Why ownership matters in the two tribes of business

Co-operatives UK launches a new report that looks at the relationship between ownership of co-operatives and conventional business worldwide. In the report, Ed Mayo, Secretary General of the...

Co-operatives UK launches a new report that looks at the relationship between ownership of co-operatives and conventional business worldwide. In the report, Ed Mayo, Secretary General of the UK's trade body for co-operatives, looks at why ownership matters . . .

Co-operative enterprises are businesses that are owned by their members. The members are one or more of the stakeholders involved in any business: its consumers, the producers (who supply inputs to or take the outputs from the business) or its workers. Because co-operatives are member-owned, they are generally not subject to stock market listing.

Unlike shareholder companies, teams of analysts are not employed to study their performance and the financial press often omits to report their results. As a consequence, there has been a tendency to marginalise the role of co-operative enterprise. The note sets out to redress this in relation to one key element, which is the distribution of ownership across individuals worldwide – comparing this to individual share ownership.

Any enterprise is a nexus of different stakeholders brought into productive relationships. Each stakeholder has an influence on and is influenced by the enterprise but ultimate control and benefit is vested in the stakeholders holding ownership.

In conventional analysis, ownership implies two rights — 'the right to control the organisation and the right to appropriate the firm's profits, or residual earnings (that is, the net earnings that remain with the firm after it has made all payments to which it is contractually committed, such as wages, interest payments, and prices for supplies).' Alongside this, and key to the culture of many organisations, is a 'sense of ownership', reflected in key aspects of co-operative working across all enterprise forms such as staff engagement and customer loyalty.

Why ownership matters
1. Ownership brings benefits to one stakeholder rather than another. If investors own a firm, they can appropriate the profits and benefit from increases in share values. Nobody else can do so. If, on the other hand, it is owned by the employees, or by customers, or by other firms that rely on it for their business, they take the profits.

2. Ownership gives control over the business to one stakeholder rather than another. There are always conflicts of interest between different stakeholders. They cannot all maximise their return from the business. If some interests were not excluded from ownership the business would lack direction and the costs of governance would be too high. More positively, ownership by stakeholders who rely on the business not just for profit but to meet their wider needs enables the business to be 'people-centred' rather than money-centred.

3. There are always costs incurred in bringing one set of stakeholders or another into ownership. Stakeholders who are left outside have to rely on contracts that carry transaction costs, while those on the inside have to bear the costs of governance. Member ownership provides a different mix of costs that, under the right circumstances, makes a firm more competitive.

4. Different patterns of ownership can create different business incentives and outcomes. There are strong incentives for businesses owned by investors to maximise financial returns to shareholders through dividends and increases in share price. In enterprises owned by other stakeholders, there can be a decision not to pursue profit but to give priority to other aims; consumers may value the quality of the product, staff decent working conditions and producers the quality of inputs to their businesses or effective marketing of their products.

5. A model of ownership can be used as a commercial or marketing strategy and therefore be a potential source of competitive advantage. An ownership stake, for example, can help to create incentives for stakeholders to trade with and through the business, acting as a means to promote and reward loyalty.

6. The existence of diverse ownership structures has wider systemic effects. It can be argued that markets that include owners other than just investors provide more choice to consumers, help prevent monopoly, provide room for innovation and generally keep investor-owned businesses on their toes and competitive.

There are two tribes of business ownership. Indeed, there are perhaps many more if you also consider informal ownership, family firms and enterprise at the micro-scale. Despite the focus of attention being on stock markets, however, it is co-operative enterprise that touches the lives of more people as owners worldwide.

• To see the full report, with statistical analysis, see below. 

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