1.5 Worker Coöperatives | Isthmus Engineering

Worker coöperatives have a long history of bringing democracy and equality to the workplace. They instantiate the values of solidarity and coöperation—and the principles of one person, one vote. In a worker coöperative, the workers are owners and have a vote and equal say to create a democratic workplace.⁹³ If there were ever one form of coöperation that instantiates the ideals of solidarity, mutuality, and social justice, it is the worker coöp.

A lot of economic theory suggests that worker coöperatives will have a hard time operating because of the costs associated with collective decision-making. John Hansmann’s classic work in corporate organization, The Ownership of Enterprise, for instance, stipulates that firms are more successful when they are more efficient in reducing transaction costs—the costs to operate and generate profit; and that, given the lower number of coöperatives than ordinary corporations, there must be a high transaction cost impediment that is offsetting the advantage of coöperatives.⁹⁴ The transaction costs in a coöperative model tend to be the more burdensome demands of collective governance, since all the views of members must be considered. But those costs are offset by other factors, such as the enhanced labor incentive given the vested stake worker-owners have in the enterprise.⁹⁵ In many cases, the advantages trump. If our tax code and politics favored coöperatives, there is no question they would thrive.

A good illustration is the Isthmus Engineering & Manufacturing Co-Op (“Isthmus Engineering” or simply “I.E.M.”), based in Madison, Wisconsin. Isthmus Engineering builds robotic machines for industrial companies.⁹⁶ It has been used as a case study in successful worker coöperatives,⁹⁷ which is especially noteworthy given that it operates in a high-technology environment that is often believed to be more competitive and difficult.⁹⁸

Isthmus Engineering started as a partnership of three mechanical engineers (who knew of each other through work with a family-owned business) and a bookkeeper. They performed contract engineering for nearby businesses and worked out of the home of one of the partners.⁹⁹ New partners were brought in who had additional skills and required more flexibility in entry (and exit) than a limited liability partnership allowed. Two of the partners heard about the success of the Mondragon coöperative in Spain at a conference, and so they all decided to incorporate the partnership as a coöperative using attorneys and advisors.¹⁰⁰ The coöperative now includes 29 worker-owners, and membership in the coöperative is open to all employees.¹⁰¹

The decision to turn the partnership into a coöperative involved some personal financial risk by members of the coöperative since each one of them was underwriting a portion of the bank loan through co-signs.¹⁰² But the enterprise proved successful. And I.E.M. has grown from two customers in the automotive industry in the early 1980s to a larger customer base with a skilled labor force. I.E.M. now has annual revenues exceeding $15 million.

In the initial 12 years after incorporating as a coöperative in 1982, I.E.M. grew from 8 to 50 members. The membership fee was described as “the price of a small car.”¹⁰³ The coöperative was structured into an administrative staff and five areas of “sales, controls (electrical) engineering, mechanical engineering, controls (electrical) assembly, mechanical assembly and machining.”¹⁰⁴ Out of the 50 employees, 29 were considered “worker-owners,” and served on a board of directors that met biweekly to govern. I.E.M. terminated some memberships in the 1990s and established a more rigorous membership process in the 2000s that remains open to every employee, but “gives the board significant flexibility in considering applications.”¹⁰⁵

In order to become a member today, one has to have been a full-time employee for two years to apply. Unless an application is rejected by two-thirds of the membership, the applicant proceeds to board member interviews and an invitation to join open and closed sessions of board meetings. Applicants can serve on board committees during this phase. One of the only limits is that only one applicant can be considered at a time.¹⁰⁶ If the application is successful, meaning no more than three to five votes against it, the applicant is invited to join the coöperative conditional upon buying a share of the coöperative, priced around $20,000.¹⁰⁷ The principles of the coöperative are that “All owners must be workers, all owners serve on the Board, and all workers are eligible for ownership.”¹⁰⁸

In terms of income, practically all of the workers (apart from the sales manager and general manager) receive hourly wages that are set on a scale from when the worker is first hired. The hourly wages do not change when a worker becomes an owner, but there is no longer a benefits package. Owners only receive wages if Isthmus Engineering is profitable.¹⁰⁹ At the end of the year, owners “pay a certain percentage of their total earnings into common equity and receive a certain share as dividends.”¹¹⁰ When an employee-owner leaves the coöperative, their stock and equity is repurchased.

There are, of course, costs associated with a worker coöperative. At times, to sustain growth and requests from customers, I.E.M. has been forced to utilize contract workers or has been forced to offset a potential lay-off by spreading the “lack of work” across multiple coöperative members (e.g., instead of getting rid of a 40-hour a week position, four workers are asked to work 30-hour weeks until the work picks up).¹¹¹

But there are many offsetting benefits. Mostly, given lack of outside equity, the coöperative structure allows, even encourages, the group to focus on long-term strategies. There is little pressure to produce short-term profits at the expense of longevity.¹¹² Moreover, as worker-owners, line workers and those working on project teams are—or at least state that they are—more self-motivated, in part because of the lack of hierarchy and the fact that they feel they have no one to answer to. There is also a certain amount of mutual monitoring that leads to a sense of empowerment and is a source of motivation to work. This reflects the absence of a manager-employee relationship, which apparently is felt positively by non-owning employees as well.¹¹³ Even among the latter, apparently, there is a strong negative feeling about employees downplaying their work by invoking their status as “only” an employee."¹¹⁴ Similarly, there is a strong feeling that members should not leverage their ownership-status.

Overall, the focus of Isthmus Engineering has been sustainability. In the words of one member: “Most companies would correlate profit margins with the size of the company. That’s the last thing we do. Before profit, the first thing is sustainability.”¹¹⁵ And given its coöperative principle of “Concern for Community,” Isthmus Engineering mobilized to produce and donate thousands of face shields to local clinics and coöperatives nationwide in face of the COVID-19 crisis. It also helped the Medical College of Wisconsin create custom tooling to expedite production as part of the “Milwaukee Million Mask Challenge” (an effort by United Way to meet demand).¹¹⁶

Worker coöperatives come in varied forms and under different names. They can be structured as a partnership or a limited liability corporation, so long as they abide by the principles of coöperatives, especially the “one vote principle” and non-hierarchy.¹¹⁷

Another form of worker coöperative is called the “benefit corporation.” Benefit corporations are traditional companies that take on a modified obligation toward accountability, transparency, and purpose, with a commitment to creating what is called “public benefit and sustainable value.”¹¹⁸ Some benefit corporations are legally required to consider and benefit all stakeholders, including workers. These too, even if they are not fully worker-owned coöperatives, can serve the goals of mutuality.

An example of a benefit corporation is King Arthur Flour, America’s oldest flour company, founded in 1790. King Arthur is a certified B Corp (certified and evaluated as to social and environmental performance) and commits itself to a “triple bottom line” for “people, planet, and profit.” It also is required to do a B Impact Assessment to show and certify its success toward these missions (independently done).¹¹⁹

Prior to 1996, King Arthur was a regular corporation run by Frank and Brinna Sands.¹²⁰ When the Sands began thinking about retiring, they decided to sell their company to its employees through an employee-stock ownership plan (ESOP). In an ESOP, an ESOP trust is formed as a legal entity to hold shares of stock on behalf of the employees of a company. The ESOP trust is funded entirely by the company.¹²¹ The trust gains cash through profit or loans, and then uses that funding to acquire shares from the owner (the value is appraised independently).¹²² The trust then allocates the shares it has bought to employees. So in effect, employees gain stock without a cash outlay,¹²³ and the owner is paid out over a period of time, often through a promissory note.¹²⁴ In effect, ESOPs function a lot like retirement plans such as 401(k)s, but there is one enormous difference: The company fully funds the ESOP and the employees do not contribute financially.¹²⁵ For King Arthur specifically, “after the first year of employment, all workers who log more than 800 hours a year, including season and part-time laborers, are eligible for the employee stock ownership program, or ESOP.”¹²⁶ According to Joseph Blasi of Rutgers University, co-author of The Citizen’s Share: Reducing Inequality in the 21^st Century, many family business-owners are drawn to ESOPs to promote the best interests of their workers.¹²⁷

This has proven successful for King Arthur, which has experienced major growth since transforming itself into an employee-owned business. It began distributing products outside of New England in the late 1990s and has now reached over $100 million in annual sales and sends over 2,000 King Arthur products to grocery stores.¹²⁸