Arguing for co-ops II: how many are there?

It’s often asked of co-ops: if they are such a good idea, why are there so few of them?
The question rests on a false premise. Latest statistics show that in March there were 322,640 partnerships. That’s 118 times the number of firms listed on Aim or the main stock market.
Granted, the majority of partnerships are small; only 0.5% have more than 50 employees, whereas 3.8% of the 1.54 million companies have this many.
But this fact gives us a clue as to why co-ops aren’t even more plentiful - capital constraints. Co-ops don’t make much sense when businesses need lots of external finance, because employees don’t want to take on the risk entailed by high gearing. 
When a company’s biggest asset is physical capital, outside ownership makes sense. But when its biggest asset is people, inside ownership does, because such ownership helps motivate employees. This is why mines and car factories are owned by shareholders, but law firms or medical practices are generally owned by employees. And it's why I’ve advocated that schools should be run as worker co-ops.
It’s also why it’s rare for co-ops to compete alongside quoted companies; different industries justify different ownership forms.
When the two do go head-to-head, though, co-ops at least hold their own. Waitrose and John Lewis are the country’s favourite retailers. Hedge funds have for a long time won business away from traditional stock market-quoted fund managers, and have shown that, on average, they are more stable than quoted banks.
And then there’s the experience of Integrated Dental Holdings. This employer of dentists floated on the stock exchange in 2002 at a price of 150p. Its price tanked thereafter, suggesting that a listed companies cannot compete well with partnerships and sole proprietors, which are the usual form of organization in dentistry - though its fortunes have improved since it delisted.
 Now, in the industrial age, it was capital-intensive firms that dominated the economy, so co-ops were rare. But in the post-industrial era one would expect co-ops - or at least non-traditional ownership forms (pdf) - to grow in importance to the extent that human capital becomes more important, at least if regulators allow them to. 

Comments

[Miller 2.0]

Valuable stuff, thank you.

[Morten]

I am sure you are familiar with Hansmann's excellent 'The ownership of enterprise', but maybe some of your readers would find it a useful introduction into the field.

[kinglear]

One of the best examples of this is the rush by mortgage companies ( particularly Halifax) to buy out estate agents that were invariable run by one or two people and doing rather well. If memory serves, Bairstow Eves for example was bought for about £400m. Subsequently, the downturn in the early 90s destroyed any value there might have been - but the small self-motovated firms still prospered, and ran rings round the lumbering behemoths. Again if memory serves, Halifax got rid of ALL its agencies for the odd million.

[ejh]

"it's why I’ve advocated that schools should be run as worker co-ops"

Do you think that you'd get many takers among teachers for this idea?

[dsquared]

On the other hand Dignity plc (undertakers) has been going perfectly well for the last few years, taking over family-owned undertakers. Also, if you want to talk about hedge funds as mutual companies (which they aren't, not the big ones), then why not tell us what happened to the mutual insurance sector?

And as I've mentioned to you before, Chris, partnerships aren't co-ops and they aren't owned by their employees. Have you ever worked for one? There is a *big* difference between being a partner and being an employee. Clifford Chance is a partnership, but ask anyone who works there if it's a similar organisation to JLP.

and finally this comparison is crazy:

[Latest statistics show that in March there were 322,640 partnerships. That’s 118 times the number of firms listed on Aim or the main stock market. ]

what's the stock market got to do with it? Surely the valid comparison (if you're going to include one and two man partnerships) would be to the number of limited companies.

[john b]

"Dignity plc (undertakers) has been going perfectly well for the last few years, taking over family-owned undertakers"

What're the main requirements for success in undertaking, though? I'd've thought they were primarily capital-based rather than labour-based, subject to hiring people who're appropriately sombre and not completely inept.

"There is a *big* difference between being a partner and being an employee."

As someone who's worked as an employee of a partnership for the last two years, and who will be delighted to stop doing so this Friday, I can confirm this is the case...

[dsquared]

Oh no, it looks like this stuff is contagious:

[Subsequently, the downturn in the early 90s destroyed any value there might have been - but the small self-motovated firms still prospered, and ran rings round the lumbering behemoths.]

You are kidding, right? Unless "still prospered" is your way of saying "went bankrupt in their thousands".

[chris]

D2 - yes, there's a huge difference in employee rights and organizational structure among partnerships; some are as hierarchic as ordinary firms.
But this, surely, is a strength of the form - it's just so flexible.
And the stock market has a lot to do with it. Quoted companies, more than any other, represent the separation of control and ownership.

[dsquared]

[What're the main requirements for success in undertaking, though? I'd've thought they were primarily capital-based rather than labour-based]

Absolutely not. The capital required for an undertaker is a hearse, a dark suit, and 30 days' credit with the coffin supplier. The main commercial asset of an undertaker is its brand and its local reputation, which is why so many of them are family firms and why Dignity always keeps the name of the undertakers it acquires (usually as a result of Dad retiring and Junior not wanting to be an undertaker). It's the human capital business to beat them all.

[john b]

"It's the human capital business to beat them all."

Brand rather than human capital, surely? - the new salaried people Dignity puts in charge when it buys out the independents don't need to be particularly skilled or motivated at undertaking, as long as they're reasonably competent. Which makes it unlike an estate agency or a law firm or a school...

[dsquared]

[D2 - yes, there's a huge difference in employee rights and organizational structure among partnerships; some are as hierarchic as ordinary firms.
But this, surely, is a strength of the form - it's just so flexible. ]

Bluntly, this seems like nonsense to me. It's an equal strength of the limited company form, of which there are also lots of different types. You're arguing for co-ops and mutuals here, which is a very particular form of industrial organisation and not a particularly popular one.

And my point was that if you're comparing against companies on the stock market, you need to compare them against similarly-sized partnerships (of which there are probably less than a couple of hundred), or you need to take into account the countless thousands of ltds. This is cherry-picking carried to ridiculous excess.

[dsquared]

John - no, undertakers have to be very skilled, competent and motivated; that's why even today it's usually a job that you are born into. That brand has to be *maintained*, and advertising of funeral services is almost 100% word-of-mouth, meaning that the entire franchise of the company is almost literally on the line with every funeral. Added to that, the undertakers have to walk a fine line between commercialism and compassion, while dealing with people who really don't want to be in the situation of buying their product. The typical Dignity deal includes something like a ten year earn-out if I remember correctly, precisely because the head undertaker is the brand; the business of passing on the torch and integrating the new man into the community has to be handled very carefully.

[Innocent Abroad]

Its failure to promote co-ops is, for me, bigger than all this government's other failures put together.

I suspect that you're pushing on a door that is going to swing wide open during Labour's second or third year in opposition - well, I certainly hope so.

As to how big the sector can grow, this may depend on the motivation of people who want to start up enterprises. Traditionally, it's been supposed that what drives them is the start-up process itself, i.e. they don't want to run mature businesses. On the other hand, professionals by and large don't want to be managers, and often make poor ones - hence the comments on partnerships.

It's also noticeable that many voluntary associations are poorly run - churches are a prime example.

Is it possible that operational management doesn't actually fulfil people (by comparison with professionalism or entrepreneurship), and they need an external driver (i.e. the salary package)?

[Peter G. Klein]

Chris, there is quite a lot of academic research on the organizational structure of coops and how this affects not only their cost of capital, but their governance costs more generally. I have a short summary of some of this literature, with links, here:

http://organizationsandmarkets.com/2007/04/04/vaguely-defined-property-rights/

[ad]

"When the two do go head-to-head, though, co-ops at least hold their own."

If they did not, they would not be going "head-to-head" in that industry sector for very long, would they? So whenever you see them going head-to-head with other ownership structures for any length of time, you see co-ops "at least holding their own".

[Ben Anspach]

Another co-op that goes head to head and is extra interesting with the financial crisis: The Dutch Rabobank.

[John Meredith]

"no, undertakers have to be very skilled, competent and motivated; that's why even today it's usually a job that you are born into."

This is very true. Successful undertakers are fantastically skilled, I can't imagine how you would go about training someone to be an undertaker who didn't have the motivation of a family connection. I hope that John just hasn't yet had cause to discover this and won't for a long time to come.

A general question on co-operatives: what would a policy to 'promote' cooperative or mutual firms, look like? Are we talking about tax breaks or something?

[john b]

Fair enough; indeed it's not a profession with which I have (much/any) direct experience.

The obvious question, then, is what the hell Dignity plc is going to do in 5-10 years' time when the earn-outs are over?

If it is as skilled a job as the consensus indicates, then surely they'll be utterly fuXXored, in an excellent demonstration of Chris's point about areas where the plc format fails...?

[Glenn]

I guess there's a difference between co-ops that wash their face commercially, and co-ops which are aimed at employing people or providing a community service or resource but aren't financially viable.

There's a huge movement out to promote co-ops and other forms of social enterprise - and these organisations are so diverse. My main problem with that, and the people that promote them is that they portray it as a panacea, morally superior to ordinary profit seeking business, and as something too often overlooked by public agencies that might be interested in such things.

There's not many examples of big successful co-ops as you say.

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