Introducing the FairShares Model of Enterprise

The key issue is that while we have developed systems for recognising the contribution of financial capital, we do not have adequate arrangements for recognising contributions of intellectual, human, social and natural capital

Excerpted from Rory Ridley-Duff:

The key issue is that while we have developed systems for recognising the contribution of financial capital, we do not have adequate arrangements for recognising contributions of intellectual, human, social and natural capital.

To understand why, we have to review the way social norms for constituting joint-stock companies and non-share companies have developed.

* Private Sector (For-Profit) Norms – Companies Limited by Shares (CLS)

There is a connection between business ideology and the arrangements in law by which entrepreneurs acquire share capital (ordinary shares). They register as directors, then recruit employees to operationalize their ideas. New capital is issued when morefinancial capital is needed, but not when more intellectual, human, social or natural capital are needed. In an unadapted CLS, employees and customers are subordinated to the interests of shareholders. They are not invited to be full members or to contribute towards decisions outside their specialist area of expertise. If employees areoffered share capital, voting rights are often limited or controlled by trustees who – in many cases – are under no legal obligation to vote in accordance with the wishes of their beneficiaries.

The intellectual property created by the workforce is acquired by the Company and controlled by executive managers and directors. In effect, majority shareholders treat intellectual, human, social and natural capital investments by others as if they were additional financial investments by themselves. They continue to acquire rights to all the property created by the interactions between employees, customers and the natural environment. This system of enterprise widens the wealth gap between those who own and govern the enterprise, and those who sell their labour to it, or buy goods from it. Even in the richest countries, wealth inequalities grow wider (unless the state intervenes) [14] and the natural environment is degraded.

* Voluntary Sector (Non-Profit) Norms – Companies Limited by Guarantee (CLG)

A typical response to the social problems created by privately owned economies is to create (private) charities and ‘non-profit’ companies using a Company Limited by Guarantee (CLG). This form of incorporation usually involves specifying charitable or social objects that define the purpose(s) of the enterprise. Founders reframe themselves as trustee-directors responsible for allocating resources in pursuit of social goals.

Charitable CLGs do not issue share capital so trustee-directors give up personal rights to the surplus wealth created by the enterprise. Their role (in law) is one of stewardship, ensuring that funds raised are used to further charitable (or social) objectives defined in the Articles of Association. As in a CLS, they employ staff to pursue social goals. Employees are still not (usually) legal members. They continue to be subordinate to the trustee-directors and give up the (intellectual) property they create.

* Social Economy Norms – The Co-operative Society / Mutual Company

Do we have to choose between these two models? Three bodies of knowledge suggest we do not. Firstly, there is a global movement backed by the UN to increase responsible use of corporate assets. Secondly, the UN’s International Year of Co-operatives highlighted the global growth of the social economy. Particularly important is the way that the internet has reduced the costs associated with co-operative working. The upsides of co-operation (intellectual exchange and collaborative decision-making) no longer come with the downsides of democracy (hefty co-ordination costs). Lastly, more enterprises identify themselves as social, deploying business models that improve human well-being through innovative trading strategies.

Creating non-shareholding companies enables the wealthier sections of society to address some symptoms of poverty and exclusion that private enterprises create, but it cannot address the root causes because it changes neither the ownership structure nor governance processes that creates and sustains them. Traditional private / non-profit models continue to institutionalise a division between producers and consumers on the one hand, and entrepreneurs and (social) investors on the other.

* The FairShares Model

For this reason, Level 1 of the FairShares Model asks important questions about representation in ownership, governance and management.

The FairShares Model is based on an approach to social economy defined by Social Enterprise Europe. It operates from the assumption that the exclusion of primary stakeholders from member-ownership (i.e. employees, producers, customers and service users) is a cause of contemporary poverty. At Level 2, the answer to each FairShares question suggests the set of corporate arrangements that is most favourable: entrepreneurs get Founder Shares; workforce members get Labour Shares; trading commitments are rewarded with User Shares; and financial capital creation is rewarded with Investor Shares.

This represents a new approach to valuing investments. When there are surpluses(profits), not only do the providers of financial capital get a return, but also the contributors of other types of capital. In a FairShares Company, half the capital gain is issued to Labour and User Shareholders as new Investor Shares, while the other half increases the value of existing Investor Shares. In a FairShares Co-operative, surpluses can be allocated to restricted funds controlled by Labour and User member-owners, who then use their chosen approach to direct democracy to allocate surpluses to social investment projects. None of this means that the conventional mechanism for allocating shares to external financial investors has to stop. In a FairShares Company / Co-operative, Investor Shares can be issued to external investors if debt finance is hard to secure. But, even with this, at least 70% of the wealth accumulated will find its way into the hands (and bank balances) of producers and consumers. It enriches the ‘bottom’ 90% as much as the ‘top’ 10%. And if this is not sufficient, FairShares Articles of Association (at Level 3) includes community dividends that act as an asset lock for philanthropic capital if the enterprise is dissolved.

The Articles of Association provided by the FairShares Association are not the only model rules that support FairShares brand principles. But they do represent an ambitious attempt to bring together the most enduring developments in multi?stakeholder ownership, governance and management so that we change the way investments are recognised and valued. The FairShares Model offers a system for ensuring that capital is allocated to different types of contribution so that wealth and power can be more fairly shared.”

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