Stakeholder cooperatives in European welfare

Carlo Borzaga
The 'non-profit' or 'voluntary' sector is a key terrain for innovation in welfare systems. Across Europe, users and producers of welfare services are responding to deteriorating state provision by creating a new type of organisation. Carlo Borzaga describes these 'stakeholder cooperatives'.
From Soundings issue 4 Autumn 1996

All European governments in the last fifteen years have faced increasing financial and organisational difficulties in maintaining and developing their post-war welfare state systems to respond to changing needs. These difficulties have brought with them three kinds of very widespread reform. The funding and organising of many services have been decentralised to local authorities; while at the same time services have been restricted, and in many cases fewer needs met. Finally there has been a sharp increase in the number of private organisations producing welfare services. The European-wide increase in private supply of welfare services has turned the spotlight on the so-called 'non-profit sector', making it once again a focus of debate. The growth has been driven partly by explicit government policies of entrusting private organisations with the production of services which continue to be financed by the central or local state authorities: this has produced widespread experimentation with contracting-out and 'quasi-markets'. But private welfare has also been driven directly by consumers forced to turn to private organisations for the satisfaction of their needs which are no longer addressed by the European public welfare systems.
This process of privatisation of the supply of welfare services has not only hugely increased the number of private welfare organisations and the scale of their workforce; it has also modified their role and nature. Private non-profit or 'voluntary' organisations Europe-wide have moved away from the functions of advocacy, self-help, pioneering new services, and income redistribution from charitable resources, functions which are typical of contexts defined by well developed public welfare systems, and they have turned to being direct producers of social services. This transformation has caused, and is causing, a well-documented trend to professionalism and managerial ism in these organisations. It is also producing a less well researched evolution of their organisational forms. The focus of this paper is on these latter changes, drawing on comparative European research.1

The organisational evolution
Organisational innovation among European private welfare providers appears to be producing a convergence on a new organisational form. Its most marked characteristic is membership, and involvement in management, by diverse stakeholders: users and workers, and also in many cases volunteers, benefactors and representatives of public bodies. These new organisations, which I call 'stakeholder cooperatives', operate in the welfare systems of almost all the European countries studied, including Britain, and have emerged mainly in the 1980s. Economic analysis offers some insights into why this has happened.
The economic literature has long identified a key problem with the private production of welfare services. Consumers of such services often find it hard to monitor the quality of the service they receive, and the relation of its quality to the price they pay. This allows a profit-seeking firm to reduce the quality of the service it supplies, and hence to cut costs, without altering the price. For this reason, market provision of welfare services is frequently unsatisfactory.
Economics furthermore suggests that one way to overcome some of these problems is to constrain the choices and behaviour of firms. These constraints can be imposed by a public administration, in drafting funding contracts with the private firms, or they can be voluntarily adopted by the enterprise. A very common voluntary constraint takes the form of a limitation on the profit-taking and profit-sharing behaviour of the firm, by creating a 'non-profit' organisation. Another is the involvement with the enterprise's management of the consumers themselves, or of stakeholders with interests close to those of the consumers, such as volunteers. In the first case, since the enterprise cannot distribute profits, it lacks an interest in increasing them. In the second case, the interests of the consumers are at least partly guaranteed by those who represent them on the board which takes the decisions on the quality of services. Across Europe, there have long been three types of organisation which exhibit one or both of those constraints:
* British non-profit organisations (mainly charities), characterised by a restriction on distributing profits to owners;
* 'associations', bound both by the pursuit of 'idealistic or social purposes' and by restrictions on distribution of profits;
* cooperative societies, mainly in countries such as Italy and Spain where cooperatives are recognised to have a 'social' character, with a consequent curbing of profit sharing.
The main distinction within these three organisational types is between the first two, which did not start out as producing organisations, and cooperative societies which have always been producers of goods and services. But these organisations are now converging, under the impact of increasing demands for private production of welfare as European welfare systems are transformed.
The big changes include a more widespread use of the cooperative form in the production of welfare services and, simultaneously, the modification of some of its characteristics. In the interests of consumer protection, attempts are being made to democratise the management, and to increase consumers' and volunteers' participation as cooperative members. Simultaneously, we are seeing a reinforcement of the productive character and activities of charities and associations throughout Europe. This has altered their organisational framework and brought the increased involvement, alongside volunteers and consumers, of paid workers and managers.
It is possible, therefore, to identify a general European tendency towards an organisational form that is a mixture of association and cooperative society. This new form takes in the strong orientation of associations towards the interest of the community (their 'idealistic' character), and also presupposes the participation of consumers and volunteers in their organisation and management. At the same time, it takes on the productive character, and the workers' involvement in the organisation and management of the enterprise, which are peculiar to cooperatives. This evolution is creating a new type of organisation, which some call 'multi-stakeholder'2, and I have called 'multi-membership'.3 For my purposes here I will refer to them by the more explanatory name of ‘stakeholder cooperatives'.
Stakeholder cooperatives have the following characteristics. They produce various types of welfare service in a manner not unlike that of a profit-seeking firm, but their goal is explicitly neither profit, nor the economic benefit solely of their own members. Stakeholder cooperatives have a membership consisting of diverse stakeholders, especially users and workers, or workers and volunteers, or all three categories, but also including benefactors and representatives of public bodies. They aim for a democratic management process, which ensures participation by the stakeholders in decisions. And while they do not necessarily adopt a complete prohibition of profits distribution, they can usually distribute profits only to a limited extent.
Stakeholder cooperatives take on, according to the legal system of different countries, the legal form either of the association or of the cooperative. At least in two countries, however, this new form has been clothed in a new legal garment.

The legal changes
Organisational change puts pressure on existing legal frameworks, which evolve in response. The Italian social cooperative society represents an evolution of the traditional cooperative form. The founding Act of 1991 acknowledged a phenomenon that had been developed over the previous ten years. The main peculiarities of the social cooperative as compared to the traditional one are the following. The social cooperative must pursue an express social purpose. A legally acceptable objective however is to promote 'the general interest of the community in the social integration of citizens'. The membership of a social cooperative can consist of a variety of stakeholders, including workers, volunteers, consumers and public institutions. And the social cooperative must be engaged in the production of social, health and educational services, or must employ disadvantaged people as at least 30 per cent of the total workers.
The social cooperative society may share out yearly profits only to a limited extent: not more than 80 per cent of the total profits and not more than the equivalent of 10-11 per cent of the subscribed capital may be distributed. If the cooperative is dissolved, members can be paid off services' only up to the extent of the subscribed capital, and any remaining assets must be put to use in the public interest.
The new Belgian form, the 'enterprise a finalite sociale', was established in April 1995 by an Act which modified the civil code. An enterprise can be designated a 'company with social objectives', if the company by-laws include the following: the social objective that the company is to pursue; a commitment that the members seek no personal profit, directly or indirectly; that the profit distributed to members be no higher than the maximum interest rate agreed by the National Cooperative Committee (at present, 7 per cent); that members' voting capacity be restricted to one tenth of the votes represented by the shares, or one twentieth of the votes when the workers also contribute to the capital; and finally that any member of the staff must become a member within two years of joining, except for those who do not enjoy full civil rights.

The activities of stakeholder cooperatives
Comparative analysis of the evolution of private organisations producing welfare services in Europe has shown that stakeholder cooperatives have developed in two main areas of activity.4 They organise and provide social services, and more generally services of collective benefit to members, to communities, or to groups of citizens with particular needs. They also organise other production activities with the sole purpose of providing work, income and training for people with employment difficulties.
Stakeholder cooperatives supplying social or collective services take a distinctly broad view of mutual aid, since their beneficiaries are often not members, and their membership includes people who gain no personal benefit from the activities and who offer their services voluntarily. They produce a huge variety of services, according to the concerns of the members, the needs of the community, and the nature of type of the public services available. Their services may range from strictly health and charitable services (such as care for the handicapped, the elderly, the non-self-sufficient, etc.) to those with a wider social scope (kindergartens, education), to cultural and recreational ones, and even to environmental services.
Comparative research has revealed great variety, and also some national oddities. The most common service production is for groups of particularly needy citizens on behalf of public administrations and with their financing. This is especially common in those countries where reform of the welfare systems has separated the financing (public) from the production (private) of services. However, a well-established track record of also producing services directly for private demand suggests that the current pattern of specialisation may not be definitive.
Stakeholder cooperatives producing social services for the public interest operate in many European countries. In some (France and Belgium) they mainly take the form of an association, although some cooperatives have been developed. In other countries (Spain, Portugal), where cooperative legislation is more recent, provision is made for the stakeholder cooperative form to perform only certain public interest activities, such as helping the disabled, and education. In still other countries, where cooperatives are employed to organise social services, the cooperative and associative forms used are the traditional ones, notably cooperatives for consumption, work, and production. But there is a clear trend to involving the workers or the consumers in the management of the company.5
In Italy, where the multi-stakeholder company has been fully recognised as social cooperative, it has been restricted to the production of only certain services. Conversely countries in which there has not been an expansion in cooperatives or French-type associations producing social services have developed other organisational forms with some of the characteristics of the stakeholder cooperative. Good examples are the community business and other small new organisations providing social services in the UK, and the Social Solidarity Private Organisation (IPSS) m Portugal.
Another kind of stakeholder cooperative uses a range of production activities as a means of creating long or short term job opportunities for the disadvantaged. These have found it easiest to operate as associations or, more often, as cooperatives. In comparison to traditional cooperatives, and more like associations, these stakeholder cooperative place more emphasis on social objectives, restricting themselves to the task of creating work for their disadvantaged members. But the fact that, to meet these ends, they produce goods and services and must respond to the market, means they acquire a more entrepreneurial form. This type of organisation is even more likely to have a complex and multiple membership than those providing social services, since their beneficiaries are employed as workers, and hence it comes more naturally to admit them as members than consumers of services.
Comparative research has shown that this latter type of stakeholder co¬operative operates in almost all the European countries, and that they developed mainly during the 1980s. Interestingly, they have grown quite independently of the pre-existing cooperative tradition or of other cooperative form operating in the sector of the social services. Their growth has been driven by the difficulty of integrating disabled workers into the labour market. The system of obligatory quotas and protected jobs in public and semi-public companies, common in European countries, worked satisfactorily during the 1950s and 1960s but failed in the 1970s. The growth of unemployment turned employment policies towards the new unemployed. There was less pressure on companies to take on disabled workers, and the protected work structures lost their original significance and risked becoming isolated ghettos, instead of helping the social reintegration of the disabled. In reaction, new production enterprises emerged, especially at the local level, which aimed to guarantee integration and stable jobs. By combining disabled and able-bodied workers, these organisations sought to achieve production levels that would ensure adequate remuneration for their workers and ward off the risk of isolation.
These initiatives then strengthened and spread in two main directions. Some organisations have substituted for the original intention of finding the disabled secure jobs in the company a temporary status aimed at rebuilding their working capacity and preparing them for new jobs in the open labour market. In addition, the target group has gradually expanded from the disabled to other workers with re-integration problems, such as ex-prisoners, and other socially marginalised people, including the long-tem unemployed.
Thus the stakeholder cooperatives focusing on reintegration into work have steadily grown into an important instrument of employment policy mid-way between training and full-time work. They provide on-the-job training for people for whom standard training schemes would be impracticable, by employing them in work activities designed to provide training. This model of intervention is still largely experimental, sometimes created unreflectively, with scant formal structure for the training activities and for the passage between training and work.6 However, it has a potential which employment ministries could consider more closely.
Research conducted to date on the various forms of stakeholder cooperative has mainly concentrated on more measurable aspects of their work. Qualitative analysis - especially of a comparative type - of the performances of these organisations is still rare. Some limited attempts have been made in Italian research on local samples of social cooperatives, and these have yielded some interesting results. Comparison between a sample of (single-stakeholder) worker cooperatives and of (multi-stakeholder) social cooperatives operating in the same sector (the maintenance of public facilities) in the municipality of Turin, shows that the latter have accumulated ten times more funded reserves than the former, and achieved almost double the rate of capitalisation, although the capital initially invested by the members was substantially lower.'
Another research study on 119 cooperatives working in the welfare services sector in Emilia Romagna concluded that those cooperatives which also have users and volunteers among their membership are less dependent on public financing, are more concerned to satisfy private demand, are more dynamic, and readier to develop new services, especially ones catering to needs not satisfied by other public or private suppliers.8
There is now sufficient research to confirm that the transformation of European welfare systems has given birth to new organisational forms in the private production of welfare services. These forms are not simply characterised by a constraint on the distribution of profits - a constraint which hardly seems sufficient in any case to protect consumers - but they combine this non-profit form with the direct involvement in the enterprise's management of a majority of diverse stakeholders. The potential of these new organisations, and particularly the implications of their providing directly for the private demand of services, remains to be explored. This article is just a first step in identifying their existence, their increasing reach, and the extent to which they have already been adopted by the legal system of some European countries.

1. This article draws on continuing research on the emergence of new forms of social enterprise in Europe, funded by the European Commission.
2. VA. Pestoff, 'Renewing Public Services and Developing the Welfare Society through Multi-membership Cooperatives', Journal of Rural Cooperation, Vol.XXIII No.2, 1996.
3. C. Borzaga, 'Social cooperatives and work integration in Italy', forthcoming in Annales de I'Economie Publique, Sociale et Cooperative.
4. C.G.M. (1995), Social enterprise: a chance for Europe, mimeo, Bruxelles. 6 E, Vidal I., (1994), Delivering Welfare, Centre d'lniciatives de l'Economia Social, Barcelona.
5. Pestoff, op. cit.
6. Borzaga, op. cit.
7. M. Marocchi, 'Le cooperative di servizi nella provincia di Torino', in Istituto Italiano di Studi Cooperativi 'L. Luzzati', I! contributo delle nuove forme di cooperazione allo sviluppo dell'economia italiana. II ruolo delle cooperative sociali, Rome, mimeo 1995.
8. S. Stanzani, 'Effetti di reciprocity nel terzo settore. Dimensioni, aspetti
operativi e criteri di effkacia della cooperazione sociale emiliano romagnola', mimeo 1995.