Good Scout Capital (GSC) recently sat down with leaders from three organizations focused on the future of cooperative economics to discuss the outlook of the sector and specific ways that policy can help advance GSC’s vision for inclusive capitalism that prioritizes worker ownership. These conversations will be excerpted in a multi-part series that touches on critical issues cooperative economics from a number of different angles. Our first excerpt highlights portions of the conversation that address specific policy steps that could help bolster the competitive environment for cooperative economics.

This piece has been excerpted and edited for clarity.

GSC Guests:

GSC: The concept of worker ownership isn’t new, but in the last few years we’ve seen a rapid growth in interest in different models of worker ownership. People are more interested in doing work that goes beyond wage labor. They want opportunities that will help them build wealth for themselves and build a stake in something. As we take a big picture view of our entire economy, what do you want to see happen so that this surge in interest doesn’t become a trend, but rather a long-term priority for our economic system?

KATE: The opportunity is in using this excitement to really build out ecosystems of support, from co-op lenders to technical assistance providers to including in education from K-12 to business and law schools. The enabling environment is still very challenging, particularly in the Southeastern U.S. We want cooperative businesses to be able to incorporate in their home state, which will require investment in existing co-op centers and expansion to make sure that they can meet the capacity of requests that come in.

ISAIAH: What Kate speaks to is the need for a movement. There has to be a political movement behind this. The cooperative movement was able to win a small victory in the American Rescue Plan passed by the Biden administration. The State Small Business Credit Initiative (SSBCI) includes, for the first time in years, the opportunity for SSBCI funds to be used by states to transition firms to worker ownership, using funding from the Treasury Department. That was a small step, but it was significant. The kind of problem that Kate speaks to underscores how we need to rewire how economic development is done at both the federal and state level so that we start from the ground up, as cooperatives are already doing, and create support systems in communities.

MO: I would go a step further and say we need to rewire how we think about work in this country. There is very little understanding or knowledge of the cooperative form. People will need to build familiarity with the model and understand how to create financial vehicles to help service the sector. For cooperatives, trying to get loans for a small business through the Small Business Administration (SBA) has been a huge hurdle because the SBA doesn’t understand cooperatives at a deep level. Most of the loans are built on this idea of a personal guarantee, which requires having all of the owners be a part of the loan process, which doesn’t align with how cooperative businesses are created. It results in this logistical problem of financial institutions and development centers not having the understanding or capacity to service these businesses.

KATE: These things are not impossible at the federal level. This has been happening at the U.S. Department of Agriculture since its inception. We are talking about worker cooperatives here, but consumer cooperatives are thriving! When electric cooperatives were originally formed, a lot of the technical assistance came directly from the USDA and now they consistently have loan products and grants that work within a cooperative structure. If you are a co-op or a non-coop you can access these programs in a similar way. This is not an impossible problem to solve, just one that hasn’t been solved at SBA yet.

MO: We have seen time and time again that cooperatives are a wealth building vehicle for many communities, particularly low-income communities of color. We saw during the pandemic with the Economic Injury Disaster Loans and the Paycheck Protection Program that they actually waived the personal guarantee which provided access to so many cooperatives. It turns out that it’s actually not the hurdle that the SBA thought it was to waive that personal guarantee – pushing for these types of mechanisms to allow cooperatives to access the capital and support they need is vital.

MARJORIE: If we’re serious about scaling worker ownership, what’s really needed is not just loans but active capital or organized capital. How do most businesses transition ownership? They often sell to a competitor, which means layoffs. Or they close. What’s odd about transitioning firms to Employee Stock Ownership Plans, in particular, is that the current owner is in the position of being both the seller and the buyer. He or she has to find the capital and the consultants to sell to employees. What we need is organized capital that comes and knocks on the door and brings the capital to facilitate the sale, then organizes the sale to employees. That’s how private equity works. Could we have employee ownership funds that operate in the same way? There are already some funds that exist or are getting started. One of the most exciting is the Apis & Heritage Legacy Fund, aimed at reducing the racial wealth gap. They are going to be acting like private equity in the public interest, purchasing businesses then transitioning to worker ownership. Cities can play a role in this too by leveraging existing loan funds. A lot of cities and states have existing loan funds. People who know worker co-ops could help manage these and prioritize community ownership and worker ownership. There is $10 billion coming from the federal government via SSBCI. We are beginning to work directly with States to help direct some of this funding towards employee ownership models.

GSC: So with a more supportive structure in place for cooperative economics, how do we go about developing the proof of concept, region-by-region, that shows that these businesses can be sustainable and build wealth for workers and communities? What else do we need to do to give cooperative businesses a competitive advantage?

MO: Legislatively there are many different irons in the fire at the moment, but fundamentally we need to ensure that cooperatives are a tool in the toolkit of any economic vehicles that invest in communities, particularly in low-income and communities of color, whether it is the Build Back Better Plan or specific regional initiatives. We need to double down on education and highlighting cooperatives to help raise the profile of the models in both rural and urban settings.

KATE: Cooperatives do have tax advantages and we need to remain united on protecting that tax treatment, but there are other areas that can move the needle. Certain existing business owner sales to some structures of employee stock ownership plans do have preferential tax treatment for the seller. We could replicate that treatment in the cooperative space. We should also think about individual tax credits to the member owners who buy the cooperative. Trying to build wealth in a place where it doesn’t exist in a lot of places. It is hard to build wealth when you don’t have any wealth to start with. Like all cooperative policy, it is important that whatever tax incentives there are actually reach the cooperative. A lot of these policies really are about leveling the playing field for cooperatives. Cooperatives can compete in those scenarios where they’re on the same playing field.

ISAIAH: In the context of community wealth-building, we want to reframe how we think about how economies should work in communities and who those economies should work for. If you have a framework that says that the economy should work for the people who live in that community and work in that community first, then everything can logically flow from that. This is the case in some of the cities we’ve worked with that have adopted community wealth-building strategies. You get the right ecosystem for worker ownership, you get the right capital structure that enables conversions to flow properly. All these things begin to happen.

Stay tuned to our website and social media channels for the second installment of this conversation, focused on small and medium enterprises, capital markets and strategies to help tell the story of employee ownership.