Using Individual Capital Accounts in Cooperatives

One of the best books on cooperatives is:

Beyond the Corporation:Humanity Working
By David Erdal
Published by Vintage Digital
March 22, 2011

I strongly recommend you buy the book on Amazon.

Amazon Description

David Erdal attended Harvard Business School; led one of Britain’s most successful paper manufacturers and moved them into all-employee ownership; and advised companies, trade unions, and governments in Slovenia, Zimbabwe, China, and South Africa on privatizing companies into ownership by all their employees. He is a director of a partnership that helps companies achieve all-employee buyouts, and chairman of the employee ownership trust of a successful childcare company.

* Beyond the Corporation is a book for our times. Offering inspiration and vision in the wake of financial Armageddon, it is the story of ordinary people who share the ownership of the businesses where they work.

* The enterprises come in all sizes: from companies employing just a few dozen people, to large corporations: John Lewis in the UK, employing 70,000 ‘partners’; Mondragon, a highly entrepreneurial group of over 100 businesses in Spain, employing more than 100,000; and many examples in the US, some employing tens of thousands. It would be hard to imagine a better informed, more involved or more enthusiastic set of employees – sharing the efforts of making their companies successful, and sharing all of the rewards. Unusually in the corporate world, they control their own destinies – a situation beyond the dreams of most working people.

* Erdal takes a hard look at those who insist, in the teeth of the evidence, that shared ownership will never work – a sorry tale, he argues, of prejudice masquerading as economic thinking. The book contains detailed case studies as well as interviews with a range of people, whose inspiring stories of success fly in the face of received wisdom. These successes include: high levels of productivity; sustained rapid growth; fast-moving, innovative responses to changing worlds; high levels of investment aimed at long-term prosperity; and, above all, the sheer happiness employees experience in working together in businesses that they own together, sharing the wealth that they create.

* At a time when the ‘orthodox’ corporate economy has been badly shaken, Beyond the Corporation makes essential reading.

The excerpt below describes the value of using individual capital accounts in coops.

If the employees do not own any shares personally, then there is in theory a conflict of interest between paying out profits and reinvesting profits. To the extent that the shares are held permanently in trust, any profit reinvested in the business is lost to the employees – they benefit during their working lives by strengthening of their company, but they take nothing with them when they do not personally share in any of the capital invested. As we have seen, economists predict that employees will therefore never want to reinvest any profit, instead paying it all out themselves. And as we have also seen, they are wrong. Nonetheless it is a reality that, for example, when John Lewis funds the building of a new department store, it uses profits that could otherwise be paid out to the partners. Once the money is invested, it cannot be paid out. Why then do John Lewis and similarly structured companies, like Arup (which has grown fast and consistently for decades through reinvesting, without ever having to borrow), reinvest their profits?

The answer seems to lie in the commitment of the people as human beings to their company and to future generations. They want to keep the company strong for their own sakes and they want to pass it on strong to the next generation. They are people with the privilege of making themselves wealthier than their employee equivalents in similar companies. They want to give the same good fortune to those who come after them. They have human aspirations which include elements of conscience and of generosity: they are much more than the immediate-money-grubbing automata of economists’ models. The Mondragon solution to this reinvestment problem has twice been invented independently – in the 1950s by Mondragon cooperatives in Spain and in the 1970s by David Ellerman and his colleagues in the Industrial Cooperative Association in Cambridge, Massachusetts. This solution is the individual capital account. In some ways it is the best formula yet found.

The Mondragon solution to this reinvestment problem has twice been invented independently – in the 1950s by Mondragon cooperatives in Spain and in the 1970s by David Ellerman and his colleagues in the Industrial Cooperative Association in Cambridge, Massachusetts. This solution is the individual capital account. In some ways it is the best formula yet found.

We have seen that each Mondragon member invests nearly a year’s salary in the business. That money is not given in exchange for shares: it is put into the member’s capital account. The employee-owner-member used to be given a booklet in which the value of the account was tracked; now the tracking is done electronically. This account is as clear a proof of ‘ownership’ as a share certificate, but easier to understand, because like a bank statement it is expressed in terms of its current monetary value. The capital sum is increased every year by a distribution of profit (or reduced by a distribution from any loss), and it receives a cash yield through the interest payments at the rate of 7.5 per cent. The capital can be withdrawn when the per son leaves the company or retires. Unlike a share, it does not carry governance rights that can be traded, nor any right to the wealth that will be created by future generations in the same company.

The right to vote, to participate in general meetings, and to appoint and dismiss the general manager are rights that are held by each member as personal rights. They cannot be sold. Even if the current generation builds up the capacity of the company enormously, so that it is clear that huge profits will be produced in future, they cannot appropriate the value of those future profits as a financial payment. In this respect the capital accounts are distinct from shares – shares in a company in that position would rise dramatically in value, because they carry the right to future profit. With capital accounts the value of future profits is left to the people whose work will make it real, as autonomous members in the future. They will be lucky. But so are today’s employees, who have inherited a successful business and will share in building it further, in charge of their own destiny.

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