Cooperatives can offer a solution for increasingly sustainable business activity

Sustainable development is more naturally realised in cooperatives than limited liability companies. According to Professor of Private Law Ville Pönkä, more attention should therefore be paid to cooperatives as a type of business form when steering business activities in an increasingly sustainable direction.

“Ultimately, whereas the purpose of limited liability companies is to generate profits for their shareholders, cooperatives are service provider entities that provide goods or services to their members, with the members usually also contributing to the entity’s operations. In cooperatives, sustainability is a built-in element of international operating principles,” Ville Pönkä sums up the differences.

In his research, Pönkä strives to determine the potential of cooperatives to promote sustainable development in the long run. While limited liability companies are increasingly taking responsibility into consideration and while investors increasingly emphasise that profits must not be pursued at any cost, in such entities profit generation often trumps the pursuit of sustainability.

Locality as an asset

When observing different types of business forms from the perspective of corporate social responsibility and sustainability, locality emerges as a clear asset of cooperatives. Doing things well is in the interest of people who use the services of a local cooperative.

“This is a real-life version of reaping what you sow. You don’t want to buy services from a company that, for example, pollutes the local environment or increases unemployment in the area. The cooperative as a type of business form serves the interests of society, often more directly than limited liability companies,” Pönkä says.

In terms of corporate social responsibility, one of the problems associated with the limited liability company relates to its fundamental nature as an anonymous society of investors. Limited liability companies often do not know their individual investors, who, in turn, do not usually know one another. Individual shareholders rarely take part in the activities of the company, nor are they committed to it, being usually guided solely by the pursuit of profit in their investments.

In contrast, cooperatives are strongly tied to their members. In cooperatives, the members contribute to the operations, fund the cooperative and are also possibly its employees – in any case, the members have a very strong connection to the entity.

Locality also has another beneficial manifestation.

“Local cooperatives cannot easily relocate abroad, for example, to avoid responsibilities related to the environment or labour law. Cooperatives that expand their membership uncontrollably and transfer their operations abroad are in danger of losing their cooperative identity.”

We need more options

In recent years, the promotion of sustainability in business operations has been prominently highlighted in the public discussion. Solutions to reconcile sustainability and responsibility with investors’ expectations of profit have been sought from a number of angles.

The question has become a priority also in limited liability companies – or at least in their public communication.

“In all honesty, it’s mainly marketing in regrettably many cases. All businesses employ sustainability to advertise themselves, every single one, as consumers and investors are demanding it at the moment,” says Pönkä.

The topic is current also in terms of legislation, since the Limited Liability Companies Act is being amended in Finland. In conjunction with the process, consideration has been given to how limited liability companies could be made, by means of legislation, to operate increasingly sustainably and adhere to the principles of sustainable development. The topic has been discussed long and earnestly, but identifying appropriate alternatives for what is known as the enlightened value maximisation model has proven to be difficult.

“This is why I wish to offer the option of not necessarily having to reinvent the limited liability company or turn it into something that contradicts its inherent characteristics. Instead, we could focus our attention on alternative business forms, such as cooperatives, for which the promotion of sustainability is much more natural.”

Pönkä stresses that his intention is not to attack limited liability companies – on the contrary, he considers them a very good type of business, which will continue to be needed in the future. Nor is the goal to classify types of business forms into “good” ones and “bad” ones. Rather, the aim is to expand the discussion by presenting new options.

Pioneering research

If some of the potential of the cooperative form has been untapped in the business world, the same opportunities have gone unnoticed also in academia. Pönkä thinks that, in the years of strong economic growth in the early 2000s, cooperatives were simply not considered a sufficiently interesting topic of research. In the aftermath of the financial crisis, the time has gradually become right for contemplating more economically sustainable solutions. In this trend, cooperatives have also been somewhat buoyed as a research subject.

In ‘Challenges and Prospects of Cooperatives in a Globalising World’, a project headed by Pönkä and funded by the Academy of Finland, sustainability is, however, only one topic among many. Since substantial knowledge gaps remain in the field, the project also explores fundamental questions of cooperative law.

“International research on cooperative law has quite an ideological hue. In other words, politics is heavily involved. A lot is based on assumptions and the chosen viewpoint on cooperatives, but we lack the data to show how things actually are.”

The empirical data needed on the topic is to be produced, for example, by interviewing cooperatives to investigate their attitudes to sustainable development and the measures they have taken to promote it. This element of the project is headed by Yi Zheng, DSocSc, from Pönkä’s research group.

Postdoctoral Researcher Alexander Gurkov, another project participant, focuses on the financing of cooperatives. Gurkov investigates whether novel financing instruments could be used to resolve the financing challenge associated with cooperatives. When cooperatives obtain funding, in practice they have to distribute memberships as collateral, which may not be the most effective solution for investors or the cooperative itself.

“Expanding the membership, especially in an uncontrolled manner, can be impossible. And even if it were possible, it can water down the objective and purpose of the cooperative. This is a problem in search of a solution. How can cooperatives acquire funding without abandoning their cooperative identity?” Pönkä asks.

Promoting the cooperative movement

Ville Pönkä has set fairly ambitious goals for his research project. He frankly describes his aim of opening people’s eyes to the opportunities of the cooperative form and, through this, increasing its popularity among entrepreneurs.

In terms of active cooperatives, Finland perhaps ranks number one in the world, with cooperative operators found practically in every field – agriculture, energy and financing as just a few examples. Still, there is room for growth in many sectors: for example, housing cooperatives have been left in the shadow of housing companies, in spite of there being a distinct demand for the former as well. Another form of cooperatives, which has so far been quite rare but whose significance may be on the rise, is the workers’ cooperative.

“Workers’ cooperatives could have a future role through their effect on employment. The distinction between being an entrepreneur or an employee is not so strict, which is something many of us are looking for these days.”