Co-operatives: Profit by pulling together

How often do you hear glib phrases about operators ‘taking full ownership of the process’, usually in the context of some lukewarm worker-participation scheme dreamt up by a management consultant?

But what happens when employees really do find themselves owning – or part-owning – a business? What are the motivational impacts internally, and how do external customers respond?

Discovery Packaging and Design is the result of an employee buyout of Prisme Packaging in Dundee. In March last year, after the workforce was made redundant and the company ceased trading, employees formed a co-operative in order to keep the business going.

The company website highlights its co-operative status on the home page, along with the “vested interest” that all staff members have in “how well the company grows”. Designer and managing director David Taylor says: “When we speak to new customers, we make a point of telling them about this. It’s one of our USPs.”

But this is by no means the view of every worker-owned business in the sector. Another small company did not even want to discuss the subject, saying: “It’s not a selling point if you’re trying to talk to ‘normal’ businesses”.

At Co-operatives UK, worker co-operative development officer John Atherton explains: “Some co-operatives, particularly those interested in promoting themselves as an ethical, trusted, environmental business, find great benefit in describing themselves as a co-operative.” But in sectors where the co-operative model is not well-known, that may simply confuse the message, he adds.

The attitude of investors and would-be investors is also, clearly, critically important. At Discovery, Taylor points out that the banks look more favourably on limited companies, for reasons of personal guarantees and liability.

Atherton, at Co-operatives UK, says: “Like other business models, a co-operative can take many legal forms, including companies, limited liability partnerships and industrial and provident societies. What defines a co-operative is how it operates: it exists to serve its members.”

At machinery supplier Ulma Packaging UK, managing director Derek Paterson points out that in the UK in particular there is widespread misunderstanding about what ‘co-operative’ actually means. When it comes to dealing with co-operatives and employee-owned businesses, it seems, political and cultural preconceptions can cloud business judgement.

Parent company Ulma in Spain’s Basque region is part of the large and diversified Mondragon co-operative. Nor is Ulma’s status unique in southern Europe. Packaging equipment manufacturer SACMI, based in Imola, northern Italy, is another case in point.

A European dream?
Paterson does not discount the possibility that the co-operative model might, under certain circumstances, work in the UK. But it is no coincidence that the parent company has not stipulated that the same model be followed in its own overseas businesses. “If you need to shift direction, the co-operative model is not too quick on its feet. There is recognition that the subsidiaries need to be faster in their decision-making,” says Paterson.

He also associates the co-operative ethos, and the way it ties workers into the business, with notions of “jobs for life” which he judges are more suited to other parts of Europe.

In fact, co-operatives are just one form of employee ownership. While few employee-owned companies will share the democratic rigour typical of co-operatives, most will have a far flatter structure than the majority of mainstream companies.

According to Patrick Burns, director of the Employee Ownership Association, employee-owned businesses in the UK notch up annual turnover of some £25bn. If so, the packaging sector accounts for a relatively modest share of this total.

But a glance at some sector-specific examples serves to demonstrate the diversity both of approaches to co-ownership and of the rationales behind it. While the John Lewis Partnership, including Waitrose, is often cited as the best-known employee-owned business in the UK, others dispute whether it is truly ‘employee-owned’ at all.

For Hugh Facey, founder of the Gripple and Loadhog businesses (see box), it is more accurate to say the retailer is owned by a trust, thanks to which all employees enjoy their famous bonuses. But when employees buy shares in his businesses, as they are now obliged to do, the value of those shares can go down – as they did last year. As he puts it: “It’s money at risk.”

Some argue that opting for a co-operative structure is a political choice. But many of these employee ownership models are in their own way equally ‘political’.

Chairman of distribution company Kite Packaging Bruce McInnes sketches out a notional line to demonstrate the different types of employee ownership, positioning John Lewis “on the left-hand edge”. He unashamedly locates his own business at the opposite end of the spectrum.

Like Facey, he attaches great importance to the fact that workers invest their own cash in company shares. “When I set up the company in 2001, I wanted to allow the workforce to participate in the wealth-creation process,” he explains. “I want to show them how capitalism works, and I don’t think John Lewis does that.”

McInnes argues the wider sector, with its multitude of smaller, privately-owned businesses, could benefit from pursuing this model. “With a lot of these businesses, the owner wants to hold on to 100% of capital,” he says. “I’m happy to bring other people in so long as the cake gets bigger.”

Having already made his mark in other types of business, McInnes appears to see this as an exciting experiment. But why else do companies move towards employee ownership?

The Baxi Partnership advises on, and finds funding for, businesses wanting to make this move. Carole Leslie, who heads up the partnership, says: “In 90% of cases it’s brought on by succession issues in a family company. If it’s a good proposition, the banks will fund it.” Other options include the Co-Operative Fund, she says, adding that Baxi can help to work up a business plan in these situations, allowing the company to remain independent.

Loyal workforce
At the Employee Ownership Association, Burns points out that staff retention is another reason why – increasingly – businesses are looking at this option. “Companies that are new or in a state of transition may choose to offer employees a stake in the business in order to motivate them and help to keep key people onboard.”

That issue of motivation is clearly key. At converter CRP Print and Packaging, sales and marketing director Dev Brahmachari explains its particular version of co-ownership: “The business is predominantly owned by the board of directors, along with around 20 owner employees – senior managers and longer-serving employees. But the majority of the shareholding is with the board.” In total, there are 180 employees in the company.

Brahmachari says that the change came about when the chairman retired. “He was keen to see at least some of his employees participate directly in the business.”

International examples of employee ownership include Appleton in the US, a producer of speciality papers and flexible packaging, which ventured into film converting in 2003. Corporate communications manager Bill Van de Brandt explains that the company has been employee-owned for nine years.

“It brings the workforce closer to the business, though there are no guaranteed returns,” he says, adding that the model is common in the US, and supported by Federal legislation. Options include investment plans for retirement.

At Kite, McInnes is proud of the company slogan: “Customer satisfaction matters so much more when you own the business.” And that, it seems, is a lesson that other businesses might benefit from.

CASE STUDY: LOADHOG
When Yorkshireman Hugh Facey set up his Gripple engineering business 16 years ago, he was keen to offer his small workforce the option of buying shares in the company.

That workforce now owns some 37% of shares, he says. And since then, workers at Loadhog – a returnable packaging business spun off from Gripple in 2004 – have acquired no less than 49% of the shares in this sister company.

Since he is 65, Facey is currently transferring the voting shares, which he has retained, into a trust ahead of his full retirement from the company. “The trust will have no power other than to veto the appointment of the chair or chief executive,” he explains. “Once the trust has been set up, it will not be able to sell the business unless 90% of the non-voting shareholders are in favour of it.”

This is all about the longevity of the business, and Facey says he is still working to ensure that the board remains accountable to the employee shareholders. “So many successful businessmen go on to sell off the business, and I don’t want that,” he says. “I want the business to continue.”

He divested day-to-day control of the two companies a couple of years ago, but says: “I’m there as the backstop to ensure that daft things aren’t done. Ours is capitalist – rather than socialist – employee ownership, even though we do have social and community interests at heart.”

Loadhog produces reusable pallet systems, including the Smartstak system used by the glass industry to combat the problem of collapsing pallet loads.

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