To be a cooperative, an enterprise must base its values on those of self-help, self-responsibility, democracy, equality, equity and solidarity, and in the ethical values of honesty, openness, social responsibility and caring for others, say the International Co-operative Alliance.
Since starting her Pattycake Bakery in 2003, Jennie Scheinbach has known the sweet smell of success-and of hundreds upon hundreds of elaborate cakes, glossy sticky buns, frosted cookies as tasty as they are beautifully decorated, and oversized, share-with-a-pal cupcakes.
At first, Pattycake operated out of Scheinbach's home; in 2005 it moved to a storefront in Clintonville. Over the years, Pattycake began wholesaling at stores such as Weinland's Market, Raisin Rack, the Bexley Natural Market and "a bunch of coffee shops," including Cup O' Joe, its biggest client. The shop's retail sales have boomed, too-an intentional evolution that provides higher profit margins, Scheinbach says.
Still, there was something missing. When Scheinbach started her business, she'd posted flyers soliciting partners in building the bakery as a cooperative business, or co-op, one in which workers would also be owners. "For me, it was a way of just saying, 'if I were going to do something like run my own business, be an entrepreneur in this way, how could I do it in a way that would feel better for everybody, really, so people would feel ownership over their labor?' The idea of workers owning a piece of the business just always appealed to me," Scheinbach says.
At the time, "we weren't necessarily attracting people who wanted a long-term commitment in that way, and furthermore, there was trust (as an issue)," says Scheinbach. "I think to operate cooperatively, there needs to be standards of trust and communication" that were not always there among employees, she says. Eventually the circumstances were right. Scheinbach sought help from the Ohio Employee Ownership Center at Kent State University. The grant-funded OEOC provided technical assistance, including connecting Scheinbach with attorney Eric Britton, a partner with Toledo-based Shumaker, Loop & Kendrick, LLP, who helped Pattycake restructure.
After a buyout scheduled to be paid off over a decade, Scheinbach is now one of seven Pattycake owners (the business employs 14 people in all). While there is a cap on its board size, there is no limit on how many workers can buy into the business after they've been employed at Pattycake for a year. Should an employee-owner depart-which happened once-they are repaid the money they spent to buy into the business. Big decisions are made by consensus among the owners.
Pattycake officially became a co-op on May 1, 2013. The significance of the date, International Workers' Day, was not lost on Scheinbach. "When we realized we could do that … we were like, 'we have to, it's perfect.'"
The International Co-operative Alliance, founded in 1985 to advance the cooperative social enterprise model, describes a co-op 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." In 2014, the United Nations Labour Organization released a report on the state of co-ops, describing them as "ranging from small-scale to multi-million dollar businesses across the globe" and estimating that, globally, co-ops employ more than 100 million people and have more than 800 million individual members.
Closer to home, in 2006 the University of Wisconsin Center for Cooperatives conducted a census of cooperative business in the US. It found nearly 30,000 cooperatives operating at 73,000 places of business. Together, those cooperatives were found to own more than $3 trillion in assets, generating more than $500 billion in revenue and more than $25 billion in wages.
There are several types of cooperative enterprise structures-and some co-ops may have more than one membership type. They include consumer-owned co-ops (members are customers), worker-owned co-ops (employees own 100 percent of the business), producer-owned co-ops (independent producers form a consortium to reduce costs in areas such as distribution or marketing) and community-owned co-ops (which draw members from a geographic community or those with a common interest). Says the ICA, "Co-operatives are businesses owned and run by and for their members. Whether the members are the customers, employees or residents, they have an equal say in what the business does and a share in the profits."
In Ohio, resources available to those interested in setting up co-ops include Kent State's OEOC and Ohio State University's Ohio Cooperative Development Center in Piketon. OSU's Department of Agricultural, Environmental and Development Economics recently launched a new major in environment, economy, development and sustainability that draws connections between co-ops and sustainability.
Kent State's center "not only studies worker ownership, but facilitates it," says Britton. The OEOC's work includes providing education and finding grants for employees looking to buy their business. It also provides key education for business owners considering a sale. For instance, it shares that the IRS 1042 Rollover allows a business seller to defer capital gains tax when they sell at least 30 percent of their company to an employee stock ownership plan or to a worker cooperative. Employee business purchases "can be done. There are people who know how to do this, and it doesn't have to cost you an arm and a leg to get it done," thanks to programs such as Kent State's, Britton says.
OSU's OCDC, founded in 2001 and supported by the USDA, supports rural economic development through cooperatives in Ohio and West Virginia, says Program Manager Hannah Scott. "We work with cooperatives in a number of ways, largely through technical assistance," she says. "That ranges from cooperative education, diving deep into what the co-op model is and how co-ops operate, to assistance with business planning and financial planning with the formation process-actually formalizing the entity, creating bylaws, articles of incorporation and going through the business startup process and then any training that they need to continue their development."
Rooted in agriculture
On a global scale, the ICA reports, "the agriculture sector is where the co-operative business model is most widely utilized. Co-operatives together account for an estimated 32 percent of the global market share in this sector." The ICA says co-ops help agricultural producers surmount challenges such as remoteness, lack of information about market prices on food, limited access to high-quality inputs, difficulty accessing financial capital and lack of transport. Agricultural co-ops can help farmers by offering services such as group purchasing and marketing, knowledge and information, capacity building and training, says the ICA. Plus, says the alliance, co-ops facilitate farmers' participation in decision-making and provide a platform to amplify their voices and increase their power to influence policymaking.
USDA Rural Development works in communities located in census tracts of less than 50,000 (and in some cases, less than 20,000), says Michael Rutherford, business and cooperative programs director for Ohio. In 1974, says his colleague, Business Programs Specialist Deborah Rausch, the Agriculture Marketing Act started its cooperative services arm. "There are grant programs that help nonprofits or cooperative development centers that are typically housed at universities, land grant universities. And they provide technical assistance, they do business plans, they do feasibility studies for groups that are interested in becoming cooperatives. They also work closely with some attorneys from around the state that are familiar with cooperative statutes, and they help get people tied into support personnel that can provide them expertise as it relates to cooperatives," Rausch says.
Agriculture producer-cooperatives are common, she says. "Really, that's where a lot of the cooperative movement got its start." Farmers who would have little power to impact prices find strength in being part of a group. "If they band together and try to sell everything together, they can impact the prices or have a little bit more power in the market than they would as individuals," says Rausch.
Rutherford gives another example: Someone with a small beef cattle farm would be pressed to fill the needs of a restaurant year-round. But with a cooperative, the farmer and his peers could share everything from a freezer and meat-processing facilities to marketing and business plans. "It's just small farmers trying to knit together to almost act like bigger businesses, but (they're) actually just smaller individual farms working together."
With facilities in seven states and business in four more, United Producers is a farmer-owned and -operated livestock marketing cooperative-the largest in the Midwest, and possibly the nation, says President and CEO Mike Bumgarner. "I think there's a little over 2,100 co-ops in the agriculture industry across the country, representing membership of over two million people," he says. United Producers has over 30,000 members, representing larger farms as well as individuals. Its primary function is livestock marketing, although United Producers also provides loans and other services.
"Our members are what it's all about. We have a 17-member board that I report to and they are all producers elected by our general membership," Bumgarner says. The time it takes to engage with members "can be a challenge, but it's probably a high point of the job, because you don't allow yourself to get too far away from what you're there for, and that's to make sure they're being taken care of," he says.
Drive through rural Ohio and chances are you'll see a grain elevator in each small town, Rausch notes. "A lot of them have merged and have become one large cooperative with multiple sites." Ohio used to have a "fairly significant number of grain marketing cooperatives," Rausch says. "The last time I looked … there were 10. And that's down significantly." She says about a decade ago, the Ohio Secretary of State's office listed about 640 cooperatives in the state. As of August, the Secretary State's office reported just 531 registered co-ops.
In addition to producer co-ops, cooperatives "help meet many other needs, such as supplying electricity, telecommunications, credit and financial services, housing, food, hardware and building supplies, among other services," says the USDA. "Co-ops are usually organized to meet a need that the marketplace is not fulfilling adequately." One common example is in rural electrification, in which electrical cooperatives-with USDA support-were established in the 1930s to serve Americans in low-density areas. Today, about 990 electric co-ops serve 42 million Americans in 47 states, according to South Central Power Company. The cooperatives own and operate 2.5 million miles of line and employ more than 67,000 people.
With a presence in 24 counties, South Central is Ohio's largest electric distribution co-op, says President and CEO Rick Lemonds. South Central gets power from Buckeye Power, Inc., a generation and transmission cooperative. South Central counts about 93,000 member-owners and serves about 116,000 consumers, which puts in it the top 20 nationwide.
Under the cooperative model, South Central uses any profits to fund capital costs, rather than satisfy investors. "In our case, we hold capital for 20 years, so in June, we refunded the patronage that we allocated to members in 1995" based on their share of service, Lemonds says.
South Central is also motivated by the international principles of all cooperatives, including cooperation among cooperatives. For instance, Lemonds says, when hurricanes hit Louisiana in the mid-2000s, "we had linemen and other employees for several months assisting the cooperatives and helping them get the lights back on for their members. And likewise, when we've had events, we've had employees from other cooperatives come in and assist us," he says.
Rutherford says the rural electrification program could serve as a model to provide rural areas with the newest key utility: broadband internet.
Banking on credit unions
Financial cooperatives-cooperative and mutual banks, credit unions and cooperative and mutual insurance companies-make up 45 percent of the world's 300 largest cooperative and mutual organizations, according to the ICA survey. In 2006, nearly one-third of Americans used credit unions, reports the UWCC.
While they resemble banks, says the UWCC, "they have several distinctive legal differences: they are not-for-profit cooperatives with an IRS tax exemption status. They return earnings to their membership in the form of reduced fee (interest) on loans and increased interest (dividends) on deposits, or they may re-invest earnings into the credit union."
Leslie Bumgarner, president and CEO of Telhio Credit Union, says Telhio is deeply committed to its members. "When I was hired at the credit union, it was very clear that I was hired to serve the membership," she says. "So for over two decades, my primary focus has been on anticipating the needs of Telhio members and then delivering those products and services in a very cost-efficient manner."
She's not just talking the talk: Bumgarner's direct office line and her personal cell number are on business cards located in all six of Telhio's branch lobbies, as well as in an email that goes out to each new member of Telhio. "Everybody has easy access to me and what's important about that is I welcome that feedback," Bumgarner says.
Telhio, a state-chartered, federally insured financial institution, has $602 million in assets and roughly 50,000 members, each of whom Bumgarner has to consider in leading the company. Being strong financially "is important so we can continue to invest in technology, provide our members with great rates, continue to build the branches and expand our products and services," she says. The fundamental difference between a credit union and another lending institution is that it reinvests into the business, rather than returning earnings to shareholders. Bumgarner reports to a volunteer board of directors elected by Telhio members.
One of the seven principles of co-ops, according to the ICA, is "concern for community." Telhio supports kid-focused charities, Bumgarner says. "It is so exciting when our membership comes and serves dinners with us at the Ronald McDonald House or we do food drives and are packing boxes at the Mid-Ohio Foodbank. … We really try to do things that our members want to participate with us on, and, you know, rally the troops," she says.
Not long ago, an outside marketing firm interviewed members at Telhio's behest to help understand what members saw as its benefits. "They summarized all those responses into four words: simplicity, accountability, relationships and community. Those four words truly are the essence of cooperative values," Bumgarner says.
"Mutual insurance companies and credit unions are both products of the same progressive movement that drove the rise of farm co-ops," Britton says. "It's people saying, 'we don't want to deal with the big banks or the big insurance companies out of New York. … We're running this for the benefit of our policyholders or our account-holders, our board is elected by the people who have bank accounts at a credit union or the people who bought insurance policies from a mutual.'"
Under mutuals' structure, policyholders are both insured and considered participants in the business, with rights of ownership. A survey by the International Cooperative and Mutual Insurance Federation released earlier this year says the mutual sector holds 27 percent of the global insurance market share by premium, with assets of $8 trillion, up 37 percent since 2007.
Central Ohio's own Nationwide is an example of one such mutual insurance company in action. The ICA's survey of cooperative capital ranked Nationwide Mutual Insurance Company No. 16 worldwide and No. 4 in the US. Customers have been at the center of Nationwide's thinking since its founding in 1926, when it was organized to serve the particular auto insurance needs of rural drivers, Nationwide Vice President of Strategic Partnerships, Cathy Lanning says. "Our mutual standing is a reflection of our roots and our historic strength. It enables us to focus more on our customers and to make decisions and investments with a longer-term perspective than many of our publicly traded peers that often must focus on short-term results. It means we take a conservative approach to managing capital. And it means we deeply care about our partnerships with our customers, communities, producers, agents and associates," she says.
Long before it became official, Pattycake's Scheinbach worked to set the stage for the conversion of her business into a co-op. That included a transparent pay scale and shared responsibilities across the staff. "There was a culture of cooperativeness that then became a formal reality when we became a co-op," says employee-owner Kate Pleuss, who joined in January 2011. The transition from employee to employee-owner "made my relationship with my coworkers more accountable," Pleuss says. "Not that we weren't accountable before, but it's a different feeling. … Once we transitioned, it was kind of like, 'well, we are working for ourselves.'"
Britton says that the sense of trust among Pattycake's employee-owners is one of the factors setting it up for success. "A co-op works beautifully when everybody feels like, 'we can trust each other, we're all in this together.' They have shared values and shared agreement about where the business should be going."
Meanwhile, Scheinbach and company are excited to look forward to the co-op's next project: City Beet, a vegan eatery due to adjoin Pattycake starting in January 2017. Scheinbach first made public plans for City Beet back in 2011, but issues securing funding forced a delay. This is not unusual in the co-op world-the ICA's 2015 Survey of Co-operative Capital reports "co-operatives can face challenges in obtaining bank credit due to a lack of familiarity with the co-operative structure on the part of the lenders."
In other words, says Scheinbach, "I think it's because we look different and I think it feels riskier, even though to me it's like we have this very successful business which we can see on paper growing every year. To us it's still a good investment, even though we're not as familiar."
Cooperative at work-and in life
Leslie and Mike Bumgarner share more than just a 36-year marriage, two children and four grandchildren-with a fifth on the way.
The two are also in a unique circumstance when it comes to their professional responsibilities: While their businesses are quite different-Leslie works in financial services, Mike works in agriculture-they both head up cooperative businesses.
Leslie Bumgarner is president and CEO of Telhio Credit Union, a position she has held for nearly 20 years. Mike Bumgarner is president and CEO of livestock marketing co-op United Producers, a role he has held since January, after rejoining the organization as chief operating officer in 2013.
"It seems to me that Mike and I have always had similar positions, although in very different industries almost all of our married life," says Leslie. "We've been able to relate-you know, dinner conversations have always been easy because we 'got' each other."
Hers is a sentiment Mike echoes. "It really works well, because even though the worlds we work in are different, the business structure is the same, and we do have a lot of similarities in terms of how we have to engage with our member-boards and our employees and our members."
From that perspective, he says, "we do build off of each other and are able to talk through challenges and successes. What's working and what's not working. From that standpoint we've been able to not only have a very long and loving personal relationship, we've been able to work well together because we understand where each other's coming from."
They are, they say, each other's rock and are valued resources for one another.
"We're able to ground each other and get back to what is important and where we need to be," says Mike. "It's a lot easier taking advice from somebody you know has been in the same situation than somebody who hasn't."
Jennifer Wray is associate editor.