I recently attended the Eastern Conference for Workplace Democracy in Worcester MA. Worker co-ops from around the country were represented. As I listened to people relate their struggles to align values with business, it made me think of our good fortune with one aspect of our company: our owners’ equity fund.
In 1987 SMCo transitioned from a sole proprietorship to a worker cooperative. Part of the re-structuring was a commitment to profit sharing – we would distribute 35% of annual net profits as cash bonuses to each employee, based on hours worked. The purposes: to share the wealth (of which there wasn’t much at the time) and to partially mitigate our hierarchical wage scale.
In addition, our new by-laws called for the distribution of annual dividends to internal capital accounts for each of the co-op owners. Generally, these distributions were (and are to this day) roughly 50% of the remaining net income after profit sharing.
The internal capital accounts are paper accounts; they do not have cash in them. They are an obligation – the company owes the money to each owner/employee when that person leaves the company. It is their equity – their share of the value of South Mountain Company.
For years we stepped along merrily and carelessly – making dividend decisions, reading our accountants’ reports, enjoying the view, accumulating obligations, and thinking nothing of it.
Until one day in the nineties. Someone (we can’t remember who) said, “So . . our internal capital accounts now contain more than a half million dollars. What happens when people leave? Where does the actual money come from?”
My tendency was to dismiss the question by saying: we have plenty of assets, we’re all young, we’re making good money, we can pay off our departing owners from revenues, it’s a long time away . . .
But it wasn’t such a long time away and the obligation kept growing. In the mid-nineties we (finally) decided it would be prudent to start putting money away, to build a single-purpose equity investment fund to back up our obligation.
At first we funded it episodically and irregularly. Mike Drezner, one of our early owners – a carpenter and a knowledgeable stock market maven/hobbyist – managed the fund with me and old friend Christina Platt, a socially responsible investment adviser at Morgan Stanley. Gradually, responsibility shifted from me to Michael, and for years Mike and Christina managed the fund together.
In 2000 our obligation was $877,000 and the investment fund contained $72,000. It was time to get serious. We resolved to increase our contributions and build the fund until it contained – at all times – assets equal to at least 50% of our obligation. It had become clear to us that one of our primary responsibilities as owners was to honor our equity obligations for decades to come. By the end of 2004 we had reached our goal: there was $1,050,000 in equity obligations and $550,000 in the fund.
Christina retired and her colleague Lisa Haner replaced her. Mike began to approach retirement age and trained Siobhán Mullin, our financial manager, to take over. In 2012 Siobhán and Mike developed a 25 year spreadsheet that made a series of assumptions and projections about retirement dates, fund contributions, and fund earnings to help us determine how aggressively we need to build the fund over time. It’s like social security – it’s essential that we have the right amount of money to satisfy long-term obligations. Because this pot of money has a sole purpose (paying off departed owners) it’s important not to over-fund it, because that ties up cash needlessly and makes it unavailable for other important uses. But if there’s too little, we may not be able to meet our obligations in future years. This is the central tension of the equity fund.
We examine the spreadsheet each year, adjust the variables, and look for patterns to help us decide about funding, which we include in each annual SMCo budget. Here is what the spreadsheet looks like (don’t try to read this; it’s just to illustrate!).
Our equity fund has been skillfully managed. From the start, Mike has been a model steward and our advisers have been stellar. Although we took a hit in the crash of 2008, we rebounded well. The management transition from Mike to Siobhán has been seamless and successful.
One of the most compelling aspects of the fund is the balance between safe investing and values investing. We seek investments that are truly consistent with our mission and values. We have invested small sums in Boston Community Capital (a superb organization that provides a wide range of debt and equity products for low income communities, affordable housing, and emerging businesses), Real Pickles, and Equal Exchange (Massachusetts worker co-ops like us – our investments help to fund their capital needs). We are always looking for low-risk mission-aligned investment opportunities, but in my view we are not yet looking hard enough. We need to divert a larger portion of our assets from stocks and bonds to true values-based (and preferably local) investments. They are, of course, hard to find, but investing in our local economy and like-minded businesses is a tremendous opportunity to put our money where our mouth is.
The rubber met the road for the fund in the sobering times of post-crash 2009 as we reckoned with our future. Should we use our equity funds to help pay wages in the event of a work shortage? No, we decided, we would not, but we might use them for an investment that created work for our staff and had a reasonable chance of a successful return. Ultimately, to create work, we invested $125,000 from the fund in a property on which we built a zero energy house on speculation. The project generated additional work, the house was sold, and the fund was paid back with a healthy chunk of interest from the proceeds. It was risky but turned out well.
This year Mike wrote an exhaustive history of the equity fund – what it is, how it developed, where it is headed. In it, he says, “We have been charting our own course as there are few maps for navigating the equity issue in the annals of worker cooperatives. Transitioning from a traditional sole proprietorship to a worker owned cooperative does not come with simple answers found in a book, a manual, or a classroom. As we have confronted each issue concerning the internal capital accounts and the equity fund, the decisions we made might appear shortsighted (at times) or prescient (at others). Some of our decisions have stood the test of time; others have changed, sometimes repeatedly. Our constant guide is our appreciation and respect for our past, current and future co-owners, and a commitment to make good on all promises and commitments.”
The big issues have been individual owners’ access to their funds pre-retirement (at this point we allow none except after age 62), whether to pay interest (we don’t), what are appropriate uses for the funds (only those which will definitely bring a return on investment), and what percentage of the obligation should we maintain in cash and assets at all times (current intelligence is 60%, but we review this regularly).
This is our 40th year in business. Many employee/owners have been here since the early years. They are approaching retirement age; some have retired already. Others have left along the way for various reasons. Right now we are paying out seven prior owners who have departed over the years, including Mike, to whom we will be forever grateful.
Currently the fund has future obligations of $2,610,000 and assets of $1,497,000 (57% assets to obligations).
SMCo also has a pension fund that most employees are part of. Individuals contribute and the company matches with 2% of wages. This fund currently has assets of approximately $4,000,000. This is also managed by Lisa and Siobhán, but it’s easier to manage because the amount of money in the pension fund equals the obligation – always has and always will.
The detailed history of the SMCo equity fund is available on request.
Meanwhile, each of our owners continues to earn equity every day we work. Wages, benefits, profit sharing, and equity – all contribute to our earnings as SMCo owners.