The Cooperative advantage

By Chris Cook

I remember attending a workshop in Leicester a few years ago when one of the heads of IT in a big Cooperative financial operation referred in his presentation to the ‘Cooperative Advantage’. What he meant by this was that to the extent that Co-ops may obtain financing from their member stakeholders then they do not need to pay financial returns either to credit institutions, aka Banks, or to ‘rentier’ shareholders.

This was brought home to me a few years later when I observed that one of the rare major ‘Social Enterprises’ had been awarded a sizeable contract by a London local authority and faced complaints from the big corporates that they had been the victims of “unfair” competition for the very reason that this new competitor did not pay returns to shareholders. While my heart bled for them at the time they had the last laugh when the social enterprise concerned later allowed itself to be bought out.

I believe that the cooperative movement has failed to use this Cooperative Advantage to wipe the floor with conventional ‘private’ operators because of the nature of the legal and financial structures which they use. Unfortunately neither the management of the movement nor its professional advisers have any incentive to use the simple but radical new alternatives now available. The former appear to fear the loss of a privileged position of management control, while for the latter, no-one paid by the hour, rather than the outcome, has any interest in simple solutions.

The Cooperative movement has long used as an enterprise model the 19th Century Industrial and Provident Society as updated . The IPS is to all intents and purposes a genetically modified Company. Although an IPS typically offers a reasonable return it is limited in its attractions to mainstream investors with more ambitious expectations and this severely limits the pool of funds available for investment.

The IPS also suffers from the “Principal/Agency” management problem of all Companies which is the conflict of interest between the owners and their agents, the management. But there are plenty of IPSs around nonetheless, because many people do in fact recognise the benefits of mutuality and cooperation.

Introducing the Open Corporate
On 6 April 2001 the game changed when the UK government was blackmailed by the UK accountancy profession into legislating the Limited Liability Partnership the purpose of which was to allow professional partnerships to offload their liability for professional negligence or worse.

More than half of UK solicitors, most major accountants, and many other professionals, are now LLPs but few will advise their clients to use this simple but radical legal form themselves.

The LLP is in fact – despite the name – not a partnership at all, but a corporate body (like a company) with a separate legal existence independent of its members. As with a limited liability Company, LLP members cannot – in the absence of fraud etc – lose more than they invest (or guarantee).

And….errrr…that’s it.

An LLP costs £20.00 to incorporate, and there isn’t even a requirement for a written LLP agreement since simple default provisions based upon partnership principles otherwise apply. Neither does it pay tax, since the tax-man assumes it does not exist, and taxes members on the income or gains they make through membership.

I believe that the UK LLP is the first example of what I call an Open Corporate, and it offers a unique new way in which individuals can come together in ‘joint’ partnership to a common purpose but without the individual ‘several’ liability that partners have to each other individually.

Open Capital
I have been observing for some time now how the new LLP may be used for purposes never intended in order to share risk, revenues and even production in new ways. Moreover, with a background in financial product development, I have been working to develop new alternatives for direct “Peer to Peer” credit and investment using LLPs or related forms such as the US LLC as a framework.

By way of example of what is possible, I was involved in a film which was made within an LLP framework. None of the actors were paid – although had it not been a short film, they would undoubtedly have needed to cover costs – and they all received proportional %age shares in the gross revenues. I received 5% for my help on the structure, and the producer got the rest. However, we needed £10,000 for lights, cameras, and other expenses, and two Capital Partners were found who agreed that they would invest this amount in return for 20% of the revenues – if there are any.

These % age Equity Shares or “n’ths” in gross revenues are shares….but not as we know them…..

The result was essentially that all of the members were participants in the film with a shared mutual interest in the outcome.

The LLP did not own anything (the Intellectual Property was held by a custodian); employ anyone; contract with anyone or even do anything. It was simply a framework within which the necessary stakeholders came together cooperatively for the common purpose of the film.

Apart from such proportional Equity Shares, it is also possible to issue Units redeemable in production – so that (say) community owned wind turbines may finance themselves by selling to investors (eg customers) Units redeemable in electricity.

I believe that a partnership between the providers and users of services may in fact be an optimal enterprise model. Imagine a partnership between a John Lewis style employee owned Cooperative and a customer-owned retail cooperative where the necessary working and fixed capital comes from the stakeholders through pension investment and investment in future consumption, respectively.

The Market Reinvented
The result of this Open Capital model is a market solution – but a market with a surplus shared between stakeholders and without returns to rentiers. This is because within a partnership framework, there is no Profit and no Loss.

Dr Yunus, of Grameen Bank and micro-credit renown, refers to the need for Social Businesses operating on a ‘Not for Loss’ basis and I believe that the Cooperative of Cooperatives outlined above achieves exactly this.

These partnership-based solutions are emerging in the US (using the LLC legal form) and the UK because firstly, they are consensual in nature, and therefore there is nothing to stop them; and secondly, because they work .

I believe that conventional Capitalism is about to consume itself, because those enterprises, whether in the Public or Private sector, who do not use these networked and partnership-based collaborative/cooperative solutions will be at a competitive disadvantage to those who do. In fact the very definition of ‘Private’ presupposes the use of a Limited Company form which is in fact no longer necessary, as for instance, City of Glasgow are demonstrating with four municipal LLPs involving service provider partners.

So the rhetoric of Neo-classical Economics may be turned back on itself. That’s right, conventional debt and equity finance capital is simply inefficient. Why pay bloated returns to rentiers when we may simply take advantage of the Cooperative Advantage?