66 Situ 2001; 2002.
63

"~Daniel

27

followed by the creation of a stock market and the sale of some shares to
ernployees. By 1999, mployees held 1.87 per cent of Shru: li~S in companies
listed on the stock rnarket, but share 8ales of state-run I:~nterprises were
suspended because of rarnpant speculation, profiteering and other problems
with thc newly issued shares , includillg perhaps fears of mm:sive discontent
in the labour forcc. Many state-owned enterprises mn at a. los8 , and share
privatization might result in substantiaI lay-offs or closures.
However, privatization continued on the provincial :md local leve l.
More than 30 provincial and municpal gOVCI nments establ .8hed guidelines
for creating employee ownership, and over 3 mil1 on TVES were created as
shareholding cooperatives by 1995 Early limits Oll th:: percentage of
employce share ownership in small and mediurn enterpll':.sS Vere later
1ibera1ized. And local authorities acted to create employe :~hare ownership
arnong rnost of the foreign trade comp ru:lies. Howevm, the Chinese
conception of share ownership appears to extend only to the right to use
certain matcrials and facilities , and not to the stronger ownership fights
farnliar in the West. 67 In spite ofths , the aggregate plcture vv- as a large gain
in productivity , led by the TVEs and sbare-privatizd small and medum
enterprises For larger firms , Qi , Wu and Zhang (2000) f01 U1 d that among
fi1l11 S lstd on the Shanghai Stock Exchange from 1991 to 1996~ return on
equity varied nversely with the proportion of stat-owned :;]mres. Here is a
second area where research is needed: fonnal and broad-bsed measm es of
productivity for individual enterprises 1n China are lacking.

In Africa, despite a long tradition of solidarity, casc studies suggest

that AfilCan worker cooperatives (most were parastatal) are having trouble
surviving the transition to market competition. 68 Ther can be no doubt that
much of thc chal1cng for cooperatives in Africa lies i st:tblishng a basic
political and economic context.
Schwunann (1997) re
:po
Irt
s ml
xe

d resu
lts
amon
:

cooperatives in Alca The Union of Green Belt ooperatives in

Mozambique survives with hlp frorn NGOs and the Uni. :ed Nations 1n
Ethopia, after govemment aid was cut off, the number of handicraft
cooperatves rose fl om 719 to 759 and membership grew from 46,000 to
60,858. 1n Tanzania, drastc cuts in governmental aid to the cooprativc
sector caused many small industrial cooperatives to become dormant or be
transfonncd into traditional ownership , but other cooperatives formd to
replace thern. Schwettmann is convinced that such COO] Ileratves cannot
floursh wthout support across a broad range of techni(:;~l and financial
services ... because their membrs lack captal and mlager ial skills" (1997 ,
p. 38). Nonetheless, reductions in state spending have not always meant th

67Ibid. , 2001.
68 CoutuJ:e et al., 002 (p. 4).

disappearace of a11 scrvices to cooperativcs. In CaJ::ncroo former

employees of the parastatal cooperative development age r; .(y have formed
th Association des Audite et Fonnateurs des Cooperat ~:s (AAFCOOP)
to offer audting, training and consulting to cooperatives. Further evidence
that cooperatives can be as productive as conventional businesss s in the
record of takeovers Scbwettman reports that in Zimbabw many small and
medium-slzcd enterprises abandond by thir owners aftl:~r independnce
were taken over by the employees, and many have bcen succ.l~ssfu]

Howevr even in African countries that have favo Ul'able conditions

such as South Africa, successful privatization through workCl 0\Ailership has
been a hard sell (Naidoo , 2002). Privatizatlon has directed shares to workers ,
but the massive lay-offs that followd have outweighd any possible
productivity benefit~ arising from share ownership. lndustrial restmcturing
has also increascd unmployment. Laid-off employes are far too poor to
hold their shares if there is a market for them. As in Rusian and Eastern
European privatizations , freely transferable shares undernlned the goal of
broadening ownership ar destabilized companies~ at leasl for a transition
period.

Comparing China and South Afrca, there seem to h~~ some missing
elements for understanding the usefulness of cooperativcii, and mployee
ownership South Africa s GNP per capita in 1999 was US$ ::1 160, more than
three times China's US$ 780. 69 And 35 8 per cent of Soutb Alcans wre
living on ]ess than US$ 2 per day , as compared to 53.7 per t;ent ofChinese
Yet the out1ook for employee ownership seems brighter for China than for
South Afi'ica. 1s this because local and provincial govrnments in China have
1 ste

p-.
irnplemented a piecemea
more thorough transfonnation to a market economy?

.6

Theoretical issues

Quite a large body of work has been producecl by theoretical

economists who havc written on employe ownership and various aspects of
productivity and performance from a deductive perspectiv~:. This literature
goes back to the ear1y twentieth century, and much of it seen,s to be founded
on highly unrealstic assumptions about the motirations of ,)wners, workers
and manages. A good summary can be found in Jones and Svejnar (1 985).
Much of the early litcrature is critical of all fonns of employe ownership,
and sems to be argued at least as much on the basis of p(llities and socia1
beIiefs as on sound reasonng and dispassionate observation.
Early crtics complained that worker demoeracy would undermine the
efficiency of the firm , that ndividual inter.st in maximzn returns would

6'}

World Bank Developmnt Report 2000/2001 (pp. 276-77).

29

1esult in shirking (l etting others do the work while one co l1 ects the rewards
of one s equal share) , in paying above-market wage rate8 , ln resisting layoffs to protect workers incomes, in gradually eroding ownership by hiring
ordinary employees who would not become members or reive dividends ,
in the se1ling of successful enterpriss in order to extract eaptal gains, in
workers dislike of the risks of ha ng their wealth con ::entrated in the
ownership of a single enterpris in depriving worker-owned entrprises of
growth and retoo 1ing capital, and in taking loans from outBiders or selling
shares that would undermiLC the advantages of 0lersbip. Theoretical
crticism along the same lines continues to come frm modem-day
economists such as Simon (1983) , Jensen d Meckling (l999) and also
Alchian and Demsetz (1972). Hansmann (1990) additiona l1y argues that
democratic govemance 18 doomed to fail 1n an entrprise of employees
unequal in ski11s, status and compnsation

However, theoretical support for employee ownership has also

devloped beginnng with Vanek (1975) , who posited both favourable alld
li
un vourable consequences
flnr the productiv
ity of mploye:
Va

ne

k (1987) worked out an xtensivl economc model for a workermanaged economy Stcnherr (1 977) po111tcd out
tha
t r
lEf
ad
JUstments of economic assumptions are needed to find t]hat productivity
can be improved with participation and profit-sharing such :;; might occur 1n
a labourmanagd firm. Fo l1 owing Vanek and Steinherr, Bowles and Gintis
(1 993) offered theoretical economic analysis suggesting thst with improved
and slightly more realistic assumptions , employee-owned an:J. managed firms
can theoretically bc more productive than outsidcr-ownl~d firms. Wi1
additional assumption8 about the market economy, theoretical workerOWl1ers are likely to work harder~ tolerate less shirking , ancl reduce costs of
monitoring. However, theori8ts a180 predict that employee-I) wned firms are
likely to be more risk-av:rse to pay hgher wages, to spend more t me in
govemance, and to have less ability to raise capital Scholars staking out a
theoretical halfway line seem to have gained ground in recent years, as the
demonstrated reality of successful employee-owned comp;1ies has belied
the theoretical pr edictions Pa Kiehoff and Tumley (20) dvelop a
theoretcal prspectiv that emphaszes the possibilities an d risks of rising
expectaon8 created by employee nvolvement and the need for education of
employees and managers, frequent communcatlon, and pmmpt response to
dissatisfaction when it appears.

2.7

Discussion

While it is mHdly surpsing to fmd that the empirical ta

contradicts the predictions and expectatiollS of severd] generatlons of
70

Vanek, 1975; see also Ward, 1958.

30

economists (whom Sen (1 977) once called rational fools") , th evidence

that employee-owned firms can and do equal or outperfonn conventonal
frrms is not the end ofthe story.

7.1

Decent work

The purpose of an employee-owned firm or cooper.ative is always

more than just making money for its owners SOle of the purposes ar
easi1y sen and eas i1 y quantified: more secure work, a gratr role in
management and govemance , better bentlts a secure retirement, jobs for
family mcmbers Coopratives can also provide social servi.ces that are not
supplied by the private market at ptices mernbers can aff)ld: health care,
chld care , IneI services, insurance polces. For exarnple , the great
cooperative corporaton of Mondragon grew out of tl1 e smple motiv of
creating local employment for newly graduated students and others ill their
profoundly depressed home region. 71
Other bellefits for the individual are easily seen, but not eas i1y
quantied: more dignity alld resct at the workplace , prid,; of ownership,
the satsfaction of meeting the ntellectual and practicall challe11ges of
mnnm the fmn. Emp
loye

e. . 0
soci
ety by levellin

1
g the
d istr1?
il
buton of income , both by paying a living wage
and by sharing th wealth g'nerated by profits nong t':ll.any mployee
owners. Ownership anchors finns and jobs in communties , ereating a more
stable econornic environment.

7.2

Coll.teral bents for

the community

Ownershp may 3180 create a diffuse beneficial .1ll l1pact on the

community at large Comparing three northern ltalian town3 with different
levels of employment in cooperives Erdal (1 999) found that on 16 of 17
rneasmcs of community we l1 -being, there i8 a posive, narly always
monotonic , relationship betwecn employment in cooperativ;:8 and desirable
social outcomes, inc1uding ch i1dren s educational achievemel I.1:S.

Beyond the simple issue of whether employee-owm: d companies of

any kind can compete alongside conventional firrns , there ar subsequent
questions. For example, what difference does the percentage of employe
ownership make? Is majority (or 100 pr ce11t) elpl(l ~ree ownership
necessary to achie productivity irnprovements? Most studies in the United
States and where
anecdotal
companies
a majorty
evidnceof from
stock the
is owned
Unitd byKingdo
employees

are more

progress}vely managed iI1 ev@lY SEnse ofthe word -moR pa1'11

l
work unm1nt and tm1hIa boardroom, morc communication of bllsir lgss infbITnation
72
arJd more training on using iforrnation.
Blasi , Kmse and B(~rnsten (2000)
:~ Whyte and Whyte 1988 , (p. 32-33)

for example, Logue and Yates, 200l (p. 153).

31

found that as little as 17 .5 per cent ownership was suffic: It to genrate a

8ma11 ownership effect" on company survival. Data from Bulgaria ,
however , indicates that enterprises majority owned by employecs did worse
than other firms ?3 For new cooperativ@S1 as for ew bm:iness generally ,
acc5S to capital s often difficult. These findings raise sevf:ral questions: Is
there an optimal rang of employee ownership percentage tlhat would al10w
tr infusions of equity capital by outside nvestors without sacrificing the
productivity and performance advantages of ownership? What about
minority employee ovvnership ~ombind with participati( n? What about
non-votng shares for outside investors? Are there thresholds below whkh
employee ownership has no mpact - or eve an advers impact? At what
percentag o f ownership docs the ownership effect" begin to operate?

2. 7.3

Unions zd employee ownership

There are a1so many questions about the role of or anized labour in
elployce ownership. The data are slim , but they generally indicate that
unions can make or break" employee ownership.74 Unionzed companies
(for example. Dimco-Gray in Centcrville , Ohio) have been successful
employee-owned unionized companies with few labour d Jficulties Other
mployem~rned firms secm nver to have progressed :1 luther than the
adversarial model , and report no change in th number of grievanccs Of42
unonized firms in Logue and Yates (2001) Ohio study l 22 excludd the
union from employee ownership Among the 22 , the reaSOtlS for excludl1 g
the union varied: at one extreme , anecdotal evidenc c: suggests that
management schemed to keep the union out ofthe ESOP. A1 the other end of
the spectrum, the ul1ions themselves refused to join becaus they mstmsted
management or simply preferred thc sccurity of a traditio tJ al pension plan.
Some companics kept traditional plans and brought the unionized employeS
l1to the ESOP by treating ownership as an addtional bem: Et rather than a
substitute pension plan. One would reasonably expect .Iabour latons to
jmprove after employec ownrship and indeed more than 70 per cent of
unionized finns wher the employees owned a majority of the business
rported fewer grievances aftr the ESOP was established: but where the
employees owned only ~_mjnority share , just 10 per cent of fns rep01ted
having fcwcr grimrances.75

On their side , some unions have been slow to embrac employee

ownership , oft: en viewing it as a thrat to the organization and its leadership ,
or spurning it for fear of eroding class solidarity by converting workers into
capitalists. Only in 2002 did the powerful Swedish labour unions
Rock and Klinedinst, 1997.
Oakeshott, 2000 p.430433); Wheatcro 2001; Logue and Yates , 2001 p
73

110~131)

75

Logue and Yates, 2001 (p. 126).

32

acknowledge that employee ownershp might have a ro: e in a rnodem

economy Many labour leaders in the Unitd 8tates still view employee
ownership as a last resort or a transitional form for failing (;ompanies that
can be brought back to health and resold to the private marke t. There have
been a few well-publicized cases where a unionized firm with highly
adversariallabour relations has been bought by employees \I/:tth catastrophic
results. 76 But there is a180 evidence that unions can coexist well with
employe ownership. In general , the presence of a union not a negative
factor for firm performance. 77 At present, unionized workers are a smaller
share of the private-sector Amerjcan work force than are employee owners
When the interests of labour and management are aligned thmugh employee
ownership (this is not automatic) , and the organizational power of the union
works harmoniously with management , productivity and :111 indicators of
firm performance can improve rapdly.

The help a union can provid goes beyond the level Df the individual
firm. For example , the 8teelworkers Union in the United States creatda
supportive network, the Worker Ownership Institute , to edu te advise and
COllilect its employe-owner memhers. And th 8telworkers Union has heen
n the forefront of developing model provisions on employe i;: ownership that
can be negotiated into bargaining agreements.
2.8

Changing transnational poUcy

With the notable exception of th ILO , which ha;; supported the

development of cooperativs since its cooperative technir:~al service was
established in 1920,78 transnational governmntal organizations have
genral1 y been silent on employee and cooperativ own:l" ship. That has
begun to change , however, 1n Europe. The accumulation 011 evidence from
two major pan European studies on employee financial participation
undertaken in the 1990s for the European Commission (1 urnrnarized in
European Commission 2001) and the interest of the social partneI s spurred
the Commission to issue its C01mnunication on promotion of mployee
financial participation in July 2002. The Commission 8 Communication
analyzes the principles underpinning nationaI policies within the European
Union, sets up an expert group to issue reconunendations or how to addres8
transnational barriers to European-wide employe financiml participat1 on,
and calls for EU measU1es benchmarking best practics and natonal
conferences on the subject in member states (European Commission 2002).

;6 Blr Blas d Kruse 2000,

280)
gue ld Yat001 (p. 125-128)
The ILO adopted Fecommendation mo. 127) Conccming t|lS Co-operlves
meveloping Countr1gs) Recommendation iI1 1966 and th;i Promotion of
Cooperatives Recommendation (No. 193) in 2002

33

2003 , the European Economic and Social Committee ,

reprsenting the social partnr8 including labour unions and employers
org1l1izations endorsed expansion of employee financlal particpation
throughout the EU (European Economic and Social Committee 2003) It
endorsed employe share ownership as the l11est form f participation"
(section 4(5][1]) and highlightcd the contribution that financal
partcpation schemcs , particular1 y in the fonu of equity participation, can
make to corporate governance" (section 4[6]) Employee share owners
'represent a type of investor concemed wth the long-tenn prfonnance of
the blness compared with the pervasiv short-tennsm which is
characteristic of market investors/' who can make a signifimt contribution
to monitoring company management," and who can strel1 ;then corporate
govmance (section 4[6J[1-4]). lC Economic and Sodal Committee
concluded that employee financial participation is entrely consistent with
the European Union s established objectives of social eohesion and
economic deve10pment, and therefore advocates stppin:! up cffbrts to
promote this instrument" (section 7[2]).

In

Fbrua

34

3..Agricultural producer and smalll

business cooperatives and productiv: IJ:y
"lt seldom hppens . thI grt pl'Opl ietor i51 {l great
improver.. [ln times ofdi510rder hJhd no leisure to ttend
to the cultiv tion and improvement qf [nd. When the
est blishment qf law d order qfforded him lei ?re he
Jfte W nted the inclinton. d almost al14ys the 1isite
abilities .... There still remin in both pf'tS of the United
Kingdom sme great est tes which hve continued without
interrption in the hnds (~f the sm fly since i!~ times
offeudZ narchy. Cornpare the pr'sent condition qf those
estates with the possessions of the small proprietors l n their
neighbourhood, nd yo w i/l require no other ar Iment to
convince yo how unfavorb/. such exte.sve prop<:rly is to
improve1ent. "

Adam Smith (1776) , An Inquiry Into the Nature and Causcs Of tl:l'~ Wealth
ofNations
Since the days of Adam Smith, thcr. has been a strorl arlment that
smal1 farms were 1110re productive per unit of land than larger scal more
extensive agriculturc whether the latter is farmed with slaserfs hired
labour, or sharecroppers. The family farm has constantly ~)een juxtaposed
against other forms of land tenure as both a superior way of life and superior
fonn of production
Yet whatever the productivity and moral virtues of small-scal
family-owned farms , such units have lacked the clout to get t1heir pr oduction
to market in a way that created prosperity for their owners. I:~8tead the fruits
of the farmers labour too often were harvested by intnnediaries the grain
companies , the ralroads, the food processors and marketers. And by those
who supplied th inputs and the financing the fertilizer companies, the seed
companies, and above all , the banks Family fanners simply lacked the scale
to have much inf] uence in a market dominated by large companes.

For more than a hundred years , family farmers have turned to

cooperatves to achieve economies of scale in buying mpplies and in
processing and marketing their products. In recent years! small business
owners have a]so turnd to cooperative purchasing and branding. The
millions of farmers and small business owners who hav:: organized and
joined cooperatives attest to le appeal of this vision.
What impact does achieving cooperative economf:s of scale tor
small producers have on their productivity? And what mpact does it have 011
ther prosperity and 011 employment?
35

Ther e are tVIIO levels at which there may be :m impact on

productivity, prosperity and employmen t:

at the level ofthe cooperative , and

at the

lev1

of the producl fanner or smal1 business

The remainder of th18 section explores th evidellce nn (1) how the

cooperative businesses compare wth convntional capitalst firms ll tenns
of productivity and (2) how their member farmers and enterpses compare
in tnns of productvity with farmers and small businesses of comparahle
size which are not members of the cooprative.

3.1

What 81'e agricnltural and small bnsiness coo):leratives?

Cooperatives are membership organizations which dc business on a

for use" rather than a for profit" basis. Mmbers gcner.al1 y select the
leadership of the cooperative on a one-member, one-vote b , sis , not on the
basis of their capital investment. Smilarly, the profits (genc .rally called net
margin" or surplus" in cooperativcs) are allocated amogj mbers on the
basis of the use of cooperative services as patronage" dividends (for
xample their volume of purchase of farm supples or bUlshels of grain
marketd lIough the cooperative) , rather than on tbe basis f thcir invested
capitaL Net margns (surplus) are divided bctween unallocated equity (which
belongs to the members of the cooperative as a whole , but is l10t allocatd
ong indiidual member) allocated equity n individual Lpital accounts ,
and allocated patronage dividends that are paid in cd,sh. When the
cooperative experences a 10ss, it is first suhtracted from thc unallocated
equity, if any , and, if this is illsufficient to cover the l08s , 1 rorated among
ndividual members' capital accounts. Jn 8hOl1 , the user OWH8, controls , and
beIIEfits fk91n tfI@ coopcrative-79
The origins of the modern cooperative movement are genral1y
traced to the organization of the Rochdale Poneers in 1844 , and the
Rochdale princples remain current in their updated foml.o It should be
79 Dunn, 1988.
80 The rcent restatement of the Cooperative Principles by the Intcrational Cooperativ Alliance is incorporated 1Jl the ILO definition of cooperatives in
Reconnnendation No. 193 on the Promotion ofCooperatives (20 )2) - both
describe a cooperative as an autonomous association of persons Ilnted voluntarily
to meet their connnon economic , social and cultural needs and aspirations through
a jointly owned and democratically control1ed enterprise " COOP{atives are
volunta open-membership organizations , autono01OUS and con l:rolld
democratically by members, who beeftt economically from their transactions as
members. Cooperatives emphasize training for thir members an employees,
concem for the community, and cooperation among cooperatives. For an
authoritative discussion ofthe cooperative principles, see MacPhe:rson, 1995

36

noted that cooperatives are multipurpose organizations that have noneconomic goals , such as training and education for member i.. collaboration
among cooperativs and attention to the broader community alongside thcir
economic goals.

Ai_cultural

producer and small business cooperatives produce

economies of scale in at least sx different areas:

purchasing or supply cooperives (for small retaU or wholesale

businesses, as well as farmers) pools members bU~1 ing power and
lowers the costs of their inputs;

shared serrice cooperatives for agt iculture or 8mall business

cooperatives provide thcr members with specific services such as
mechanized planting, ti l1ing and harvesting (e.g. , V:I.l:deniss disict
cooprative in Armnia); land preparation for rice farmers ,
veterinary and breedng srvices soil testing alld production
consulting, and irrigation and drainage consulting (e . Xiangcheng
Supply and Mar keting Cooperative in China); and a communications
network for product availability (e.g. , Ghana Cooperative
Pharmaceuticals);8l

marketing coopratives pool membrs production and seekng

larger contracts to icrease the price paid to cooper:lt ve membrs
while increasing access to markets;

processing cooperatves pool members' production for processing

such as cooperative dairies and mat packers
and capturing
additioual va1ue added for producr members tl rough rertical
integration 82
cr.dit cooperatives reduce the cost of financing; and

branding activities for retail cooperatives, such as 0::an Spray, Sun

Maid, Florida s Natural, Sunkist, Land 0 Lakes , Welch s, and Ace
Hardware in the United States, or Danish Crown, Dairygold, HK
Ruokatalo MD Foods, and OPTIC in Europe, or Bf.Jngladesh s Vita
Milk, increase consumer attention to the brand and allow small
farmers and retalers to compete with national and international

J Counlre et al , 2002 (PP 8-49)

The so-ca Jed newgneration cooperatves" in American agricuhure essential1y

to capture added value for their farmer members in additioflal areas io which
cooperatves had not been active, such as Growers Pasta" in Nmth Dakota, or in
cooperative ethanol plants This is fundament a11y dentical to the !trategy that
dairy farmers in the United States and pig producers in Denmark Ilave used for
more than a century in capturing added value dowllstream from tb fann in
process.i.ng ther products.
striv

37

marketers

3.1.2

Cooperatves 'lso serve other functions

In addition to providing economic benefits to their members through

economies of scale (which may include enhancing productivity)~
cooperatives provide other benefits including broadening c'Nnership (with
the economic , social , and political benefits that may result from a more
equitable distributon of resourees) , an emphasis on responsiveness to
members , and schooling for membrs in democratic practics and
ga

ni
za
tions the
y offer
an 1):>pportunity for
procedures As membershipor
bootstrap
develo

pm1
l
housmg and credit as well as primary economic activities.
In developing countr ics , one of the go a1 s of many cooperatives is
creating emp loymnt for the unemploy undremployed.md maintaining
gainful employment for farmers and small business owners who might
othrwise be forced into the ranks of the unemployed. The lLO 1996
Recommendation o. 127) Conceming The Co.Countries) rcognized the em
pJloyme
nt creation goa
1. Jn .976 , the 1LO
83
World Employment Conference cal1 ed for the general ievelopment of rura1
cooperatives; its 1986 Intemational Labour Conference P::.:per on Youth 84
recommended th exploration of coopcratives as a means to employ young
people; and the 1990 report on promotion of slf-emp!loymnt to the
Intemational Labour Conferellce emphaszed the utility :)f both worker
cooperativcs and shared service cooperatives for artisans in employment 85
The 1993 ILO cooperatve xperts meeting recognizd the l nportance of all
fonns of cooperativcs in creating employmet and raising income in the
ruraJ and informal sectors of the economy in the developin world. It was
suggested that cooperatives can b an effectve mechanis:1[1 to ameliorate
some of the negative employment cffects of structural adjuslment policies. 81i
Subsequently the ILO made cooperatlve development a notable element n
its Decent \Vork agnda and a response to globalization. 87

In 2002 , the JLO retumed to the issue of cooperat

1'"t'
context that included developed as well as devloping countis. lt adopted a
new intemational labour standard, Recommendation No. 193 on the
Promotion of CooperativS. Its man thrusts ar recognition of the global
importance of cooperativ es n economic and social developmnt (there are

83

Economic gro'll!th income and employmnt: An analysis prepare {or the Wor ld

8 Empnent COf{erene Gen~:va

June 4~] 7 ]976.

IYQI4tfh - Repwt V, 72 Intemational Labour Conference , Geneva, 1986.
Ienthal 1994 (p. 132-35)
i ILg , l993- This reP?rt also stressed tlm rols ofcooperatives in pmmoting glenlher
Fparticipation, educat1OR and trainiIl and in diffusing innovations in 111ral areas.
{Schwettrnann , 2002.
nd

38

akeady 800 mi I1ion individual cooperative memben worldwide) ,

reaffirmation of the cooperative identity basd on values and principles ,
equal treatment for coopeatves vis--vis other types of enterprise ,
definition of the govemments role in creating a supportive policy and legal
framework , and in facilitating access to support services and "1.Ulllce without
interference , an active promotional role for employers , workers' and
cooperative organizations: and encouragement of intemationa.1[ cooperation. 88
For many of the world s people, cooperatives are th only hope of
amassing suicient capital to create 8ma11 businesses and decent shelter, as
the private sector takes little interest in people who have no rnoney In these
cases , it may 110t even matter whether cooperatives are ineffil:: ient and or fa i1
to rais productivity noticeably. Th ey are simply better than nothing, whch
is the real alternative.
3.2

Theory of coopel'atives and

productity

There has long been discusson among economists about the

efficency of cooperatives relative to their prvate competitors as an
organizational form. The two poles in this debate agree lat the various
col1 ateral bnefits of cooperatives should be disregarded, and they should be
treated as purely economC units. Thus, on the one side, er 50 yars ago
Clark (1952) argued for separating the usual argument:) in favour of
cooperative actjon by farmers , such as increased efficiency in marketing,
increased income for low incorne farmcrs , and ant-monopoly action" - a11
advantagcs to the farmer mmber from an objectiv comparison of the
the probable allocation of
results of the two forlS of enterprises in
rsources in relation to economic welJare
Clark found that genrally
prvate firns wcre c]oser to the social optimum allocation of resources.
Proponents of this view compared coopratives with inves l: )r-owned firms
and generally con c1uded on theoretical grounds that cooperatives would
under-perform their investor-owned competitors.

On the othr side of the argument, others disputed the basic fbcus
For example, Phi1lips (1953) - who also argued for disregarding the social
and ethjcal collateral benefits of cooperatives - responded to Clark that,
len a group of individual firms fbrm a cooperative ~I:ssociation. they
agree mutually to st up a plant and operate it j ointly as an intcgral part of
each of their individual finns (or housholds in the case of a consumer
cooperative). The cooperative has no more economic life or purposes apa
fr om that of the participating economic units than one c f the individual
plan of a large mti-plant fi ffi1." Phillips goes on to argue that
cooperating finns individually seek to maximize their profits considerng
that part of their oprations in the jointly operated plant as well as thlr

88 Levn, 2002 (pp. 4-6)

39

individual operations outside of it."

Xlat

do empi cal studies show? This question is answered n the

following section.

3.3

Empirical studies of cooperatives and produc1 ilvity

Surprisingly - given their long history and substantal clissemination

- thre are relatively few emprical studies of the mpact of agricultural
purchasing (fann supply cooperatives) , procssing marketin1 branding , and
credit cooperatives on the productivity of their members 0 1" r e1 ative to those
who do not belong to a cooprative. Cooperative experts assume the cas as
glven fhe International Co-operative A l1 iance (2001a) puts it simply:
cooperatives are at least as efficient in their business operations and use of
capita1 as others in the marketplace."

The cooperative 18 created for the benefit of its membrs: to obtain

inputs for them at lower prices and to s11 ther outputs at higher prices than
they would otherwise be able to obtain. In particular, the cooperative is able
to pay its fanner-owners a higher pice by cutting out the profit (and prhaps
a local monopoly) of the middlemal1 purchaser. Nilsson (2n01) concludes
that the cooperative is able to pay a higher pricc to th farmr8 than woul d
any other organizatiollal type , or otherwise offer better trad conditions. So ,
it is no wonder that agricultural cooperatives have become dnmmant in most
raw product markets
The consequence is that cooperatives often achieve a ver high
degre of organization
For cxample , a Unlted States Depaltment of
Agriculture (USDA) study found that in 1986, 7 per cent of A.mercan dairy
fanners were affiliated with agricultural cooperatves as members or nonmember patrons , up from 83 per c1t in 1980 Ninety per cent of the
members marketed through the cooperative in 1986, and 80 per cent of
members purchased supplies through the cooperative. 89 Dairy fanners ar at
least equally cooperative elsewherc in the world. The Intcmational Cooperative Alljance reports that, in 1999, cooperatives accouuted for 97 per
cent of dairy productiol1 or milk collection il1 Denmark and Finland, 100 per
cent in Malta, 84 per cent in the N etherlands, 80 per cent in Portugal, 80 per
cent in Slovenia, 99 per cent in S~eden and 90 per cent in Uruguay. Th ey
p]ay an imortant role in supporting family farming in numerous other
branches of agriculture including pigs (90 per cent in Denm Cl. rk, 100 per cent
1n Malta) , beef (69 pEr ceI1t in Finland, 8O per cnt in Slovt! tiia, 8O per cent
in Sweden, 93 per cent in ex-Yugoslavia) , cotton (77 per cent in Burkina
Faso) , edible oils (51 per cent in India), :fishries (90 per cent in Ma]ta).

89

Gray et al., 1990.

40

flowers (95 per cent in the Netherlands) , forestr (73 er cen in Canada, 38
per cent in Fin1 and, 70 per cent 1n Slovenia) , fruit and veptables (25 per
cent 111 Cyprus , up to 80 per cent of some uits in Crreece , 5 g per cent in the
Nether1 ands) , and wine production - 30 per cent in Cyprus 43 per cent in
Portuga1.90 This degree of organization encourages cooperatves to consider
providing more value-added processing, vCltically in legrating their
industries and capturing more value for producer membS.

The empirical litera11re on the re1ativ' fficiency of cooperatives

and comparable non-eooperatve firms i8 quite limited and the findings are
rather contr adictory.91 Some studies find that cooperatives outperfonn their
investor owned counterp1s Lennan and Parliament (199C. compared the
financial performance of cooperatives and non-cooperatives in the American
fruit and vegetable processing and daily industry between J976 and 1987.
They found that cooperatives perforrned as well or better than investorowned firms in profitability, leverage, and interest coverage

investgators find no differece. In a study puhlshed in 1994,

A. M. Hind (1 994) asessd the r elative performance of 31 agricultural
cooperatives and 82 non-cooperatves in the United KingdlU. Hind found
no significant different between the two groups in profitability, capital gains ,
liquidity, and operational efficiency indicators such as sales to working
capital ratios. (Cooperatives were found 10 turn their inventory more
frequently.) The
c onchon: in the United Kingdom , coopI ves and noncooperatives performed equal1 y we lI
Som

Others , such as the Amelican economist Phi1lip Portcr with his

valious collaborators~ have argued that cooperatives are inn .a tely inefficient
and found supporting emprical evidcnce in the American dairy industJ
FeITier and Porter (1 991) state succinctly that cooperativs are theoreticall y
an inherently inferior fonn of organization" because prob I.ems wth time
horizons , non- transferability of ownership 8OOes, and conl:r ol have led to
technical , allocativ and scale inefficiencies in cooperatives In a test using
1972 data for 84 milk-processing cooperatives and 84 proprietm milk
procssors Fe 1Tier and Portr found the cooperatives to be ll(~ss cfficient on
every measure of efficiency leadng them to conclude tlllat there is a
probability of 95 [that] thc mean level of non-co-operatv cost efficiency
exceeds that of the co-operatives." In an earlier article using the same data,
Porter and Scully (1987) concluded that the average cooperarive fluid-milkprocessng fiml is only 75.5 per cent as efficicnt as ts propr :l etary, for p' ofit
countrpart" which they attribute to the nherent weakness in the structurc
of property rights wthin cooper atives". Porter acknowledges the fact that

~ Intematonal Co-operative Al liance, 2001 b.

91

T'

for a survey of the empirical literature 011 farm coopratives se Krivokapic

Skoko, 2002
41

<

cooperatives were once use fu1 in keeping a monopoly buyeI from dictating
prices to farmers and that cooperatives stil1 fare wel1 in agricultural markets
in the United States,,92 but he and his collaborators ascrbe thb to taxpayers'
1argesse" in providing tax breaks, interest subsidies, and thf: gratis services
ofthe Depanment of Agriculture".93 Curiously, Portcr and bis collaborators
make no effort to detennine the tax status of non-corative milk
processors 80 as to ompare th total taxes paid by both type;;; of enterprises ,
nor do they discuss puhlic subsidies to proprietary lrms

3.3.1

Coopeltives: Mtching

or beting investor-owne firms?

Smple meaSl:es of profitability suggest that coopemtives match or

beat the IOFs. The most recent USDA survey of farm cooper,:u:ives financial
perfonnance in 1997 found that the net income of farm cooplives
responding (1929 of 3791 sureyed; the responding coperatives are
estimated to account for 80 per cent of total business volurI' le of Amrican
rm cooperatives) to be $ 1.9 bil1 ion (011 $103 bil1 ion ln sa}e of which 31
per cnt was paid in cash patronage refunds , 42 per cent was allocated to
individual capital accounts , 2 per cent went to dividends OII capital, 15 per
cent to unal1 0cated equity , and 10 per cent to ncome taxes. 94 Note the much
higher average payout rate to cooperatve members th2n characterizes
shareholder dividends from public agribusiness corporatioD;3 in th United
States. At the end of 1997, reporting cooperaves held jUSI! under US$ 15
bi1lion in member equity. Equity amounted to 41 per cent (l f assets. Retum
on assetsras 5.3 per cent; retum on members qmty was a I[~spectable 12.7
per cent. By contrast, ) f its 2001 financial year, the glol)a1 agribusiness
giant Archer Daniels Midland reported a retum on assets of 2.7 per cent a
US$ 383 millon retum on assets of US $14.3 bi1lion. 96 Ir. the same year,
another agribusiness gian t, ConAgra, rported a 4 9pr cent retum on assets ,
and 19.9 per t return on equity-97
O'.)

Regardless of their findings , al1 of thse studieB considr the

cooperative as an economic ul1it completely separate from its producer
members. They ignore the fact that the for use' principle in cooperatives
leads to higher prics paid to mmbers and to t11e distnbutions of net
margins" - profits" in propritary firms - as patronage bene "f ts to members.
These numbers arc not inc01equentiaL Just cOllsider the importance
of patronag@. In the IJSDA l997 farlI1 cooperative survey , tl1e cooperative

z; Feier .d Port 1991 , (p. 161)

Porter and Scu l1 y, 1987 (p. 51l)

Rathbone and WSSI 2000 (pp. 1; 7)
Tbid. (p p.15; 27)
Fortune Global 500 website
~

9(1:/lwwwrtune-COInffumingtgloba1500/snapshoutO l51 %?241:}100.}ml)

I Stan .d ard and Poor s Stock Report (http://www8.f.ml. com 7/1 1/ (3).

42

dairy sector provded a return on assets of 7.5 per cet a.n d retu11l on
members equity of 18 6 per cent. Of the dairy cooper
a--:1ve

r
es' tota1 ne
t
mc

ome 75 per cent was paid to cash (36 per cent) and nou-cash (39 per
cent) patronage. The remainder went to unallocatcd equity (l l~. per cent) and
income taxes (11 per cent). T otal member patronage dividends in dairy
cooperatives in 1997 amounted to 14.3 per c~~t of equity,98 certainly better
than the long-term rate of return on publicly traded equitie~; in the United
States.
Cooperatives ownrship fonn shapes their business :;tratgles The
study 83 cooperatives and 228 investor-orned fimLs from 1988 to
1992 conducted by Katz (1997) found that cooperatives maintain a focused
corporate stratgy to ensure the firm continues to serve the market linkage
needs of its owner-patrons. Ther business strategies have the hallmark of
risk averion: financial1 y conservativ relant on board :involvement in
manageral decisions , and hestant to use tcchnolor to positively affect
performance." Wh y? Because the cooperatives owners elIcounter risk in
thir primary business enterprses , and cannot easily or ql.:kly diversr
their investment in the cooprative by sel1ing their ownership interest in the
firrn , they are motivated to seek a risk averse set of strategH:s " 99 In short,
cooperatves business strategy reflects their ownrship structure
m or

3.4

Small business cooperatives

Far less informaton is available 011 thc smal1 bus :::[ii:: SS purchasing
and branding coopcrativs. This group of cooperntives seems to b growmg
rapidly. For instance, the National Cooperative Bank estimates tbat more
than 50 ,000 small businesses are members n about 250 cocrperatives in the
United States, and that the llumber of members and of C'DOPraV s has
doubled in the 1ast decade. lOO In other developed nations, the '~vdence is a180
beginning to accumulate in the fonn of growing numbem of small and
medium-sized business cooperatives n crafts , food retail, producton and
service , services , fishing and forestry , and professional rvlces Thse
inc1ude sma l1 business cooperatives for such varied groups s bakers (BekoBenelux , Ntherllds) bookstores and rcord shops (plein Cie] , Flce)
building maintenance services (Aichi Buildng Mainumance , Japan),
construction materials (I nkoop Contact, Nthrlands) , 1a yers (Sogiphar,
France), management consulting (Co-Aim, Neleands) opllcians (OPTIC ,
France), and retai1 grocers (Systeme U , France , and EDEK'\, Gennany). lO l
1 ach of these cases , the cooperative handles business actiity where there
are economies of scale for the members , such as purchasing, marketing and

Cculons based on Rathbon d Wissm (2000) , hl 1, 3, and 7

atz 1997 1)
Reynolds, 2003.
101 (')uture , 2002a (p .7-9).
43

trammg.
Oper ting

3.4.1

in the presnt environment

[n the developing worl lL small business cooperativf: (SBCs) must

emerge from a history where cooperatives and cooperative as!~ociations were
treated as parastatals - anns of th State For example, a~: Taimn notes ,
Govemments in the Asian eontinent have always been cLosely involved
with cooperatives, have had a policy for their developmnt and growth, and
hav had spcial arrangements to provide capita1 and credit 1:0 thm. A 110st
of unstated nationalistic and political considrations and compelling social
reasons have influenced tb governments to support cooperative" This
researcher also observes, Ahnost a11 apex cooperatives n the Asian region
have close , col1 aborative and inter-supportive relations with the govemment,
except prhaps in the Phi1ippines." I 02 The result of those clC1iW relationships
18 that cooperatives received resources from 1he State alld experienced
neither the pressures nor the opportunites of a tmc market. Jv l[any were never
properly audite lL gave jobs to friends and relatives of elcted officials , and
allo!ed business practce to be set by political outsidrs rather than by
economic conditions. Political interfernce was not always a resu1t of
corruption, but sometimes arose from well-intentioned effmi:; to nurture and
i mpor
ta: and too nave
protect the cooperatives , which wer considered too
to manage on their 0\\'n. 103 ln any event, requirements ld e~ pectations were
imposed on cooperatves that were not imposcd on ordinary fi l1llS.
Stmctural adjustment policies and the subsequent elnomic failurc
of many cooperatives have pressured governments to end support fOl
cooperatives and 1 them proceed through self-goveman::e , limiting the
involvem1t of the Stat to registraton and deregistration I) f cooperatives ,
technical support and traning for cooperatve personnel.
Oper ting

3 4 2

in the present clmte

This, then, is the climate for the emergence 01 SBCs in the

developing countries today Some are created by privatization and some
smply form around a 1ader to seize economic opportudties. Examples
include the Anjuman Textiles Handloom \Veavers Cooperative Society in
India, the Akamba Handicraft lndustry Cooperative Socie1:y in Mombasa,
Kenya and in Senegal , the Cooprative des Ouvrier; d Btimnt
(Construction Workers Cooperative). The Auman Tex l:iles Handloom
reavers Cooperativ Society, with 75 active weavers and 1.ve employees
(a secr6taw-honkkeeper, master dycr, apprantice , a quality l;:0ntrollgr and a
watchman) , purchases materials for the weaver-memb1's a.nd dstributes
their rugs and carpets, but there is not enough work for the weavers to
1

./

--
0

itt

ni n7

nY

J!

n UN

m E
mn

produce throughout th year Its 1999 earnings were US$ 27~g29. Services to
its members in c1 ude installing electricity , health care , education grants ,
financing for weddings , insta1ling wate pumps and other benefits. Mmbrs
in tum , have mad loans to the cooperative , to the extent that its debt
position
dangerously high and its profit margin s hair-hin - 0.008 per
cent of sales in 1999-2000. IC The Akarnba Handicraft IndustlY Cooprative
Society in Mombasa , Kenya , brings together artisans pmducing for the
tounst industry by offering workspace ll production sheds on a single
property. Mmbers agree to sel1 only through the cooperative . which has 100
employees servicillg 2 ,902 altlsans ln the past there have been problems
with auditing the cooperative S 1'1cords in c1uding lost cash sale books and
lack of proof of payment of tax returns. 105 ln Senegal , the Coprative des
Ouvrers de Btiment (Construction Workrs Cooperative) 01' COB brought
together 40 smal1 contractors who wished to bid and negate on larger
proJet8. The COB a180 leases too18 to members al1 d )ffrs training ,
information services , 1iteracy training , and a savngs umion. It also
esablishes small cooperatives to employ young people. It s ;overned by an
am1Ual genral meeting of all members , which elects the nine mernbers of
the Board of Managemet Committee. lembrs pay the cooperative 10 per
cent of their profits on COB-negotiated contracts , but do :not receive any
dividnds nor is accountng for the Cooperative s lnds completely
transparent Cooperative incom has hovered around US$ 11 ,750 , although
1997 and 1998 were exceptional1 y good years , when incom ;: rose to a high
of US$ 13 ,921. COB members face intense competition fr (l m larger ns
from new small and medium enterprises that have sprung p as a result of
structural adjustment policies , and from unskilld migrants from the
I06
countrsde. They have also suffered as a result of high in 1.erest rates and
tluctuating currency values.

3.4.3 F 'acing the p l'oblems of enterpres in develo

countries
j
These examples 1lustrate that small businss COOp(: :ratves seem to
be suggling with the problems that face every entrprise ilU a developing
country: severe and extreme economic fluctuations rootcd in the global
economy , a stalant local economy , inefficiences associated with
undercapitalization , a too-politicized process for awardin: governmental
contracts and rellating business, and a lack of affordahle, high~quality
professional services , particularly in management , accounting , and auditing.
Recurring themcs in Coutur s 2002 report emphasize neds for more
professonal management , regular and complete professional accounting and
auditing; tll active use ofbusiness planning; more energetc investigation of
additional business opportunities , including partnering with other
f Couture , 2002a (pp. 20 , 22)
lIJ.)

Ibid. , (pp. 26-28)

id. , (p p 35-39).

106 Ib

45

enterprises; and more training and education for cooperativc members and
management. Taken as a whole, the needs are most1 y for long-term and
lasting enhancemcnts in knowledge and actons. The long-ten:n commitment,
however, rnust come :from withn the cooperative and the country. Outsiders
can only facilitate the changes needed. Other cooperatives might provide
help. Three possible solutions wOld be partnring mentori or a network
that includes successful business cooperatves (l ike thc CEO club of
Canada s Crocus Investment Fund, which brngs togeth]' the CEOs of
investe companies for a quarterly meeting and exchange of infQtmation and
advice).
In her analyss , Couture (20021'>) sets forth cl ar and specific goals
and standards for successful SBCs: members should be successful bfore
joining the SBC, and committed to using its servces; it should 0fer only
th08 services which members actually need; the elected leadet must be
competnt committed,
good managers in every sense of the word
responsible leaders with business acumen. The cooperative should set up
c1ear expectations for management and both the cooperative ;md its members
sho u1 d follow the cooperative s rules , particularly n providin complete and
transparent accounting and auditing; the cooperatives should do strategc
planning, devllop the f1 exibility to met challenges, and take advantag of
opportunities that arise. The eooperative should p]an to m{:~:t ts financing
needs out of membe1's own resources and focus on expansion and
diversificaton of its income streams before turning to extemal funding
sources. Training and education fo1' mernbers , leadrshp managemnt and
staff are also a clear priority for cooperatives 107

There is a ver limited thcoretical literature on lllon-aricultural

cooperative enterprises. One 1979 article starts by bemoanirtg the fact that,
since Enke; s at1icle in thc American Economic Rcvicw in 1945 , the vast
majority of the literature conceming cooperatives has appared in
agricultural econornics joumals and h~_ focused almost exclusively upon
producer and marketing cooperatves". 08 In their treatmclltt of consumerowned firms (whch include the category of smal1 buslnes:! cooperatives),
Andersoll, Porter and Maurice conclude that consumer-owned , consumermanaged firms , organized to maximze the utility of each member, reach the
same long-run equilibrium position as the perfectly compO:::1:itiv firm~' (p
129). In a second theoretical piece the following year th fbcused on thg
production aspcts of consumr-owned and managed firms , 1:hy cOllcluded
that the theory of factor usage for the consumcr- owned, con:mmer managed
firm is rath similar in many areas to the theory of factor usage for le
competitive fin and industry" , Thcy note n closing tb this and our

~~~ Couture , 2002b (pp. 56 62)

"", Anderson , Porter and Mmice 1979 (p. 119).

46

previous paper probably cay le purely static theory of the consumerowned and managed rm about as far as is profitabl".109 1;1ither of thesc
pieces provides any empirical evidence.
3.5

Agricultnral cooperatives and land reform

The purpose of land refonn has been to put land 0mrship (or other
fonns of land tenure rights , such as long-term leases) in the hands of th08
who actually tm the so i1 The replaccment of landlcss agricu:l turallabourers,
sharecroppers , and other modcm fonns of feudalism throu1. land rform s
general1y held to improve plluctivity by (1) increasing incentires for those
doing the actual work, (2) intensifying cultivation, and (3) improring the
quality of the land over time. It also prmits farmers to diversify thr
produetion and reduce their risk , typically increasng produ::tion for family
consum:ption and often reducing production of cash crops. T ltJ ey ar feeding
people , ven if they are not contrjbuting to global trade.
On the other hand, dividing estates into smal1 family plots of several
acres , as done through land reform in Egypt, Japan and Taiwan (Chna) for
example, also reduces the conomies of scale held to be cru:al 1'0 efficient,
modem farming. Cooperatives offer a means to address this i::8U
There have ben a number of studies of the impact of coopratives
as pt of a general1 y supportive system of particlpatory self-organzation
and govermnental pooling of resources (e.g. , for irrigatinn system) on
agricuJtural productivity in developing countries

T 0 the European -American vicw f the cooper ative as a business

organization through which fanners can improve their lot in life and protect
themselves .om exploitation , ... the dveloping countries hav added a
image of the cooperative
as
an ins
tituti
ona
1
h1ri
dg

e
b et}
w\'een the
1 ow
prod

llC
v
it)
r work of subsistence ag
ncu

11tu:re and the hl1g

h.--p
- .productivity world
of scientific agriculture," ote the USAID rural development specialist
Edgar Owens (1 976) more than a quarter of a century ago. Owens argued
that the cooperatives often fail in developing countries (th debasement of
an honorable nstitution") bcause of organizational progranlmes initiatdby
govemment rather than by fann:rs; because of the absence (l f fanner buy-in
and influence; because of governmental control alld corrur tion as well as
because ofbusiness reasons (too small scale, absence ofrgi;NIal fcderations
and secondary cooperatives). But cooperatives do not alwaY::l fail: the initial
experincc with running the formerly plivate sugar plantatiorm in Jamaica as
cooperatives compa:red favourably i terms of pro:fit.."i and prnductivity with
the record of their capitalist plantation predecessors 110 On the other hand, in

109 lbid (pp. 129 and 57).

110 Richards and Willams, 1982.
47

developing countriswhre small farmcr patiicipation throuh cooperatives

and tlrrough local government is strong , Owens found subS1antially greater
increases at the macro lev1 n food grain production betwn 1948-1950 and
1970-72, typicaIIy by a facto of 2 to 5 over Jower-particip:l.1Lon countries.
Interestingly, agricultural productivity per acrl in some of these hghparticipation developing countris (Egypt, the R.epub1i c of Korea and
Taiwan, China) roughly matched productivir increases in th( Unitd States,
despite the dwarf holdings of th former. Interestingly , Japan l':8e productif
increases per acre match American ncreases despite the Japanse pattern
of tiny holdings. Further, Ow1S noted that small fa:rmers in high
paicipation countries not on1y produce more food grains per acre: they
produce more fruits and vegetables and other cash crops as w ::11. "
The World Bank s Klaus Deininger argues pe l:8uasively that
voluntary, democratic service cooperatives" that suppl nputs , markting
credt and technology to farmers enhance agricultural efficiency in
developing or transtional econornies by enabling farmels to overcom
imperfect markets" for their inputs and thcir products that o l:herwise 1ad to
thcir exploi~~tion Further, they contrute to relatively rapid rur1 capital
formation" . 11 He arles that the land reform experiences of Cuba,
NicaraIa Peru and Viet Nam as welJ as in transitional economies
(Bulgaria, Romania and Russian Federation) establish the relative
nefficiency of largecale eollective production 01' production cooperatives
as compared to small farm cu1tivation with cooperatives, even when farm
Slzes arl suboptima1. Service cooperatives contributf: to increasd
cornpetitveness of agricultural and financi~l_ markets and technology
transfer in competition with the private sector. , 112
Cooperatives offcr an opportunity for small, under:::apitalized , and
otherwisa marginaI producers to COInpetg in tllc marlict with larger capitalist
concerns on a relatively equal footing. This is not only I: he case in the
developing world; it a180 occurs n the developd wor1 d. Thus, in ther
analysis of the Spanish o1i ve oil cooperativs for example, -;\i[arti , Ortiz , and
Jimenez (2002) sec the cooperatives' primary goal to ddnd members
against hig private businesses and to achieve economdc and social
independence frOll major landowners who, with thcir prlvate olive oil
companes, exerted eat influence and power".
The employment impact s striking. To use Owens' figures , in 197072, Eg}TIt, the Repllblic of Korea and Taiwan (China) had ;:.retween 78 and
l O6 fkI111ers per 180 acres versus about l faITIler per I OO acr;:rs in tk Unitsd
States Both their moductivi@ pcr acrE iI1 fbod grains f| tId iIICreas m
productol1 per acre over the prlous two decades matdu~d that of the
?ff IciI1ir 1995 (p. 1318).
Ibid (p. 1328).

48

Unted States.

3.6

Impact of farm and small business cooperativ1i!!IS

member enterprise productity

00

their

Reca11ing the earlier discussion 1n this report, the pllrpose of farm

and small businss cooperatives is not maximizing the rturn on capita1
invested in the coopratve but maximizing th benefits to the individual
businesses associated in the cooperatve. As one Danish cooperator summd
.it up , the purpose of nvestment by fanners n thelr coope:ratives is not to
maxmize retum on capital, but to provide the scrvices they lt1 eed at th best
prices, and to maintain their proactve position n the marke t." 113
Thus, farm cooperative mmbers {~xpect and receive ])wer prices for
their inputs and higher prices for their outputs through the cooperative than
they would elsewhre. The cooperative may a1so provide substantial
services , such as fertilzng fields and laying down herbcideH and pesticides ,
at mnber prices. Even matters of family consumption, such as the dlively
of home heating oil , may be provided by the cooperative. In addition to the
price adrantage that cooperative membership brings, its o"lwrs also benfit
from the al1ocation of the cooperativ s net marins" or profits , with a
portion received in cash and a portion retaind as indjvidual apital accounts,
wor19 n the coope.rative , untiI that too is u1timately distrib ,ed in cash.

No systematic empirical studies of the mpact of thse lower

purchase prices and highr sales prices on farm or :small business
productivity alld profitablity have com to light Most COOP( ;rative members
and al1 cooperative general managers know, however, the p:r ce advantages
they bring to their markets. (For example, the non-core busin58 serviccs
purchasng cooperative for the 55 employee owned member companies of
Ohio s Employee-Owned N et;ork which pools their purchm.ing power with
6 other small busness cooper atives, has yielded price re.u.ctions ranging
from about 5 per cent to about 60 er cent, depending Of. the product 01
service purchased.)

Case studies give some sense of the scope of value aptured through
th cooperatIve These tend to be most dramatic in the dC 'I1 eloping N'orld.
Tbc angladesh Cooperative Milk Producers Union, wbich markets as
Milk Vita," has helped landless housholds acquire airy cows and
marketed the milk, has increased its 40,000 farmer memhers earnings tenfold , liing the household eaJlings of around 300,000 p;ople (includng
family membrs) to well above the poverty line" as well a;; creating 2 ,200
[13 Background paper for the COPAC Open Fornm on Cooperative:;:, Fanners
Organizations and Sustainable Development, Mch 1995. Cnpenhagen
Available at:
http://www.wise.eduJuwcc/icic/orgs/ice/un/conf/worJ dsumm/speciaH|(ground.html

49

114

new jobs in milk processing and distribution. A similar dairy cooperative

in India, which served as a model for Bangladesh and which began in 1946,
has grown into a national f deration of 70,000 village milk CClOpratives with
more than 9 million members; it is estimated to generate an additional US$
90 annually in income for each family as well as having : reated 250 ,000
new, non-farmjohs in mral India. 115
Shared service cooperatives for self-employed artisaI' ~ shopkeepers ,
and other self-employed persons in the informal sector have a fairly good
track record of creating and maintainin employment in s:lIne but not a1l
parts of the developing world. Experiences have shown tha l: handicraft and
small-scale industry cooperatives in India have a major impact on the
creation of employment opportunities, the mprovemefl 1: of working
conditions, and the raising of income levels among the poor ::r sectors of the
economy" But n sub--s
ha
ve
had vr limited effects on mployment Il6 Howler indivdual
African coopratves such as le U ganda Shoe Shiners Indust1'ial
Cooperative Socie; have contributed significantly to l.mproving the
quality of life of ts members ... creating jobs for a large number of young
people [\lch] prevented them from joining the tlks of the
unemployed".' 17

3.7

.I mpacts 011 the br mmunity

Beyond the obvious jmpact on theiT members, purchasing and

marketing cooperatives for farmer and small business have a broader
salury impact on non-members and the community.
First, they ncrease competition in the maIke t. Purchasing and
marketing cooperatives have a postiv impact on non-members who buy
their supplies and market their products through non-coop r ive channels.
For example , the avai1ability of cooperative suppr and marleting channels
for grain faners forces conventionally owned, capitalist fa: m supply firms
to lower their prices for supplies and forces conventionally uwned, capitalist
;rain elevators to rase the prices they pay farmers if they 11) not , they wil1
lose out in the competitive struggle with the farm cooperativ(: 'S.

This is llot only true in the agricultural sector; it s even true in

bankng. Thus, fo 1' exampl a recent Fedral Reserve Bank Board of
Govemors study in the United States found that bank:s pad their depositors
higher interest rates in cities with high credit union membership than they

1 Birchall, 2003 (p. 36).

p. 57
Linde~thal 1994 (p. 20).
117 Kazoora, 2002 (p. 58).
; .) Ib.
16

50

did in cities wl weak c1-adit li11ions-! I8

Consequent1y a strong cooperativ sector has a positjve impact even
on those who remain outside the cooperative structure It tetilds to make the
market more fcient.
Second, many cooperatives are committed to tb~: princple of
community concem: they seek to gve something back or, ' ccasionally, to
build whole cooperative economies, as the Mondragon cooperatives in t11e
Basque regioll of Spain have done.
Third; as member-owned and controlled organizations, agricultural
and small business cooperatives have a tendency to xpand servces to
respond to mcmbers demands. This is notabl not only in temlS of core
services (such as the addition of crop fertilizjng and 5prayl:115 service5 , soiJ
testing, an.d other agronomy services) to existing agriculturall and marketing
services but a]80 through the
expa

ns
iOll
0 f no

n-c

ore ser'\
di5t
rib

)u
tion of home heating oil) as independent suppliers go ,:mt ofbusiness.
In rural areas with declinin populations , cooperatives have sen their
community mportance expand because of thc difficult prft stuation of
for profit" suppliers who frequerrtly exit the area either because profits are
too low (the decline ofbanking in rural Quebec relativc to thf credit unions)
or because retirng owner cannot find purchasers for their businesses and
liquidate theI at retirement

Fourth , cooperatives are veritable schools for democracy."

Cooperatives provide other benefits to ther members and to the broadr
community tOOt are harder to quantify. Thes include:

close community ties based on the fact t1lat ovmership of the

coopcrative is spread among communty members;
democratic structures where members gain experience in democratic
procedures;
a commitment to member educaton and financial literacy;
el;ted boards that train more active mernbers n ur.drstanding and
supervisng large-scale business organzations;
open communications wth members;
building trust and 1yalty among rnembers; and, pos~;lbly
maintaining higher ethical standards than conventional business. 119

118 Hannan (2003) found that banks n cites with unusua lJ y high cn~dit union
membershi paid l lO of 1 per cent more in interest to retail de::IIJsitors than n
cities with average credit unon membership

119 Tl1e histoi? of fbrm cooperatives suggests that adopting and pri micing a highr
code of thlCS Wras a major hnpgtllS fbr cooperatives as an alterI| gtiV form of
business" (Lasley et al., 1997 , p. 10)
51

Final1y , there are thos who would go further stll. The Iuternatonal
o-operative Al liance (2001a) argues that cooperatives bui1d peaceful
societies by promoting understanding and co l1 aboration anng people of
different cultural and income backgrounds".

52

4. Conclusion, balancing efficiency, produc Ilivity and

other goals in employee owned compa11l es and
cooperatives
There is such a thing as the qualty of the ec:momy. Behind
aggregate economic indicators a variety of possible scen31 :os of differing
qualities may exist. Wealth may be produced by capital-intl:msive actvities
alongside mass unemploymet or by labour-intensive activities provding
large-scale employment. Econornic indicators may mask greater or less
income disparities. The participative ownership of coopemtive enterprises
. [s] a specific public good. The essential nature of the 'Public good s
twofold: large sectors of the population, instead of being inert and passive in
the market, are proactive in seeking to create economic utililis and avai1 of
economies of scale by going into business togeth. They Lre individually
and collectively self-reliant and thereby create social capital Secondly~ their
action and presence in the market ca actually change thl~ nature of the
market itself, because a different ethic is iutroduced 12

Ifther e is a singularity of purpose for capitalist ente:: prises at least

as posited by economists - in maximizing profits for their owners ,
employee-owned finns and cooperatives clearly have mu:.tiple goals that
reflect their members' aims and choces. As democratic {~rerprises they
balance compcting, indeed sometimes contradictory, goals These include
job security,l2l reinvestment, hiler wages and benets1J2 hea1th 123 and
safety, and independeee for their ownrs as well as hl gher linancial retums
from rising share values, profit-sharing and patronage dividends. Un1 ike the
conventional capitalist finn , which is blieved to maximze 1;he single value
of profits, employee-owned and user owned firms clearly must optimize the
balance between various goals Many of these goals are ecor.omic, but some ,
such as voice for members, a focus on local economic dev opment and
community , decent work f;>r employees, and training and education for
members , are both highly alued and broadly distrib l. Lted. However,
employee ownership is not without its shortcomings. F01 example , both
Greenberg (1 986) and Gruuberg (1991) found that the health and safety

Background paper for the COPAC Open Forum on Cooperative:: , Fanners

Organizations and Sustainabl Development, March 7, 1995, Copnhag1.
Available at :

120

1111XWW!sc edu/uwcc/icic/orgs/ice/un/conf!world-srumn!specialJbackground.html.
Kru se and Blasi, 2001; Pencavel and Craig, 1994.
122
123

KardaS? Scharf and keogh, l998i

Erdal, 1999

53

record of plywood cooperatives in the Pacific N01thwest is worse than

average for the ndustry , and the river that runs through l:he Mondragon
ralley is foul with sewage , trash and industrial nmoff.
\Vorkers' cooperatives and other employee-owl1 enterprises
generally pay wages that are competitive or better than 10l1y prevai1ng
wages when profit-sharing} bonus and dividends are included. They are less
likely to lay off members during economc downtums , prelrring to share
the work, cven accepting a lower price for their product in order to remain in
the market and maintain production and employment. 124 Th,;:y tend to offer
better fringe benefits than conventonal companies in their fi(: ld ,

4.1

Employee and user ownership and

producivi l:;r

What conclusions can be drawn aftr revewing Hle litrature 011

employee-owned firms and on farm and 8rall busness coo eratives and the
relations of these ownership forms to productivity? Firt~ let us look at
employee ownership. Good thoretcal arguments can be built for and
against a positive relatonship between employee ownership and
productivity. The results, as in so much of economic theory, appear to
depend on the assump ons. But if the theorctical discussion is illconclusive~
what do empirical studics show?
Here the reslts appear to be fairly conclusive. Firs': , that employ@
o,",'Ucrship of firms by itse]f does not nccssarily have a pmitive impact on
productivity. (American studes in the 1970s and early 19808 which appear
to find evid:nce that al1 employee ownrship leads al.l tomatcally to
improved company performance seem to have suffered f1"0111 l response bias
in surveys with-low response rates.) Too often worker ownership is purely
nominal , as has generally been the case in the privatizatior of state-owned
enterprss in the fonner Sovict Union and Eastm Europe Or it may be too
indirect and too 8tpped ofthe rights we consider to adhere ownership , as
is often the case in the United States wth Employee Stock Ownership Plans,
in which worker.wn

lcd stock is hld in a pension tmst, administered by a

trustee who is gcnerally either a manager or appointed by the board of
directors , votcd by the trustec , and pays no ongoing dvdend. Not
surprisingly, neither of these forms in and of themselves 5,eems to have a
positive impact on productivity.

On the other hand, the preponderance of empirical studies which

have been done in the developed an developing worJd have found that a
combination of employee financial ownership with ownCl ship rights to
111formation about the hnsmess and thE right of participatiniI1 in decisions
have positive impacts on productivity and other aspects of firnl performance.
Wrorker cooperatives, as the dominant foml of employee ov.nership outsde

124

54

Craig and Pencavel, 1992; 1993; 1995.

the United States , virtual1 y by definition provid the fu11 rang of ownership
rights However, even the dontinant, indireet fonn of ownership in Employee
Stock Ownership .Plans in the United States eontributes !:<D productivity
increases when combined with employee partcpation in lecisions , free
flows of infonnation about the business , and the training to understand the
fo:nn of ownership , to use the participation system etIeetively, and to
understand business nfonnation.

Indeed, the evidence has become sufficient1y compe:J ing that it may
be argued that ESOP fiduciaries who do not encourage t: :mployee~owner
particpation in the business are failing to meet thr obligatons to
employee-owners as future pension bneficiaries because l:he productivity
enhancements that flow fi'om the combination of employee ownership and
mployee panicipatio clearly do have a positive impact cm ESOP stock
value and on the future value of employee-owners penSlOns.

Po1itcal thinkrs have long suspectd that worker ownership has

collatcral benefits for democracy. Th eorist Carol Pateman (1970) argued
that participative ownrship was a training ground for dmocric citizenship
and ctzen involvement. Perhaps the best systematic videm:e in support of
this claim is Erdal s study (1999) of three 11ian towm: with diffrent
amounts of cooperativ ownership. The two towns with a highr perce:n tage
of cooperative members have lower crime rats lower ra l: es of domestic
volence, more social participaton , better developed socia l. networks, and
hgher tmst in authorities, and the town with the larges l: percentage of
cooperative members is typically the one with best condition;.:.

The evidence on the productivity impacts of fa:nn an: l small busness

cooperatlves is more difficult to analyse , because the si uation is mor g
complex than in th worker-owned fiml. Productivity has to Ioe measured at
two different levels: the level of the cooperative and the level of its
componcnt members. The cooperative exists for the use of :.ts members. As
such , it may act like a conventional compally in generating I.arge profits for
its owner-mmbers which it then rebates to them , or 1t may :;e11 inputs to its
members at lower prices and buy outputs from thm a: higher prices ,
limitng its net margins 0 1" surplus (i.e profits) to the minimu:m necessary for
the continuation of the cooperative [easured by the convt::rltional too1s of
value added per hour worked, the fonner cooperative app::ars to be more
productive than the latter. However, wh1 the value added per hour worked
in the cooperative is combined with value added by m ::mber farms or
enterprises , it may equal or exceed the value added by COl'entional nns
and finns. However, this notion of a measure of productivity that combines
producer and processingimarkcting cooperative must remain speculative, as
there is no research exploril1g this particular issue.

Generally speaking, cooperatives neither seek to maximze profits to

55

rebate to the members nor hold profits to th minmum self-~rustaining leve1.

Instead they take an intermediate position , offering members !I )wer prices for
what members buy and higher prices for what thy sell than :investor-owned
firms but still seeking to maintan a level of pro:fitability sulcient to meet
the cooperative s needs for reinvestment and growth and to provide modst
patronage dividends.

Empirical studies of productivity in cooperatives t1 mt focus at th

cooperative level have found mixed results. Some find .at cooperatives
have a modest performance edge. Others find that investor-owned firms have
a modest performane edge. None take nto consideratior however, th
impact of le cooperative on mnbcrs pl oductivity.
Th erc seems to be a lacuna in the cmpirical literature in this area

Cooperative advocates arguc that members join cooperatives precisly for

the productivity bnefits so the ct that cooperatives exist establishes that
members perceive a bllefit. By contrast, convntional eI:onomics offr
robust analyses of firms only by factoring out extema1ities , 11cb as benefits
to mcmbers in thc form of higher prices for their outputs or Ilower prices for
their inputs.
It seems c1 ear rom the empircal literature that fal and business
cooperativs have a nt positve impact 0 value-added p ::::r hour worked
when both the cooperative and its member units are included in the analysis.

4.2

Worker 0rnership and cooperatives in the developing

world

Situations differ in developing and developed conol es in temlS of

the behaviour of worker-orned entcrprises and coop atives. These
differences are driven in significant measurc by the context, particularly the
availability of a1tmative mploymcnt in the prvate or publ1 sectors , Thus,
in developing countries, the goal of providing employment often t.akes
precedence over questions of productivity at the level of the flrm. Of course ,
the narrow definition of productivity at the level of the firm ::t 8sumes that the
presnce or absence of productivity outsde the firm is imma l: erial - which is
nver the case in rea] life. For people who are largely UIJ employed and
always peripheral to th labour market, any regular employm;;:nt makes thm
more productive th1 they wre othet:vise. As noted earlier, there is no
productivity in an unemployment line

Under these circumstances, the self-help, bootstm::. aspect of the

cooperative has substantial appeal in developng countrie:.. Cooperatives
facilitate people in POOHng their greatest assgt, tflir labour, filmig wjth small
amounts of cash (perhaps all the eash they have), to create a l Elrgel enterprise
from which they wil1 receive a benefit and retum le'lhcr it is more
productive than a privately owned enterprise is not as important as whether it

56

s productive enough to compete in the market. As long a it crosses that

threshold, the cooperativ s members can gain a tohold in the economy, and
take another step on the journy toward economic development.
Further, as 15 the caSe in employee-owned firms , there are ubstantial
collateral benefits to cooperatves which may be unrelated 1:0 produetivity
but which arc clearly relatd to the TLO s Decent Work .agenda These
bnefits appear to b stronger in the devloping wOIld and among
marginalized populations in the developd world than in the mainstream
eeonomies of developed countries (but they also apply there) , They includ:

suffieient eeonomies of scale to make otherrise nefficnt small

scale production sufficiently productive in value-added ten8 to
yield higher living standards for smalJ fanners and artisans and to
kcep thcm from joining the ranks of the unemployed:
<

the personal and community benefits that accme from selforganization and bootstrap development
coop~~ 1ives arc , in
effect, schools for learning the benefits of collective :::df-reliance;

the dcvelopment of tranSDrable

in poor communities; and

the likclihood that memhers of one successfu] cooJ~rative venture

ri1l attempt other cooperative efforts, such as addin a credit unon
to a succssful dairy cooperative , or working wLh other groups
outsid th cooperative

lead~ship

and bas<:: financial skills

It should also be noted that cooperativs hav hi:torically arisen

from market failure: from producers' inability to markl~t their crops

efficiently or struggles with monopolistic and exploitatve ntermdiaries.
Gnerally speaking , the existence of a cooperative as an altrnativ
mechansm for purchasing and marketing helps to kp the ::apitalist market
economy honest by introducing an lemnt of competition that historically
was absen t. Thus , cooperatives increase the fficiency ofthe m.arket evn for
non-member producers.

Fina]J y, and not least, both employee ownership (l f the means of

producton and farnler and smaU businSS ownership of purchasing and
marketing cooperatives increase income and wea1th for crnployee owner,
farmer , and smal1 busness owner, n rclation to what they INould earn and
own n the absence of the workerivncd firm or the coopera1 ve Broadening
the distlibuhon of income aI1d the owncrship of wealth amolljE working men
and women in developing and developed counliS lmpl oves their life
chances alld, hy improving ther economic status, expand~: their rcalm of
choice and freedom

4.3

The future role of the ILO

The recently adopted (2002) ILO Recommendation No. 193 on the

Promotion of Cooperatives suggests an exanded role in th development of
cooperatives and wor
ke

r- wned enterprises would b appl:upriate for th

ILO. The new European Union commitment to expand mv10yee financial
participation in enterprise results and the support of the social partners for
this policy initiative , particularly in regard to employee slre ownership ,
underscores its importance in the developed as well as the d ~.eloping world
The rapid process of globalization reminds us of the need 1:0 anchor both
capital and jobs locally to secure the foundations of commun: ity economics.

There is much that the JLO could do in three differeTI11areas:

First, in the field of research
There are a number of key questions which the
does not answer

:isting litratur

t would be useful for the ILO to commission a study I}f the impact of
small business cooperatives and the value added, both in the cooperative and
in the individual membr business For reasons that are nil entirely clear,
there seems to be an absence of research in this area 125

There is also a need for comparative research OII the impact of

cooperative law and regulation on enterprise productivity and on the benefits
of cooperatives for societal productivity.
Employee ownership , farmers cooperatives , and 8mall business
cooperatives share the common denominator of broadened 0 'vvnership. Their
legal fonns , however, are diverse. Some penit mixed ownrship that
involves a partnership between outside investors and producers or
employees Others require 100 per cent employee or coopemtive ownership
Te know less about the advantages and disadvantages both than we
should.
In some countries, such as the United States , p!'i ial employee
ownership is often part of a tr ansition strategy for owners nem ing retirement.
Is this something that should be encouraged elsewhere?

It would be useful to identi successful regional and sectoral

models , their legal underpmings, and their organizatol1 al structures,

highlighting fonns of employee-owned enterprise and supp Ol" ting policy that
fit well in their cultural context.
We know far less about the impact of concentrated ownership vrsus
125

It may be that while agricultural cooperatives hav a major resOlce in research

programmes at national ministris of agriculture, the same is 110t true for smal1
business cooperatives_

58

broader active ownership (that cooperatives and worker 0\\rship inspire)

than we should What impact does broadening ownership have on economic
growth? On socia1 welfare? On the tax burden l1 eeded to ;;upport welfare
measures?

How successful are those programmes that use lump-sum

unemployment compnsation to help capitalize worker-owllled businesses ,
and can they be adapted to other economies?

Second, in the area of promotion of cooperatives

Thre is much that ILO can do to promote and emphasize the dignity
of work and self-help through promoting worker coopera 1lives and other
forms of employee ownership.

The evidence is overwhelming that participa l: ory employee

ownership produces improved living standards for worker owners in th
present and better wealth and pension creation in the future. Participatory
employee ownership is a win-win situation for both labour and management ,
as the European Union s Economic and Socia1 Committee :mggsted. It is
worthy of pr01lotion by the ILO s Cooperative Branch.
Prornoting networks of cooperative enterprises rnee1 ing rellarly to
exp10re business topics of immediate concem can be extr emely effective
when the conferees have an opportunity to discuss their pr :blems in smal1
groups and hear advice and information from other members.

In additon to using its publication series to dissem:inate theoreticaI

and practical information in this area , the ILO can provide workshops n
conjunction with the intemationa1 trade union movement , 0 ffer study tours
and speakers , and build a library of publications avai1 able 1: 0 help workers
become owners Of course , those pub1ications can a1so be a :;egment of the
ILO s web site.

Third, in the area of technical assistance and tranng

It would p1obably be useful to build some capacilly in providing

additiona1 assistance with worker ernployee ownership to add to the

Cooperatve Branch S '\IOrk with producer business .Elnd consumer
coopratives

Cooperatives in deve10ping counres often have difficu1ty in

obtaining professional servic of a11 kinds , and they may also be at a
disadvantage in the justice system. The ILO could facilitate training for
cooperative managers , auditors and accountants , possibly art1y through
distace learning , and it could ncourage national policy to S l.l pport networks
to rovide training and effective application of the training.
Finally , friendly and supportive financillg has proved 1: 0 b central to
launching new cooperatives The ILO cou ld disseminate infonnation and

59

encourage the creation of cooperative-friendly banks witb_ training and

networ ks.

ln 8hort, expanding the ILO's competenc in the arl:a of worker or

employee ownership and continuing to bui1 d on th outstanding ILO record
of promotion of consumer, producer and business coopratbes would be a
valuable policy direction for the future. It hlps to create ::mployment in
developing countries , to anchor capital and jobs in ndustrial democracies
and to create more balanced economic development policies in both Broader
and more diverse ownership of productive assets is also likely to create a
stronger domestic market to cushion local cconomiS 1 economlC
down1ums. And, last but not least, it builds on social partm:rship to create
wm-In outcomes for both employcrs and labour

60

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