Stakeholder financing with 'Capitalist Co-ops'
"Capitalist Co-ops" presents a vision for a superannuation (or pension fund) industry based on “stakeholder investment” principles - linking superannuation investments & business governance to the present, daily lives of the people that invest in super, who are also customers and employees of the companies invested in.
This 2007 paper summarised and updated the key concepts in my 1998 papers on:
"Employment Service Companies" and "Customer Service Companies" (which built on the somewhat vaguer concepts of a "stakeholder society" championed by the likes of Will Hutton, John Plender and the 1980s management consulting guru Charles Handy),
"Third Way Economics" (offering a specific approach to the "third way" political concept articulated by the UK Prime Minister Tony Blair), and,
"Supporting flexible labour markets" (through progressive tax reform).
To my surprise, given the aim was to challenge the problems of modern free-market economies & capitalism, I concluded the answer could simply lie in better, less restrictive governance of sharemarkets and superannuation funds (subject to a sufficiently fair redistribution of wealth through the tax & welfare system).
Besides revealing my journey to the "dark side" of market economics, those original 1998 papers also discuss the key concepts covered in my subsequent papers on "FinancingInnovation" /"Financing Start-ups" and "Supporting Employment & Reforming Welfare", which are referenced in the following summary and in my separate discussion of superannuation and tax reform - particularly "Part 2 – Higher-Rate Tax Reform for Flexible Careers" (p.13-14) of my "supertax reform" paper.
Finally, in "Capitalist Co-ops for new Global Governance", I extend the concept to one of competing global networks of economic communities , which may positively challenge the negative aspects of nation states, and thereby more effectively address global challenges.
Customer Stakeholders & Crowd-Funding
Applying the concept to superannuation investors would involve formally recognising that many of these super fund members are already also customers of the businesses they indirectly own shares in, and then allowing these customer shareholders to receive investment returns through ongoing product discounts instead of conventional dividends. This would be conceptually similar to loyalty pricing such as Coles supermarkets' previously popular shareholder discount scheme (but with block-chain technology reducing admin costs), and also to "access pricing" structures commonly applied to utility bills (based on "Ramsey pricing" theory, which is especially useful for industries with relatively high fixed costs and low marginal costs, as is increasingly the case for technology companies). An advantage of customer shareholding via super funds is that instead of asking people to commit spare cash to shares (rather than on alternative consumption), the choice offered is simply whether to invest in shares with customer discounts or shares with less controllable and risky dividends. The value of product discounts would need to be tracked by super funds so they could be taxed the same as cash withdrawn for consumption, in order to ensure the system operates for genuine economic benefit, rather than as a tax loophole.
If applied to specific new products, the concept of customer shareholders is similar to internet-based "crowdfunding", which gives price discounts to customers who pre-pay before manufacturing starts - most recently and dramatically demonstrated by 232,000 Tesla Model 3 orders & deposits being taken within 24 hours (about double initial estimates) of the car's launch on 31 March 2016 (& a total of over 325,000 within a week, worth potentially US$14bn), almost two years before production and first deliveries planned for late 2017. One key advantage of this approach over conventional equity financing is that customers who know they want the product face less risk on their "return" than 3rd-party investors (& therefore demand lower returns). The reduced business risk created by these mass pre-orders also then reduces the cost of any supplementary financing required. In turn, early-bird customers are rewarded with lower prices in return for supporting the early production risk that will eventually, through economies-of-scale, lead to lower costs and prices for later customers.
Customer share-ownership through Capitalist Co-ops would aim to combine the opportunities of crowdfunding's mass, low-cost micro-finance (tapping into many small but enthusiastic investors, enabled by the internet) with conventional equity investor structures, to offer a variety of new models for business ownership/governance and customer/employee loyalty schemes, depending on the business needs and market opportunities.
Whilst the US has recently legalised equity crowdfunding, it looks like the big end of town hobbled this with a maximum $1m raising and a prohibition of using trusted intermediaries to facilitate transactions (why??).
- Maybe that's an opportunity for Australia (see "FinancingInnovation-1page"), now that Crowd-sourced Funding legislation seems to have finally been passed (after the 2015 draft bill got halted by the 2016 Federal election, but in any case seemed to need improving) and has already spawned at least this, this & this crowdsourced finance sites.
The potential advantages of business customers investing in tech startups (through traditional trade acquisitions or more novel hybrid customer-investor packages) is discussed in the attached "Financing Start-ups" paper.
By linking investment to consumption, customer share-ownership could make superannuation products more "present" and attractive to ordinary people (a marketing advantage for the super fund), whilst simultaneously reducing investment risk and offering lower-cost finance to businesses (thus supporting economic growth). The greater long-term loyalty that could be expected from stakeholder investors also offers the prospect of reduced share-price volatility (in addition, & perhaps counter-intuitively, volatility could also be reduced by the expansion of on-line gambling to the stock market).
Extending the concept from customers to "community stakeholders", stakeholder ownership would help to ensure companies operate in the broader interests of society in general, rather than financial investors exploiting people's ignorance to maximise profits. For example:
Stakeholder ownership could help promote trust through community oversight of "private" companies delivering "public" human services such as education, health & social/affordable housing.
Environmental objectives could be more strongly driven by stakeholder investors, who may in turn provide lower cost finance - as Sydney Renewable Power Company has done for solar power (supporting its viability beyond that offered by regulatory incentives like emissions trading). This approach can also exploit the expected benefits of lower future production costs as economies-of-scale are achieved (see attached PV finance paper).
Stakeholder representatives can pressure companies to protect & enhance community assets (such as Aboriginal heritage) beyond the bare minimum legal requirements.
Tobacco companies owned & controlled by stakeholders might support plain-packaging regulation and stop pushing their lethal products on kids in unregulated developing markets.
("YourCigs" brand might be one of the few types of allowable differentiation - "Owned by smokers to act in the interest of smokers"! Of course cigarettes will still kill you, but at least the company won't lie about it. Or better still, they might instead promote "snus", which has dramatically reduced smoking and health costs in Sweden.)
Food producers could prioritise healthy, ethical & environmentally sustainable production practices (e.g. by supporting meat alternatives instead of mistreating animals or filling food with water to boost the apparent product size)
Football or other major sporting clubs owned by supporters would prioritise the local club and the fans' experience, instead of private owners exploiting dedicated fans with effective-monopoly rents (or even selling them out or merging for profit - not appreciating that for many fans, supporting your local team is more important than profit or even winning).
News / media organisations owned by customers/stakeholders could promote a return of independent journalism that aims to inform readers, rather than pander to their prejudices and push the misleading and self-serving propaganda of unethical owners like Murdoch, who are such a blight on democracy. News media is uniquely important to the effective functioning of democracy and society, so it warrants unique regulation, which I suggest should prevent any major media company being controlled by a single shareholder (or their family, where "major media company" could be identified by those self-serving entities who put their hand up for subsidies under Australia's disgraceful News Corp Media Bargaining Code - a protectionist scam by Government for propping up the currently dominant, right-wing mainstream news businesses). Major news companies should be overseen by a plurality of owners (possibly with a minimum level of subscription customer ownership), or an independent trust (similar to The Guardian's Scott Trust, although recent years of their radical-feminist propaganda - as noted here - show such governance provides no guarantee of balanced & truthful journalism).
Despite current concerns with "big tech", if they establish appropriate independent oversight, co-op networks led by the likes of Google & Facebook would be well-suited to collate news personalised towards readers interests, by contracting with (or owning) a variety of pay-walled sources (as many traditional news organisations are having to do anyway because they've lost so much advertising revenue, but to do so they need to lift their game with their core editor job of robust fact-checking & peer review) and bundling this with other web services, like email & photo/data storage (which Google already sell by subscription) and video streaming. As global information-management businesses (see also below), Google, Facebook and other networks (e.g. WeChat) could compete on how they best organise information - including basic control of fake news & hate speech (potentially supported by some kind of devolved customer-rating system, which could also be useful for modernising the restrictive world of universities & their academic publications) - facilitated by open protocols that enable information on one network to be easily shared on others. For example - and perhaps more plausibly than a Government-imposed open-access law - Facebook and Google could do a limited open-access deal between just the two of them, so Google Chrome - which can already post to Facebook - could be upgraded to also read and display a user's Facebook news stream, whilst Facebook could in return get "under the bonnet" access to Google's search engine and Chrome bookmarks. Each business would then compete to produce the best single interface for accessing the internet, video (including YouTube) and "Facebook-friend" postings.
A key difference from traditional co-ops - which are typically focussed on a single industry - would be that superannuation-based Capitalist Co-ops would be formed from a diverse network of businesses, primarily in order to reduce investment risk, but also to promote synergistic co-operation between businesses within the network.
Superannuation funds that manage these Capitalist Co-ops - particularly Australia's union-linked “industry funds” (with associated loyalty shopping programs) - could encourage indirect employee share-ownership with investment risk diversified throughout the Co-op network's businesses, and to complement this they could also provide competitive union services, representing employee interests in corporate governance whilst also helping employees with value-enhancing business change through employment-agency services. As shareholder representatives, these unions would be represented on company boards, subject to exceeding a certain threshold (which would also ensure employee representation is not divided amongst too many unions to make it impractical to have any influence). Thus, companies would exhibit a kind of "inverted management" (as management would be accountable to the board and ultimately through super funds to employees), because in an age where value increasingly resides in the knowledge & skills of workers, the role of management is to provide these skilled workers with a service to make the most of their employment (as I discuss in my paper on "Supporting Employment & Reforming Welfare").
Besides the improvement in economic productivity, there is also evidence that co-operative management helps to improve employee's mental health (i.e. be less depressed / more happy).
Consistent with this theme, superannuation funds are already showing increased activism to ensure the businesses they invest in treat their employees appropriately (partly to manage financial and legal risks, as well as doing the right thing by workers).
Management accountability & sustainable performance metrics
The concept of Capitalist Co-ops gives greater emphasis to sustainability, especially for member employees. But oversight of sustainable business performance is already hampered in existing organisations by a tendency to use short-term metrics, such as annual profit (or better - though still in practice less than ideal - “economic value added”). Such metrics have widespread negative impacts throughout organisations, by encouraging behaviours that improve the immediate metric, at the expense of the longer term. Budgets get wasted towards the end of period (“spend it while you’ve got it”) and frenetic, rather than thoughtful activity waves through an organisation in order to meet quarterly and annual reporting deadlines at the top.
Of course accounting systems need to adopt discrete time periods, like a financial year or quarter, but we need to develop better metrics to guide and incentivise management and employees towards more sustainable medium & long-term goals (& perhaps create calmer workplaces), in both private and public sectors (see proposals to address short-termism in public-sector financial management here).
A relatively simple improvement on current practice would be to focus on averages or trends calculated across a number of historic time periods (adjusted for the time value of money), and in the case of senior executive bonuses, to defer payment until a number of periods after they’ve left an organisation. This could discourage short-termist behaviour that boosted immediate metrics if the consequence would simply be to reduce subsequent measures and the future running average.
International Co-op Networks
In a world of global trade, Capitalist Co-op networks would also be global, and would have loosely-connected & dynamic corporate membership, with the stock market continuing to provide external scrutiny and performance pressure on the value of superannuation funds and their constituent network businesses. Organisations well-placed to develop in this way could include transformed banks or the likes of the Virgin Group (anchored by Virgin Money), or Google (if it fixes the failures in its recent payments & banking ventures), Facebook (if its efforts to create a global currency weren't stymied by regulators) and Apple (maybe if Elon Musk joined Apple to restore its innovative drive and give it a better social mission, whilst the Apple board restrains his crazier tendencies) - thanks to their existing networks and sheer capital scale allowing them to quickly expand into new industries (but maybe not the tax-dodging Amazon - which poorly pays & mistreats its workers to the extent of not even seeming to care when they die - as its CEO, Jeff Bezos, despite personal wealth of $US167bn in 2018, has no community/philanthropic spirit and instead spends his fortune on big-boy space toys because he thinks, "there is not enough philanthropic need on earth for him to spend his billions on", even though half the world's population doesn't have a decent toilet).
Conceptually, a strong loyalty pricing scheme operating across a network of businesses has some similarities to a network-specific currency, and in time this may eventuate within Capitalist Co-ops (and perhaps provide the stimulation to economic growth claimed of Modern Monetary Theory). Such network currencies could potentially replace the struggling Euro, with the Euro becoming a common underlying 'base currency' for multiple competing Co-ops across Europe, & indeed globally - see The Euro & international economic networks post 'Brexit'. This scenario is not so far-fetched, given the IMF supports planning ahead now for a future with competing, international "crypto currencies", and India is moving aggressively towards a cashless, digital society whilst a number of African countries are already introducing block-chain digital currencies and many others, including China & Singapore, are considering it.
Ultimately people will be able to choose which global economic community network they wish to join, whichever country they live in, and - as I argue in the attached document, "Capitalist Co-ops for new Global Governance", which was my entry to the 2017-18 Global Governance Challenge - the concept of the nation state will further disappear (which is already outdated as a concept of an integrated, stand-alone economic entity, given the global nature of most supply-chains).
Although this vision is primarily about business strategy, there are undoubtedly various tax and legal/regulatory barriers that need to be addressed (not least the superannuation fund "sole purpose test") to facilitate such an industry transformation (I recommend a detailed review to consider this).
Here's some relevant links within the general 'vibe' of co-ops, mutuals and stakeholder/social/community/ethical investment:
Australian Business Council of Co-operatives & Mutuals: FAQs, 2014 paper on Public Service Mutuals & 2016 Federal election policy statement.
Platform co-operativism - using internet technology to provide platforms for multi-stakeholder co-ops & the 'sharing economy'
Members Equity (ME) Bank (created to provide mortgages to members of Australian Industry Superannuation funds, which are in turn linked to unions)
NSW Government Office of Social Impact Investment
Janelle Orsi - a 'legal rebel focused on helping individuals and organizations share resources and create more sustainable communities'
Investors In Community - creating 'Community Credits™' to support volunteering & donations
B Corps: for-profit companies certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency
Collaboration vouchers (also here)