Communities and Local Government Committee - Mutual and cooperative approaches to delivering local servicesSupplementary written evidence from ResPublica

Thank you for the follow-up questions from the MPs subsequent to my oral evidence given before the Committee in the inquiry session held on 11 June. My responses to their questions are detailed below.

1. At the session on 11 June there was some discussion about “multi-stakeholder mutuals”, involving service users, employees and, potentially, the local authority
 —For these types of mutuals, must there be agreement from the different stakeholder groups before decisions can be implemented?

In the 21st century, the model for co-operatives (being a type of mutual) is not simply a member-only co-operative. It is a shift to a multi-stakeholder model (a “multi-way mutual”) that will involve and empower a wider community of people, including service users and their families, employees, volunteers and funders (eg local authorities). The core rationale of creating a cooperative lies in the democratic control by its members, which is one of the seven co-operative principles approved by the International Co-operative Alliance in 1995. However, the risk is that the co-operative structure can become captured by a particular cohort of members. Through extensive and intensive engagement of multiple stakeholders “who actively participate in setting their policies and making decisions”, the primary mission of a multi-stakeholder co-operative is generally broader than the interests and benefits of a single stakeholder group alone, and will often reflect the interdependence of interests of each stakeholder group and so generate a broader and deeper conception of the common good.

 —What happens when stakeholders disagree? Is organisational paralysis an inevitable consequence?

Understandably, when public services have never been run by a “multi-way mutual” some observers rightly wonder if it is ever possible to reconcile disagreements arising from inherent conflict of interest amongst stakeholders who represent different needs and viewpoints. In this relatively new governance structure, consciously solidifying commonalities instead of highlighting differences may not be the natural response. If competitive animosity or indifference that might have characterised the usersproviders relations in public service delivery is to be replaced by a co-operative mentality, it requires a set of very advanced communication and interpersonal skills of co-op members, but also a much more basic sense of what they as a whole are trying to do. Some observers, therefore, are concerned about the high transaction costs of a multi-stakeholder model (necessitated by the involvement of so many parties) and may even have predicted an inevitable consequence they called an “organisational paralysis”.

Like any other operative model, disagreements amongst stakeholders do occur from time to time. But, a “multi-way mutual” can provide a platform where differences in co-operative decision-making are offset by the efficacy of the organisation, and the trust that this success creates can help mitigate conflict and disagreement. When stakeholders “co-own” the mutual and commit to a shared purpose, they can succeed where others fail as Nobel laureate, Elinor Ostrom, endorsed in her research on the self-governance of common resources. It should thereby be regarded as a more highly evolved co-ordinating mechanism for the collection and co-ordination of disparate information in the pursuit of common needs. With increased levels of information, trust and involvement resulting from a multi-stakeholder approach, the transaction costs, we suspect, will be more than offset by the gains in trust and shared information.

Research by Antonia Tomas of the Institute for Service Industry Research (Italy) in 2004 concluded that the struggles experienced by Italian multi-stakeholder co-operatives cannot be attributed to their governance structures. In fact, different stakeholder groups are able to maintain a focus on the overall mission and goals of these organisations. As an illustration, volunteer members typically contribute their time to these social co-operatives for altruistic reasons rather than to pursue individual interests; and similarly, investors are commonly donors dedicated to the social outcomes of these co-operatives and are not focused on financial returns. The highly engaging governance process results in both greater trust amongst stakeholders and better availability of information. (Tomas, 2004)

Moreover, research from Quebec (Canada) and Italy suggest that the assumption that a “multi-way mutual” would lead to “organisational paralysis” is not supported by empirical evidence, and in many cases, multi-stakeholder co-operatives are flourishing simply because they sustain a “commonly shared purpose”. In 2004, the Co-operatives Directorate, Ministry of Economic Development, Innovation and Export Trade, Government of Quebec (Direction des cooperatives, Ministere du Developpement economique, de (‘Innovation et de (‘Exportation, Gouvernement du Quebec) conducted a survey of 179 multi-stakeholder (solidarity) co-operatives, incorporated between the 1 June 1997 and on 31 May 2002, in Quebec. It revealed a very high level of satisfaction with governance processes. Over 90% of respondents reported that the participation by different stakeholder groups at board meetings was excellent and, so too was the ability to achieve consensus amongst different stakeholders. Furthermore, when asked to identify forthcoming challenges, most respondents stated that economic issues, such as increasing total revenue and paying higher staff wages, were of more concern to them, rather than problems related to collective decision-making. (Chagnon, 2004) (Levitan-Reid & Fairbairn, 2011)

Italy is the first country to provide the formal legal recognition for the multi-stakeholder model, as it had legislated for social co-operatives to provide essential social services as early as 1991. Despite the prediction that these multi-stakeholder co-operatives would be inefficient or more confrontational than a single-constituency co-operative, more recent evidence in 2006 from Italy suggests that the well-being of different constituencies (ie stakeholder groups) within a multi-stakeholder co-operative is not a zero-sum game—one cohort of members does not need to win to the detriment of others, according to Borzaga & Depedri (2010). In a large comparative study which involves over 300 cooperatives, it was found that on both social and financial measures, workers proceeded equally well in co-operatives organised as multi-stakeholder and worker-only co-operatives—the addition of other stakeholder groups in this sample did not take away at all from the ability of co-op workers to achieve their objective of meaningful and remunerative employment. Therefore, “organisational paralysis” is not an inevitable consequence of this model. (Borzaga & Depedri, 2010)

The predictions expected from some observers may come from a simplistic analysis that actually overlooks that even a single-stakeholder-group co-operative model obscures a dynamic set of differences between members of a common class. For instance, credit unions, being one of the largest and strongest co-operative sectors worldwide, usually need to address the conflicting interests of borrower-members who desire low interest rates and depositor-members who favour high interest rates on a daily basis. We would like to reiterate that a multi-stakeholder co-operative is one where such differences of perspective and experience are not only tolerated but also embraced.

 —Do you think processes might be needed to assist the stakeholders to come to agreement and make decisions? If so, what might these be?

As mentioned during the inquiry session, mutualism can cover a range of operating models. Today, there are about four legal models that fit essentially within the co-operative model, but none of them, bound by a nineteenth-century mind-set, address all the needs of a modern 21st century co-operative. The multi-stakeholder model I have been talking about cannot go to scale unless a new legalised form of company model is in place. Co-operatives have to move beyond a membership-only model to a more diverse one that includes all stakeholders, all of whom will have a different role. For instance, we favour a hybrid model that can on the one hand allow private sector funders to receive a good, “competitive” return, whilst also on the other hand receive a mutualised return on the benefits from that capital injection and investment. Currently, we fear that none of the current company models for both co-operatives and mutuals allow them to grow to sufficient scale—perhaps because they cannot as yet incorporate a partial and normal private sector return on investment. We should encourage a diversity of approaches which offer social plus economic productivity and that requires a new hybrid company model for mutuals.

However, it is understandable that one of the most fundamental decisions that members of a multi-stakeholder co-operative will need to make is the allocation of governance rights between different groups of members. If Parliament considers legislating for the subject model, the Government may “recommend” the approach proposed below for consideration of potential members of this type of mutual.

A Proposed Governance Structure for a “Multi-way Mutual”

In the interest of equality amongst members, traditional co-operatives adhere to the “one member, one vote” rule, with the exception of some secondary co-operatives (Co-ops of co-ops), which sometimes use “proportional voting”. Multi-stakeholder co-operatives also follow the same rule, but they often do so within the confines of the number of board seats allocated to each class of members.1 In principle, as the first step to building a trusting relationship in the process of effective multistakeholder governing, a successful multi-stakeholder co-operative must have inherent in its board structure the “check and balance” mechanism which defines any successful democracy.

To observe the spirit of a “participative democracy”, as opposed to a “representative democracy”, we indicated during the inquiry session that a “multi-way mutual” that could run public services may go even further. All members of a multi-stakeholder mutual should be given a board seat automatically. For instance, a “multi-way public service mutual” may have the following composition of members (stakeholders).

Class of membership (stakeholders)

No. of
members

Governance stake
(non-financial)

Surplus stake
(financial)

I.

Service users (and their families)

3,100

25%

30%*

II.

Employees

80

25%

20%

III.

Volunteers/Supporters

1,200

25%

10%

IV.

Investors/Funders

100

25%

40%*

eg Community residents

eg Local Authorities

(represented by Councillors)

20

 

Total

4,500

100%

100%

The size of each class of membership in a “multi-way public service mutual” is usually significantly different. However, equality amongst different membership classes means that they should all be given the same percentage of “stake” which is not necessarily financial.

On voting rights, all members are entitled to vote in this co-operative. An “agreement” is reached only when there is a majority vote (usually more than half) in each of the four classes of members (stakeholders). This arrangement aims to ensure no stakeholder group can dominate or be superior to another whilst the interests of all stakeholder groups are duly respected during the collective decision-making process.

In contrast to the Society for the Benefit of the Community (BenComm) in the UK, social co-operatives in Italy are permitted to distribute profits.2 This should be a core element of any potential Member’s Bill (whether private or public) legislating for a new multi-stakeholder mutual model. For multi-stakeholder co-operatives, the rights to the distribution of surplus is complex, which is due to the different levels of participation and patronage for different classes of members. The rights to surplus distribution in a “multi-way mutual” may or may not correspond to the allocation of governance rights above-mentioned. In its start-up, a mutual may decide, for instance, to pay something similar to a preferred dividend* to “investors” who make significant financial contributions or; “service users and their families” whose livelihood depends on the financial success of the mutual whilst maintain equal governance stakes for them. A democratic mutual structure can be maintained, even when giving out differential returns to different types of members.

2. When mutuals (of any stakeholder involvement model) are used to deliver local authority services, who should ultimately be accountable for the spending of public money? Should accountability always sit with councillors? How is this to be ensured?
 —Do mutuals require particular organisational structures to guarantee accountability? If so, what might these be?

Given the consistent low voter turnouts in local council elections, it is questionable that local accountability (for spending public money) can only be achieved through representatives who are directly elected by 10–20% of electorates and therefore do not necessarily correspond with the true needs and opinion of the electorate. Considering that this is exactly the type of representation that discourages public involvement, we are of a view that councils could and should harness (a) the community rights stipulated in the new Localism Act and; (b) the area-based budgeting pilots currently being run through DCLG to empower a more neighbourhood-based unit of accountability.

A “multi-way mutual” is an organisation which always subscribes to a collective decision-making process implemented by all classes of members or groups of stakeholders together. Rationally speaking, “collective decision-making” should go in parallel with “collective accountability”, which has been already ensured by such a multi-stakeholder governance structure. In this participative model of democracy, the extent of public accountability will be higher we suspect than the more traditional representational/electoral system currently delivers.

As a consequence, accountability should not sit just with councillors but everyone involved in the decision-making process. “Collective accountability” has an additional advantage that prevents councillors from making any “political decisions”, particularly during election years, which may not be in the best interest of the residents of their wards.

3. What role would the local authority play in a world where all services were delivered by mutuals? Would it effectively become just a guarantor of service provision?
 —What do you mean when you talk about service users? Should multi-stakeholder models involve just those who currently use the service, or members of the community as a whole?

In a world where all or most of the public services were mutualised, the local authority would still perform a variety of roles other than guarantor of service provision. An effective co-operative council, as I suggested during the inquiry session, would facilitate co-operatives at infant stage and afterwards become an alternative financial/trust platform to enable co-operatives to go to scale, empower rights to challenge, utilise area-based community budgeting and ensure universality of standards through allowing local innovation. As already demonstrated by some mutualised housing associations which allow residents to manage their estates, the expected outcome of this movement is that the community environment is transformed for people at the very bottom with a co-operative capture of all the social services which can draw together both the service consumers and producers in their areas, and enable the service users to participate in service production and delivery.

A traditional price-driven business model, whether it is co-operative or not, may be perceived as simply transactional. A multi-stakeholder model should be seen as “transformational”. A “multi-way mutual” emerges not in response to the absence of a particular good or service in the marketplace, but rather as a response to the declining quality and sensitivity of essential public services in a conventional government-controlled marketplace in an age of austerity. Building a longer-term relationship based upon equal treatment for all parties, a multi-stakeholder mutual requires all members to look beyond their immediate short-term interests and join their business partners to envision a system where public service delivery will be truly democratised to meet the differential needs of everyone in both the short- and long-term.

Central to our evidence is our advocacy of multi-stakeholder involvement in the provision of public services. Beside service users, a “multi-way mutual”, as exemplified by Italian social co-operatives, will also engage families of service users, employees, volunteers and investors (eg local authorities), who are already members of wider community. In Italy, an investor category of membership allows bodies like local authorities to support the development of the social co-operatives and to safeguard their success. Social co-operatives there are often involved in joint planning of services with local authorities, which may have implications for the UK as it is pushing forward the concept of community budgeting, joint commissioning and even neighbourhood planning.

By “service users”, we refer to the recipients of and public sector funding and services (eg day care, home healthcare or other social services) who are also capital owners in the multi-stakeholder model. The table below exhibits the variations in membership classes of a “multi-way mutual”.

Service users and
their families

Employees
(as co-owners)

Volunteers/
Supporters

Investors/
Funders

Short-term needs

Accessible location and price

Production costs covered;

A platform to campaign for certain social issues

Existence of resource in community

Job security;

Fair wage

 

Long-term interest

Access to personalised services;

Sustainable source of income

Accumulate social capital for community benefits

Healthy and vibrant local economy

Predictable pricing and supply

Safe, respectful, gainful employment

 

Non-financial contribution

Purchasing power

Professional knowledge and experience

Time to volunteer

Possible special expertise and acumen

Service feedback

Specific expertise and networks

Networks and relationships

 

Equity contribution

Generally low

Low–Medium

Medium

Quite High

 

Stake in outcome

Low—High depending on alternative supply of services

High

Medium–High

Low–Medium

Other than governance or financial stakes offered to community members as an incentive to engage in a public service mutual, there are a number of other ways to share information and invite participation, including preferred stock, membership in advisory boards, employee committee and partnerships, which have proven successful in the United States and Canada.

I hope the information provided above will be of use in your further considerations on the possibility of a nation-wide rollout of the co-operative council model. Again, thank you for the privilege of giving evidence before the Committee last month.

July 2012

References

1. Borzaga, C, & Depedri, S (2010). The implications of Stakeholders’ Participation on Goals’ Achievement and on Performances: the case of Italian Social Cooperatives. Paper at the meeting of the International Association for the Economics of Participation. Paris: Not Published.

2. Chagnon, J (2004). Les cooperatives de solidarite au Quebec. Quebec QC: Direction des cooperatives, Ministere du Developpement economique, de (‘Innovation et de (‘Exportation, Gouvernement du Quebec.

3. Levitan-Reid, C, & Fairbairn, B (2011). Multi-stakeholder Governance in Cooperative Organizations: Toward a New Framework for Research? Canadian Journal of Nonprofit and Social Economy Research (Revue canadienne de recherche sur les OBSL et l’economie sociale), 2(2), 25–36.

4. Tomas, A (2004). The rise of social cooperatives in Italy. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 15(3), 243–263.

1 Acknowledging that some classes of members may have more to contribute and/or may have a more compelling interest in the success of the co-operative, multi-stakeholder co-operatives in Quebec, for example, may choose to allocate them a proportionately larger number of board seats while supporter members (who may have less direct interest in the co-op business) may be limited to a maximum of one-third of board seats, regardless of their number.

2 For social co-operatives in Italy, profit distribution is subject to the conditions that (i) distributed profits are restricted to 80% of total profits and; (ii) the profit per share is no higher than 2% of the rate on bonds issued by the Italian Post Office.

Prepared 6th December 2012