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If I could drop dead
right now, I'd be the
happiest man alive.
– Samuel Goldwyn
The State of Co-ops
by Stephen Morris
Where Capitalism Meets Communism
The State of Co-ops
BY STEPHEN MORRIS
Jim Schley is a member of seven cooperatives. He lives in a cooperative housing community. He owns his home, but the land on which it sits is owned jointly with five other households. When he needed a loan for a septic system, he secured it from the Cooperative Fund of New England, which specializes in giving loans to cooperatives. He also could have gone to the Vermont State Employees Credit Union, whose membership is open to any resident of Orange County.
His home is insured by the Cooperative Insurance Company. He is a member of two grocery co-ops (the Upper Valley Food Co-op and the Hanover Co-op, one of the oldest in the country). He is also a member of a pre-buy food co-op that allows his family to order food in bulk at a discount. When gardening time rolls around, he buy seeds from Fedco, a seed co-op. In short, nearly all of his family's needs are met by co-ops.
"I like the fact that in a cooperative I am an owner as well as a customer," says Schley. "There's a very different attitude toward profit within co-ops because the motivation is to service the members, not a group of outside investors. Given a choice, I always prefer doing business with a cooperative."
Schley's first brush with the co-op concept involved friends.
Back in the early 1980s he and several others who had worked together in various anti-nuclear, feminist and disarmament coalitions decided they wanted to buy land and live together, not communally, but as a community. But what form should their group adopt? Were they a partnership? They explored a land trust model, an agreement whereby one party (the trustees) agrees to hold ownership of a piece of real property for the benefit of another party (the beneficiaries), but they found that structure insufficient for addressing the many social interactions of their intended community.
The group met regularly while defining themselves and looking for land. Although they shared goals of simplicity, fairness, and flexibility, they found it more difficult than anticipated to articulate exactly what kind of entity they were. One might describe them as a "peculiar organization with a legal issue." Of all people, a lawyer came to their assistance and encouraged them to become a cooperative. By the time they finally located the 165-acre farmstead that would become the Blue Moon Community Cooperative, they had in place a set of solid by-laws that has stood them in good stead in the quarter century since.
In choosing a co-op, the group chose from several basic business models. Among them: a sole proprietorship, or a business that has no separate existence from its owner; a partnership, in which the owners share in the profits or losses of the business; a corporation, a legal entity which has a separate legal personality from its members; and, of course, the cooperative.
Some of the nation's most familiar names in business are cooperatives - Ace Hardware, Best Western, and Land O'Lakes. It's on the nation's left and right coasts, however, where cooperatives seem to be gaining new momentum on delightful new platforms.
Electric power, agriculture, and banking have been traditional cooperative strongholds. Oregon is home to 18 electric cooperatives, some of which date back to the 1930s, that exist to bring power to under-served areas. More than 10% of the state's population receives their power from cooperatives
Even these traditional organizations have become leaders in innovation. Washington Electric Co-op, in central Vermont, is a good example of how co-ops evolve over time. Formed in1939 to bring electricity to rural homes at a time when no one else would, the new co-op provided diesel-generated power to 150 farms and homes over 55 miles of distribution line. Today, the cooperative services over 10,000 members, the vast majority of whom are residential. It has also been an innovator in supplying renewable energy by operating the hydroelectric generating station at the Wrightsville Dam on the North Branch of the Winooski and constructing an electric facility at Vermont's largest landfill that is fueled by methane, the worst of the greenhouse gases.
Another agricultural cooperative, Organic Valley, has been fueled by the rise of small family farms that embrace organic farming methods. Started only in 1988, it now boasts more than 1,100 farm members nationally who provide the raw product that the organization brings to the market under the Organic Valley brand. In its mission statement the organization states explicitly that profits will be split with 45 percent going to the farmers, 45 percent to the employees, and 10 percent to the community. It members say that with the time and investment required for farms to convert to organic there was just no way that the burgeoning demand for organic dairy products could have been or could be met without a grassroots organization like the cooperative.
The engine behind the growth of Organic Valley are the retail outlets that emerged to fill the void left by supermarket chains. A prime example is the Ashland Food Cooperative, nestled in the beautiful Rogue Valley in southern Oregon. Their organization started as a buying club in 1971, and has evolved into a well-respected, full-service grocery with more than 4,700 member/owners.
Mad River Glen–A Case Study
Betsy Pratt, when she was owner of Mad River Glen, originally had the idea of selling the popular, but stubbornly traditional, ski area to its customers in the early 1980s. Eric Friedman, current marketing director and (by his own good-natured description) "the latest in a long line of world class Jewish skiers from New Jersey who fell in love with Vermont," says Mad River was facing challenges on many fronts at the time. Downhill skiing, he says, is "a dubious business model to begin with" due to seasonality, weather fluctuations, high liability, and issues surrounding real estate development. Many ski areas have had to choose to expand or fade away. Sugarbush, Killington, Pico, Stratton, and others followed a path to growth, often becoming parts of huge, publicly held corporations. They reduce weather dependence through snowmaking and high-tech grooming. They combat financial uncertainty by developing slopeside condos. They install high-speed quad lifts that reduce the waiting time in lines ... but all at the expense of crowding the slopes.
These technological and mechanical contraptions and crowds are anathema to skiing purists, who think that nature should play the most prominent role in the downhill experience. Mad River, with its unflinching embrace of natural snow, lack of grooming, challenging trails, and single chair lift is one of the last bastions of an outdoor experience that has not been "Disneyfied" by corporate America, say the fans of Mad River Glen .
Wanting to preserve the character of Mad River Glen, Betsy Pratt decided not to sell to a large company. She wanted to sell it to the skiers who shared her love for the mountain. In 1995, the year that Friedman joined the company, the Mad River Glen Cooperative was formed, offering shares to convert the organizations' best customers into its owners. Twelve years later the cooperative has sold 2,158 shares at $2,000 each to 1,800 individuals. In return shareholders get a small bonus - a 10-15 percent discount on lift tickets. The shareholders also are subject to an annual purchase requirement of $200, payable at the start of each season, similar to the concept of community supported agriculture (CSAs) in which the customers help the farmer's cash flow by paying in advance for their produce.. Shares can be sold, but only back to the cooperative with the seller reimbursed (less a $100 processing fee) only when a new buyer is found.
A good investment? Hardly. Cheap skiing? Not compared to other promotional deals available. Says Friedman, "Ultimately it's about protection and preservation of the mountain."
There are other advantages that keep the mountain in operation. The ski area's Web site is maintained by an unpaid volunteer. Much of the labor for forestry stewardship is contributed by the cooperative's member-owners. Friedman's job is made easier by having over 1,800 enthusiastic skiing fanatics who promote the challenging slopes through word-of-mouth and the ubiquitous badge of honor, the Mad River bumper sticker that cheekily declares, "Mad River Glen .... Ski it if you can."
The ski industry, generally, continues to grapple with risk. Failed public offerings and bankruptcies have been more common than fresh powder, but not at Mad River. Thanks to what Friedman describes as a "perfect storm" of passionate skiers, people with financial resources, and the ability of Vermonters to "get it" when it comes to an off-beat idea like a cooperative ski area, Mad River Glen has been in the black for 10 of its 13 years. Moreover, the ski area has invested in rebuilding the cherished (historic) single chair and double chair lifts, and Friedman adds this punctuation mark: "We've burned the mortgage." The mortgage has been retired.
The transition from a for-profit, privately-held entity to cooperative was not without its bumps. Friedman admits it was "messy" for the first five years as prospective members figured out their articles of governance, and the new owners learned to trust management and not feel obligated to micro-manage even the smallest decisions. Part of the challenge was the lack of precedent. No ski area in America, to the best of Friedman's knowledge, had ever re-organized as a cooperative. Moreover, the laws governing cooperatives in Vermont were not written with downhill ski areas in mind.
"We were the square peg trying to fit it into a round hole," he says with a laugh. "We're the food co-op of ski areas."
No matter how you cut it, Mad River Glen is a peculiar organization.
What Mad River Glen and the Blue Moon Housing Cooperative had something in Common. It was Laddie Lushin of Braintree Hill, Vt. Trained as a certified public accountant with a specialty in taxes, he has all the tools and training to survive within the belly of the traditional corporate beast. But he describes himself as an anarchist with a specialty of "the legal issues of peculiar organizations." Because there are so few lawyers with his potentially lucrative training willing to work in the notoriously low-to-the ground cooperatives, Lushin finds himself in demand from "peculiar organizations" nationwide.
Tall and soft-spoken, with a shock of semi-ruly gray hair and a beard that parts frequently to show a grin, Lushin is not a figure to inspire fear. He drives a very unlawyerly (but very Vermonty) old Subaru wagon that looks as if it might have trouble come inspection time His ability to break imposing legal language into plain language inspires confidence that perhaps the meek can inherit the earth. If all lawyers were like Lushin, there would be no such thing as "lawyer jokes."
Lushin lives with his wife in a modest home tucked into the Green Mountains. His wood is in the shed for the winter. He heats his home with a Free Flow Stove, circa 1979, and a combination wood/oil Sterling cookstove that likely pre-dates the Great Depression.
Lushin was raised outside Cleveland, a suburban kid, who majored in business administration in college. He soon became a CPA and lawyer, with a specialty in taxes. It's the pedigree for which corporate America pays handsomely. Despite his traditional credentials, however, Lushin has never followed a path where financial reward is the primary goal.
As with many of his generational contemporaries in the turbulent late 1960s, Lushin became aware of the limitations that growing up in a cloistered suburb had created. "I realized there was a reality out there that I just didn't know about, and I had to figure it out."
After his formal education, he had a particularly vivid experience in a job offering legal services to prisoners in the Illinois State Penal System. "Too many times I saw cases where the prisoners could just as easily have been on my side of the desk, with our roles reversed." The line separating right from wrong, legal from illegal, he realized, often is blurred.
He was drawn to cooperatives for many of the same reasons he met in the penal system. He wanted to learn more, but found little in the way of relevant courses in his law school. "I was amazed at the immense amount of knowledge that did not exist." (Even today, little has changed. Most law schools, says Lushin, offer no courses specifically geared to the needs of cooperatives.)
Longing for an environment more receptive to counter-cultural ideas, Lushin and his wife relocated from the Midwest to Vermont, first to Rochester, and eventually to Braintree Hill.
Since the late 1970s he has focused exclusively on "peculiar organizations" needing legal assistance. He has worked with small groups of homeowners like Schley, ski areas like Mad River Glen, and food co-ops of all size and description, from all areas of the country. Many need help in articulating what kind of organization they are or want to be.
Agreeing on the bylaws that will establish the basic governance of a cooperative can take lots of time. Sometimes these bylaws are refined over the years. The bylaws for Mad River Glen, for instance, were originally adopted in 1995, but have been amended at least four times since.
Lushin makes no effort to conceal his enthusiasm for the immense potential for cooperatives in America. "The concept is unlimited. There is nothing that could not be structured as a co-op, but in so doing you are sacrificing some level of personal control." Being a cooperative is no guarantee of success, he admits, and cooperatives can fail for the same reasons that other businesses fail. He cites the failure of his own local food co-op as an example. Whether due to location, competition from a new supermarket, or management turnover, the organization dissolved into bankruptcy. "Co-ops fail for the same reasons other businesses fail," he explains. Then he adds the caveat, "the reason for failure is never their organizational structure as a cooperative."
More specifically, what is a co-op?
The International Co-operative Alliance defines a co-operative as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.
The cooperative movement got its start in Great Britain thanks to a Welsh cotton merchant named Robert Owen (1771-1858), who had the novel idea that his workers deserved decent working conditions with access to education for themselves and their children. An idealist and some would say a socialist, he envisioned "villages of cooperation," where workers would grow their own food, make their own clothing, and self-govern. He started several such villages, but they failed.
His work was furthered by a Dr. William King (1786-1865), who started a monthly publication called "The Cooperator" that gave practical advice for running a shop using cooperative principles. The publication, which made its debut in 1828 offered a mixture of philosophy and practical advice applying cooperative principles. King advised people not to cut themselves off from society, but rather to form a society within a society, beginning with a store where they could shop for their everyday needs.
King's guidelines gave cooperatives some uniform boundaries. These evolved into what was published in 1895 as the "Rochdale Cooperative Principles," issued by the International Cooperative Alliance. The principles have been revised only three times over the past 100 years and still provide the foundation for cooperatives of all size and types.
The principles are widely printed in the literature (and now Web sites) of cooperatives worldwide.
According to the Rochdale definition, a cooperative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise.
Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.
The Rochdale guidelines also specify that members contribute equitably to their cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any of the following purposes: developing their cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership.
Finally, the guidelines urge that education and training be offered to members, that members work to promote the cooperative movement and that they work for the economic and social improvement of their community.
Another Case Study–Cabot Creamery
One of Vermont's best known co-operatives, and oldest, is the Cabot Creamery Cooperative, which has been in operation since 1919. As with many cooperatives, Cabot came into existence to meet market challenges. In this case, it was the challenges faced by of small-scale, decentralized, independent farmers who lacked the capital resources to collect, process, distribute, and market their dairy products to the urban markets "down country." Each member put up $5 and a cord of wood to establish the equity of their organization, adopting as a slogan "There's efficiency and strength when we work together."
Cabot is now a leading national brand of cheese, a fact that Roberta MacDonald, senior vice president of marketing, says is a major factor in keeping local farmers in business. "Milk is a commodity, and our brands ... are the farmer's hedge against the volatility of the milk market. Our farmers get paid for their milk, but they also get that 25th check at the end of the year which is their share of the cooperative's profits."
Cabot's line of dairy products has expanded dramatically since 1919 and now includes such bedrock Vermont standards as Habanero Cheddar and Reduced Fat Jalapeno. What hasn't changed, however, is their proud declaration of "Dairy Farmer Owned Since 1919." Putting the farmers front and center is not just a feel-good gesture to members, it has proven to be a smart marketing method.
Is the cooperative movement thriving, as the successes of Mad River and Cabot might suggest, or languishing by institutional indifference as many, including Lushin, now fear? Even more puzzling, if cooperatives are such a good option, why aren't there more and why aren't they the dominant business paradigm across America? Are they the wave of the future or a vestige of the past?
Paul Freundlich has founded several cooperatives, most notably Co-op America, which he describes as a "tri-partite cooperative, with business members producing goods; consumer members purchasing, and worker members staffing the operation." This national organization boasts over 60,000 individual members. Freundlich says: "Cooperatives are a legitimate third option falling midway between capitalism and communism. With the establishment of ESOPs (Employee Stock Option Plans), housing and food co-ops, and the National Co-op Bank in the late 1970s, it looked like cooperatives in the USA were finally ready to take off."
But what happened. Freundlich shakes his head. "Enter Ronald Reagan and a decade of dedicated greed," he says. "Reaganomics (an economic model featuring reduced growth of government spending, reduce marginal tax rates on income from labor and capital, and reduced regulation) was great for Wall Street, but it took the wind out of the sails of the cooperative movement." It is difficult to focus on issues of democratic governance, Freundlich says, when the headlines are about such things as 'green mail,' the acquisition strategy that so characterized the '80s, in which one company acquires another and then immediately sells it in component parts.
Others take exception to Freundlich's assessment, pointing out that the National Consumer Cooperative Bank, privatized by the Reagan administration in late 1981, has seen its endowment grow from $60 million to $1.829 billion in 2006. Freundlich's assessment, however, seems to be echoed by Art Jaeger of the Communications and Public Affairs office of Watson/Mulhern, a Washington, DC-based law firm that delves into cooperative issues. Assessing the state of the cooperative in the United States is not simple, says Jaeger.
"You have to look at individual sectors," he says. "The number of credit unions has been declining for years due to mergers, but the number of members of credit unions has been growing dramatically. Electric co-ops are holding steady but, again, membership is increasing. Food co-ops are slowly expanding despite intense competition from companies such as Whole Foods and Trader Joe's.
"Co-ops boomed in the first half of the 20th century and then leveled off. For much of the last 30 years co-op principles and values were 'out of fashion' in America, yet they did manage to survive. Now, the pendulum is swinging back the other way, and co-ops are poised for a new era of expansion as people get more frustrated with impersonal big business and again value the concepts that are at the core of the co-op model."
The state that has the most enlightened statutes governing cooperatives, says Lushin, is Washington State. Nonetheless, cooperative appear to be flourishing in the Green Mountains. According to the fledgling Co-op Alliance, there are approximately 75 cooperatives operating in the state today, a number that includes three agricultural co-ops, 35 credit unions, seven daycares, three energy co-ops, 11 food co-ops, eight housing co-ops, two insurance co-ops.
The explanations are partly anecdotal ("Vermonters get it," says Mad River's Friedman), but compelling. Yvonne Garand, business development director for the Vermont State Employees Credit Union, says simply: "Vermonters like protecting their homeland, and we like doing business with neighbors. We just do business differently. Think of it as a matter of form versus function. We're not serving our customer base for the benefit of our outside shareholders, but for the common benefit of our members. They are the recipients of any benefits we create." Jim Schley, he of seven co-op memberships, agrees. "I love the social aspect of cooperatives. I can't think of a negative experience I've had customer and member of a co-op."
Democratic, social, fun. ... So why not still more cooperatives? Michael Potts, a cooperative member and consultant to new paradigm businesses offers this blunt assessment: "The spirit of individualism runs deep in the American soul. Plural ownership, maybe like the idea of plural marriage, while cool in the abstract, can be a nightmare in practice. Our government, which runs on tax dollars, has a harder time finding those dollars in an organization of multiple ownership, and therefore, does nothing to encourage the creation of more cooperatives. They'd rather provide tax loopholes to traditional corporations."
Roberta MacDonald of Cabot Creamery tacitly acknowledges an anti-establishment aspect to cooperatives. "When there is a semester course on cooperatives at Harvard Business School, we'll know we're reconnecting with people who mistrust big business for all the reasons common sense would suggest."
Meanwhile, Mad River Glen reports a foot of new powder. The Beaujolais Nouveau has arrived at Ashland Food Cooperative. And on Braintree Hill Laddie Lushin throws another log in his Free Flow stove and awaits the next call from a "peculiar institution" needing "legal assistance." They will find him. They always do.
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