Employee Ownership: The Power of the Cooperative Model to Build Opportunity and Wealth for Worker-Owners and Their Communities
By Alison Powers, Cooperative & Community Initiatives Manager
Co-ops are having a moment. That is to say that cooperatives, which have existed for generations, are currently being recognized for their ability to build economic power for the workers who own them. This point has become more underscored as communities have been touched by the instability that the COVID-19 pandemic has caused within our health and economic systems, as well as decades of racial injustice.
Racism and subsequent systemic discrimination has resulted in considerable and still-rising wealth disparities across the country. Black, Indigenous, and people of color and women, particularly those in low-wage jobs, have been left with little ability to create a viable financial future. In 2016, the median white family had $147,000 in wealth, compared with $3,600 for Black families and $6,600 for Latinx families. Women, Black, and Latinx people are often segregated into employment that offers lower wages, fewer benefits, and few chances for advancement. Earning lower wages also means that, if people decide to become entrepreneurs, they have fewer savings to invest into their businesses and less equity to bring to the financing table.
With so many people in communities across the country looking for viable opportunities not just to survive but to thrive, cooperatives are rising as a model that builds and holds wealth, especially for workers who earn low wages. There are many good examples of how workers can come together to shape their financial future through democratic ownership. As part of our mission to help create places of opportunity, Capital Impact Partners has long centered cooperative development, particularly employee ownership, as a strategic model for building wealth for disinvested communities.
Employee Ownership Provides Many Benefits to Workers…
Employee ownership is not new; it has supported workers, including those in underserved communities, to engage in dignified work and earn living wages and create generational wealth for themselves and their families. Owning their business enables worker-owners to make decisions that are in their best interest and the interests of their community, from setting wages to selecting health care benefits to deciding staff time that promotes a work-life balance.
Worker co-ops build wealth, create quality jobs, stabilize communities, and provide essential services. When workers who are traditionally at the lowest level of the organization are able to be represented at the highest level of the company’s governance, “co-ops will almost always choose the path with the most security for their workers,” says Kate Khatib, executive director for the Baltimore Roundtable for Economic Democracy.
Democratic ownership also has a ripple effect. Training is a core tenet of co-ops, transferring skills that workers can utilize throughout their careers. Seeing worker-owners commit to the economic and social future of their community, other businesses stay in the community as well and invest in its growth, support other local businesses, etc. It can also improve involvement in community engagement, volunteering, voting, and more by fostering a stronger sense of harnessing local assets. At a time when home ownership is increasingly out of reach due to stagnant wages and limited opportunities, employee ownership provides a way for workers to own their business and build generational wealth.
…And Has Helped Worker-Owners Weather the COVID-19 Pandemic
A powerful model for economic empowerment, employee ownership has also been vital to keeping workers employed and financially grounded throughout the pandemic. Our economy’s least-protected workers – Black, Indigenous, and people of color, and women – were the most impacted by the COVID-19 pandemic and in many cases lacked the financial safety net that the generational wealth of business ownership creates.
Recent research suggests that employee-owned firms showed higher job quality and resilience during the 2020 public health and economic crisis. Companies owned by their employees significantly outperformed other firms in retaining employees, protecting worker health and safety, and maintaining hours, salaries, and wages in a time of tremendous economic upheaval and uncertainty.
In the face of historical barriers to expanded cooperative participation, the co-op model is again being adopted by communities in larger numbers than before, particularly historically disinvested communities. The most recent Worker Co-op Census in 2019 conducted by the U.S. Federation of Worker Co-operatives showed 465 worker cooperatives and democratic workplaces that were operational. These co-ops employ an estimated 6,454 workers and produce about $505 million dollars in revenue each year. The average wage paid is $19.67, more $7.00 higher than the minimum wage in the states with the most co-ops. Worker co-ops distribute surplus profits as patronage; the average worker owner earns $8,241 in addition to wages.
And the growth continues.
The options for employee ownership vary, including:
- Worker-owned Cooperatives;
- Employee Stock Ownership Plans (ESOPs); and
- Employee Ownership Trusts.
Watch this video to see how the workers of Ward Lumber, with support from Capital Impact, came together to form a worker-owned cooperative to ensure their future and the future of their community.
Worker Co-op Conversions Addressing A Crisis in Small Business Closures
With the growing interest in worker-owned cooperatives, worker co-op conversions present an opportunity to grow and scale the field.
A sizable number of the small businesses in the United States are owned by Baby Boomers, many of which do not have a succession plan. With Baby Boomers retiring, many healthy businesses have no one to inherit and no buyers; as a result, these businesses are closing in record numbers, and that trend was only exacerbated by the COVID-19 pandemic. In New York State alone, even before the pandemic, an estimated 3,700 businesses closed each year due to owner retirement, leading to a loss of 13,260 jobs annually. Surveys indicate that 79 percent of business owners want to retire in the next 10 years, 57 percent in less than five years, and 33 percent in less than three years.
Policy action is being taken both locally and nationally to expand co-ops, particularly within the Biden-Harris administration. Capital Impact has signed support for the Capital to Cooperatives Act, legislation that aims to ensure that cooperatives can access Small Business Administration lending to create jobs.
In addition, new funds have been recently launched that combine technical assistance and financing to be competitive in the market and help the cooperative sector overcome some historical financial barriers to expansion. Apis & Heritage and Accelerate Employee Ownership are two examples.
Strong relationships are needed with national allies, including social justice allies, labor unions, and advocates, as well philanthropy and local government playing a larger role in building opportunities for co-ops, especially in historically marginalized communities that have been shut out of generational wealth building and might not have equity to start a co-op.
Capital Impact’s Efforts to Support Employee Ownership
Since our founding in 1982, we have been grounded in the power of the cooperative model, and have worked to foster employee ownership nationwide.
In 25 years, Capital Impact has lent $250 million in support of cooperatives, dispersing about $10 million last year.
In 2008, Capital Impact and several leading nonprofit organizations helped form ROC USA Capital, a nonprofit CDFI and subsidiary of ROC USA, LLC, a nonprofit that helps residents form cooperative corporations to purchase their manufactured home communities from private owners and manage their neighborhoods in perpetuity.
Seven years ago, we created and have managed our Co-op Innovation Award to amplify innovative co-op business models in communities living with low incomes and/or communities of color. Awardees are focused on community-driven co-op development initiatives broadening opportunities for quality jobs, wealth creation, and asset building. Since Capital Impact Partners launched the Co-op Innovation Awards in 2015, the 12 grantees have:
- Leveraged their combined $385,000 in awards to secure more than $6.2 million in additional funding from foundations, investors, and government.
- Replicated programs regionally or nationally (6 grantees)
- Worked with with over 20 local or state governments to further co-op development goals
- Reached over 2,000 community members through meetings and training.
The vast majority of our awardees have been worker co-ops. Co-op Innovation Award winners include ChiFresh Kitchen and The Driver Cooperative (incubated by The Independent Drivers Guild), both of which received their first funding from Capital Impact Partners, which allowed them to move from the idea stage to getting national recognition and financing, including from our partner Shared Capital.
Capital Impact provided seed funding for the Workers to Owners Collaborative, a national collaborative of organizations working to transition small businesses to employee ownership. Workers to Owners is a clearinghouse for ideas and best practices, a place where worker owners can go to network with peers, get feedback, learn about trends, and advocate for employee ownership. Ownership transitions through Workers to Owners member organizations resulted in the preservation of more than 980 jobs and the transfer of more than $31.9MM in business assets according to a 2019 data brief.
In August 2018, we published “Co-op Conversions At Scale,” a market research report to assess the growth potential of employee ownership (worker co-op) conversions in several markets, particularly how to scale co-op conversions of businesses with 20-100 employees. Following on the report, we convened Community Development Financial Institutions (CDFIs), small banks, and credit unions from around the country at our Financing the Preservation of Legacy Businesses event – funded by Citi Community Development in October 2018 – to learn about opportunities for scaling co-op conversion and train them on the specifics of financing and underwriting. The event featured Representative Nydia Velazquez, who was a champion of the Main Street Employee Ownership Act, federal legislation passed that improves small business loan programs for employee-owned businesses.
Most worker co-op conversions have been very small businesses with under 20 worker owners, but there has been an intentional focus in the sector to target companies with larger workforces. This is where Capital Impact sees its value; as a larger CDFI, we can support the conversion of businesses that require more financing. In collaboration with our co-op partners, we have been able to strategize ways to support employee ownership growth.
This year, we are proud to announce the financing of our first worker co-op conversion with long-time partner Cooperative Fund of New England. This proud new cooperative, Ward Lumber, is another example of the power of worker co-op conversion to maintain and augment wealth and stability within communities.
Ward Lumber is a 130-year-old business in New York, employing more than 40 workers. When Jay Ward realized that the family business would not pass to his next generation, he and his workers looked for another way to ensure that the business continued. This is an important transaction, not only for the workers themselves, but because the ripple effect of this business closing would have been felt throughout the local economy for years to come. Instead, this effort helps preserve a community pillar for years to come.
After many years of ecosystem development, we are excited to see the number of cooperative development projects growing, and we plan to work with our partners to continue fostering this growth as part of our long-term strategy to expand wealth building and dignified work for our communities.