If you are reading this post, chances are you are an innovator, you are looking for guidance on alternative business forms, you run or are part of a mission-driven organization, you are considering adopting democratic governance models in your business or nonprofit, or some combination of those. I have to alert you that this is not a typical technical post.

I’ve joined the JWPC team early January 2021 and you can learn a little bit about me here, but I wanted to share with you some insight I have gained in my years practicing law, and more specifically the past four years working with nonprofits, cooperatives, and community-based enterprises, but also through the lens of a sociologist and political scientist. Don’t worry, I won’t make this political.

My job is to advise people like you. And I love it. I love being part of resolving a problem, I enjoy spotting or anticipating an issue and guiding my clients towards a good solution, through a mix of education, experience, on the job training, (a combination of fixer/creative) personality, and evidently a great team of colleagues and mentors.

Part of what is so exciting about the areas of law I practice is that my clients, people and organizations like you and yours, are equally as passionate about their project or enterprise – their mission, really. This is true in my current position, and it is true of the clients I served when providing public interest legal services.[1]

In both public and private practice, I have seen some patterns that I want to share with you throughout a series of posts.

One of those “patterns” is a misunderstanding concerning the differences between traditional businesses and cooperative businesses. There are many and I intend to highlight a few.

Shareholder profit as the default rule

In my opinion, one of the most important distinctions is the business purpose, which relates to how capital is invested in the business and the consequences of it. The traditional capitalist business model is guided by the shareholder primacy norm, carved by the court in Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668 (Mich. 1919)). It says “[a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”[2] In this context, the business purpose is to operate the business in a way that generates, or extracts, the most amount of money for the benefit of the stockholders-investors/owners.

Traditionally, capital is invested in the business with a goal of extracting profits and controlling how the business is done. The more money an investor (owner or shareholder) puts in the business, (i) the more return that investor expects and, sometimes, (ii) the more control that investor expects to have in the business. Marjory Kelly calls it casino finance[3] and the metaphor is easy to understand: you expect to get more out than what you put in, without much, if any, personal effort. In this type of structure, the financial purpose is to maximize profits in the short term, the ownership is often disconnected from the life of enterprise, and governance administered by the capital markets. If you have a small, local business, and this does not feel right – you would have good reason, but the common idea of a successful business is still the traditional model: I am investing money, so money can work for me, and grow (almost magically).

One of the concrete ways this shows up is that the business owner/investor expects returns, dividends, based on the equity they hold in the business. We can talk about that in terms of how many shares that person owns, or the percentage of ownership held by that person. That owner/investor expects a return (dividends, profit share) that is proportional to those shares/percentage of ownership, regardless of the amount of work they put in the business (they may be employed by the business, but that is another topic for another time – let’s not get confused). They also expect to control the business, i.e. vote on important decisions, based on that number of shares or percentage they own in the business: the owner/investor votes the number of shares they own; they can be majority or minority shareholders, and they will vote accordingly.

Another way is that the owner/investor expects to “retire” and continue to receive income based on the investment that they hold in the business. Because their investment/ownership has bearing only in the capital they invest in the business, they can expect the “money to keep working” even though they are no longer (or have never been) involved in the business activity. The goal is to maximize return to investors as shareholders and not as stakeholders.

In my next post, I want to tell you how the cooperative model distinguishes itself, from a capital point of view, from this model. In the meantime, feel free to share your thoughts with me at jacqueline@jrwiener.com.

[1] “Legal services” is a term often used to refer to, well, legal services of public interest, that are offered to individuals of modest means, either at a discounted rate, or free of charge, while sponsored by charitable donations, grants, the private bar, and government.

[2] See Dodge v. Ford Motor Co., 204 Mich. 459, 507 (Mich. 1919); the court agreed that “[a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.”

[3] Kelly, Marjorie, Owning our Future, The Emerging Ownership Revolution: Journeys to a Generative Economy, p. 14.