Co-operatives and Co-operation: Causes of Failure, Guidelines for Success

CONTENTS

Scope of Report

Purpose of Co-operatives

Different Needs, Different Co-ops

Co-operatives and Mutual Societies

Allocating Profits and Ownership of Reserves

Co-operation Between Partners

Ownership and Control

Style of Management, Decision-taking and Management Performance

Motivation of Directors and Managers

Work and Pay

Aims and Fundamentals

Conclusions and Recommendations

Notes <..> and References {..}

More Detailed List of Contents

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview

SCOPE OF REPORT

This report looks at why members of established co-ops are dissatisfied with what they are getting from their co-ops, why mutual societies and building societies are converting to public limited companies, why there is so little appreciation of what co-operators aim to achieve.

The report is based on a series of eight studies of co-operatives and mutual societies <9> which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from their mistakes.

Its conclusions and recommendations are relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control.

PURPOSE OF CO-OPERATIVES

When people are exploited and oppressed they co-operate with each other to escape from poverty, to overcome exploitation and oppression. As do people wishing to improve working conditions and the quality of their lives. They get together and form co-operatives. {12-13}

Different forms of co-operatives tackle different kinds of problems. What they have in common is that they serve their members and the community, aiming to improve the quality of life for their members.

On the other hand companies (corporations) are controlled by directors on behalf of owners whose main objective is to maximise profits. Profits increase when labour costs (wages, salaries, pension and social security payments) are reduced and also when operating costs are passed on to the community. So profits can be increased by reducing pay, by reducing the quality of life of the workforce, and at the expense of the community. {01-02}

Profits are generated by the joint efforts of capital and labour. But directors acting for owners aim to maximise profits and labour struggles to achieve some kind of reasonable existence.

Co-operative enterprises, however, are owned by their members and such conflicts are either much reduced or disappear.

Producer co-operatives of all kinds enable producers (workers) to control their working conditions. So it is not surprising that co-operative enterprises (co-ops) are opposed by those who prefer to exploit their workforce and who dislike co-operative principles of service to members and community. Co-ops are opposed by those whose power and riches depend on underpaying and exploiting employees and on overcharging customers.

Co-operative enterprises can be more effective and successful than companies (or corporations). Those who oppose co-ops are generally well aware of this.

In the U.K., for example, co-operatives have an annual turnover of GBP 13 billion and employ 120,000 people in production and retailing. Co-operative enterprises also cover housing, banking and insurance, and more.

And consider also the well-known Spanish Mondragon group of co-operatives 'Mondragon Corporacion Cooperativa' with profits of GBP 17.8 mill. Mondragon is changing, not necessarily for the better, as we shall see.

DIFFERENT NEEDS, DIFFERENT CO-OPS

What distinguishes one co-op from another is the kind of problem it aims to overcome, who owns the co-op and who decides its policies, who manages and directs its operations, and last but not least who benefits and how.

In such matters there are differences between one co-op and another. Important and often conflicting considerations are whether a surplus should be paid out to members or whether it should be re-invested in the co-op for growth and a more secure future.

What follows is a summary of the key characteristics of different types of co-ops <2> and information about the real-life case studies which illustrate the problems met by co-ops. The case-studies were used to analyse basic causes with often surprising results.

Consider people in need, in poverty, hungry, earning only enough to exist, to keep alive. Unable to afford medical help, adequate housing, in severe hardship when ill or old. Exploited by being paid too little and by having to pay too much for what has to be bought.

The greater a person's need, the easier is it to exploit him, the easier is it to force him to work for less. When traders' foods all include extortionate markups (profit margins), one either pays or starves.

So it was 150 years ago when co-ops became popular. And so it is today as unemployment bites, the poor get poorer and the rich get richer, with massive deprivation and suffering all over the planet.

First came self-help groups, mutual societies, aiming to ease deprivation and suffering and to enable people to insure against illness and the effects of old age.

And co-operative societies, building societies, to help with housing. And co-operative savings and lending societies such as credit unions, to overcome exploitation through extortionate interest rates demanded from those in need by money lenders and loan sharks.

In addition there are consumer co-ops aiming to reduce the cost of purchases such as food and household goods by cutting out middlemen.

And producer (worker) co-ops which belong to those who work in them. Here worker-owners benefit both as workers and as owners from the added value, from the surplus, they create.

So there are different co-ops to satisfy different needs:

Mutual Societies
Building Societies
Credit Unions
Consumer Co-ops
Producer (worker) Co-ops

Another key distinguishing feature is to whom the co-op belongs.

A co-op is sometimes owned collectively by its members, belonging to its members as a group. The group changes as members leave or new members join. Examples are the kibbutzim.

Others are wholly or in part owned by members as individuals. Mondragon co-ops are in part owned by their worker-owners.

Also important is the extent to which a co-op serves its members and the community as compared with profit maximising for the sake of profit maximising.

The examples in the following sections are discussed in detail in the individual case studies {03-10}.

MUTUAL SOCIETIES

Mutual Societies, often called Friendly Societies, are societies in which people get together to help each other in times of need. A Mutual Society belongs to its members and is controlled by its members for the benefit of its members. A mutual life assurance company's funds, for example, come from members' contributions and premium payments and, after paying the society's running costs, are used to benefit members.

As all assets are owned jointly by members, they share in the losses as well as in the gains.

In 1993 the British 'Registry of Friendly Societies' reported that funds in friendly societies had reached GBP 6.8 billion.

Trustee Savings Bank

The UK's Trustee Savings Banks {03} have been collecting and looking after the working population's small savings for about 200 years. They were formed 'for the safe custody, and increase of small earnings belonging to the labouring and industrious classes'.

The Trustee Savings Bank was run entirely for the benefit of its depositors. Well known for friendly and effective service, the TSB had more branches than Barclays and was considered to be better managed than the big clearing banks.

Until quite recently when it was turned into a profit-maximising company, a bank just like any other. How this was done, and what happened, is almost unbelievable. See the case study.

Credit Unions

A credit union {04} is owned by its individual members and is run for the benefit of its members. It is a financial co-operative, a kind of community bank.

Credit unions provide funds at below-market rates. For those in need, for those who need to borrow small amounts till the next payment arrives. For buying cars or paying for holidays.

Many are small but some, particularly in Canada and the USA, are very large.

Building Societies

Building societies {05} take in deposits and provide capital for buying houses, provide mortgages at what should be favourable rates of interest.

Those who deposit their savings are members as are those who borrow from the society.

And building societies are owned by their members for the benefit of both borrowing and lending members.

Net Profits of UK building societies amount to about GBP 1 billion. For many years they retained surplus funds and so built up massive reserves.

Successful, big, powerful, they should be doing well and should be doing much for their members and the community. But building societies have been merging, have been taken over by banks and have turned themselves into banks.

Which would seem to have little to do with serving one's members and the community and the case-study {05} takes a close look at what is going on.

CONSUMER CO-OPS

Consumer co-ops belong to, and are run for the benefit of, their customers.

Co-operative Retail Services Ltd

The Co-operative Retail Services (CRS) co-op is owned by its members, that is its customers. {06}

It is big with a 1995 turnover of GBP 1.3 billion. And it looks as if performance ought to be better than it is. However, its 'Directors' Report & Financial Statements' are clear and to the point and one has the impression they are having a go at forging ahead in innovative ways.

Co-operative Wholesale Society Ltd (and its subsidiaries Co-operative Bank PLC and Co-operative Insurance Society Ltd)

The Co-operative Wholesale Society (CWS) is a co-op {07} whose founder members were retail co-ops. It was formed to buy in bulk for member co-ops. It also farms and manufactures goods for retail co-ops.

Its profits are shared out among its member retail co-ops in proportion to their purchases from CWS.

But CWS now has a big retail division selling directly to many individual customers.

And it has two wholly owned major subsidiaries, namely 'The Co-operative Bank PLC' and 'Co-operative Insurance Society Ltd'.

It is big with a 1995 turnover of GBP 3 billion. It does much and has achieved a lot but to me it seems that its performance should be better than it is. This is discussed in the case study.

Co-operative Bank PLC {07} is a publicly quoted limited liability company. It is a fully owned subsidiary of CWS and CWS is apparently the only shareholder.

It is an innovative bank which is owned by a co-operative. The bank seems to put people first and provide good service.

Co-operative Insurance Society Ltd is one of Britain's largest insurers {07} and one of its top five providers of personal pensions. It insures 3.5 million families. Its profits are used for the benefit of policyholders and the amount allocated to them for 1995/96 is GBP 581 million.

But it is a wholly owned subsidiary of the Co-operative Wholesale Society (CWS). So it belongs to the CWS which seems to be the only shareholder, and it pays interest on its share capital.

Eroski

Eroski is an outstandingly successful retail co-operative.

By comparison, British consumer co-ops are running as fast as they can only to be standing still.

Eroski is one of the Mondragon group of co-ops and there is much to be learned from its success.

PRODUCER (WORKER) CO-OPS

Producer co-ops belong to, and are run for the benefit of, those who work in them.

Mondragon Co-operatives (Mondragon Corporacion Cooperativa)

These co-ops {09} are owned by their members. Each member contributes to the co-op's capital when he becomes a member and individually owns a share of his co-op.

What stands out is that the group of Mondragon co-operatives succeeded in creating for their members and for the local communities a good way of life, a good standard of living and a high degree of job and social security.

My own impression is that much of this is coming under threat from within. So the case-study {09} looks at ingredients of success as well as at underlying weaknesses.

Kibbutzim (Plural of 'kibbutz')

A kibbutz {10} is an agricultural co-operative community. Land, factories, buildings and equipment are owned jointly (collectively) by the community. There is no private wealth and members transfer all their assets (but not personal belongings) to the community when joining. The kibbutz looks after all the needs of its members and their families.

Three per cent of Israel's population, about 125,000 people, live in 270 kibbutzim ranging in size from say 200 to 2,000 members. They produce something like 50 per cent of Israel's agricultural produce and about 9 per cent of its industrial goods.

Successfully providing members with a high and secure standard of living and quality of life. But younger members leave for a better life outside. The case-study {10} looks in some detail at what has been going wrong and what can be done about it. The lessons learned are of value to all co-operators.

CO-OPERATIVES AND MUTUAL SOCIETIES

The case studies tell us much about co-operatives and mutual societies. There seem to be many different kinds and we are here trying to see what they have in common and what distinguishes them from public limited companies.

Credit unions are financial co-operatives. The owners of a credit union are its individual members and it is run for the benefit of its members. Its members save regularly and pool their savings to provide loans at favourable rates of interest to members. {04}

A building society is a mutual society owned by its members. Both depositors (lenders) and borrowers are members. The mutual interest between lenders and borrowers is that profits are shared out between them. Compared with banks, the lender gets more and the borrower pays less. {05}

A consumer co-operative belonging to its members who are customers. One becomes a member by opening a share account and paying a small amount of money. The more one buys the greater is one's share of the co-ops surplus (profit).

Each producer co-op is owned by its members and all who work in it must be members. Directors are elected by and from members. Each member of the co-op has one vote regardless of the size of his capital account. It is owned by its workers and run by its workers for their own benefit. {09}

Within the kibbutz all are equal, all share to the same extent. Some are more able than others, some do more than others, but all are paid the same. Earnings are pooled and divided equally. A kibbutz belongs to its members and they decide policy. The members benefit equally and voting is democratic. {10}

What all co-ops <2> have in common is that they belong to their members and that they exist for the benefit of their members, just like companies which belong to their shareholders and exist for the benefit of their shareholders.

However, a co-op's shares cannot be bought and sold by the general public, are not quoted on the stock exchange. And co-ops also differ from shareholder owned companies in one essential aspect. Members have one vote per person regardless of the amount saved, deposited, borrowed, bought or work done.

The intention is to ensure democratic deciding of policy and control of the co-op by its members.

So a co-operative is an enterprise which is owned and run jointly by its members as individuals for the benefit of its members.

And in the following sections we look at the extent to which members benefit (Allocating Profits) and at democratic control (Ownership and Control).

ALLOCATING PROFITS AND OWNERSHIP OF RESERVES

Shareholders of companies benefit from profits in two ways. Firstly, some of their profits are paid out each year as dividends. Secondly, the remaining profits which are retained by the company increase the value of their shares correspondingly and this capital gain is realised when the shares are sold. {19}

Important is that all the profits belong to the shareholders. Any profits which the company retains, which the company adds to its reserves, remain the property of its shareholders. An individual shareholder can convert his share of retained profits into cash at any time by selling his shares.

Similarly, and as a matter of principle, all profits (surplus) made by a co-operative or mutual society <2> belongs to its members as individuals. Any profit which is retained and added to reserves is the total of amounts which in effect were deducted from the profit share of each individual member.

But surprisingly the case studies show that co-ops and mutual societies retain much of the profits and that members cease to be entitled to them.

This is perhaps the most important single finding of this report.

A company is entitled to accumulate reserves from profits and there are good reasons for doing so, the company using its reserves on behalf of its shareholders to whom the reserves belong. Co-ops and mutual societies also accumulate reserves from profits but then hang on to them for no apparent valid reason. A member who leaves does not get back the moneys deducted by the enterprise from that member's share of the profits.

The extent to which owners' money has been held back by co-ops can be seen from the following figures:

For each employee or owner:

Mondragon Co-operatives: About GBP 11,900 belongs to each owner but the co-ops' reserves amount to GBP 21,000 per owner. This would seem to indicate that Mondragon corporation has accumulated big reserves at the expense of its owners. {09}

John Lewis: Net assets per employee are GBP 30,700. {08}

For the enterprise as a whole:

Mondragon Co-operatives: Reserves are GBP 585.92 mill (Ptas 110,739 mill) {09}

Co-operative Retail Services Ltd (CRS): Net assets are GBP 491.957 mill. {06}

Co-operative Wholesale Society Ltd (CWS): Worth of CWS to owners GBP 590.7 mill. {07}

John Lewis: Net assets are GBP 952 mill. {08}

So there are co-ops and mutual societies which have accumulated massive funds which are under their control but which belong to members as a whole rather than to the individuals from whom they were taken. And this explains some of the odd things which are taking place such as

Buyers of the Trustee Savings Bank receiving not only ownership of the bank but also the money they bought it with. {03}

Lloyds Bank in effect using C&G Building Society's reserves to persuade C&G's members, both depositors and borrowers, into voting their mutual self-aid society out of existence. {05}

Abbey National apparently using N&P Building Society's reserves to persuade N&P's members, to hand over the society in return for share or cash payments drawn in effect mainly or completely from their own reserves, from their own capital. {05}

And now we have a look at what the case studies indicate about how profits were divided between members and their enterprise and about benefits received by members.

Mutual Societies

Credit union members get some immediate benefit when borrowing costs less and deposits earn more compared with commercial banks. Immediate benefits correspond to dividends received by shareholders. But each year something like 10 to 20 per cent of the surplus (profit) is retained and added to reserves. Credit unions are accumulating reserves and massive reserves at that. {04}

Building society members ought to be getting an immediate benefit as borrowing should cost less and deposits earn more compared with commercial banks. In practice their interest rates hardly differ from those of the banks. Building societies are retaining and adding to reserves most of their surpluses and have also built up massive reserves. {05}

Consumer Co-ops

A consumer co-operative is supposed to be run for the benefit of its members who are its customers. After paying expenses, its surplus is divided and paid to members in proportion to their purchases. The more you spend in the co-op, the greater your share of the surplus. The money you receive is your dividend, your 'divi'. That was the intention, that is how it was. But the divi, the immediate benefit, has almost disappeared.

Take CRS. Some members do get a discount. 42,000 members (out of 1,485,000) who invest at least GBP 50 in the co-op get a 5 per cent discount but only in non-food stores which account for 17 per cent of CRS sales. {06}

What stands out is that members (customers) receive little direct benefit. Most of the surplus (profit) is retained and added to reserves.

Producer (Worker) Co-ops

Take the Mondragon co-ops. Each member's capital account is credited each year with his share of the co-op's profits. Each member also receives each year interest at up to 6 per cent on the balance of his capital account. This is added to his capital account. Capital accounts are regularly increased in value in line with inflation to maintain their purchasing power. The capital has to be withdrawn when a member leaves the co-op.

But only about 20 per cent of the profit is allocated to owners' capital accounts while about 75 per cent is retained by the co-ops and added to reserves. {09}

Within a kibbutz all are equal, all share to the same extent. Earnings are pooled and divided equally. Members can vote themselves increased benefits in cash or kind at any time. {10}

Summarising

So we see that 1995/96 surpluses were divided between members and reserves as follows {06-09}:

Consumer co-ops retain about 75 per cent of the surplus and add this to reserves. CRS also donates 15 per cent of the surplus to various causes so members only get 8 per cent.

Members of UK consumer co-ops gain little direct benefit. Most of the surplus is retained by the co-op.

We can also compare these consumer co-ops with John Lewis by estimating the amount received by members out of each GBP 100 of sales, as follows:

The figures, rough as they are, speak for themselves. Members of consumer co-ops receive little because the co-ops are keeping most of the profits and because the co-ops are much less profitable. The profit available for allocating is taken after expenses and a contributing factor may be that these co-ops are spending too much money on expenses.

A key difference is that John Lewis' employees receive their bonus as cash each year while Mondragon owners' share of profits is credited to their capital accounts which are only realised when the owner leaves the co-op. But in each case what is allocated is the direct benefit which corresponds to a shareholder's dividend.

A kibbutz's surplus belongs to its members. But as far as I am aware, a kibbutz member leaving a kibbutz does not get his share of the kibbutz's assets or wealth but may at times get some cash from the kibbutz. {10}

Co-ops <2>, their directors and managers, appear to be saying to co-op members:

Every year you are with us we keep 75 per cent of your share of the profits.

We will give you 25 per cent of the profits we make from using the money we kept back.

When you leave we stop giving this to you.

The money we kept back from you each year will not be returned to you when you leave or (in some cases) if the co-op should be dissolved.

Requirements

Hence what is required is a capital account for each member for accumulating his capital holding, its starting balance being the amount he has invested in the enterprise.

The whole profit should then be divided and allocated each year to members in two ways:

Firstly as a profit sharing bonus which is paid out once each year as a cash payment. (As is done by John Lewis Partnership)

Secondly, the remaining profit is retained in the enterprise and each member's share of this retained profit is credited to that member's capital account with the co-op. Capital accounts would also need to be increased each year for inflation as the enterprise revalues its assets. A member's capital account could also be debited with that member's share of the co-op's losses.

As members are owners it seems no interest should be paid on the balance of their capital accounts as long as balances are adjusted each year for inflation.

When a member leaves he should have to take his capital with him and his account is closed.

Co-ops should acknowledge that their assets belong to individual members by opening a capital account for each member and by dividing ownership rights among them, making reasonable efforts to contact those who left or the descendants of those who died. If a co-op's constitution says otherwise, if members originally agreed to donate funds regularly, then such matters can be brought up and put to members at a General Meeting.

Members can similarly ask their co-op to reassign ownership rights to members, discussing and deciding this at a General Meeting. If the co-op is unwilling then a last resort is to start proceedings for dissolving the co-op as the assets would then have to be realised and divided among members. This is what in effect has been happening to building societies {05}. But some co-ops, some credit unions for example, have rules which prevent members from recovering ownership rights in this way, the rules stipulating that assets on dissolution have to be given to another credit union or placed elsewhere, instead of being returned to members.

Shareholders can vote with their feet by selling their shares which at the same time converts their capital gains into cash. Co-op members should be able to do the same. And this means that co-op members should be able to dissolve their co-op by a majority vote and that the co-op's assets should then be realised and distributed among its members.

This is a means of last resort which shifts the balance of authority back towards the members. Members can in this way hold their co-op's directors and executives to account if the need arises. A badly managed co-op would be unable to continue indefinitely simply by retaining most of the profits. A well managed co-op serves its members well and would welcome such rules.

I would suggest members should request their co-op to return ownership rights to its members. The amounts per member can be considerable and if the co-op fails to do so, if ownership rights cannot be restored, then I would suggest forming and supporting co-ops which operate under fairer rules.

In concluding this section, let me emphasise again the kind of rules which are required:

A capital account for each member for accumulating his capital holding.

An agreed part of the total profit to be paid out once each year as a profit sharing bonus, as a cash payment.

The remaining profit is retained in the enterprise. Each member's share of this is credited to that member's capital account. Capital accounts to be increased each year for inflation. Capital accounts also to be debited with a co-op's losses.

When a member leaves he should have to take his capital with him and his account is closed.

Members may dissolve the enterprise by a majority vote in favour, of at least say 75 per cent of those voting or else of at least 70 per cent of the membership, either one or the other.

When the co-op is dissolved for any reason, any remaining assets are to be distributed among its members at that time.

It may be possible to include some rules about how much is to be paid to members as cash profit sharing bonus and how much can be retained in the business, specifying some range round about the 50:50 mark to begin with, asking for approval by General Meeting if the proportion is to be changed either way.

What has been said here about co-ops and members applies to all types including consumer co-ops, credit unions and other mutual societies.

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CO-OPERATION BETWEEN PARTNERS

BETWEEN PRODUCERS AND CUSTOMERS

There is a mutuality of interest, a partnership, between producers and customers which has to be taken into account when deciding policies (what is to be done and how it is to be done), when electing directors and when sharing out profits. A co-op's success depends on this.

Producer and Consumer Co-ops

Let me illustrate this for both producer and consumer co-ops. The producer co-op is owned by its members, namely those who work in it. The consumer co-op is owned by its members, namely its customers. Now consider a retailing co-op. This can be owned either by its workers or by its customers, can be either a producer or a consumer co-op, as follows:

The mutuality of interest between them is that profits are shared between workers and customers in a mutually acceptable way. In each case the owner benefits from retained profits.

The case studies {06-07} indicate that these consumer co-ops are far from successful. Democratic control by members appears inadequate and customers gain little from co-op membership.

But retailing producer co-ops can be and are successful when they acknowledge the partnership between producers and customers. John Lewis Partnership with its policy of 'never knowingly undersold' is very successful {08}. Eroski's success is outstanding and it has been expanding rapidly as a result of sharing its profits not only among its worker owners but also with its customers by reducing prices {09}.

General Meeting and Board of Directors

Mutuality of interest, that is partnership, can be reflected by the composition of a General Meeting as well as that of a Board of Directors.

Among the Mondragon co-ops, for example, is the Caja Laboral Popular, Caja for short. As a savings bank it provided capital as well as management services for new and existing co-ops. During the early stages of development of these co-ops it had considerable impact spreading the benefits of co-operation in its local community.

Ultimate control of the bank rested with the general assembly of 'members'. In the early stages this comprised the staff of the bank plus representatives of member co-operatives as follows {09: MON 01}:

It seems that the general assembly elected the board of directors. This apparently consisted of four directors elected from among themselves by its own staff and of eight directors from associated (customer) co-ops <5>. Each staff member received a share of the bank's profits which was a sum equal to the average distributed in the co-operative group as a whole.

Consumers are also represented on Eroski's board of directors.

BETWEEN CO-OPS

There is also a mutuality of interest, a partnership, between co-ops and more particularly between co-ops of different kinds, between co-ops co-operating, supporting and advising each other, and the co-operative movement's ability to achieve its aims and to prosper depends on taking this into account.

Co-ops <2> need to co-operate with co-ops while acknowledging the mutuality of interest between them. This applies to all, to those providing capital, management services, raw materials, components, sub-assemblies, products, installations, insurance, retail goods and services alike.

Each benefits. Each obtains goods and services at preferential rates, each sells for less and becomes more competitive.

To a considerable extent the success of Mondragon's co-ops resulted from the way they co-operated with each other in providing for the needs of their local community. Mondragon's key supporting co-ops, for example, were an insurance co-op (Lagun-Aro) which provided social security and pensions, a medical and hospital services co-op, and a research and development co-op (Ikerlan). Mondragon's key advising co-op was the banking co-op (Caja Laboral Popular).

But a mutual interest, a partnership, can exist only between co-ops which apply similar benevolent rules, does not exist with a consumer co-op, for example, which exploits its employees and customers.

Co-operating with Each Other

Co-operation has to be direct between co-ops without use of intermediaries. External co-ordinating structures place themselves between co-ops who should be working together. Co-ordinators appear when teamwork is ineffective and make matters worse. In the end co-ordinators are likely to take authority over those they co-ordinate, are likely to take away decision-taking from individual co-ops and their members. That such processes are at work in co-ops just as in companies would seem to be indicated by the case studies.

The importance of co-ops of all kinds co-operating with each other cannot be stressed too much at this point. But the way in which supporting and advising co-ops and managers team up with those engaged in direct work (such as production) is one of the least understood aspects of general management, of enabling people to co-operate with each other in teams. However, there is a concise, clear and relevant discussion of how to obtain effective co-operation and teamwork in 'Organising' {14} <4>.

ALLOCATING SURPLUSES (PROFITS) BETWEEN PARTNERS

To be decided is how profits are to be shared out between cash profit-share payments and how much is to be retained in the enterprise and added to individual capital accounts.

And then how the profit-share payments are to be divided between owners and partners.

BETWEEN OWNERS AND EMPLOYEES

All worker-owners are members and all workers in a producer co-op need to be members.

This is so because a producer co-op which employs workers is in effect exploiting them as it is retaining the employees' share of the profits they helped to produce. I would suggest not more than 5 per cent of workforce should consist of employees at any one time. Any employee would be employed for a period of say not exceeding one year, this being a trial period before applying or being admitted as worker-owner. During this trial period, that is while employed, the employee should receive a share of the cash profit share.

Similarly employees of other kinds of co-ops should receive their share of the cash profit share.

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OWNERSHIP AND CONTROL

Members decide policy and elect directors whose role is to ensure that policy is put into effect. If the members are dissatisfied with what directors are doing then they replace the directors.

Directors in turn appoint the General Manager and senior managers to put the agreed policy into effect and to deal with day-to-day problems. If the directors are dissatisfied with what the managers are doing, then they replace the managers.

Members decide policy and elect directors at a general meeting. When the total number of members is reasonably small then all can attend, have their say, vote.

When numbers are large, as in a consumer co-op, then delegates need to be elected on the basis of each delegate representing about the same number of individual members.

A key issue to be decided is by what proportions those having a mutual interest, partners, should be represented in a general meeting or by directors. In a Mondragon student co-op, for example, both students and lecturers as well as producer co-ops (customers) were represented by directors.

DEMOCRATIC POLICY DECIDING AND CONTROL

Companies {19} are in effect owned and controlled by their majority shareholders, as follows:

One vote per share.

Majority shareholders are in control and elect directors (can appoint themselves or nominees).

Majority shareholders can use company as if it were their own and decide what is to be done.

Ownership means control. It is the owner who decides what is to be done, it is the owner who decides policy. Majority shareholders in effect take over ownership from the other shareholders. What is left for these other shareholders to decide is whether to sell their shares or buy more.

For co-ops <2> the corresponding basic system is very different:

One vote per member.

Majority vote decides policy.

Majority vote elects directors.

The decisive difference in comparison with companies is that share ownership in a co-op establishes a voting right of one vote per member, establishes a democratic basis for the control of the co-op. In this way each member has one vote regardless of the amount of money he may have put into the co-op, regardless of the amount purchased.

Ownership means deciding policy. And democratic deciding of policy, that is democratic control of a co-op, is intended to ensure that co-ops are run for the benefit of their owners, that is of producers, customers and the community as a whole.

Deciding Policy

Basic is that key decisions have to be taken by the people and not by those in the hierarchy, have to be taken by the members.

Policies have to be decided by members at general meetings held at regular intervals. Its agenda, the subjects of individual proposals to be decided and their wording would need to be set by the members. For example, come up from branches.

Agreed policies have to be mandatory, have to be put into effect. The role of directors is to have these policies put into effect by the managers and to deal with policy questions in between general meetings.

The process of deciding policy should be independent from a co-op's officials and managers. But an input is required from them before objectives are decided. It should be possible for them to comment in clear factual terms on specific proposals before a vote is taken.

Stating Aims and Objectives

Policy may take the form of aims (general statements of intent, timed if possible) and objectives (quantified and timed). It is comparatively easy to put together warm-sounding heart-warming aims which are meaningless in practice. Aims need to be converted into objectives so that directors and executives can plan and control the achievement of these objectives {16}, so that the co-op's progress and the performance of its directors and managers can be assessed against the objectives which were to have been achieved.

Setting objectives is common practice in general management and is effective. Stating 'sales should be improved' is fairly meaningless. 'Sales need to be improved within 12 months' is only a little more meaningful. But saying 'sales were 10 units per week on 1 Jan 96 and need to be increased to 15 units per week by 1 Jan 97' is a meaningful objective which enables progress to be planned, measured and controlled, and which also enables performance to be assessed <6>. A key point is that social and community objectives can be similarly quantified and timed.

ROLE OF DIRECTORS

We have seen already that members decide policy and elect directors whose role is to ensure that what was decided at a General Meeting by the members is put into effect, is done and is achieved.

In the period between general meetings, directors deal with unexpected matters from the point of view of putting the policies into effect, are responsible for making such decisions. They are accountable to the members for what they decided or failed to decide and need to get the members' approval of what they did or did not do, by reporting to the members before the next general meeting. Members can then discuss and approve the report at that meeting.

Directors appoint the General Manager and senior managers to have the decisions carried out and have to ensure that the co-op's General Manager puts into effect the policies decided by the general meeting.

Directors need to ensure the co-op is managed participatively. Which means that organisation has to be functional, that the style of management is participative and that managers understand how this affects how they manage. Such aspects are discussed in more detail in the next section.

The annual report from directors to members should state in concrete terms what progress has been made by the co-op in achieving people-orientated and community-orientated co-op aims.

Members need to be aware that the role of directors is to have carried out the mandatory policy decisions taken by members at general meetings, to achieve the mandatory aims and objectives set by members at general meetings.

ROTATION OF DIRECTORS

The number of directors on a board of directors varies from 2 or 3 upwards. Some boards in the case studies have between 12 and 30 directors. Smaller boards find it more difficult to take balanced and appropriate decisions. Larger boards have communication difficulties as there just is not enough time for all to contribute their knowledge and experience. The most effective boards consist of about 6 directors, say up to 8.

Directors are generally elected for a period not exceeding 2 or at most 3 years. And no director should serve for more than two terms of office.

If elected for 3 years, then rotation of directors can be specified by stating that one-third of the directors should resign each year, in turn. These can be re-elected as long as they have only served one term of office.

If there are 6 directors (A-F), then A+B retire at end of first year, C+D retire at end of second year, E+F retire at end of third year. If A+B were re-elected at end of first year, they retire at end of fourth year. And so on.

This process ensures that directors can be replaced by the members at regular intervals and that continuity is maintained as only a few (not more than one-third of the directors in the example above) would be elected for the first time, would be inexperienced.

INFORMATION FOR DIRECTORS AND MEMBERS

Accounts

It is quite usual for an enterprise's annual statements of accounts to be presented to directors and members in stylised format and legalistic language which can be fairly meaningless to non-expert directors and members. These statements are then nodded through, accepted without question.

Accounts indicate performance and should be stated or summarised in easily understood form showing source and application of funds, analysing expenses including overheads, stating which groups or causes were supported and by how much.

A separate summary report could be prepared by a group of interested members acting as an independent committee of the general meeting. Independent, that is, of the co-op's hierarchy, with committee members unrelated and unconnected to the hierarchy.

Performance

Directors and members need factual information about co-op performance. A standard system and format should be used for reporting performance and accounts, doing so from the point of view of co-op members.

The information and methods used in the case-studies associated with this report are good starting points. Including, for example:

Members and employees (full-time and part-time).
Pay (all levels and average).
Sales, expenses, donations.
Remaining profit and how divided between member's cash and capital accounts.
Members' funds (Net Assets; Share Capital + Reserves).
Extent to which co-op aims and objectives achieved.

The Right to Know

Each member as owner has the right to know. This applies to all co-ops and to all co-op matters.

The right to know is heartily disliked by authoritarian managers who believe in obeying and giving orders and by empire builders.

All information should be available to all when requested, no matter whether technical, organisational, accounting or financial. Included would be information like salaries and wages but not private and personal information about individuals.

As part of the right to know, meetings of directors and committees should be publicised in advance and open to any member wishing to attend as an observer.

But at Mondragon, for example, the General Manager attends board meetings without having a vote, to give expert advice {09}. Here directors are not only owners but also employees and discussing co-op performance could be more difficult with the General Manager present.

EXCHANGE OF INFORMATION BETWEEN CO-OPS

Information compiled about co-op performance of the kind suggested above under 'Performance' is of interest also to other co-ops. Included should be a short description of what the co-op does and any special circumstances which may be relevant.

There is much to be said for establishing an independent grassroots channel of information exchange and discussion, as suggested here. And 'grassroots' means independent of existing established institutions which are likely to have their own agenda forced upon them by financial pressures.

A successful co-op is an example to others, one with problems could be inviting helpful comments. Performance information enables one co-op to compare its performance with other similar co-ops, an invaluable source of important information.

All that is needed is for co-ops to co-operate with each other by posting the information to an internet newsgroup which is completely independent and open to all.

OPEN DISCUSSION BETWEEN MEMBERS

The case-studies indicate that members feel disregarded and apathetic. So there is also a need for a completely independent grassroots discussion forum for members.

Here also members could be exchanging information and discussing matters of concern to them in their co-ops with others. I again suggest posting to an internet newsgroup as this is open to all and completely independent.

Access to co-op internet discussion groups could perhaps be made available to members on co-op premises.

Such access could also be used by members for freely making available to other members material such as grassroots co-op election proposals and canvassing material.

BACKUP FOR DIRECTORS

Directors should be able to draw on independent advice as and when required.

To me it seems that management consultants serving companies are too deeply involved in the ideology of profit maximising for them to be able to offer useful or effective advice to co-ops. The strength of the Caja's banking and managerial advice to Mondragon's producer co-ops {09} was derived from its co-operative background, its weakness was its preoccupation with accumulating reserves.

Much knowledge and expertise will be available from a co-op's members and in the local community. It can be tapped via the communication channels already suggested such as a magazine of some sort or access terminals on co-op premises.

COMMITTEES

There is a place for independent committees elected from members at general meetings for doing specific tasks, for reporting findings to members before a general meeting, for making available the knowledge and experience of committee members to co-op members and directors, for recommending courses of action.

Such committees should be independent of the co-op's officials, directors and managers and these should not be committee members. But committee members should have access to whatever information is required by them for their committee work.

Committee members should be rotated as described earlier for directors. But committees should not be self-perpetuating and should be kept in existence only as long as required.

Suitable tasks could be

Collating proposals from members or branches into an agenda for the general meeting.

Preparing a summary report of the co-op's annual accounts in easily understood language while drawing attention to any figures which seem important.

Preparing and arranging for distribution of a co-op magazine.

Reporting on spending from a co-op's community development fund in relation to co-op aims and objectives.

A certain proportion of the co-op's surplus should be made available to the general meeting for expenses connected with the work of its committees.

Committees do not decide, they advise and recommend. But committees can provide a wide range of opportunities for members to participate in the control and management of the co-op, particularly when formed in response to members' expressed needs in relation to the co-op's activities.

STYLE OF MANAGEMENT, DECISION-TAKING AND MANAGEMENT PERFORMANCE

DECISION-TAKING

Directors are responsible to and thus accountable to the members for putting into effect policies set by members.

The General Manager is responsible to and thus accountable to the directors for putting into effect policies set by directors.

And in this section we look at ways of ensuring that within the co-op we have effective management and decision-taking which serves the interests of the membership and of the community.

What stands out is that a co-op's management is responsible and accountable to members who are workers, 'employees' and customers.

So that in a producer co-op top level managers are accountable for what they do and omit to do, to directors who work in the organisation and have first-hand knowledge about what is taking place within, of actual results and management performance.

And it is individuals who take decisions, who are responsible for taking them and thus accountable for the consequences of the decisions they take or fail to take.

MANAGEMENT ACTIVITIES

What managers do is to

Plan ahead and set objectives.

Organise to achieve the objectives. The organisation needs to be functional and results depend on the style of management.

Measure progress and take appropriate action.

Compare results obtained with those aimed at and feed back lessons learned and experience gained.

For more information about corporate planning, setting objectives and evaluating performance, as well as on appraisal of managers, see 'Directing and Managing Change' {16}.

STATING OBJECTIVES

We already saw in the previous section that objectives need to be quantified and timed:

Stating 'sales should be improved' is fairly meaningless. 'Sales need to be improved within 12 months' is only a little more meaningful. But saying 'sales were 10 units per week on 1 Jan 96 and need to be increased to 15 units per week by 1 Jan 97' is a meaningful objective which enables progress to be planned, measured and controlled, and which also enables performance to be assessed.

Social and community objectives can be similarly quantified and timed.

FUNCTIONAL ORGANISATION

An understanding of functional organisation and functional relationships is just as necessary between front-line and supporting and advising work units such as departments as it is necessary between co-ops.

The importance of all work groups co-operating with each other cannot be stressed too much. There is a concise, clear and relevant discussion of how to obtain effective co-operation and teamwork in 'Organising' {14} <4>.

So directors need to ensure that organisation is functional and that managers are aware of how this affects what they do and how they do it, as well as decision-taking.

But directors need also to ensure that the co-op is managed participatively, that is that the style of management is participative {11} and that managers understand how this affects how they manage {15}. Style of management and participative management are discussed in the following sections.

AUTHORITARIAN STYLE OF MANAGEMENT

In an authoritarian system those at the top, their establishment and their experts, tell people what they have to do. An authoritarian manager expects to be told what to do, to be given an order, and to pass this on by way of instructions to his subordinates. The process, and the problems which arise, have been described elsewhere {11, 15}.

Here is an example. It is difficult to tell one's manager that he is to blame for what happened, that it was caused by something he did or omitted to do. That he could have prevented it. The higher up you go in the hierarchy, the more difficult it gets to criticise one's manager.

So people near or at the top are mostly not told when it is they who are responsible, when it is they who should be held to account. They are likely to be told that what happened was caused by someone else, by faulty organisation, by circumstances outside one's control.

The result is they can begin to see themselves as being always right. If something goes wrong it is because someone else did not do what he had been told to do. They can lose touch with reality.

The greater is the extent to which authority is unchecked, the more authoritarian is the style of management, the greater is the likely damage to the organisation (business, political, private, enterprise, country, people, club, whatever).

The authoritarian mind, however, continually attempts to bypass and negate socially responsible democratic decision-taking and to replace it with self-interested direct rule from above, regardless of the consequences to the organisation and those in it.

What could be indications of such processes taking place could be that pay differentials increase between top and bottom with pay advancing much more quickly at the top. Or pressure for such increases, for new salary structures. Or proposals for 'vertical' restructuring, for 'centralising' decision-taking. And 'empire building'. Or distancing policy setting and management control away from members, an example being the forming of subsidiary companies. Or mutual societies converting to companies or allowing themselves to be taken over by companies {05}. And co-ordinating structures which are likely to result in 'co-ordinators' taking over management functions and then gaining control over those who allowed themselves to be 'co-ordinated' in the first place.

SOCIAL RESPONSIBILITY, PROFITS AND SOCIAL ACCOUNTABILITY

It is some years since the report 'Social Responsibility, Profits and Social Accountability' {02} called for

Open decision-taking at all levels of government, business and local government levels.

Free access to all relevant information.

Establishing ways of what has since been called whistle-blowing, of being able to inform the community of decisions and all matters which are taking place and which are against the public interest. And also of establishing ways of protecting, supporting and providing back-up for whistle-blowers.

The same report also stated that

As far as management is concerned it seems that one should find practical ways within the company to let employees (at all levels) express themselves without endangering their position or prospects.

There is the problem of how to prevent a self- perpetuating elite being formed which in due course again attempts to take over the people so as to exploit them.

One essential requirement is that democratic forms of decision-taking are used, such as secret voting at committee meetings, and that they cannot be bypassed or changed by the authoritarian mind.

Much has been achieved since then, much is being done, more remains to be achieved. People are struggling to achieve these objectives.

But within enterprises there are solutions which work well and which should do even better in co-ops. And these are discussed in the following sections.

THE RIGHT TO BE HEARD

A monthly magazine, or its equivalent, needs to be produced to keep members informed and for publishing reports to members. But its key purpose is communication between members, and between members and management.

All worker owners and employees should have the right to write a letter, either signed or anonymously, to the magazine on any matter affecting the co-op or management, and to complain. Such letters must be published unless publication could harm the co-op. Anonymity must be protected. All letters have to be answered honestly by those concerned, including the General Manager and the directors.

This simple provision gives worker owners and employees an effective influence and control over the style of management. It works well and is effective. {08}

A good manager welcomes helpful criticism, no matter where it comes from. But many managers dislike being criticised. This is a characteristic failing of authoritarian managers and authoritarian organisations. {11}

An important element of effective management is to inspire staff, to motivate towards working well and towards working well together in teams {12-13, 15}. So public criticism can be seen as an indication of how inadequate a manager is in this and in other aspects of his work. Managers at all levels will carefully examine the magazine to see who and what is mentioned as well as the honest replies which must be given.

Public criticism of any aspect of a manager's work can affect job and promotion prospects. And so can public praise.

Criticism from within one's own group, from below, can be stifled, discredited, eliminated. Anonymous public criticism cannot be dealt with like this. An employee's right to criticise anonymously in public any aspect of management in a way which can be seen by all is most potent motivation towards good and effective management at all levels.

THE RIGHT TO KNOW

It follows that with the right to be heard goes the right to know. They complement and reinforce each other.

Empire building and co-ordinating depend to a large extent on information being held back, regarded perhaps like private property, possibly increasing job security.

Not so under modern conditions and certainly not so in a co-op. All information should be available to all when requested. And this includes the co-op's accounts, salaries and wages, expenses and donations.

PARTICIPATIVE STYLE OF MANAGEMENT; ROLE OF MANAGER

How managers are expected to behave within a participative style of management has been described and discussed {11, 15}. Perhaps the key points are that work is done, that responsibility is carried, at the lowest level it can be done and that the role of the manager is to clear difficulties out of the path of those whose work the manager co-ordinates.

DECISION-TAKING BY THOSE WHO DO THE WORK

Participation in decision-taking does not mean being asked for an opinion. It means that decisions about work should be taken by those doing the work or close to the doing of the work.

And clearly in a co-op matters to be decided by those doing the work includes conditions of employment such as flexitime working, paid holidays, capital expenditure on new equipment, production methods, modernising showrooms.

APPRAISAL OF MANAGERS

Supervisors, managers, officials at all levels including the General Manager should be evaluated regularly much the same as in companies. While appraisals are carried out either once or twice a year, I prefer twice a year.

The essential difference, however, is that in a co-op the appraisal should be carried out by those working for the person being appraised.

Each subordinate receives a standard form with carefully prepared standard questions, marks each question on a five-point scale and posts it completely anonymously.

The overall score is translated into an easily understood figure such as a percentage rating between 0 and 100 per cent. The results are then published within the co-op, within the workforce, on a public noticeboard likely to be seen by all such as outside a canteen or an office entrance. The system works and works well. It does systematically what takes place in a kibbutz general assembly when considering allocation of work and responsibilities {10}.

But questions on the form used for appraising need to be well thought out and be co-op orientated as well as management orientated. For example, one may wish to assess the extent to which the manager being appraised encourages teamwork.

APPOINTING MANAGERS

We have seen that work is being done at the lowest level it can be done, and that responsibility for the way it is done rests with those doing it. We have also seen that a key part of a manager's work is to clear difficulties out of the path of those whose work he is co-ordinating.

And there are good reasons for promoting or appointing managers from within the enterprise.

It follows that managers should be selected by those whose work they would be co-ordinating. This is obviously so within a producer (worker-owned) co-op but applies equally well elsewhere.

In a kibbutz, for example, all share equally in the work to be done and the general assembly of members elects managers. A managers is elected to be responsible for part of the work to be done, for a limited period of say two years. Following this he or she can be elected to manage another part of the work. This has worked well. {10}

MANAGERS AND CO-OP VALUES

A co-op needs to ensure that its managers believe in, and work to apply and advance, co-operative aims and practice.

Mondragon co-ops' managers during early stages were younger, more non-materialistic, more motivated by co-operative ideology. {09}

So what is needed are more idealistic upcoming managers. And younger managers growing through work experience and job rotation.

Combined with education and training to develop managers to the full, paid for by the co-op in return for commitment to co-operative aims and to the co-op. {12, 10}

Including education in co-operative aims and practices, in the application of co-operative ideology within the community.

MOTIVATION OF DIRECTORS AND MANAGERS

Pay is pay, no matter what it is called. There is no difference between pay, remuneration or emoluments as long as we include all direct and indirect pre-tax payments and services received from the employer.

Company directors <8> are motivated by pay in its various forms, by greater wealth and by greater influence, patronage, power. {12-13, 05}

Pay for managing directors (chief executives) and directors depends on performance and performance is assessed by criteria such as profit generated, turnover, deposits.

And so company directors aim to expand the enterprise they control by diversifying into other related areas, by taking over other enterprises, and aim to improve profit performance.

But for some time now pay of directors has been what the market will bear, what controlling shareholders will not object to in the light of dividends they receive and the increase in the value of the shares they own, what owners decide to pay themselves.

And this applies equally well within co-ops when the pay of General Manager and managers is seen by them to depend only on commercial performance and not on achieving of people-orientated and community-orientated aims and objectives <7>.

Co-ops of all kinds have accumulated assets which can be massive. Higher pay and increased status, power, influence and patronage can come from being in control of the application of such funds.

So managers of co-ops can be motivated by the prospect of higher pay to expand the enterprise they control, by diversifying into other related areas, by taking over other enterprises, to increase profit performance by charging more, by paying lower wages, by giving less to members.

Managers can then see democratic policy-setting by members, and by directors elected by members, as interfering with profit-maximising goals, with decision-taking. And managers may then strive to weaken and bypass democratic policy setting and decision-taking.

An example being the statement that 'member-democracy should not be exercised at the expense of a society's efficiency'. Which, translating into basic English, presumably means that democratic processes should not interfere with decision-taking by chief executives (general managers). {05}

Concentrating on increasing of profit performance, on expanding the enterprise, has been accompanied by a loss of mutuality and neglect of co-operative people-orientated and community-orientated objectives. The objectives of larger co-ops are now barely distinguishable from those of companies, of commercial banks. {04-07}

Co-op directors do not get paid for what they do as directors, are generally unpaid volunteers. Some directors receive a shop discount, others have approved expenses repaid.

Kibbutz experience showed that members acting as directors or managers gained much from doing so. There is the knowledge that one is applying one's abilities and skills to the full in meeting the challenges which arise. And the satisfaction of knowing that other members of the co-op are aware of the work one is doing and of its contribution to the common good. {12-13}

Directors represent and act for all the members, have to ensure that members' interests and members' ownership rights are respected. Directors have to ensure that member and community interests, that co-operative ideology, override the pressure, the push, for less democratic policy setting or for greater profits. They have to do so regardless of how plausible-sounding the arguments put forward by managers.

So directors need independent backup as and when required. Best provided by and through independent committees of the General Meeting.

It is the directors who should decide and control the application of a co-op's assets as well as how surplus (profit) should be divided between cash profit-share payouts and capital gains (surplus retained to be added to reserves).

We need to ensure that those running our organisations are people-orientated and imbued with the spirit of co-operation, with a sense of social responsibility.

WORK AND PAY

The National Remuneration Pattern {01} is a precise pictorial record of the differentials within a country, and between countries, from top to bottom, from young to old. It shows the relative value placed on different kinds of work. At the top are the owners or those who work directly for them, at the bottom is the mass of wage-earners.

The pattern of differentials shows that what is rewarded is service to the owners and their directors (establishment) rather than ability and service to the community. {01}

To owners and employers the worth of a job is what has to be paid to get it done. They want work to be done at the lowest rate at which they can get it done.

What stands out is that the whole system rewards service to owners, directors and general managers. So when Mondragon worker owners and co-op managers are paid according to market rates, their pay is compared with and determined by a scale which rewards service to those in authority. To those in authority who often expect people to maximise profits regardless of other considerations such as cost to the community.

What the case studies indicate is that one of the early symptoms of a managerial hierarchy's actions weakening democratic processes is pressure to introduce and increase pay differentials. Increasing pay at the top, bigger rewards for doing as told by superiors, with reward linked to results, to contribution to profits. Plus introduction of chains of command, of rigid organisational structures.

However, people should be rewarded in accordance with the benefits which result to the community. When it comes to incomes and wealth one should at least limit differentials. {17}

But then one has to consider just what sort of differential would be both fair and appropriate. {01}

At Mondragon, for example, each member is paid the local going rate for the work he does. But the before-tax differential between the lowest paid and the highest paid is limited to three. And directors receive no extra pay for the work they do as directors. {09}

A maximum differential of two, the maximum gross earnings being twice the minimum earnings, both within and between countries, would seem a reasonable target to achieve under present more extreme circumstances. {01}

It would seem reasonable to link reward to results achieved by increasing the income received by already well-paid levels while maintaining the differential. But only after the income of the lowest paid has increased and then only corresponding to the increase at the lowest level. {01}

The existing pattern of differentials rewards service to company owners and their establishment instead of service to the community. The nurse, the fireman, the policeman and the teacher are at present paid comparatively little for the work they do.

What is the value of one person's work when compared with another? How do you assess the value to the community of the work of a nurse, teacher, manual worker, musician or manager? How does one decide or how can one determine what should be the differential (if any) between the value of a nurse's work compared with that of a tractor driver at harvest time and in winter? {01}

It is not easy to assess the relative service rendered to the community by people in different positions bearing in mind also that a community's needs may change with time. {01}

We are now so organised and inter-dependent that it is common for the whole community to be inconvenienced whenever there is a local disruption of some service. Which emphasises that each activity is essential for the welfare of the community and leads one to consider whether there should not be a common wage for all. {11}

Within a kibbutz all are equal, all share to the same extent. Some are more able than others, some do more than others, but all are paid the same. Earnings are pooled and divided equally. The success of the kibbutzim is well known. {10}

Mondragon co-ops succeeded in spreading the benefits of co-operation within their local community. Kibbutzim achieved a good and secure life of high quality for their members.

And local work-exchange currency systems apply a constant rate of pay per hour, valuing a person's work as the time in hours taken to complete it. It is hours of work which are being exchanged, all receiving the same currency rate per hour.

Co-ops should limit differentials step by step, starting with limiting differentials to 2 and then working to reduce them by increasing lower level pay. Doing this is likely to discourage those more interested in money for its own sake than in co-op values. One should decide at the beginning by what date the process is to be completed.

AIMS AND FUNDAMENTALS

AIMS

To end people being exploited and enslaved because of their need and by excessive prices, starvation wages, extortionate interest rates and oppression.

To provide a good life of high quality including free education and full social security against unemployment, illness and adverse effects of old age.

Responsible leadership aims to eliminate need so as to eliminate exploitation because of need, wants to eliminate exploitation by high prices, low wages and high interest rates, wants the highest possible standard of living, social security and quality of life for the people. {02}

The purpose of any enterprise is to satisfy a community's needs by providing high quality goods and services at reasonable prices {17}. The real profit or gain any enterprise achieves is the gain which the community obtains as a result of the enterprise's operations {02}.

RIGHT TO OWNERSHIP

Ownership {19} is the right to possess something and to decide what is to be done with it. If I own something it belongs to me and I decide what is to be done with it. An example would be owning a house.

Possession is having something in one's custody as distinct from owning it. If I possess something it belongs to another but I can decide how to use it. An example would be renting a house.

Another example would be deciding what to do with my money (ownership) or deciding and controlling the use of money belonging to someone else (possession).

And considering the right to ownership, two questions need to be considered. Namely where does the right come from and how is it exercised.

The right to own property varies among societies. Ownership rights are based on man-made laws and there has been little, if any, grassroots community-orientated participation in their drafting.

Ownership of land and means of production, of funds and wealth, has always been accumulated at someone else's expense. All belonged to the community, belonged to all alike.

The source of profit (surplus) is someone else's money. Hence the need to spread excess (beyond reasonable) benefits of co-operation to others, to the community, so that those who have less can catch up. The individual supports the community and in return is supported by the community.

The community supports the individual but only if the individual in turn supports the community. Those supported by the community are under obligation to support others in need of support, in due course and when able to do so, to spread the application of co-operative principles, to share with others who are in need. Where need includes the need for capital to secure their operation, to achieve the general standard of living and quality of life.

A human right is a something one may legally or morally claim, is the state of being entitled to a privilege or immunity or authority to act. Human rights are those held to be claimable by any living person.

Human rights apply to all living people. Every living person is entitled to them.

We saw above that ownership of land and means of production, of funds and wealth, rightfully belongs to the community, belongs to all alike, is a human right. Those who have accumulated them have only possession, which means they can decide how to use them.

We have the use of possessions as long as we use them to provide a good living for our family, and beyond that for the benefit of the community. For the benefit of others less able or fortunate, for the benefit of the community around us and then for the benefit of communities abroad. But only supporting those who genuinely support our co-operative ideals and principles and their application and who themselves live and act accordingly.

CONCLUSIONS AND RECOMMENDATIONS

The case studies show that co-ops and mutual societies retain most of the profits and that members cease to be entitled to them. A member who leaves does not get back the moneys deducted by the enterprise from that member's share of the profits.

So what emerged from this work is a picture of a fundamentally flawed (faulty) system in which co-op members are much worse off than company shareholders.

This is perhaps the most important single finding of this report.

The figures, rough as they are, speak for themselves. Members of consumer co-ops receive little because the co-ops are not as profitable as they should be and because the co-ops are keeping most of the profits. The profit available for allocating is taken after expenses and a contributing factor may be that these co-ops are spending too much money on expenses.

The objectives of larger co-ops are barely distinguishable from those of companies, of banks.

ALLOCATING PROFITS; OWNERSHIP OF RESERVES.

Important is that all profits belong to the owners, to the members. A co-op's reserves consist of retained profits and belong to its members.

Each year a co-op holds back profits belonging to its members and adds them to the co-op's reserves. At present any claim a member may have to money held back by his co-op is ignored when a member leaves and then forgotten by the co-op. And we saw that some co-ops <2> have in this way accumulated massive reserves.

A co-op's reserves belong to its members and this has to be stated openly. And co-ops need to acknowledge that their assets belong to individual members by opening a capital account for each member and by dividing ownership of assets among them.

The balance in each member's capital account would then be the money value of his share of the co-op's reserves plus whatever he paid to the co-op on becoming a member.

Each year the whole profit has to be divided and allocated to members in two ways:

Firstly as a profit-sharing dividend which is paid out once each year as a cash payment.

Secondly, the remaining profit is retained in the enterprise and each member's share of this is credited to that member's capital account.

A mutual society would need to state clearly each year to each member the amount assigned to the member and its basis for calculating the amount assigned.

Shareholders of companies can vote with their feet by selling their shares which at the same time converts their capital gains (which include retained profits) into cash. Co-op members should be able to do the same.

If a member leaves he ceases to be an owner, ceases to be entitled to any share of the co-op's profits. So he should be able to, and should have to, take his accumulated capital with him and his capital account should then be closed.

What is said in this report about co-ops applies to all types including consumer co-ops, credit unions and other mutual societies.

Some co-ops have rules which in effect prevent their members (owners) from dissolving the co-op. And other rules sometimes state that a co-op's reserves are not to be distributed among its members when a co-op is dissolved, that their money would then be given to others.

A majority of members should always have the right to dissolve their co-op. A badly managed co-op should not be able to continue indefinitely simply by retaining most of the profits. And in the event of a co-op being dissolved, a co-op's assets (including its reserves) should then have to be distributed among its members.

I suggest members request their co-ops to return the ownership of reserves to its members. The amounts per member can be considerable and if the co-op fails to restore ownership to members, then I would suggest forming and supporting co-ops which operate under fairer rules.

CO-OPERATION BETWEEN PARTNERS

There is a mutuality of interest, a partnership, between worker-owners (members) and their customers, between customer-owners (members) and employees, between co-op and co-op.

The mutuality of interest between them is that partners co-operate with each other and that profits are shared between partners in a mutually acceptable way. But in each case only owner-members benefit from retained profits.

We saw mutuality of interest, that is partnership, reflected by the composition both of the General Meeting and of the Board of Directors.

Co-ops <2> need to co-operate with co-ops while acknowledging the mutuality of interest, the partnership, between them. This applies to all alike, no matter whether they provide capital, management services, raw materials, components, sub-assemblies, products, installations, insurance, retail goods, services, and so on.

Each benefits. Each obtains goods and services at preferential rates, each sells for less and becomes more competitive. To me it seems that the co-operative movement's ability to achieve its aims and prosperity under modern conditions depends on taking this into account.

But a mutual interest, a partnership, can exist only between co-ops which apply similar benevolent rules, does not exist with a consumer co-op, for example, which exploits its employees and customers.

And co-operation should be direct between co-ops, without use of intermediaries. External co-ordinating structures would place themselves between co-ops who should be working together.

Producer Co-ops with Employees

Producer co-ops are formed to overcome exploitation of workers by employers and co-ops may not profit from exploiting others.

A producer co-op which employs workers is in effect exploiting them as it is retaining their share of the profits they helped to produce.

So all worker-owners are members and all workers in a producer co-op need to be members, except when employed for a trial period.

There is a mutuality of interest, a partnership, between employer and worker and one is as important as the other. The surplus they create should be shared between them in a specified way.

I would suggest that the number of employees be limited to not more than 5 per cent of workforce at any one time. Any employee to be employed for a period not exceeding one year, this being a trial period before applying or being considered for membership.

During this trial period, that is while employed, the employee should receive his share of the cash profit share.

DECIDING POLICY

A co-operative <2> is an enterprise which is owned by its members as individuals and is run jointly by them. It is run first for the benefit of its members and then for the benefit of the community.

Co-operatives are based on the principle of 'one person, one vote' regardless of the amount saved, deposited, borrowed, bought or policies taken out.

The intention is to ensure democratic deciding of policy and control of the co-op by its members.

What is at stake is ownership of means of production, of the co-op, of an independent source of income. What is also at stake is freedom from exploitation and from oppression through need.

Whoever takes the policy decisions, deciding what has to be done and what is to be achieved, controls the co-op. If co-op members wish to retain ownership then it is the members who must take the policy decisions, who must decide what has to be done and what has to be achieved.

Basic is that key decisions have to be taken by the people and not by those in the hierarchy, have to be taken by the members.

So policies have to be decided by members at general meetings held at regular intervals. It is the General Meeting which decides policy by a majority of all members. Policies agreed by members at a General Meeting have to be mandatory, have to be put into effect.

Agendas, the subjects of individual proposals to be decided and their wording, would need to be set by the members. For example, come up from branches.

There is a place for independent committees elected from members at general meetings for doing specific tasks such as preparing the agenda for the next general meeting, for reporting findings to members before a general meeting, for making available the knowledge and experience of committee members to directors, for recommending courses of action. Independent, that is, of the co-op's hierarchy, with committee members unrelated and unconnected to the hierarchy. These are committees of the General Meeting and they report back to the General Meeting. Committees do not decide. They report, conclude, advise, recommend.

Directors need independent backup as and when required and this could also be provided by and through independent committees of the General Meeting. For example, a separate summary report on co-op performance and accounts could be prepared by a group of interested members acting as an independent committee of the general meeting.

A certain proportion of the co-op's surplus could be made available to the general meeting for expenses connected with the work of its committees.

Directors have to be democratically elected by and from the members of the General Meeting. Role of directors is to put into effect policies decided at a General Meeting, to have these policies put into effect by the managers and to deal with policy questions in between general meetings.

Directors represent and act for all the members, have to ensure that members' interests and members' ownership rights are respected. Directors have to ensure that member and community interests, that co-operative ideology, override the pressure, the push, for less democratic policy setting or for greater profits for the sake of greater profits.

Directors need to ensure the co-op is managed participatively. Which means that organisation has to be functional, that the style of management is participative that managers understand how this affects how they manage.

FUNCTIONAL ORGANISATION

An understanding of functional organisation and functional relationships is just as necessary between front-line and supporting and advising work units such as departments as it is necessary between co-ops.

So directors need to ensure that organisation is functional and that managers are aware of how this affects what they do and how they do it, as well as decision-taking.

THE RIGHT TO BE HEARD

The greater is the extent to which authority is unchecked, the more authoritarian is the style of management, the greater is the likely damage to the organisation.

All worker owners and employees should have the right to write a letter, either signed or anonymously, to a co-op magazine on any matter affecting the co-op or management, and to complain. Such letters must be published unless publication could harm the co-op. Anonymity must be protected. All letters have to be answered honestly by those concerned, including the General Manager and the directors.

This simple provision gives worker owners and employees an effective influence and control over the style of management. It works well and is effective.

An employee's right to criticise anonymously in public any aspect of management in a way which can be seen by all is most potent motivation towards good and effective management at all levels.

THE RIGHT TO KNOW

With the right to be heard goes the right to know. They complement and reinforce each other. And each member as owner has the right to know. This applies to all co-ops and to all co-op matters.

All information should be available to any member or employee, no matter whether technical, organisational, accounting or financial. Included would be information like salaries and wages, expenses and donations, but not private and personal information about individuals.

PARTICIPATIVE STYLE OF MANAGEMENT; ROLE OF MANAGER

Directors need also to ensure that the co-op is managed participatively, that is that the style of management is participative and that managers understand how this affects how they manage.

How managers are expected to behave within a participative style of management has been described already. Perhaps the key points are that work is done, that responsibility is carried, at the lowest level it can be done and that the role of the manager is to clear difficulties out of the path of those whose work the manager co-ordinates.

DECISION-TAKING BY THOSE WHO DO THE WORK

Participation in decision-taking does not mean being asked for an opinion. It means that decisions about work should be taken by those doing the work or close to the doing of the work.

APPRAISAL OF MANAGERS

Supervisors, managers, officials at all levels including the General Manager should be evaluated regularly, much the same as in companies. While appraisals are carried out either once or twice a year, I prefer twice a year.

The essential difference, however, is that in a co-op the appraisal should be carried out by those working for the person being appraised.

APPOINTING MANAGERS

And there are good reasons for promoting or appointing from within the enterprise.

It follows that managers should be selected by those whose work they would be co-ordinating. This is obviously so within a producer (worker-owned) co-op but applies equally well elsewhere.

MANAGERS AND CO-OP VALUES

A co-op needs to ensure that its managers believe in, and work to apply and advance, co-operative aims and practice.

So what is needed are more idealistic upcoming managers imbued with the spirit of co-operation and a sense of social responsibility. And younger managers growing through work experience and job rotation.

Combined with education and training to develop managers to the full, paid for by the co-op in return for commitment to co-operative aims and to the co-op.

PAY DIFFERENTIALS

A maximum differential of two, the maximum gross earnings being twice the minimum earnings, would seem a reasonable target to achieve under present more extreme circumstances. Doing this is likely to discourage those more interested in money for its own sake than in co-op values.

Comparing different kinds of work and activities leads one to consider whether there should not be a common wage for all.

So co-ops should start by limiting differentials to two and then work to reduce them by increasing lower level pay in relation to top level pay. One should decide at the beginning the date by which the process is to be completed.

SOCIAL SECURITY FOR PEOPLE; CAPITAL FOR CO-OPS

We need to provide full social security against unemployment, illness and adverse effects of old age which includes pensions.

We also need to make capital available for new and existing co-ops, for capital-intensive production, for larger projects.

So what we need are banking and insurance co-ops which are genuinely owned and controlled by their individual customers in partnership with their employees.

It is the members who have to decide and control policies and this applies particularly to investment policies.

Such co-ops would enable us to mobilise the community's many small savings, pension contributions and premium payments for the benefit of customers, the community and the co-operative movement. Offering a better deal to customers and the community than could be offered by profit-maximising financial institutions. Able to provide funds to the co-op movement and as well as the expertise for using such funds well and securely.

SABBATICAL YEAR

Worker-owners and employees of co-ops should be entitled to a sabbatical year every seventh year. This amounts to using some of co-op's surplus for providing worker-owners and employees with something exceptionally valuable while at the same time reducing local unemployment.

Academics already enjoy regular sabbatical years. During this period they are paid their salaries. If such a large and well paid section of the community regularly enjoy their sabbatical years, then co-operators should benefit from the same.

Consider what sabbatical years would mean. For you and for others who would during such a year be free to do as they pleased. Free to travel, train for more skilled or better work, update knowledge, study, gain greater understanding, qualify.

We could have much more satisfying lives, we could do much for our own communities, could do much for those in need, for those who are underdeveloped and unable to afford our own expert skills.

Those on a sabbatical must not work for pay, or produce to sell, during that year but are paid the average pay for the enterprise. They are entitled to the sabbatical year regardless of the work they do or the level at which they worked during the previous six years.

COMMUNITY FUND

Every co-op should set up a Community Fund and pay into this each year 10 per cent of the surplus available for distribution, for the benefit of the community and the co-operative movement.

Spending money in and on community should be politically neutral, but could be used for teaching and spreading co-operative principles and practice.

Community Fund spending needs to be reported in detail to members and to be approved by them. Simply not good enough to see a single line somewhere saying a certain amount has been spent on donations.

Again probably best dealt with by a committee of the General Meeting reporting directly to the General Meeting. The General Meeting should approve spending guidelines for this committee and members should be rotated in the usual way.

EXCHANGE OF INFORMATION BETWEEN CO-OPS

There is much to be said for establishing an independent grassroots channel of information exchange and discussion, as suggested here. And 'grassroots' means independent of existing established institutions which are likely to have their own agenda forced upon them by financial pressures.

All that is needed is for co-ops to co-operate with each other by posting the information to an internet newsgroup which is completely independent and open to all.

Information about how individual co-ops perform, for example, is important to all co-ops as a measure of their own performance. A standard system and format should be used for reporting performance and accounts, doing so in compact, clear and factual terms from point of view of co-op members. Included should be a short description of what the co-op does and any special circumstances which may be relevant.

OPEN DISCUSSION BETWEEN MEMBERS

Here also members could be exchanging information and discussing matters of concern to them in their co-ops with others. I again suggest posting to an internet newsgroup as this is open to all and completely independent.

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NOTES AND REFERENCES

NOTES

REFERENCES

Can also be downloaded from
https://www.solhaam.org/

MORE DETAILED LIST OF CONTENTS

Scope of Report

Purpose of Co-operatives

Different Needs, Different Co-ops

Mutual Societies
Consumer Co-ops
Producer (Worker) Co-ops

Co-operatives and Mutual Societies

Allocating Profits and Ownership of Reserves

Co-operation Between Partners

Between Producers and Customers
Between Co-ops
Allocating Surpluses (Profits) Between Partners
Between Owners and Employees

Ownership and Control

Democratic Policy Deciding and Control

Deciding Policy
Stating Aims and Objectives

Role of Directors
Rotation of Directors
Information for Directors and Members

Accounts
Performance
The Right to Know

Exchange of Information Between Co-ops
Open Discussion Between Members
Backup for Directors
Committees

Style of Management, Decision-taking and Management Performance

Decision-taking
Management Activities
Stating Objectives
Functional Organisation
Authoritarian Style of Management
Social Responsibility, Profits and Social Accountability
The Right to be Heard
The Right to Know
Participative Style of Management; Role of Managers
Decision-taking by Those Who Do the Work
Appraisal of Managers
Appointing Managers
Managers and Co-op Values

Motivation of Directors and Managers

Work and Pay

Aims and Fundamentals

Aims
Right to Ownership

Conclusions and Recommendations

Allocating Profits; Ownership of Reserves
Co-operation Between Partners

Producer Co-ops with Employees

Deciding Policy
Functional Organisation
The Right to be Heard
The Right to Know
Participative Style of Management; Role of Manager
Decision-taking by Those Who Do the Work
Appraisal of Managers
Appointing Managers
Managers and Co-op Values
Pay Differentials
Social Security for People; Capital for Co-ops
Sabbatical Year
Community Fund
Exchange of Information Between Co-ops
Open Discussion Between Members

Notes, References and Links

More Detailed List of Contents

Associated Case Studies

Mutual Societies

Trustee Savings Bank
Credit Unions
Building Societies

Consumer Co-ops

Co-operative Retail Services Ltd
Co-operative Wholesale Society Ltd

The Co-operative Bank PLC
Co-operative Insurance Society Ltd

Producer (Worker) Co-ops and Others

John Lewis Partnership plc
Mondragon Co-operatives
Kibbutzim (Plural of 'kibbutz')

Relevant Current and Associated Works

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The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.

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