Why we need to get back to thinking of co-operative and mutual enterprise as a social business

Co-operative and mutual enterprise provides a proven and comprehensive model for a social business, but it has been largely ignored by social entrepreneurs, writes Dr Paul Thambar from Monash Business School.

There’s a new organisational model that everyone wants to be involved with – purpose-driven social business. It’s “on-trend” and importantly, structured to deliver positive societal impact. 

We are all suddenly searching for our purpose and wanting to work in and engage with organisations which have a purpose that resonates with our values. 

Social business, where the primary goal is not profit maximisation but instead profit for purpose is the driver of business decisions and actions, has been touted as the responsible way to do capitalism. However, social businesses face the challenge of deciding how to structure and establish their operations where commercial and social goals are pursued and profit for purpose is the key driver. 

Frequently, the answer appears to be a structure that is a hybrid of a listed company entity and a not-for-profit entity. Yet, co-operative and mutual enterprise (CME), a business model and structure for social business that has existed successfully for over 150 years, has been neglected due to a lack of education and understanding of the CME model and its role in enabling social businesses. 

The education deficit was recognised in 2016 when the Australian Senate handed down a watershed inquiry into the barriers to fair competition for the co-op business model. The Senate inquiry noted the systemic lack of experienced professionals with the background and knowledge needed to provide the requisite legal, accounting and financial skills to set up social businesses as co-ops and mutuals. The Senate recommended improvements to access to relevant education and training including requiring lawyers and accountants to undertake education about co-operatives and mutuals.

A social business, as defined by the Nobel Laureate Professor Mohamed Yunus, is one that combines commercial and social goals and is focused on profit for purpose and creating value for all stakeholders. Profits are reinvested in the business to create more value. 

Consumers and other stakeholders are increasingly seeking to acquire products and services from social businesses. A recent survey of Australian consumers has found that over 87 per cent are interested in ethical purchasing, acquiring products and services from social businesses. Increasingly, governments are encouraging this same trend by prioritising goods and services from social businesses. Business schools and their partners are promoting the development of social entrepreneurs amongst their graduates through education and capability development, and investors are actively supporting the development of social businesses by providing seed funding. 

Although the focus on social businesses is increasing, two challenges remain. The first is designing the appropriate business model and legal and governance structure for social businesses, while the second involves developing knowledge and education of the different and proven models that are available, especially the CME model.

CMEs form when people come together to achieve an objective that they could not achieve alone. They are a rational alternative to investor-owned business when the objective is different from maximising return to shareholders. Co-ops and mutuals operate across much of the Australian economy, from farming to finance, health to housing, and motoring to manufacturing, and they deliver trusted products and services in some of the most competitive domestic and international markets. With good management it is an efficient model of business, with no leakage of value from the business and all returns reinvested locally. Today, eight in 10 Australians are members of at least one cooperatively owned business including member-owned super funds, and CMEs contribute around 7 to 8 per cent of Australia’s GDP. Globally, there are over 3 million CMEs operating in a range of industry sectors.

As a social business, CMEs are not well understood by Australians and the CME business model remains hidden to many who are seeking to engage and establish social business ventures. There are two main reasons behind this lack of understanding. 

First, in our schools and business schools, the predominant business model taught remains the listed company business model with its focus on profit maximisation for shareholders or investors. Almost by default, students learn about business, accounting and marketing in relation to this default business model. In all my university education, I have never taken a course that focused on business models other than the listed company model. So, our new managers and entrepreneurs by default gravitate to the company-type model when they plan the launch of a social business. 

Second, while CMEs create sustainable commercial and social value, measuring and reporting this value has been a challenge as existing accounting and business measurement frameworks are designed for profit-maximising listed company business models. The absence of an appropriate measurement and reporting framework for CMEs has resulted in an inability for these social businesses to measure and communicate their value to their stakeholders, leading to an under-appreciation of the CME model.

However, CMEs are fighting back and are developing professional education courses on their business model and related legal and governance structures. The peak industry body for CMEs in Australia, the Business Council of Co-operatives and Mutuals (BCCM), has developed an introductory professional development course for practising accountants and lawyers on co-operative financials and legal structures designed to educate these business advisers on the CME model. 

Furthermore, through an ongoing strategic research and education partnership with the Monash Business School, BCCM has developed and made available a performance measurement framework, the Mutual Value Measurement (MVM) Framework© which enables a CME to measure and report in a comprehensive and holistic manner the total value generated by these social businesses. More than 30 CMEs in Australia have begun the journey to implement the MVM framework in their social businesses. Global CME interest in the MVM Framework© is increasing as it is also able to capture the environmental, social and governance (ESG) value created by CMEs. The partnership with Monash Business School will also see professional education programs and eventually undergraduate subjects with a focus on the CME business model and its value creation being designed and taught to future graduates and business professionals.

The CME business model and related legal and governance frameworks provides a proven and comprehensive model which has been largely ignored by social entrepreneurs and others interested in viable structures for social businesses. As education and knowledge of the CME model grows through the efforts of BCCM and the wider sector, it is hoped that many more social businesses will discover this proven business model which marries purpose, values and performance in a proven model that is easy to understand and implement.