Can Worker Cooperatives Save Capitalism From Itself?

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In an economy beset by rising inequality, stagnating wages, and precarious work contracts, many activists, academics, and political leaders are looking for new ways of organizing the relationships between firms and workers. These debates have grown increasingly urgent as governments, workers, and business leaders around the world have begun to grapple with the fact that the economic status-quo has been extraordinarily unkind to the vast majority of the population that relies on wages rather than capital (wealth) to survive. In the United States, for example, the share of adults living in the middle class has fallen from over 61% in 1971 to 50% in 2021, while the share of those earning what are considered ‘lower incomes’ has increased. More generally, a recent UN report found that inequality is growing for more than 70% of the global population. The pandemic has only accelerated these trends as Canadian billionaires, for example, saw their wealth increase by over 51% during the most severe waves of COVID-19.

In response to these worrying trends, both new forms of economic thinking as well as recycled versions of older ones have begun to (re)-emerge. Whether it is the ‘union boom’ occurring in the United States, pension protests in France, the election of Brandon Johnson in Chicago, the grilling of ex-Starbucks CEO Howard Schultz by Sen. Bernie Sanders, or the resurgence of leftwinger Lula in Brazil, the tides of global sentiment are clearly shifting against dominant neoliberal economic thinking. But as discussions of inequality, unionization, and labour markets have gone mainstream, one issue that strikes at the heart of the political economy of our present moment has gone largely ignored: the issue of corporate governance. Long relegated as a topic of discussion for specialized corporate lawyers, the study of corporate governance is gaining traction in some sections of the policymaking world as part of a potential remedy for our economic malaise. In short, corporate governance structures describe the ways in which corporations are organized, or governed. This might seem like a banal and self-explanatory concept, and in many ways it is, but for others, different kinds of corporate governance structures can create corresponding economic incentives that have broad and consequential knock-on effects in the larger economy.

Before delving into the different kinds of governance structures and their respective trade-offs, it is important to understand the different agents and stakeholders that participate in the formation of a corporation. Traditionally, corporations are made up of shareholders, boards of directors, managers, and employees. Shareholders, as the name suggests, own shares of the corporation - they are its owners. For a conventional, publicly-traded corporation, shareholders are made up of institutional investors, fund managers, and the general public (retail investors).

Once a group of shareholders has been assembled (either privately or publicly), they select a board of directors. The board of directors is elected to represent the interests of shareholders in the day-to-day operation of the company and is usually made up of a diverse group of shareholders, managers, and advisers. This group is responsible for overseeing the managerial class. The label of manager is usually applied to the high-level executive staff (CEO, CFO, COO, GC) that is responsible for day-to-day operations, strategic planning, and litigation. Some executives, especially at the highest levels, are compensated with stock options in the companies that they manage; this is one of many possible governance variations that can blur the lines between managers and shareholders. Finally, managers oversee the critical mass of a corporation: its workers. Workers are too large a group to describe in a single sentence, but in a governance context workers are responsible for implementing the strategic vision developed by the managerial class. In other words, they create value for shareholders. 

The structure outlined above is the one employed by the vast majority of corporations, both private and public; a strictly hierarchical structure with a relatively clear distinction between what we might call ‘wage earners’ (workers and most managers) and ‘capital earners’ (shareholders, some managers, and most board members). Importantly, we would call ‘capital earners’ earners because they have deployed an amount of capital (an investment), and are now earning money off that investment through both increases in the value of their shares and potential dividend payments.

Although this traditionalist structure is common, it is not universal. Instead of organizing themselves on the basis of a distinction between the worker and the shareholder, thousands of corporations and small businesses around the world operate as worker cooperatives, or co-ops. Co-ops are defined by a governance structure where workers are the shareholders. In other words, the company is owned by its workers. At a very basic level, co-ops operate with a group of ‘worker-owners’ who act in the same way that the shareholders of a traditional corporation would: they elect a board of directors, appoint managers, and make strategic decisions. Although there are many implications of this governance structure, there are two primary consequences of a move towards co-ops: the democratization of the workplace and the sharing of profits. As to the first, workers who belong to co-ops are able to participate in high-level decision-making in a way that the employees of a traditional corporation would be barred from. This is similar to the way in which the citizens of a democratic nation are able to shape the structure and makeup of the governments that rule them; most have no specialized policy expertise, but the mere fact of them being citizens gives them a right to participate in the formation of their society. In a similar manner, proponents of co-ops argue that the mere fact of being a worker should give them a right to participate in the formation of their workplace.

In addition, because workers in co-ops are part-owners, they become ‘capital earners’ rather than just ‘wage earners.’ This gives them both the benefit of profit-sharing as well as the ability to gain when the value of the business increases. Of course, it also exposes workers to the possibility that the business might decrease in value, a risk that is normally only attributed to the shareholder class in the traditional model. Although co-ops usually come in the form of small businesses, there are prominent examples of large corporations that have successfully organized themselves as co-ops. The most renowned of these is the Spanish Mondragon Corporation, a federation that combines 102 individual co-ops and 85,000 worker-owners. Because of its size and complexity, Mondragon does not follow the exact, most basic structure outlined above. However, most of its employees are worker-owners and top executive pay is capped at eight times the salary of the lowest-paid worker. In comparison, American CEOs were paid about four hundred times more than the typical worker in their respective firms in 2021. As a result, the geographic location where the majority of the Mondragon Corporation is based has experienced far less unemployment and inequality than other parts of Spain. 

Accordingly, proponents of co-ops argue that this model should be replicated on a larger scale in order to combat some of the problematic economic trends described above. However, the feasibility of creating larger-scale worker co-ops is not unquestioned. In fact, recent scholarship suggests that corporate governance problems have been at the root of the failure of many recent co-op ventures. As the authors explain, however, very little research has been done (at least in relation to traditional corporations) to examine potential governance strategies that would allow for long-term growth of a universal co-op model. As a result, given the present challenges facing both the economic and environmental sustainability of the conventional corporation’s current structure, policymakers, scholars, and activists should turn their attention to the compelling possibilities that worker cooperatives may have to offer.