How alternative business ownership models can help solve some of the most pressing social challenges of our time.
Each month we delve into a new story inspired by our surroundings and our work as a small business building towards a just and regenerative future. This month we contemplate how alternative business ownership models can help solve some of the most pressing social challenges of our time.
Like most small businesses, Trident Booksellers and Cafe of Boulder, Colorado, took a hit when the COVID-19 pandemic arrived in the U.S. last March. Lockdown orders erased the possibility of foot traffic, and social-distancing rules meant the staff could serve fewer customers when the store was open.
So Trident adapted. It sold stay-at-home care packages of books, teas, and coffees. Staff rearranged the store layout to facilitate socially distanced shopping. And the 40-year-old bookstore even transitioned to a new employee-ownership model.
As Cyanne Stonesmith, one of Trident’s new employee-owners, told local newspaper the Daily Camera, the bookstore had been able to stay in business for decades because it “value[d] people and the community over profits.” Transitioning to employee ownership would allow Trident to continue doing just that amid the pandemic.
Trident Booksellers; Source: Trident Booksellers
That sentiment isn’t just idealism — it reflects a very sober-minded business strategy. In the words of Peter Jones, another of Trident’s new owners, “We wanted to eliminate that tension [between the owners and employees] and make everyone an equal contributor to the success of the bookstore. Now everyone pulls their own weight, and the Trident can move forward without many of the traditional roadblocks one finds when employees work for owners.”
Clearly, the change has been working: Trident has so far weathered a tumultuous economic storm that has forced more than 100,000 small businesses to shut their doors forever.
THE SHORT-TERM THINKING — AND LONG-TERM THREATS — OF MAXIMIZING SHAREHOLDER VALUE
The story of Trident Books is about more than one small business’s extraordinary efforts to survive the COVID-19 pandemic. It also throws into sharp relief some of the shortcomings of traditional forms of corporate ownership — those “roadblocks” Trident sought to knock down with its transition to employee ownership.
Most companies in the United States, whether privately owned or publicly traded on the stock market, operate under the direction of private shareholders, whether they be the company’s founders, private equity firms, or other investors who have put money into the organization. Such shareholder-directed companies often act according to one key principle: maximizing shareholder value.
Milton Friedman didn’t invent the concept of maximizing shareholder value, but he played a key role in promoting the idea; Source: Randy Glass Studio
Popularized by conservative economist Milton Friedman in the 1970s, the principle of maximizing shareholder value exhorts companies to do whatever it takes to earn profit and increase the return on investment for their shareholders. Friedman’s disciples argue that chasing short-term profits still creates significant incentives for “good” corporate behavior. Consumers, they say, are more likely to spend money at businesses that treat them and their communities well. However, this assumes that consumers have access to perfect information about a product, its true costs, and the behaviors of the business making that product — and that consumers use this information to make perfectly rational spending decisions. As the field of behavioral economics has shown us, these assumptions are deeply flawed: People’s economic decisions are influenced by culture, emotion, and other slipperier factors.
As we’ve seen in the early 21st century, pursuing maximum shareholder value can generate incredible wealth for investors, but companies operating under this framework have little real incentive to consider the long-term impacts of their operations on their employees, their communities, or even the planet itself. Instead, the quest to generate maximum shareholder value tends to promote a short-termist view: How can a company generate the most money in the shortest period of time while avoiding as much responsibility for costs as possible?7
“[We have] an extractive global economy — one that is leading to ever-increasing inequality, rapid depletion of natural resources, potentially irreversible climate change, and enormous social challenges.”
As a result, we have what Jasper van Brakel, CEO of RSF Social Finance, calls “an extractive global economy — one that is leading to ever-increasing inequality, rapid depletion of natural resources, potentially irreversible climate change, and enormous social challenges.”
The fossil fuel industry offers a particularly stark example of the dark paths that maximizing shareholder value can lead us down. Exxon knew as early as 40 years ago that fossil fuels were contributing to climate change. Rather than modifying the business’s operations in any way that could have impacted profitability, company leadership spent millions to promote climate disinformation.
Rather than investing in renewable energy, Exxon and other fossil fuel producers cast doubt on climate research for decades in order to continue chasing profits. Source: Unsplash
The principle of maximizing shareholder value is also a key cause of income inequality, which is correlated with lower life expectancy, lower literacy rates, worse physical and mental health outcomes, increased crime, and other social ills. As University of Technology Sydney professor Thomas Clarke writes, the drive to maximize shareholder value means “value generated by corporations services the increasing wealth of shareholders rather than taking all interests into account. Firms neglect their wider social obligations, such as taxation, but also limit investment in human capital development, innovation, and research.”
In other words: Companies that pursue shareholder value above all else are incentivized to keep wages low, cut tax rates, disinvest from communities, and even cut corners on their own products and services in order to distribute more money to shareholders.
PUTTING COMPANY OWNERSHIP IN THE HANDS OF WORKERS
Of course, not every company with a standard ownership model pursues shareholder value with such brutal gusto. In fact, many shareholder-directed companies are beginning to reconsider the corporate orthodoxy. In the summer of 2019, the Business Roundtable — a nonprofit association of CEOs including Apple’s Tim Cook and IBM’s Ginni Rometty — issued a new “Statement on the Purpose of a Corporation,” urging organizations to commit to delivering value for all of their stakeholders, not just shareholders.
However, little tangible action has since been taken by the signatories of this letter, highlighting the lack of accountability inherent to the shareholder-focused model: Unless shareholders demand otherwise, it’s easy for companies to say one thing and do another.
“Unless shareholders demand otherwise, it’s easy for companies to say one thing and do another.”
The 19th-century Welsh textile manufacturer Robert Owen, widely considered the father of the worker cooperative, envisioned the creation of large-scale cooperative settlements, like the one pictured above; Source: Wikipedia
Given that the traditional system of business ownership is designed with only profit in mind, are we forced to sit around and wait for individual moral actors to come along, ascend the corporate ranks, and use their power for good, totally of their own volition?
Thankfully not. Activists, politicians, and up-and-coming entrepreneurs are going even further than encouraging personal ethical choices — they’re fundamentally rethinking the system of ownership. They’re not just encouraging companies to consider all stakeholders, but actively promoting alternative forms of company ownership designed to combat the short-termist, extractive approach of maximizing shareholder value. Trident Booksellers and Café is just one recent example in centuries’ worth of work reimagining systems of business ownership to drive better social, environmental, and political outcomes.
“Each worker co-op is essentially a democratically controlled and jointly owned operation in which the workers and the owners of the company are one and the same.”
With roots in the early labor activism of the 19th century, worker cooperatives, or “co-ops,” are one of the oldest forms of alternative company ownership. While worker co-ops can take a variety of forms, each worker co-op is essentially a democratically controlled and jointly owned operation in which the workers and the owners of the company are one and the same. Rather than following the directives of corporate boards and investors, the employees of a worker co-op work together to manage the organization. Worker co-ops are present across most industries. For example, Black Star Co-Op operates a prewpub in Austin, Texas; Namasté Solar is an employee-owned certified B Corp. providing residential and commercial solar energy technology.
Because worker co-ops are owned by the people who work in them, they can be a means of democratizing wealth, rather than concentrating it in the hands of shareholders. The worker-owners of a co-op have inherent motivation to invest in themselves, their businesses, and their communities, instead of distributing money to far-flung shareholders with no connection to the local neighborhood. As the Democracy at Work Institute, a nonprofit dedicated to building worker co-ops, puts it: “With ownership in the hands of workers, who are usually living and spending locally, these companies stay connected and accountable to their communities.”
Rich City Rides, a cooperatively owned and run bike and skate shop in Richmond, California, was transformed by shifting to a worker cooperative. Source: Shareable.net
THE PURPOSE-FORWARD APPROACH OF STEWARD OWNERSHIP
By all accounts, worker co-ops can perform as well as shareholder-driven businesses, and even exceed them in some metrics. Employee-owned small businesses average 4-5 percent higher productivity and can generate as much as 14 percent higher profits. Yet worker co-ops do have one glaring disadvantage: It’s often harder for them to access capital. Investors tend to be wary of worker co-ops because the average return on investment trends lower than a typical shareholder-driven company’s. Lenders, too, are hesitant: Few banks have experience working with worker co-ops, and they often perceive these companies to be particularly risky, on account of their nontraditional structures. All told, that lack of capital can put a hard limit on how large a worker co-op can grow and how much it can do.
A slightly newer corporate-ownership model may help solve that problem by extending the benefits of self-governance to a broader array of organizations, for which cooperative structures may not be the best fit. It’s called steward ownership, and it has already been implemented successfully at a wide range of companies, from Oregon-based produce distributor Organically Grown to the Helsinki-based marketplace-platform creator Sharetribe. Could this be the solution that finally makes it feasible — and financially attractive — for the entire economy to adopt more socially beneficial ownership structures?
Like employee ownership, steward ownership is enshrined in a company’s legal documents and can take a variety of forms, but all steward-owned companies share two key principles: self-governance and the guaranteed use of profits to serve the company’s purpose — that is, the company’s social mission above and beyond turning a profit.
“Could this be the solution that finally makes it feasible — and financially attractive — for the entire economy to adopt more socially beneficial ownership structures?”
Imagine a large farm that exists to grow tasty, nutritious food in a sustainable manner. Under a classic shareholder model, the farm will be managed for short-term profits under the control of its financial backers, as is their legal duty. That means the farm will make choices based on what leads to the most beneficial outcomes in the near term. If, for example, pesticides are found to create a higher yield, the farm would use them, despite any consequences those pesticides might have for the surrounding environment. Similarly, if planting only one kind of crop over and over again led to more production, then the farm would pursue that single crop. In the long term, paradoxically enough, that monocultural approach to farming would deplete the soil’s nutrients and lead to the farm’s collapse.
Under steward ownership, the same farm would have a nonnegotiable responsibility to pursue the purpose it was created for: to grow healthy, nutritious food in a sustainable manner. The farm would be self-governed by a group of stewards who work within the farm and represent a diverse set of stakeholders. Rather than being directed by investors, these stewards can safely make decisions to prioritize the long-term health of employees, the soil, and the natural habitat, even if that means lower near-term profitability. The result is a company that is set up to be managed with a view toward long-term success for all stakeholders, not just financial shareholders.
Suzi and Steve Fry of Fry Family Farm, steward owners of the organic distribution company Organically Grown Company (OGC); Source: PCC Markets
Like worker co-ops, steward-ownership models have already been shown to lead to improved company performance. According to research conducted by Steen Thomsen of the Copenhagen Business School, companies with steward-ownership-style models are more profitable, more trusted, pay better wages, and are 600 percent more likely to exist after 40 years. Steward-ownership can also be a vital tool in combating income inequality. Because steward-owned businesses are self-governed, they cannot be inherited, nor can the company’s stewards extract excessive wealth from the business. As Purpose, a nonprofit that promotes steward ownership, puts it, “These businesses belong to the commons, serving their purposes and the interests of all the stakeholders who contribute to their successes, and helping to build a more equitable, regenerative economy. In this sense, they democratize capital.”
THE FUTURE IS COOPERATIVE AND STEWARD-OWNED
While worker co-ops and steward-owned businesses are still in the minority, social forces seem to be aligning in their favor. Workers, entrepreneurs, and consumers alike are increasingly interested in mission-driven businesses, and a little bit of demographic luck has placed the U.S. on the precipice of a whole new alternative ownership movement. [Editor’s note: we are currently working on transitioning Keap to steward ownership!]
We are in the midst of a so-called “silver tsunami,” the ongoing mass retirement of baby boomers, who own as many as 12 million small businesses. As Eillie Anzilotti reports for Fast Company, as these retiring business owners seek to pass their companies on, many are finding that their children aren’t necessarily the best stewards for the organizations’ futures. Their employees, meanwhile, are growing more interested in transitioning their companies to cooperatives or other models of alternative ownership.
“Employees are growing more interested in transitioning their companies to cooperatives or other models of alternative ownership.”
At the same time, government and financial institutions are taking steps to make establishing worker co-ops and steward-owned companies even easier. In 2016, the U.S. Department of Agriculture added new funding options to support the creation of worker-owned businesses in rural areas. The Main Street Employee Ownership Act, signed into law in August 2018, allows the U.S. Small Business Administration to more easily make loans to finance employee-ownership transitions. Thanks to the efforts of the steward-owned Organically Grown, Oregon recently became the first state to enshrine Steward Trusts in law. Similarly, private funding sources like RSF Social Finance, which specifically lends to social enterprises and helped fund Organically Grown’s transition to steward ownership, are growing more common.
Imagine a future where all companies are managed toward a deeper purpose than profits and for the benefit of a richer community of stakeholders. That’s a future where humans are treated well, communities are invested in, natural habitats are protected, and business can help everyone flourish. A massive opportunity to reinvent company ownership for the good of our planet and our communities is here. Like a spirited little bookstore in Colorado, all we have to do now is ensure that we seize it.
— THE KEAP TEAM
About the authors
Keap Candles, are a Kingston, NY-based B Corp making master perfumer candles that help to regenerate you and the planet.