Introduction

A growing body of evidence, from studies in the United States and elsewhere, indicate that worker cooperatives are more resilient than conventional businesses, on average. There are a number of reasons why this would be: profit is not their primary objective so they can flex with economic turbulence, worker-owners are more committed to their workplaces than traditional employees, and worker co-ops have a productivity advantage over other businesses. However, worker cooperatives are quite rare in the US. This yields a scarcity of data from which to evaluate the survival of these entities, but does not prove that co-ops have a higher failure rate than conventional businesses. Rather, co-ops face unique barriers to entry. Investment in worker cooperatives and the organizations that support them can help lower these barriers and facilitate a more sustainable economy.

Survival of Worker Cooperatives Compared to Conventional Businesses

Starting any kind of business is risky: less than half of all businesses survive beyond year five. Worker co-ops are not immune from this. However, “[t]here is a growing literature on the survival of [worker cooperatives (WCs)], which indicates that while a significant percentage of them fail—especially during their early years—they do not fail at a rate that exceeds that of [conventionally-owned firms (CFs)]. Instead, once created the expected survival of WCs meets or exceeds that of CFs.”¹

Professor Erik Olsen surveyed studies that evaluated hazard functions (the probability of not surviving the midpoint of a 12-month period) of WCs compared to CFs. Because this data is not available for WCs in the United States, the research relied on studies from the UK, Canada, Israel, France, and Uruguay. Olsen found across the studies that:

●  WC hazard rates were lower than CF rates in those countries or in the US

●  Like CFs, WCs experience an elevated hazard in their early years, but it peaks at year two or three for WCs and year one for CFs

●  Early survival and median lifespan of WCs meet or exceed that of CFs

●  WCs appear to have comparable long-term survival rates to CFs²

Olsen concluded that existing research does not support the proposition that WCs, once formed, are at a competitive disadvantage to CFs.

European studies echo these results. For example, statistics from France showed a particularly high survival rate of conversions of conventional companies into worker cooperatives: there was a three-year survival rate of 80-90% for these cooperatives, converted from “in crisis” or “sound” enterprises, respectively. Compare this to a 66% three-year survival rate for all French enterprises. Likewise, the five-year survival rate of cooperatives formed from existing businesses was 61-82%; this figure for all French businesses was 50%.³

Specific example: WAGES

The Bay Area’s Women’s Action to Gain Economic Security (WAGES, now Prospera) is one of the country’s most successful worker cooperative incubator. In 2013 it had created five green housecleaning businesses, providing high-quality employment to over 100 women and generating $3.2 million per year. The Executive Director, Meche Sansores, wrote in March 2013 that “two of WAGES’ five co-ops were launched during the recession – one in 2009 and another in 2011 – despite the fact that the national small business failure rate increased by 40 percent during this timeframe, and California’s was the worst in the country.”⁴ All five of the co-ops experienced steady growth even during the financial downturn. 

Specific example: Mondragon

The Mondragon Corporation in Spain is a federation of worker cooperatives and the most successful example of such enterprises in the world. In 2013 it employed over 100,000 workers and is the seventh largest corporation in that country.⁵ As of 2011, the success rates for Mondragon startups was 80%.⁶

Other Evidence of Worker Cooperatives’ Resilience

Resilience of employee-owned companies

The most notable (and studied) form of employee ownership in the United States is the Employee Stock Ownership Plan (ESOP). A 2005 study found that US businesses that were 100% employee-owned were one third as likely to fail, compared to publicly traded companies.⁷ Studies also show that employee-owned companies are more productive and have less employee turnover.⁸ ESOPs should be distinguished from worker co-ops, however: while ESOPs allow employees to share in company profits, they usually do not convey 100% ownership, nor the democratic control of the business that characterize worker co-ops. But 30-40% of the 12,000 ESOP companies in the US are 100% worker-owned, and their success rate is instructive. ⁹ Additionally, the tax incentives that have encouraged employers to offer ESOPs are available for cooperative conversions as well.

Resilience of cooperatives generally

There appears to be a consensus among studies in a number of countries that cooperatives are more resilient than conventional businesses.

●  Recent Canadian studies:

●  Cooperatives in British Columbia between 2000 and 2010 had a five-year survival rate of 66.6% (100 out of 150), compared to conventional Canadian businesses what had a 43% and 39% 5-year survival rate in 1984 and 1993, respectively.¹⁰

●  Alberta cooperatives created in 2005 and 2006 had a three-year survival rate of 81.5% compared to 48% for conventional businesses in that province.¹¹

●  A 2008 study in Quebec showed that co-ops had a five-year survival rate of 62% and ten-year survival rate of 44%, compared to 35% and 20%, respectively, for other Quebec businesses.¹²

●  A 2012 study by the European Confederation of Workers’ Cooperatives, Social Cooperatives and Social and Participative Enterprises (CECOP- CICOPA) found that worker cooperatives and social cooperatives in Spain and France “have been more resilient than conventional enterprises during the economic crisis.”¹³

●  Cooperatives in Italy have shown a lower mortality rate and incidence of bankruptcy than conventional businesses.¹⁴

●  In 2005, 1% of German businesses were declared insolvent, but the statistic for cooperatives was less than 0.1%.¹⁵

Why Worker Cooperatives Are So Scarce

Olsen’s study on the viability of worker cooperatives concluded that their scarcity in the US was due to obstacles to their creation, not to their survival. The report identified the following as the primary reasons that start-up businesses are rarely formed as worker cooperatives:

●  Workers must take the risk of high costs should the enterprise fail, since in most cases they must make an initial contribution to the business. In addition to losing their jobs, they would also lose this investment. This risk of loss may make taking a job in a conventional business more appealing.

●  Relatedly, these start-ups are usually credit constrained and lack collateral. Co-ops do not typically offer control to outside investors and rely heavily on loans, which can be hard to come by, or their own limited wealth.

●  Start-up costs may be unevenly distributed, and the founders of the co-op may not see a material benefit for the risks they took in starting the business.¹⁶

Abell found the following barriers to entry (and growing to scale) that worker co-ops face:

●  Culture and education: competition and conventional capitalism are still the dominant culture in the US

●  Business expertise: workers lack business management experience and nonprofits lack experience incubating new businesses, especially co-ops

●  Partnerships: ill-equipped partners or premature withdrawal of organizational support often inhibit resilient co-op development

●  Financing: lack of startup funding and patient capital is a key barrier for co-ops

●  Management and leadership: co-ops require more participatory, egalitarian management that can be difficult to cultivate

●  Entrepreneurship: traditional entrepreneurial personality types and skills may be ill-suited for the cooperative form of business

●  Organizational democracy: co-ops need to develop processes for democratic decision-making, as well as training in facilitation, collaboration, and conflict management.¹⁷

Cooperative conversions of existing businesses would seem to avoid many of the impediments that entrepreneurs face when attempting to start a co-op from scratch. For example, Olsen noted that the equity of an existing business can be used as collateral to finance the purchase from the original owner, and established businesses are less likely to fail. Additionally, the tax incentives that have helped create numerous ESOPs have led to almost no worker cooperatives, even though the same incentives exist for these conversions. But Olsen observed that, despite these advantages, cooperative conversions are very rare in the US.¹⁸ With greater public awareness and financial support for conversion of existing businesses into worker cooperatives, this co-op creation strategy may hold the most promise and highest success rates.

Success Factors and Addressing Barriers to Entry

Under the right circumstances, cooperatives are highly resilient, productive, and successful. What factors have been shown to contribute to this success?

According to the Canadian Worker Co-operative Federation, common success factors for the worker co-op movements in Italy, Spain, and France, were:

(1) sufficient capital accessible to worker co-ops; (2) technical assistance provided to worker co-ops in the start-up phase; (3) a mandatory indivisible reserve, at least for those “mostly mutual” worker co-ops which were able to receive government support; (4) significant federation and consortia structures which support, guide, direct, and help educate the worker co-operatives; (5) significant concentrations by industry; (6) a strong sense of solidarity and inter-cooperation; and (7) scale: having achieved a size and strength to enable the worker co-op movements to be taken seriously by governments, the broader co-operative sector, etc.¹⁹.pdf”>http://www.canadianworker.coop/sites/canadianworker.coop/files/CWCF_Research_Paper_International_16-6-2010_fnl[1].pdf.]

Abell’s report identifies similar success factors from the US and European contexts:

1. Ongoing training and cultivation of cooperative culture
2. Design for business success
3. Effective long-term support
4. Patient capital
5. Strong management and social entrepreneurial leadership
6. Good governance²⁰

Public policies and investment that allow worker-owners to access patient capital, technical assistance, training, and support, will help pave the way for a more resilient economy. For more detailed proposed policies, see the following recommended publications:

●  Hilary Abell, Worker Cooperatives: Pathways to Scale (June 2014), available at http://community-wealth.org/sites/clone.community-wealth.org/files/downloads/WorkerCoops-PathwaysToScale.pdf

●  Jennifer Jones Austin, Federation of Protestant Welfare Agencies, Worker Cooperatives for New York City: A Vision for Addressing Income Inequality (Jan. 2014), available at http://www.fpwa.org/binary-data/FPWA_BINARY/file/000/000/697-1.pdf

●  Nicholas Iuviene, Amy Stitely, Lorlene Hoyt, MIT Community Innovators Lab, Sustainable Economic Democracy: Worker Cooperatives for the 21^st Century (Oct. 2010), available at http://web.mit.edu/colab/pdf/papers/Sustainable_Economic_Democracy.pdf.

●  Shareable & Sustainable Economies Law Center, Policies for Shareable Cities: A Sharing Economy Policy Primer for Urban Leaders (Sept. 9, 2013), available at http://d3n8a8pro7vhmx.cloudfront.net/theselc/pages/204/attachments/original/1393535972/Policies-for-Shareable-Cities.pdf?1393535972.

Written by Sara Stephens
Staff (not-yet-) Attorney, Sustainable Economies Law Center