Professor Steve Toms, University of Leeds

1. Producer co-operatives and economic efficiency: Evidence from the nineteenth century cotton textile industry Professor Steve Toms, University of Leeds Full paper and references: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1943765

2. Introduction and overview • Investigates cotton textile producer co-operatives in the Rochdale, Oldham and district, c.1850-1900 • Mainstream literature expects producer co-ops to underperform • Relationship between two aspects of governance and performance investigated here: • Democratic voting ‘one shareholder one vote’ (OSOV) • Involvement of operatives and working class investors through use of low denomination (LD) shares • Some evidence (using financial and stock market data) that these co-operatives were successful in the medium term

3. Why does mainstream literature expect poor performance? • Producer co-operatives ownership distributed among employees • Incentive problem: Owners have non-marketable claims on firms assets, eg might be reluctance to support investment beyond their expected period of employment • Control problem: Difficulties devising methods of management Jensen and Meckling (1979) • Mainstream theorists are confident because there are few cases of successful producer co-ops • But, what if these are limited by legislation not economics?

4. Some early mills Rochdale Co-operative Manufacturing Society, 1854 (Mitchell Hey, 1859), profit sharing co-operative. Bonus to labour abolished 1861 Sun Mill, Oldham, Built by Oldham Industrial Cooperative Society in 1861

5. The debate within the movement • Bounty to labour favoured by ‘pioneers’ (eg William Marcroft, William Cooper) • Resisted by ‘anti-bounteyites’ who favoured the alternative mechanism of LD shares (lazy worker free rider problem) • Workers control vs shareholder democracy • In Oldham the ‘anti-bounteyite’ solution was: • Bonuses to directors only • Linked to shareholder dividends • Middle class support, but condemned as ‘joint stockism’ by others (eg co-partnership movement, trade unions)

6. Lowbands Farm tea party, Jumbo, 1860 Advocated setting up producer co-operatives to integrate with retail societies Some important participants: Henry Hewkin, inaugural Chairman, Sun Mill William Marcroft, director Sun Mill, ‘pro-bounteyite’ William Cooper, Rochdale Pioneer, ‘pro-bounteyite’

7. Legislative background • Companies legislation, democracy vs plutocracy • Companies Act 1862 Permitted ‘one shareholder one vote’ (OSOV), and ‘show of hands’ voting • c.f. present day universality of one share one vote • Industrial Provident Societies Act, 1862: • Allowed members free withdrawal of capital • Required supply of finished goods direct to members

8. At a typical company meeting • Shareholders tried to dismiss or reduce salaries of directors who cut dividends • Directors questioned over associated technical matters • Vociferous, animated as a result, eg ‘minature Waterloo’; ‘taproom party’ accusations ‘throw him out’ etc • ‘…shareholders proved to be the strictest of economists and were prepared to oust a whole board which failed to produce an acceptable balance sheet, displaying as much ruthlessness as the Athenian Ecclesia or the leaders of the French Revolution towards their unsuccessful generals’. (Farnie 1979, p.266)

9. Local investors want ‘Divis’

10. More exclusive firms perform better overall

11. But inclusive firms pay out more cash

12. Democracy = cash in earlier phases

13. …and greater efficiency

14. Highlights from statistical tests • Apparent turning point c.1885 • HD outperform LD, after 1885 • Before 1885, OSOV significantly improves: • Dividend yield, and • Overall performance • Working class investment (LD) increases dividend yield (but not significantly so) and does not make any difference to overall performance • For HD firms, adopting OSOV significantly improved performance; ie democratic but exclusive societies very successful before 1885

15. What changed after 1885? • Rise of cotton trade unions and working class hostility to co-ops • Promotion of new mills by financial cliques and speculators • Working class investors exit during slumps, especially the slump of the early 1890s

16. Lessons for the co-op movement • Oldham co-ops at odds with the wider movement • Activities not well integrated with retail and wholesale societies • Vulnerable to takeover and new technology and trade cycle • Liquid stock market provides mechanism for exit, but also seeds for co-op degeneration: • High dividends, and therefore: • Low capital accumulation and reinvestment in mills = long run loss of competitive advantage • So, producer co-ops can use stock markets, but need to retain non-negotiable shares

17. What does the case tell us about governance structures? • Incentive problem. Overcome by use of realisable LD shares • Control problem. Overcome by OSOV governance system • Effects on performance: • LD does not damage performance • OSOV enhances performance • Value of permissive companies legislation

18. Wider lessons for the mainstream • Potential value of OSOV for present day regulators: • Mechanism for limiting directors salaries (Oldham directors paid £4 per quarter) • Mechanism for limiting the power of block holders • Mechanism for limiting takeovers and mergers • Mechanism for involving shareholders in corporate decision making Full paper and references: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1943765