Members of the new Island Employee Cooperative at a meeting in Stonington on February 8.
Members of the new Island Employee Cooperative at a meeting in Stonington on February 8.
Over a year ago, Stonington resident Deanna Oliver began to get nervous about her future livelihood. For 23 years she had been working as the bookkeeper for three businesses - the Burnt Cove Market, V&S Variety and the Galley - which provided everything from groceries and prescription drugs to hardware, craft supplies and other goods and services to the residents of the idyllic fishing community. Owners Vern and Sandra Seile purchased Burnt Cove Market in September 1971 and built it up from a small general store to a 10,000-square-foot, full-size supermarket. A smaller convenience store, the Galley, was built in 1972 after a fire destroyed a previous market on the island. In 1995, Seile opened V&S Variety, an ACE Hardware store. After the island's only pharmacy closed down, requiring islanders to travel 25 miles off island for medications, Seile added a pharmacy to serve the needs of local residents.

But although it had been a successful run, the workers knew that Vern wasn't planning on owning the businesses forever. They started to hear rumors that he was thinking about selling the three stores so that he could retire.

"He didn't actually come out and say it, but we all knew," said Oliver. "It's a small island. You see people coming around and he talks to them, so we knew there was a rumor that another store further away was interested in buying."

Oliver enjoyed her job and so did most of her fellow coworkers. Many of the 60 employees had worked for Seile for over 15 years and one woman had been at the Burnt Cove Market since 1973. The combined businesses are one of the largest employers on the island, but they knew that if a new owner took over, none of their jobs would be guaranteed. Although Oliver had been loyal and worked hard, she knew that someone from away wouldn't know her and could very well let her go. And although the island is picturesque, aside from lobstering, there aren't a tremendous number of other job opportunities.

"We were very worried about it," said Oliver. "There's little doubt that an outside buyer would likely have consolidated some operations, cut back on offerings, and cut jobs."

Then one day Vern called a meeting with the department heads and proposed an idea. How would they feel about purchasing the three stores and running the businesses themselves?

"I thought that since I've got a lot of employees who have been with me for a long time, I'd make them an offer to see if they'd want to take over the stores," said Seile. "We wanted to retire and wanted the stores to continue to serve the island for many years to come."

As it turned out, Vern had been in discussions with the Independent Retailers Shared Services Cooperative (IRSSC), a purchasing cooperative of independent grocery, hardware and other retailers, and the Cooperative Development Institute (CDI), a nonprofit group founded by other Northeast cooperatives that provides technical assistance to cooperative businesses.

Oliver said they were shell-shocked at first. As the wife of a fisherman, she knew a little bit about fishing cooperatives, which are common in the area and allow seafood harvesters the power to collectively negotiate a better price for their catch. However, the idea of a completely employee-owned and -operated business was not something that they had ever considered. But then astonishment gave way to excitement.

"Of course we jumped at the chance," she said. "It's a huge opportunity because we would be guaranteed job security. We've pretty much helped him run that store for many, many years and we knew this way that it wouldn't be changed."

Eighty percent of the employees voted to form a worker cooperative and pledged an initial investment to be paid over time through payroll deductions. At the end of January, the group announced the formation of the Island Employee Cooperative and signed a deal with the Seiles to purchase the businesses. By the end of March or early April, the organization plans to close on the deal. It will be the largest worker cooperative in Maine.

What Is a Worker Cooperative?

The International Cooperative Alliance defines a cooperative as "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise." According to the National Cooperative Business Association, cooperatives in the U.S. employ over 2 million people and generate $500 billion in revenue and $25 billion in wages and benefits. Cooperatives exist in virtually every industry and are most commonly set up as consumer and retail cooperatives to facilitate the purchase or sale of goods and services. It could be a utility coop, a food coop or one of Maine's 62 credit unions. There are also over 300 worker-run cooperatives in the U.S., ranging from manufacturing to food service. The nearly 60-year-old Mondragon Corporation in the Basque region of Spain is the largest federation of worker cooperatives in the world with 260 cooperative businesses ranging from manufacturing to retail, financial services, and the knowledge industry. With 80,000 worker members and annual sales of $19 billion in 2012, Mondragon is often held up as the model for a successful worker cooperative.

In Maine there are about four existing worker cooperatives, which include Local Sprouts and Hour World in Portland as well as Clinton-based Fedco Seeds, and Crown o' Maine Organic Cooperative in Vassalboro.

A Long History of Co-ops in the U.S.

"It is often said that the winners write history," wrote John Curl in his history of cooperatives "For All the People." "Cooperatives have been widespread and important in many periods of American history, and more people are members of cooperatives today than ever before. Yet it might almost seem as if they don't exist and never existed in the U.S., because cooperatives are almost universally absent from history classes and almost never appear in the American media. An unbalanced emphasis has been placed on the self-reliant, individualistic frontiersman as typical of the Westward movement in American history, while this has only been one element in a much more complex situation."

When the cooperative movement emerged during the second half of the 19th century, it was a time when the industrial revolution had kicked into high gear and more and more Americans moved off the farm to earn a living. While it's commonly estimated that well over 90 percent of Americans lived off the land in 1800, according to the U.S. Census, by 1870 half of the workforce was employed by someone else. By 1940, the number had climbed to 80 percent and in 2007, it was 92 percent. Even in Maine, currently only 10 percent of the workforce is self-employed.

But while working for a boss is commonly accepted today, in the 19th century earning a wage was seen as a form of bondage, from which the cooperative movement hoped to liberate workers. The cooperative movement began reaching momentum in the 1880s when the Knights of Labor hit its peak. With the goal of liberating workers from wage dependence and creating job security through the establishment of a vast network of worker-owned and -run cooperatives, the Knights believed that they could transcend the capitalist system and build a new democratic economy known as the "cooperative commonwealth."

As Curl notes, in the 1880s the Knights organized about 334 worker cooperatives, while farmers in the National Grange and Farmer's Alliance opened "an extensive network of cooperatives that they planned as the agricultural backbone of a newly structured cooperative economic system."

In 1882, the Knights of Labor formed its first chapter in Maine. According to Maine labor historian Charles Scontras, the Knights established a Portland insurance cooperative, a coal company in Bar Harbor, a cooperative trunk factory in Bangor, and a store in North Whitefield. Even the granite cutters of Vinalhaven experimented with a cooperative enterprise following a strike.

There was a resurgence of the cooperative movement during the Great Depression in the 1930s and later in the 1960s and '70s. In the aftermath of the 2008 recession, with rampant income inequality and the rise of political movements like Occupy Wall Street, there has been a renewed interest.

"Every generation there seems to be a resurgence of co-ops in the US," said Coastal Enterprises Inc. Vice President Carla Dickstein, who has witten about cooperatives extensively. "You certainly see it in bad times because people have a natural tendency to want to control their economic situation. The worse the economy gets ... it's ripe for these structures that are more focused inwardly on how we can control our circumstances."

Benefits of Cooperative Ownership

It was in recognition of the potential of the cooperative business model to reduce poverty and generate jobs that the United Nations declared 2012 the "International Year of the Cooperative." Local Sprouts Cooperative member and co-founder Jonah Fertig says that one of the biggest attractions of the cooperative model is that profits, known in co-op terms as "surplus," are divided up amongst the members in the form of annual bonuses. He says that although Local Sprouts, founded in 2007, is still in its growth phase, established co-ops can yield decent returns even in the low-margin food-service industry. Fertig points to the Cheese Board Collective in Berkeley, California, which has been operating as a worker co-op for over 40 years.

"They pay close to $40 an hour, including pay, benefits and profit sharing," Fertig said. "$40 for working in a bakery is pretty good."
With employees having a say in the governance of the business, the co-op model also serves as a check on executive pay, as the wage ratio of a cooperative is decided by its own members through a vote. Unlike the CEOs of S&P 500 Index companies who made an average of 354 times the average wages of rank-and-file workers in 2012, the Mondragon Corporation's ratio between top executives and the lowest-paid members ranges from 3:1 to 9:1, with an average of 5:1.

Fertig also says that the cooperative model allows for more leisure time than a sole proprietorship. With 16 to 18 full-time positions and an average 40-hour week, he says the workload is spread more evenly.

"Personally, I wouldn't want to be the sole owner of a restaurant," he said. "Most restaurant owners that I know work a ridiculous number of hours."

But most important, cooperative advocates say it's the feeling of ownership that makes working for cooperatives more fulfilling than working for a conventional business. The sense of ownership leads to higher productivity.

"Workers have a voice and they are invested in their business. They take greater pride in their business," said Fertig. "You're not just making money for some owner, whether it's a sole proprietor or a corporation that's not based there. You're making money for you and your community."

Challenges Facing Worker Co-ops

But in spite of the higher productivity rates of co-ops, Dickstein of CEI notes that co-ops face a number of challenges. She points out that finding a good manager at a competitive salary can be difficult.

"Unless you care about the structure of the company and you have an invested interest in broader ownership that shares wealth and decision-making, then I think it's really hard to attract somebody to that kind of institution in this culture," said Dickstein.

She added that accessing capital can be difficult because traditional banks and investors are unfamiliar with the co-op business structure. There's also the matter of having an entrepreneurial-minded person to focus on the businesses' viability.

"I don't believe that collective entrepreneurship will drive that business," she said. "You still need that talent who stays in the business."

Dickstein points out that expanding a worker cooperative can also be difficult without selling a share of ownership away to a third party, which would violate cooperative principles. She notes that sometimes a co-op will appeal to customers for financial support, but it would likely be for ideological reasons rather than for a financial stake. There are also barriers to scale, which co-ops can overcome by coming together as federations. The most well-known example is Mondragon, which exists as a system of several co-ops that support each other with financing, technical assistance and marketing. She adds that worker co-ops differ from employee stock ownership plans (ESOPs) in that ESOPs receive bipartisan support and get favorable treatment under tax laws.

"The co-op model is seen as more ideological," said Dickstein. "There's a tendency of co-ops in this country to be what I call 'candles and sandals' co-ops. At least in contemporary history we haven't seen many that are large industrial co-ops."

She says that unlike in the U.S., Spain has a history of ideological struggles, such as the Spanish Civil War, which have provided fertile soil for alternative economic structures like Mondragon. Nevertheless, Mondragon has come under criticism from co-op advocates for hiring contracted labor in other countries, which undermines cooperative principles. Still, Dickstein said it's a marvel that Mondragon has survived in the sea of capitalist competition that clashes with the values of cooperation.

"Why Mondragon is so fascinating is that it adapts," said Dickstein. "Some will say that it's gone the way of capitalism, but they're competing in a global capitalist environment."

But while Mondragon has managed to survive in the era of globalization, the massive federation of cooperatives has not been immune to the global economic downturn. In November it announced the bankruptcy of Fagor, its electrical-appliance-making unit, which reportedly employs 5,700 people internationally. In January, the company's president resigned, opening a "period of reflection" for the corporation.

However, as Fertig at Local Sprouts notes, according to International Organization of Industrial, Artisanal and Service Producers' Co-operatives (CICOPA), the employment and enterprise survival rate for worker cooperatives is actually better compared to conventional enterprises.

"It's just easier to point out the organization structure when a cooperative business fails," said Fertig. "When a corporation or a sole proprietor goes out of business, it's not because of their business structure. It's because of 'economics' or whatever."

Making It Work

Unlike conventional businesses that are constantly in competition with each other, the sixth of the seven cooperative principles is "cooperation among cooperatives," which means strengthening the cooperative movement by working together through local, national, regional and international structures. For Mondragon, this has meant partnering with the United Steelworkers with the goal of financing Mondragon-like industrial manufacturing cooperatives in the United States and Canada. Here in Maine, the Cooperative Development Institute (CDI) and the Independent Retailers Shared Services Cooperative (IRSSC) plan to provide the technical assistance to expand the cooperative movement into the state.

"For worker co-op owners, they definitely need training in management," said Dickstein of CEI, which is helping to finance theStonington venture. "It's a tricky structure because the manager is the boss by day, but by night at the board meeting, the workers are the boss. So it's a circular structure of management, which can be tricky if you don't really outline the roles and responsibilities."

Mark Sprackland, the founder and executive director of IRSSC, agrees. "You've got workers up there [in Stonington] who are great and dedicated employees, but they have never really managed the whole portfolio," he said. "My role is to connect the dots."

According to Sprackland, as part of the loan terms, the Island Employee Cooperative is required to contract with IRSSC for technical assistance in marketing, merchandising, and general management. CDI will help coordinate the organization's governance. Island Employee Cooperative will be run democratically with a governmental structure to ensure each employee-owner has a voice. A core group has formed a 10-member steering committee to do the nuts-and-bolts work of developing the ownership structure, incorporating, and drafting bylaws. Each member is given A-stock, which allows them a vote on major decisions. New employees are given Class B shares and after two years they can be upgraded to voting shares. Voting members then elect a board of directors, who oversee the business and hire managers to run everyday operations.

"I don't foresee the day-to-day operation changing a whole lot," said current owner Vern Seile. "The only difference would be instead of me being the owner, there's going to be a multiple of owners and the profits would be divided up equally among the people who have a share of stock."

Seile also noted that employee compensation would depend on how many hours they work and their job titles. According to Rob Brown, director of CDI's Business Ownership Solutions (BOS) program, unlike some cooperatives with under 10 employees, most of the worker-owners will not be directly involved in the day-to-day management of the businesses.

"You're not going to have employee meetings with 60 people sitting around discussing product placement," said Brown. "There's going to be highly qualified management with the authority to hold people accountable. The difference is the governance is a corporation."

A Model for Maine's Aging Boomer Bosses?

According to Brown, the organization's BOS program was set up specifically for retiring business owners like Seile who are developing their business succession strategy. It's estimated that 70 percent of family businesses do not survive the next generation and with each subsequent generation, the survival of the business diminishes. Brown said that with Maine's aging population and the number of baby boomer business owners retiring within the next several years, the worker self-directed enterprise has great potential as a tool to preserve jobs and hold rural communities together. He says he hopes that if the Stonington project is successful, it could serve as a model for other businesses.

"If we pull this off, considering its location and the traditional industry it represents, it will be such a good example of how cooperatives can successfully work and reward all parties," said Brown. "Nobody is taking a haircut on this. Everybody is getting what they want, but they're getting what they want in a way that lifts up all boats."