The case for indivisible reserves in worker co-operatives
I read with great concern about the sale of New Belgium Brewery to Kirin-owned Lion Little World Beverages. The concern is not only for the loss of this ESOP, as disappointing as that is. Rather, it is because we know that every ESOP, worker co-operative and enterprise in the solidarity economy is vulnerable to the same fate. Humans, being who we are, when a collective enterprise becomes very successful after years of blood, sweat (equity), and tears, sometimes it is hard to resist the temptation to cash out as the opportunity presents itself.
A similar situation unfolded with Careforce Home Care Worker Co-op of Kentville, Nova Scotia, now Careforce Inc. The co-op converted from a conventional business to a worker co-op in 2008, with a loan and other support from the Canadian Worker Co-op Federation (CWCF). It was our poster child for business succession to a worker co-op, with fast growth and many recognitions. In 2014, Careforce received our Worker Co-op Best Practices Award for their Worker Orientation Program, described in an Ignite presentation. However by spring 2019, the members received an offer from a private buyer that they couldn’t refuse. It was a sad day for many of us in the Canadian worker co-op movement.
The fact is, ESOPs and worker co-ops, perhaps especially when they are successful, are at risk of demutualizing. It is always painful for those of us dedicating our work lives to democracy in the workplace, as a means of economic transformation. It feels like moving backwards.
So how might we provide an antidote to such a path, which at the stroke of a vote and a pen can undo years of hard work by former worker-owners? For coops, it is the concept of an indivisible reserve, also known as permanent co-op capital.
In 2010, we interviewed Bruno Roelants, then the Secretary General of CICOPA, the international association of worker co-operatives, to ask him where in the world he believed the worker co-op movement was the largest & fastest growing. We wished to study those regions so that we could tease out the common denominators, and use them to inform the development of a worker co-op eco-system in Canada (see the research results here). He suggested Mondragon, the Emilia Romagna region of Italy, and France. One of the key findings is that all of these regions had a mandatory indivisible reserve. The indivisible reserve was pioneered by worker co-operatives, and it is referenced in the third International Co-operative Alliance (ICA) co-operative principle, Member Economic Participation. This principle addresses several financial policies, including distribution of member dividends and “….setting up reserves, part of which at least would be indivisible”.
An indivisible reserve in a co-operative is property owned by the co-operative / the co-operative movement, which can never be divided among members. It is created by allocating a set percentage (from 10 to 100 percent) of annual surpluses to the indivisible reserve fund. It is permanent co-operative capital, and is notionally seen as the value of the common effort of the members. As long as the co-op is operating as a co-op, it can use this reserve like any other retained earnings. In other words, the reserve can be controlled by the members, but not accessed by them for personal distribution. “Indivisible” means that if the co-op ceases to exist as a co-operative because it is wound up, or sold, the reserve will go to a co-op development fund, a federation or another co-operative organization and not be available to the individual members. Member shares and any preferred shares, and any divisible portion of reserves, however, would be reimbursed to individuals.
Because indivisible reserves can never be cashed out by individual members, they provide long-term investment capital that supports longevity of the co-op across generations.
Because indivisible reserves can never be cashed out by individual members, they provide long-term investment capital that supports longevity of the co-op across generations. Although not the only factor that combats co-operative demutualization (others include co-operative education and strong governance), indivisible reserves are one such factor. The indivisible reserve is one effective means by which co-op members can demonstrate commitment to the co-operative movement and its values and provide patient capital and a financial legacy to the movement as a whole.
The indivisible reserve provision in a co-operative can be created either because it is required by legislation (as is the case in Quebec, as well as in Italy, France, Spain, and most other Latin language-speaking countries), or because the co-op members decide to adopt it (possible but not mandatory in many other jurisdictions).
Quebec and many jurisdictions outside Canada that have mandatory indivisible reserves for co-operatives provide a tax benefit and/or other supportive public policies. This makes sense because members are giving something up: any claim against a portion of the co-op’s surpluses.
It is for these reasons that the Canadian Worker Co-operative Federation seeks to obtain preferential — i.e., fair tax treatment and/or other fair public policy treatment for worker co-operatives with indivisible reserves nationwide. If we are successful, this would be a definite benefit to the co-ops in Quebec, and it would also be of potential benefit to co-ops in other regions of Canada, if they choose the indivisible reserve approach. Last but not least, it would have the potential to assist in our collective efforts to grow and maintain the co-operative movement across Canada — and if/ when co-operativists in the US or other places take this up, well beyond our borders.
Hazel Corcoran is the executive director of the Canadian Worker Co-operative Federation (Calgary, Alberta). She was born and raised in New Orleans, LA, and like so many in the North American worker co-op movement, spent several years in Berkeley, CA, some of which doing a Master’s degree (Linguistics) at UC Berkeley, and frequently consuming the Cheese Board Collective’s pizza, sourdough bread, & the irresistible vibe of workplace democracy!