What Next for Community Business?

Issue 34, Summer 2021
written by
Mark Simmonds
illustration by
Andy Carter
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This article explores the recent significant and prolonged increase in community businesses in the UK, what evolutionary pressures have created our current community business landscape in early 2021, and where we might go from here.

Things to be happy about

Much of the increase in community businesses – the sector doubled to 9,000 businesses between 2015 and 2021 – can be put down to the rediscovery, and the rise in the use, of community investment. This is where communities are using the Registered Society (formerly Industrial and Provident Society) legal form to issue withdrawable shares to their communities to fund the purchase of community assets, such as pubs, shops, farms, and even piers. ‘Community shares’ – the brand name for withdrawable shares – were also used extensively to fund capital infrastructure renewable energy projects until the government sabotaged the Feed in Tariff scheme that made these projects viable. The supportive legislation and tax efficiencies were incidental – the policy was not created to specifically benefit the community shares market. 

What actually happened?

Community enterprise, a fairly recent concept, was originally defined as any social enterprise that benefitted a specific, and normally geographical, community. So initially it was possible to be a one-person community enterprise. In the late 2000s, I argued that the definition would be better if such enterprises were actually owned and run by that community and that seems to have happened. It’s worth saying at this point that very few of these organisational “brands” are defined in law and so pretty much anyone can still present themselves as a social or community enterprise.

The Big Society

This was the situation when a programme of policies – known as the Big Society – was introduced in 2010, an austerity-fueled plan by the Conservative Party and their coalition partners to bootstrap the former ‘Third Sector’ to fill the vacuum left by a rapid withdrawal of the state from civil society. The Big Society ideology also included the idea that social need could be commodified and that existing social investors could be persuaded to invest in enterprises that delivered both a social and a financial return. Large amounts of money were sequestered from dormant bank accounts and social investment finance intermediaries were created to lend this money to what was now being called the Voluntary, Community and Social Enterprise (VCSE) sector as part of this process.

The VCSE sector, which was itself experiencing its own effects of austerity, was of course interested in the possibility of new cash, but was intuitively averse to debt finance having been used to a grant culture where it would simply be paid for delivering social impact. To kickstart the Big Society, grant funding programmes were established that used some of the Big Society cash to support the VCSE sector to become “investment ready”. This provided work for co-operative and community business advisors such as myself, but we began to notice some interesting phenomena:

  1. Many organisations used these programmes as development funding, without ever getting too serious about the prospect of taking on debt at the end of it. It was the only game in town.
  2. It became apparent that not all of the VCSE sector was considered part of the Big Society. In particular, the various schemes favoured making the charitable end of the sector more business-like and investment ready, whilst disfavouring the already business-like co-operative end of the spectrum.

More Efficient Philanthropy: Charity culture in a co-operative context

So the concept of community accountability became baked into these various programmes. Many of the “shiny shoes” employed to administer these schemes, having much less empathy and experience of models of mutual self-help, simply embraced the concept of more efficient philanthropy. 

The upshot of this culture was that those seeking to create co-operative models (and particularly worker co-operative models) of community business were actively excluded from the majority of the funding and business support landscape for several reasons:

  1. The stipulation that businesses supported had to be owned by or accountable to a geographical community had the effect of excluding both community businesses that operated on a larger scale but also those that used a worker co-operative model. Providing members of the community with agency and opportunity to own and control their livelihood – what I would argue is the most sustainable community business model – were only eligible for many programmes if they diluted their governance or bolted on artificial community consultations.
  2. Even where a community business had an acceptable governance model, they also had to be able to demonstrate social impact. That sounds great and “concern for community” is hard-wired into co-operative models through the co-operative principles. However, the definition of social impact outlined by these programmes has been heavily influenced by traditional philanthropic culture of nice people doing nice stuff for others. It requires, in my experience, the identification of a community of benefit where the social impact is the improvement in the lives of individuals in that community. Not a problem in itself, but it excludes many other valuable impacts, such as increase in biodiversity, carbon reduction, and so on. This has also led to communities that just wanted to save their local pub having to reinvent themselves as community hubs by bolting on things that they wouldn’t necessarily have done – being a community running your pub is not enough – you have to be more “More than a Pub”.

Pressures around community investment models

In parallel to this, the community investment model promoted as part of the Big Society, but also separately by the wider co-operative movement, favoured community membership over worker membership. As the community investment model almost exclusively required the use of one of the two different Registered Society legal forms, this favoured the Community Benefit Society model over the Co-operative Society model. Again, there were several different reasons for this:

  1. Some infrastructure organisations, such as the Plunkett Foundation, only had Community Benefit Society models available for those they worked with. Co-operatives UK’s original community investment model was a Community Benefit Society model although all their Society models now include a multiple share option. The funding landscape has also discouraged development bodies from programming support for worker ownership.
  2. Some of the investment tax reliefs available to incentivise investment into social enterprise, such as Social Investment Tax Relief, specifically excluded the Co-operative Society legal form. Those reliefs, which are still available, then excluded employees from the scheme. So worker co-operatives were effectively excluded from investment tax relief unless they set themselves up as a Community Interest Company and then only for loan finance from their communities. The problem for them would then become how they approached advertising the opportunity to lend to their co-operative without falling foul of the Financial Services and Markets Act 2000. It’s a bit of a mess and worker co-operatives get the rough end of the deal.
  3. Those setting up worker co-operatives generally do not have the ready cash to capitalise their businesses and so we see community co-operatives providing members of their community with a hobby rather than a livelihood over which they have agency. Those same workers also often lack the time to devote to the creation of an enterprise, which is no small undertaking.
  4. The Financial Conduct Authority (FCA), with whom you register Societies, have quite strict (and I would argue somewhat culturally subjective) criteria for what they will allow to register as a Co-operative Society. The FCA abhors a Co-operative Society with any significant membership who do not have a transactional relationship with the co-operative. So a Community Supported Agriculture (CSA) enterprise which wanted to raise community finance from its community would struggle to register as a multi-stakeholder Co-operative Society without seriously limiting the voting power of those community members who might actually form the bulk of the membership, but weren’t seen as customers. The flip side of this is that the same organisation might struggle to register a Community Benefit Society due to the transactional nature and potential member benefits derived by worker and customer members. As a result, Societies either create more complex governing documents to ease their square peg into the FCA’s round hole or more simply just run as a multi-stakeholder without defining that in the governing document. Again it’s a bit of a mess and, again, co-operatives get the rough end of the deal.

So through a mix of political and cultural pressures we have seen a great rise in community ownership of assets and key local enterprises, while the economic downside is that these organisations are mostly run by volunteers. According to Power to Change’s 2019 report, there were 205,560 volunteers in the sector compared to only 33,900 employees – or five in six of those ‘working’ within community businesses. The sector also experiences another problem that is typical within charitable models, where the social capital of ‘the great and the good’ affords them the strategic control of organisations that are significant local economic actors and generally exclude their workers from any governance role. Those same Directors of community enterprises are often also over-worked, and with the best will in the world, are providing an unpaid micro-management role. This is often due to a misperception that the Directors of community businesses cannot be remunerated, and I have come across two Community Benefit Societies recently who have insisted that Directors stand down from the Board as they have become employees of the Society – there was no basis for this in their governing documents and in one case they were advised that they had to do so by a community business advisor. As I type this paragraph I’m sitting in the Zoom AGM of a community pub which is riding Covid through the herculean efforts of a small Board in the context of a large passive investor membership – they are burnt out.

What next?

Some of the social and political evolutionary pressures driving the community business model will persist, but some are going to change, not least the near-future ending of the Power to Change programme. Power to Change, which as a funder has heavily influenced the definition of community business since its inception in 2015, has injected millions into the VCSE sector and this will likely come to an end in the next few years. Some of what happens next will depend on what, if anything, replaces it, but we now have a critical mass of community businesses within a wider co-operative movement and it’s time to explore some other options. What follows are some suggestions as to where we can go from here and how we might do it. To simplify the options, they have been framed around a community-owned co-operative pub.

Option 1: Worker-led startups

In the case of a community coming together to save their local, it would be possible for that community to support a worker buyout, but it would require the community investment to be as loans rather than shares. Were the community to invest in the form of shares then we would be looking at a multi-stakeholder co-op rather than a worker co-op.

There is precedent for this, both historical and more recent:

In the 19th century it was not unusual for the Consumer Retail Societies that dominated the UK co-operative landscape to invest in what were then known as “productive societies” rather than worker co-operatives. This is what happened in my own local Hebden Bridge Fustian Manufacturing Co-operative Society which received investment from the Co-operative Wholesale Society. There would be nothing to prevent the current retail societies investing in other co-operatives and some, indeed, have invested in new student housing co-operatives.

More recently we have examples of worker co-operatives, borrowing money in the form of loanstock from their customers. Handmade Bakery issued “bread bonds” to their customers and Unicorn Grocery in Manchester bought their premises and growing land with two loanstock issues, which allowed their customers to invest in an important community resource without the need for them to engage in the governance.

Pursuing this option just requires a knowledge of the option and a willingness of the support organisations to entertain the possibility.

Option 2: Multi-stakeholder startup or exit to multi-stakeholder

There would be no problem for an existing community pub project to establish themselves as a multi-stakeholder Co-operative or Community Benefit Society of customers, workers, and community investors. It would just require careful handling with the FCA as described above.

For existing community pubs, most of whom are registered as Community Benefit Societies, there would be nothing to prevent the inclusion of staff on the Board and some already do. It might be slightly more difficult to enshrine multiple classes of member as a Rule change with the FCA, but it is often possible to implement that without changing the Rules so long as what you are doing is consistent with the existing Rules (even if not explicitly laid out). I myself have helped set up multi-stakeholder Community Benefit Societies where the member classes were defined in the share offer document rather than the Rules of the Society.

A further option would be an adaptation of the “Exit to Community” model being proposed as an alternative for platform co-operatives. In contrast to tech platform co-operatives, which need large inputs of cash to develop the product, this model gets that cash from the community rather than angel investors who traditionally recover their investment by selling the whole business.

Option 3: Community as steward

Particularly in the context of community pubs, there is a further option that addresses one of the real benefits of community pub ownership that doesn’t seem to get much airtime. Many pubs suffer periodic changes of tenant and ownership down the years until a dodgy developer gets their hands on it with a view to change of use. The benefit of an asset-locked community organisation having ownership of the important assets in a community, such that they will be removed from the property market in perpetuity, cannot be overstated.

So can we find a way to have the benefits of community stewardship, without burning through volunteer Boards and excluding the staff from the governance? I’d like to propose a simple solution.

Many community pubs start with a ‘managed’ model, employing a manager to manage staff. The main reasons for this have been that the alternative of having a tenant is often considered a complexity too far, alongside the efforts to raise finance and start a pub business. There is also the fact that running a pub is a trade that is acceptable to HMRC when it comes to incentivising shareholder investment, whereas renting a pub to a tenant is not. As a result some pubs start off being managed; the investor members derive the benefit from the tax relief and after three years the pub moves to a tenanted model.

Why can’t that tenant be a worker co-operative of staff members? The bulk of the administration burden of the Board falls away and if the worst happens and the business fails then the community pub just has to find a new tenant. I would encourage all community owned pubs to consider this option, especially those looking to use a tenanted model.

Option 4: Exit to worker

In this case we are looking at a complete exit to a worker co-operative model from a multi-stakeholder model, rather like the exit to worker models for platform co-operatives being proposed in the United States or the model proposed in the excellent Nesta and Co-operatives UK report Solving the Capital Conundrum. The report suggests a multi-stakeholder co-operative startup with a significant investor class whose investment replaces that of venture capitalists in a typical tech startup. These supporter investors gradually withdraw their shares over time as the ‘transactional members' (the workers) invest their dividends as shares in the Co-operative Society, so the workers are gradually buying out the investors.

This model would probably require a Co-operative Society rather than Community Benefit Society model as the FCA would likely kick against the registration of a multi-stakeholder Community Benefit Society with member classes with a significant transactional relationship. The downside of the Co-operative Society model is its ineligibility for Social Investment Tax Relief (although other tax reliefs are available) and, as discussed above, it may find it harder to engage with the support ecosystem currently in place with its empathy for the Community Benefit Society model.

I think this model is particularly suited to a situation where there is not a significant asset – such as land or a building – that would be at risk if the business failed. In this case, option 3 with community stewardship may be preferred. In the event of the tenant business failing, the community asset is preserved and merely needs to find a new tenant.

Summary and next steps

We need to pilot some of these different approaches, challenge the dominant models which in many cases are a ticking governance timebomb and which fail to address the justice aspect of the new economy; and provide real agency and livelihoods to working people rather than hobbies to the retired middle class.

People are already pushing the envelope. Equal Care Co-operative is using the Co-operative Society model to attract significant investment into a multi-stakeholder co-operative and we have Weaver Valley Co-op, a worker co-op managing Cornerstone Inns pubs in the North West. At Co-op Culture we are already talking to a community pub interested in moving to a tenant model where the tenant is a worker co-operative of its existing staff.

We also have the exciting prospect that as we reach a critical mass of co-operative enterprises within the sector, they have the ability to form secondary co-operatives which can support the creation of new co-operatives in that sector through peer to peer support and investment. This is sometimes known as the Arizmendi model after the secondary co-operative of San Francisco worker co-operative bakeries that actively support the creation of new autonomous co-ops. Here in the UK, we have exciting new ventures like Stirchley Co-operative development seeking to create a new co-operative economy in Birmingham.

Community Business has come a long way in a very short time and has many ways it can evolve further. Here’s hoping that this vibrant and exciting community of practice can find ways to embrace the workers within it, create real livelihoods, and real co-operatives as part of our journey to a more just, equitable, diverse, and inclusive economy.

Mark Simmonds is a co-operative and community business advisor working across the UK as part of Co-op Culture. Mark has also been co-founder of Pennine Community Power, the Fox and Goose co-operative pub and is currently assisting his community to buy and run their local Post Office.

Issue 34, Summer 2021
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