After more than two decades of growth and success, Fort Collins based New Belgium Brewing became 100% employee owned three years ago, with the employee stock ownership plan buying out the 59% of the company previously held by its founders. Today it sounds like they might be putting themselves on the auction block. With around 500 employees, and a potential valuation of a billion dollars, it’s not too hard to understand the temptation. That’s $2 million worth of company value per employee.
When I first heard about this, I was sad. The more I think about it, the more it seems like an almost inevitable outcome of New Belgium’s success, and what I understand to be its ownership structure. While employee owned, it’s still a stock ownership company, which usually means that the voting power of the owners is proportional to their share of ownership. I don’t know how evenly distributed ownership of New Belgium is, but in theory a small minority of the employee owners could have decided to sell the company off, if they had a majority ownership stake between them.
This is still probably a much better outcome than you’d expect from a normal company selling itself off. Usually, the employees would be left to fend for themselves, while founders and investors take home their winnings. The workers would be lucky to continue working with the company. At least in this case, a big chunk of the equity is held by those whose work helped build it.
This set of structures and incentives means that it’s easy for the profit maximizing money machine to gobble up an enterprise that seems to have had a different set of values for a long time. The brewery is run on 100% renewable energy. New Belgium supports a paid team of traveling carnies, who put on the Tour de Fat and Clips film festival, contributing money to bicycle advocacy organizations all over the country — including our own Community Cycles. Early on they decided to allow employees to participate in the ownership of the company, and then recently they became a certified B-Corp, and the employees took over ownership entirely.
Comments that then CEO Kim Jordan made when the employees took over ownership of the company suggest that she’d hoped this structure would lead to a durably different organization:
There are few times in life where you get to make choices that will have multi-generational impact — this is one of those times. We have an opportunity to write the next chapter of this incredible story and we’re really excited about that. We have always had a high involvement ownership culture and this allows us to take that to the next logical level. It will provide an elegant succession framework that keeps the executive team in tact ensuring our vision stays true going forward.
Jordan also said then that she’d remain CEO for the long term, but earlier this year announced that she would be retiring, to focus on running their family foundation (funded by her own cash-out).
I think I was disappointed when I saw news of the sale because I also saw New Belgium’s employee ownership as a source of durable change. But anything that can be bought out is susceptible to success. Do a good enough job, and the capital will come, seeking to devour and assimilate you. Which is totally fine, if your goal is to make money and be part of that system, which has solved lots of difficult problems and created all kinds of wonderful things (while also creating lots of difficult problems, and destroying all kinds of wonderful things… but that’s another topic).
If your goal is to create a durable, economic change-making organization you need a different structure. A different container. Something that isn’t automatically assimilated as soon as it succeeds. It’s a different kind of thing.
The most familiar organizational structure that provides this kind of insulation is the 501(c)3 non-profit organization, but it seems to me like this protection is incidental, and flows from their tax-exempt status — the IRS doesn’t want anybody building a tax-exempt business that succeeds due to that unfair advantage… and then gets cashed in. So when a 501(c)3 liquidates or sells out, it can only be taken over by another 501(c)3.
Cooperatives are another more egalitarian and economically participatory container that can provide this kind of protection, if they’re set up to do so from the beginning. They have a natural protection from the influences of capital because of their member instead of capital centered structures. Rather than one dollar, one vote, co-ops are one member, one vote, typically regardless of whether different members have invested different amounts of equity. Member economic participation is also typically not based on the amount of equity held by each member. Instead, it’s based on the amount of “patronage” that the member engages in with the co-op. If it’s a buyer cooperative (like most food co-ops) then you get a dividend based on how much you bought. If it’s a producer cooperative (like most agricultural co-ops) then your dividend depends on how much you produced. If it’s a worker cooperative, then it’s based on how much you worked. More money doesn’t buy you more power, or entitle you to accumulate money more quickly than anybody else. Unsurprisingly, this means that most co-ops have relatively flat equity structures, often requiring exactly the same ownership share from each member.
The more democratic governance structure means you can’t end up with a small minority of shareholders wielding the power to sell the entire enterprise — it would take at least a simple majority. Some cooperatives (like Equal Exchange) that are dedicated to being a durable vehicle for economic change go a step further, and incorporate a poison pill into their bylaws, which requires net proceeds from the sale of equity to be given to a charitable organization, or another cooperative, rather than being paid out to the member-owners, while also requiring a super majority to amend the bylaws.
This is a structurally very different kind of thing than a traditional employee owned company like New Belgium. The members of this kind of cooperative are more like stewards than owners. They have a hopefully mutually beneficial relationship with the organization, but don’t have the same power or incentive to liquidate it. This same dynamic came up in a very personal way over the summer, when the members of the Chrysalis and Masala housing cooperatives were displaced so that our homes could be renovated. It was inconvenient, and frustrating, and a month behind schedule. Some members wanted to be compensated monetarily for the inconvenience and frustration (even after we were able to move back in), but that compensation wouldn’t have come from someone else. The 501(c)3 group equity organization that owns the houses — the Boulder Housing Coalition — is just us. Taking money from it to pay for that inconvenience would be taking money from the third house in the co-op system, or taking money from future co-op members by neglecting our capital reserve contributions. Past generations of co-opers put up with inconveniences so that we could have the houses as they are today — they put in sweat equity, and lived in hundred year old homes that needed a lot of work. They took care of these dwellings, and we’re benefiting from that labor and inconvenience today, so I feel an obligation to pay it forward, and help ensure that our little autonomously governed housing system can take care of itself, and hopefully grow in the future, carving out a little niche in parallel to the other systems.
I prefer this type of relationship with resources, in part because of my work on climate policy. Our economy is built on ownership and private property rights, even in contexts where the ability to destructively utilize a resource has permanent consequences for future generations. Stewardship implies less power and more responsibility than ownership, so maybe it’s a hard sell, but I’d rather live in a world full of good stewards than owners, and for that to be possible, we need to build organizations that are durably dedicated to stewardship, at least for those of us who want such things.
Janelle Orsi at the Sustainable Economies Law Center in Oakland, CA has a little cartoon that gets at some of this stuff too, in the context of the “Sharing Economy”
Images courtesy of Quan Ha and Matthew Peoples via Flickr and the Creative Commons.
10 thoughts on “Ownership vs. Stewardship, Companies vs. Co-ops”
This sucks. Capitalism wins again. Yes to stewardship instead of ownership that sells itself to the highest bidder.
From Kyle Huelsman: Hey Zane! I just read your article and felt inspired to push back against your argument (note: I love employee ownership as an economic justice strategy). In the US there are only around 300 worker-owned coops (excluding buyer/producer coops), with approximately 3,500 worker-owners. Worker-owned coops are an incredible model, but they are difficult to scale and are not broadly applicable to traditional corporate structures. I agree that sustained employee-ownership is the ideal outcome, but I do not buy into the idea that the form is the single variable (i.e. worker-owners in coops can also be bought out). The long-term strategy to sustain employee ownership needs to start at the inception (governing documents and intent of the company) and in the culture (worker-owners commitment to ownership). I am agnostic to the form as long as it benefits the long-term outcome. This has been seen in a number of local examples where majority owned ESOPs have turned down buy-out offers, all of which offered premiums above the ESOP valuation.
Kyle, what governance structures have you seen that can make an ESOP durable against buyouts? What’s the failure mode for scaling up worker owned cooperatives that doesn’t exist for ESOPs? Having employees involved in every single decision seems like a mess, but why not allow them to elect leadership that takes on the executive roles? Is it a failure of democracy?
From the National Center for Employee Ownership – “In a company with an equity benefit plan only, employees receive an equity stake in the company but do not as a group have voting control over the company. Such plans are often set up as a retirement or savings benefit and as a way to let employees in on the equity growth of the company while creating an incentive to stimulate productivity. In such plans, ultimate control remains with either a top manager or an outside owner (although perhaps subject to some legal rights of the employee owners).
In an employee-controlled company, employees as a group have voting control over the company. Ownership may not even involve significant equity rights, but any outside owners are minority or nonvoting owners. Employee ownership in such a company is a means of sharing control and dividing up corporate income among employees.”
The governance structure of the company is determined at the point of conversion. The spectrum of ESOPs exists from a one-worker one-vote model to a deeply hierarchical corporation with a profit sharing retirement plan. ESOPs as a form are agnostic to governance type, but often larger companies do not take the more democratic route.
As worker-owned businesses become more profitable, private investors are inevitably going to offer unsolicited bids. Obviously there is a profit-centric approach from traditional business owners to sell the business, but the same force exists with broad-based ownership as well (especially with highly successful companies). I think it would be extremely interesting to survey employee owners in New Belgium on whether they prefer the buy-out or not, let’s not forget that they are benefiting greatly from a high-value buyout as well. I think it is to simple to assume that corporate owners generally sell out to private investors and worker-owners generally maintain employee ownership (the same financial motive exists for both sides). More democracy may reduce the financial incentive, but it is far from eliminating it.
Ultimately, we are operating within the constraints of capitalism and we will never be able to prevent private investment dollars from encouraging the sell of employee-owned businesses. However, we can encourage the expansion of worker-control in employee owned firms to increase durability, and that starts at the culture level.
I disagree that the financial incentive is exactly the same in the member vs. capital centered models. When ownership is concentrated in a smaller number of hands, and voting power is determined based on equity share, those individuals have both a larger personal incentive to sell and more power to wield in causing the sale to take place. Flattening the governance structure, and thus also in many cases the distribution of equity, moderates the influence of outside capital by reducing the concentration of incentive and power within the employee owned enterprise. Obviously there’s still influence to be had, and if there company were so valuable that even a flat distribution of the proceeds would make everyone independently wealthy, you’d need a very strong internal non financial motivation to avoid the sale, even with a supermajority required. But I do think it would be less likely, and I think that setting that expectation at the outset probably acts as a filter on the kind of employees that are attracted to the business.
Great analysis. I don’t know what structure would prevent the assimilation of the successful small into the economically powerful big, but if we take that as an unavoidable pattern (it isn’t, necessarily) then the question is how do the small retain their values through the transition? Could their benefit even be multiplied and scaled? The usual corporate profit-driven model is usually irrelevant to the small. We small business owners do all sorts of things that aren’t driven solely by rationally motivated self-interest. Is there a way to bake that weighing of values to profit into the future decisions (b-corp etc)?
To me, I feel like the big risks of New Belgium being bought are: diluted product quality, less sustainable sourcing/operations, worsening work environment (or complete loss of the jobs), and the further centralization of money into the hands of the already rich. Is there some way for the big to also durably exhibit the savvy stewardship of the small over the long haul?
Some people seem fundamentally opposed to bigness, but I don’t think I agree. “B-Corp” is really just a certification, which you can lose, and which doesn’t have implications for your governance structure or organizational imperatives. Public Benefit Corporations have some structural implications, and explicitly empower the management to value things other than profit. I still think the distinction between ownership and stewardship is key. What tools do we have at our disposal to create durable and even expanding stewardship organizations? How can cooperatives be made more scalable and efficient? Or ESOPs made more durable when successful? Are Public Benefit Corporations really structurally different enough that they behave differently in the long run? Or will they too be gobbled up when successful?
The possibility of some investors making a lot of money is what gets investors to pour a lot of money into new (seen by many as crazy) ideas. This works as a great incentive to try new ideas. Crowd funding cannot replace that model since by the time the idea is described and sold to enough people to persuade them to invest $500, someone else has already started running with your idea. In this age often being first is more important than being best.
The crowd funding could work with proven ideas like airbnb, uber in an attempt to create a new entity with an ownership structure more beneficial to everyone. But that sounds a lot like stealing someone else’s idea. Are there example of industries where a corporate-like structure is replaced by a structure that benefits the workers and users rather than a few big shareholders? Is that the credit union model? Seems like telecommunications and banking sectors are ripe for this type of change.
Great blog! I do think you’re right that in aiming to durably institutionalize a set of values, the fundamental building block of the co-operative structure, one member – one vote, gives co-operatives a “head start” over other corporate structures. I agree with Kyle’s point that the corporate form is not essential but it seems like there’s significant legal machinery necessary to create the same threshold against buy-out that a co-operative provides from the get go.
The governance section of the B-Corporation certification is significant, accounting for 1/5 (I believe) of the total points awarded to an organization. While you don’t have to be a co-operative or have significant employee ownership to get B-Corp certification, B-Corp does have some implications for corporate governance because of the value placed on more democratically structured organizations. Each year the total points needed to remain a B-Corp increases, which could push some organizations toward more inclusive and democratic corporate structures in order to maintain their certification.
The B-Corp certification is ultimately most significant in terms of marketing I would say. It’s interesting to think that in this case, the investors purchasing New Belgium have arguably diminished the value of the brand they’ve bought by eliminating an employee ownership that appealed to some segment of their target market (e.g. people like us who care about this sort of thing!). I think there’s some real value in the straightforward and marketable story of employee ownership. One question my friend Jochem had was what constitutes the minimum employee ownership needed for a company to tout that it is employee owned – do you know?
Will just leave this here for you 😉 — http://purpose.ag/book