There are many ways to transition your business to cooperative governance. There is an art to governance design, with many policies, practices, roles, and rules that can be arranged into place to produce a desired outcome. We will explore various methods to smoothly transition your business into a cooperative governance structure while ensuring stability and allowing former owners to retain a certain levels of control.
Grasping Cooperative Governance Structures for Beginners
There are potentially infinite ways to design a company’s governance and a wide variety of ways to transition governance in the process of converting to a cooperative. One desired outcome of a cooperative conversion is to give power to workers. This transfer of power will need to be structured. Some of the basic governance rights include the right to vote, access to information about the cooperative and more. These rights may not sound like they amount to much, but they are quite powerful, in that they give members the ability to alter the direction of a cooperative through Board elections, helping to keep cooperatives ultimately accountable to members. Although these powers seem simple, they can be hard to grasp at first when you are not familiar with strategies and opportunities for exercising these rights. This calls attention to the need to train workers on how to exercise these rights. For example, companies that did not have a board of directors before will need to go through training to understand the roles of the Board.
Democracy is powerful when people are informed and active participants in the democratic process, and educating new worker-owners about the process can bring more genuine democracy.
How Much Will Governance and Management Change?
When companies change ownership, whether or not to become a cooperative, the workers, customers, and a wide variety of stakeholders often worry about the changes that will occur. Sometimes new owners bring dramatic changes (even closing the business), and other times, the transition is made to feel as seamless as possible.
Maintaining Stability
On the one hand, stability is a highly valued quality of a business, and it offers a very good reason to continue “work as usual” during the ownership transition. Keeping structures that were keeping the business afloat before the conversion process may be key to the company’s success and profitability during the conversion. It’s not necessarily wise to shake things up at the moment when many parties are taking a great financial risk. Employees, in particular, have their livelihoods at stake during a transition. They may wish to retain the status quo in governance, even if they find management structures to be stifling.
On the other hand, new governance structures may be the primary incentive for workers to buy their employer’s business, and worker control could unleash widespread innovation in a company. In many companies, workers tend to be an undiscovered treasure trove of information. Their experiences and insights – if tapped – could refine a company’s effectiveness and performance. This untapped potential has been acknowledged by businesses for nearly a century but, top-down management structures have been prioritized over decentralized governance models in the mainstream business world.
Either way it will be important to maintain stability through open and communication and accountability between the worker-owners.
Former Owners Might Retain Some Control because they have financial stake or to protect their mission
The level of control retained by former owners significantly impacts the transition process of your cooperative towards cooperative governance. There are two main reasons a former owner will want to retain control and each will have different effects on your cooperative:
- Former Owners have financial stake
- Former owners want to protec the initial mission of the business
Former Owners have financial stake
Even after the business converts entirely to worker ownership there is are some situations when the former owner wants to retain a certain amount of power either temporarily or indefinitely. One of the core cooperative principles is that cooperatives should be autonomous, meaning that they are independent of outside control. As such, giving temporary or ongoing control to former owners can be seen as undermining the cooperative principles. At the same time, there are some valid reasons, described below, to allow some degree of control by former owners.
If the the owners helped finance the buyout, they still have “skin in the game,” even if it’s in the form of a promissory note.
- If a former owner wishes to retain some control in order to protect a financial stake, this brings up the big-picture question: How much voice should we give to capital? Giving power to capital is almost antithetical to the concept of a worker cooperative, but giving people no means to protect their investment would prevent a flow of capital to cooperative development. A balance generally needs to be struck.
To protect a former owner’s financial stake, it is not uncommon for the cooperative’s governing documents and/or loan agreements to give former owners the right to approve or veto any decision by the cooperative to:
- Make a major expenditure,
- Pay out dividends, bonuses, or patronage distributions,
- Raise wages by a certain percentage,
- Borrow money,
- Restructure,
- Expand the business, and/or
- Dissolve.
Former owners wanting to protect mission
The owners want the business to retain a certain social/environmental mission or continue to serve a certain group of stakeholders. Even when the previous owner no longer has any financial stake in the business they might want to make sure the cooperative continues to serve a specific mission and or make sure the cooperative doesn’t sell out to conventional businesses. This is especially common when a former owner loses money in order to convert to cooperatives. To protect the former owners’ vision, the cooperative’s governing documents could give the former owner the ability to approve or veto any decision by the cooperative to:
- Change the mission or change certain socially responsible policies of the company,
- Convert or sell the company to a conventional business,
- Change the dissolution provisions of the business meaning giving the owner of the business the ability to approve or veto future cooperative members from changing the part of the bylaws that would dictate what would happen if the co-op was sold, in this case that the assets of the business be given to a nonprofit or another cooperative. Basically, its a mechanism to disincentive a cooperative from “demutualizing” or selling out.
- Change the formula of how profits are allocated or distributed.
- Retain a right of first refusal to buy the company back, at a specified price or using a specified appraisal method, in the event that the cooperative desires to sell the company.
Alternative Approaches for Granting Former Owners Control when you Cannot give Power to Non-members
Some cooperative entity statutes will not allow Bylaws to give power to non-members. In such a case, power can still be given through a contract, such as through a loan agreement. Here are ways to give former owners control that avoid this statute:
- Granting rights in a contract, such as loan agreements, another financing contract, or leases.
- Giving the former owner one vote and requiring that certain decisions be made unanimously or by a supermajority.
- Allowing one or more Board seats to be appointed by specific individuals or organizations. This may not be allowed under some cooperative corporation statutes.
- Allowing the former owner to nominate candidates for the Board.
- Having the former owner serve on the Board and on an “Empowered Committee” for a specified period of time after conversion.
- Allowing the former owner to appoint all or part of the initial Board.
- Adopting Bylaws provisions that cannot be changed except if approved (or not actively vetoed) by specified individuals.
Take your time: Multi-stage Buy out
In some cases, the cooperative has a multi-stage buyout process when converting their business into a cooperative. This means the process might be gradual and the transition to a workplace democracy might also be a gradual process. Full worker control may be an ultimate goal, but the intermediate governance structures may take many forms. It is important to be open-minded and realistic when adopting a new governance structure when going through this process.
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