The Failure of the Anglo-Saxon Model of Business and the Worker-Cooperative Solution

Introduction

Discontent with the prevailing business model of the Western, capitalist economy, while arguably mounting for the past half-century, has reached a climax with the financial crisis of 2007-8 and its enduring aftermath. There is now a pervasive sentiment among intellectuals, policy-makers, and the public at large that the shareholder-oriented corporation is not fit for purpose, and that a fundamental change is needed in the way that businesses are run. The sources of this dissatisfaction are manifold, relating to the failure of the status quo both to maintain a robust economy and to deliver on social criteria like fairness and wellbeing. While there have been calls from many quarters for companies to include a wider variety of stakeholders in their systems of participation and decision-making, the worker-cooperative model, whereby workers own and control the firms in which they work on a democratic basis, is a largely overlooked alternative to conventional enterprise that offers some unique advantages in addressing some of the most urgent socio-economic ills of our era.

Inequality

Amongst those ills, it is probably the issue of inequality that has received the most attention in recent times. The work of renowned economists like Thomas Piketty and Joseph Stiglitz has exposed both the magnitude and the costs of a scandalously lop-sided distribution of wealth and income, which has provoked popular agitation against a system in which a small class of super-rich – the infamous ‘one-percent’ – grows increasingly richer while the rest of the citizenry endures hardship and stagnation. Although issues such as deregulation, union decline, and deindustrialisation are all contributing factors, the shareholder model of corporate governance has undoubtedly been complicit in causing and perpetuating this woeful state of affairs.

The capitalist corporation configures the firm to be a mere investment vehicle through which the wealthy can multiply their wealth without taking an active part in the production process; ownership of (limitedly liable) residual claims has become just another financial asset for an investor to add to her portfolio. Furthermore, due to the separation of ownership and control, especially when coupled with dispersed shareholdings, managers have become a class of their own, enjoying astronomically inflated levels of pay that are entirely inconsistent with their levels of productivity. The real wage of the average worker, meanwhile, has been stagnant for nearly half a century; the common citizen is no better off than were her parents, or even her grandparents. In short, while corporate profits boom and executive pay soars, workers are sharing less and less in the proceeds of growth. With the rise of ‘precarious employment’, they are also enjoying less in the way of promotional opportunities, critical welfare services, and job security.

By conferring both residual claims and ultimate authority to workers, cooperatives have the potential to generate a more equitable distribution of wealth and income: in a cooperative, worker-members enjoy both a stake in the firm’s profits and the power to determine their own wages. They also have the power to determine the salaries of managers, and thus to reduce the deadweight burden on society caused by inordinate executive pay. Furthermore, in addition to creating well-paying jobs, cooperatives have been lauded for preserving those jobs during economic recessions, a propensity that derives in part from the fact that worker-members can collectively choose to temporarily reduce their share earnings.

Economic Stagnation

The classic justification for inequality is that it is ‘good for growth’, which expands the total size of the economic ‘pie’. In recent years, however, we have instead witnessed economic stagnation, punctuated by financial bubbles that eventually burst and thus reduce the total wealth of society. The most convincing explanation for this deep-seated malaise, which has come to be known as ‘secular stagnation’, is the rising tendency for economic agents and institutions to forego value creation in favour of value extraction – that is, to leech on society’s resources – a practice that is intrinsically related to the rise in inequality.

Although the most obvious driving force of value extraction is the unrestrained ascendancy of the financial sector, which has directed its resources to ‘innovations’ that are not only unhelpful but in fact detrimental to the real economy, even non-financial companies are at fault. As economist William Lazonick has explained, large, investor-owned corporations, long the protagonists of Western economic history, are failing to invest in research and development, worker skills, and other productive assets that generate a social benefit. Instead, they are siphoning an ever larger share of their net revenue towards dividend payment and share buybacks, the latter of which are usually performed purely to boost the already-excessive pay packages of top executives.

Even amongst the investments that corporations do undertake, shareholder primacy (coupled with the excessive mobility of capital and the threat of hostile takeovers) leads to a bias against long-term and uncertain investments – precisely the ones that lead to the most significant innovations, and thus social rewards – in favour of ‘low-hanging fruit’ that temporarily boost share values and look good on quarterly reports. Indeed, non-financial corporations have developed an unhealthy taste for financial assets, further contributing to the ‘financialisation’ of the economy. The result of this neglect for productive investment is that, despite giving workers an increasingly unfair deal, Western corporations are increasingly unable to compete globally or deliver the level of social value that would be commensurate with the amount of economic resources they command. On the contrary, they are using those very resources to push for tax cuts, deregulations, and even subsidies – not to mention exploiting fiscal and regulatory loopholes that further reduce their contribution to society – or else abandoning the communities that have come to depend on them.

Worker cooperatives offer an expedient alternative to the myopic imperative of share-value maximisation. Because members of a cooperative are not only investors but also workers, they cannot withdraw their wealth without incurring either unemployment or a loss in the value of their firm-specific skills, and in some cooperatives the withdrawal of investment may anyway be limited or even prohibited. The livelihood of a worker-owner therefore depends to a greater extent than an investor-owner on the long-term prospects of her enterprise. This gives her reason to not only reinvest within the enterprise, but also to engage in those investments that secure the future of the enterprise, not least her own skills. It also contributes to the inherently ‘place-based’ nature of cooperatives – workers are members of a community, and are unlikely to pick up sticks in order to take their investment elsewhere.

Alienation and Antagonism

Concomitant with the recent surge in inequality is a sense of workplace alienation, which, given its documentation by Marx, Durkheim, and others, has been present at least since the Industrial Revolution. The activity of work, which occupies the majority of an adult’s waking hours, is increasingly seen a necessary evil that must be endured purely for the sake of earning an income, and ultimately for consuming goods and services produced by other people. This loss of personal and social meaning is not only deplorable in itself; it also leads to a decline in productivity, and thus contributes further to economic stagnation. As work conforms to its economic depiction as mere ‘disutility’, workers conform to the economic prediction that they will dodge their responsibilities, fail to take initiative, or at least work without enthusiasm, doing just enough to receive their wage and avoid the sack. A knock-on effect of this behavioural shift is that workers come to view managers as enemies, enforcers of an organisational objective that does not affect them, at least in a positive way. A vicious circle of distrust and disloyalty is therefore initiated, further impairing organisational performance.

Worker ownership not only provides material incentives for workers to perform above and beyond the bare minimum, but also, when coupled with worker-control, affords a moral motivation to pursue the ‘common good’ of the company, be it by working harder or by exerting social pressure on peers to do so. Worker-members can also democratically choose less alienating terms and conditions of work, and, because managers are ultimately accountable to workers, they are less likely to be seen as adversaries.  

Conclusion

Shareholder capitalism was famously justified by Milton Friedman on the grounds that maximising profits was the best way for a company to serve the common good. Although the investor-owned corporation remains predominant in the Anglo-Saxon world, Friedman’s argument has been called into question by a rise in inequality, economic stagnation, and workplace dissatisfaction. Social and economic prosperity clearly requires an alternative business model, for which I have argued worker cooperatives represent a promising candidate. Indeed, countries across the globe are already experiencing a trend towards employee participation in various forms. More public awareness and more public action will be needed, however, if worker cooperatives are to be given a legitimate opportunity to challenge the hegemony of the investor-owned corporation, and so help to remedy its adverse socio-economic effects.