Models of Mutuality: Which Business Model Is Best?
- Garth Herman
- Oct 31
- 10 min read
This week, we welcome Garth Herman as our guest writer, in collaboration with our editor, Karen Kuykendall. Garth is a Computer System Analyst with a school division in Saskatchewan, Canada. He has a degree in computer science with distinction, as well as an honors degree in psychology. Garth has a passionate interest in how we can structure business in our society in a way that makes life better for everyone. He has been to Africa five times and twice to Nepal to assist with developing co-ops and credit unions.
In this post, Garth compares how different types of businesses work, along with their advantages and disadvantages. As you read through the list, think about which attributes are best for economic mutuality.
If we were to divide businesses into different types, the list would look something like this:
Co-operative
Employee owned
Government (in democracies)
Family owned, partnership, or sole proprietor
Publicly traded
Each type has its advantages and disadvantages, which we'll take a look at, along with how it is formed and how it functions.
Co-operative/Co-op (example: Hendersonville Community CO-OP; see our earlier post on Co-ops here.)
How It Works:
At the first meeting, a Co-op will typically arrange the financing of the initial setup through the original members. A board of directors (usually 7 or 9 members) is elected from the members and is responsible to give direction to, as well as hire or fire, the CEO. The term of office is usually three years, with a third of the directors being elected each year.
Co-ops want everyone to be able to join, so the membership is usually priced at what someone would earn for less than an hour of work. In Canada, that’s $5 or $10. Members typically own one share, which entitles them to one vote at the annual meeting and one vote when electing a Co-op director.
At the end of the year, the board of directors decides on any dividends that will be paid out, based on the profitability of the Co-op that year. The annual general meeting would have to adhere to state/provincial and federal requirements for things like appointing an auditor, reviewing financial statements, etc.
Not everyone who shops at a Co-op has to buy a membership. If they don’t have a membership, though, they will not get a yearly dividend cheque based on what they have purchased. They will also not get to vote at the annual general meeting.
Advantages:
A Co-op is controlled completely by the members of the community that belong to it.
All of the profits go to the members of the community that belong to the Co-operative.
It is more socially responsible and environmentally friendly to the community because the people who control the business LIVE there and care about their neighbors, the resources that their family use, and the local land.
There is no transition of shares when someone dies, because the Co-op still has all the remaining members plus new ones that have recently joined.
Because the members are the owners, they care more about the quality of work and the quality of people that are hired.
Because it is 100% owned by the members, the company will continually be controlled by the people who live in the community.
The CEO is responsible to the board of directors, who are elected by the members. If a new CEO is being abusive to the employees, the town, or the environment, the members can inform their elected board member, and the board will discipline him or her appropriately. The members can also elect different directors, because the members own the company.
Disadvantages:
Co-ops are generally smaller than chain grocery stores, so there are typically fewer items from which to choose.
Due to their smaller size, Co-ops may have higher prices than bigger stores.
Employee Owned (example: Food Giant)
How It Works:
Initially, a number of shares are created, then priced according to the estimated worth of the
business. For example, if a business is worth $2 million, then 100,000 shares would be priced at $20 each. This method allows all employees to buy a bit of the business. Each share is a voting share and a dividend-yielding share. Employees are not obligated to buy shares.
A board of directors is elected from the employees and by the employees. The board is responsible to give direction to, as well as hire or fire, the CEO. The term of office is usually three years, with a third of the directors being elected each year.
By-laws are constructed so that ONLY employees who have been with the company for
a certain amount of time are allowed to buy shares in the business. Any worker who is no longer employed with the company (retired, quit, fired) has a specified amount of time to sell shares back to employees or the company.
The decision to pay out any dividends is decided at the annual meeting by the employee owners. The annual general meeting would have to adhere to state/provincial and federal requirements for things like appointing an auditor, reviewing financial statements, etc.
Advantages:
The company is controlled by the people who do the work.
The profits go to the people who do the work.
It is more socially responsible and environmentally friendly to the community because the people who control the business LIVE there and care about their neighbors, the resources that their family uses, and the land.
It allows for a slow and smooth transition into retirement. The original owner(s) can slowly sell more and more shares to their employees as they let them take over the business.
If employees are part owners, they care more about the quality of work and the quality of people that they recommend to be hired.
Because former employees have to sell off their shares, the company will continually be controlled only by the people who do the work.
The CEO is responsible to the employees. If a new CEO is being abusive to the employees, the town, or the environment, they are able to fire him or her.
*Disadvantages:*
Employee ownership plans (ESOPs) have significant setup and ongoing administrative costs, including legal fees, valuations, and trustee fees.
The company must have enough cash to repurchase shares from departing employees, which can create cash flow problems, especially if a large number of employees leave at once.
ESOPs and other employee ownership structures are governed by complex rules and require significant oversight and compliance, which can be burdensome.
Government Owned (with democratically-elected governments; example: USPS)
How It Works:Te
A government-owned business functions with a dual mandate: to provide universal, affordable resources as a public service while operating as a self-funded entity. It is not funded by taxpayer money; instead, it generates its own revenue with market-based pricing. Some federal agencies, such as the USPS, function independently and are directed by a Board of Governors. This kind of business employs federal workers who are subject to federal laws and benefits, but it has a unique status with some aspects of a private company, such as a competitive pricing structure and its own policing apparatus.
Advantages:
The profits go to the government to benefit all the people in the province, state, or country.
The government has the financial resources to support almost any kind of business.
The government is accountable to the people, so if they are making decisions that are not welcome, they will be voted out.
Some profits are still going to the people, and decision making is still by the people.
Disadvantages:
It is more bureaucratic and less flexible than most businesses.
When the government changes, the direction of the business can radically
change, or be shut down, or sold.
It’s the regulatory body as well as the owner, which can produce a conflict of interest.
While there is some involvement of citizens, it is less direct than in a cooperative business.
Family Owned, Partnership, or Sole Proprietor (example: most businesses; sole proprietorships and partnerships make up 80% of businesses in the US.)
How It Works:
A sole proprietorship is a business structure where an individual owns and runs a business, and there is no legal distinction between the owner and the business itself. This means the owner is responsible for all business debts and liabilities, but also receives all profits. Income and losses are reported on the owner's personal tax return.
A partnership is a single business co-owned by two or more people who combine resources, skills, and labor, and agree to share in the profits and losses. The specific structure and liability for each partner depend on the type of partnership chosen. While a formal partnership agreement isn't always required, it is strongly recommended to define each partner's responsibilities, contributions, and share of the business.
Advantages:
There is a person or small group of people who are directly responsible for decisions.
Depending on their perspective on life, owners or partners can do a tremendous amount to assist others.
Because they live where they work, owners/partners care about the environment in which they live.
Disadvantages:
Less capital is available at the beginning to finance activities.
There are limited perspectives in the decision making process.
Profits are only shared by the owners/partners.
Decisions are only made by the owners/partners and cannot be changed by the
employees or members of the community.
Publicly Traded (example: any company listed on the stock exchange)
*How It Works:*
A publicly traded company sells shares of stock to the general public on a stock exchange, allowing anyone to become a part-owner. This process, often starting with an Initial Public Offering (IPO), provides the company with capital for growth. In exchange for this capital, the company must regularly disclose financial information to shareholders and the public through bodies like the Securities and Exchange Commission (SEC). The profits are divided between shareholders annually.
Many publicly traded companies are large and have multiple locations. The headquarters of such a company may be thousands of miles from where its impact is felt. Also, the focus on quarterly reports puts pressure on these types of businesses to continually produce a profit or risk making their stock holders dissatisfied.
Advantages:
There is a large potential source for financing.
Disadvantages:
It has a singular focus: to make money regardless of the impact on people or the environment.
If the CEO doesn’t focus on maximizing profit, then the board of directors will hire a new CEO (example: Apple firing Steve Jobs).
If the board of directors doesn’t focus on maximizing profit, then a hostile takeover by another company is very possible (example: Twitter bought by Elon Musk).
Often, shareholders are investment funds, whose owners sometimes don’t even know what companies they own (example: Teachers in Ontario and British Columbia, whose pension funds have invested in companies that many of these same teachers would feel are unethical).
Because of its focus on making money (like one publicly traded Canadian company’s mission statement in 2005: “Maximize shareholder profit”), many publicly traded companies are very destructive to their employees and to the natural environment.
People with the most money get the most votes because they are the people with the most shares. As a result, the people who are elected to the board of directors will be people who have making money as their primary focus.
Because of this focus on profit, there are less diverse perspectives in the decision making process at the board table.
The majority of profit is going to the rich, because they are the ones who can afford to buy lots of shares.
The Bottom Line
Now that we've looked at these different business models, let's evaluate them in the light of mutuality. Below is a ranking, from least to most, of these models and their ability to deliver economic partnership to those who are involved with them in some way:
Publicly traded corporations, in my opinion, are the least beneficial to society as a whole, because the majority of profits and decisions are limited to a very few people, and the decisions are often made to maximize profit to shareholders rather than to benefit society.
Sole proprietor and partnership businesses come in next. The business will reflect the attitude of the owners. A positive example is Ten Tree, which is focusing on giving a share of the profits to protecting our environment.
Government-owned businesses in a democracy are also designed to support everyone, but when new governments are elected with a different perspective, they might sell off the business to their allies. An example is SaskTel, which provides telecommunications services to the people of Saskatchewan.
Employee-owned businesses share some positive traits with Co-ops and can be seen in a number of industries, such as food (Food Giant), publishing (Friesens), and housing construction (PCL Construction, with over 4,000 employees and offices in three countries, is 100% owned by the employees).
Co-ops, then, are probably the most socially and environmentally effective organizations. Some even have the ability to compete financially at the same level as many multi-national publicly traded organizations. An example is Federated Co-op in Western Canada that does over $10 billion in sales a year and is 100% owned by millions of people in Western Canada.
From a philosophical perspective, Co-ops and employee-owned businesses are more responsible than publicly-traded corporations because they are owned and controlled by the members who live and work in the community. These organizations do not have the incentive to maximize profits by restricting wages or destroying the social or physical environment. After working with a number of them, I can personally recommend these business models. I hope you will consider joining, supporting, or starting one in your area.
If you are interested in beginning a Co-operative in your community, you can view a short video on becoming a certified Co-op entrepreneur here. If you want help explaining the concept to potential members or if you need support for organizing an employee-owned business, send your request to info@BetterCapitalism.org, and we will forward your information to Garth.
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