By Daniel Fireside, the Capital Coordinator at Equal Exchange
Many people in the SRI world are familiar with the pioneering work that Equal Exchange has done to bring Fair Trade coffee, chocolate, tea, bananas and other products to the United States. We take great pride in the fact that our success has challenged those who thought there was nothing one could do to address the systemic inequities of global trade.
However, we’re about more than just changing the way people buy and sell what goes in their shopping basket. For 25 years Equal Exchange has been turning a host of conventional business models and practices on their heads. Pay farmers above market prices. Increase your suppliers’ market power by providing affordable credit and helping them form co-operatives. Spend time and resources to educate consumers. Encourage them to care about farmers and families they’ll never meet. Make sure there is no exit strategy. Entrust complete control and ownership of the company to the people who work there. Share your knowledge and business model with competitors and even encourage them to enter your category and compete for your customers. Don’t dodge your taxes.
And it’s been working pretty well: over $40 million in annual sales, growing product lines, and fanatically loyal customers and partners.
But there have been countless social enterprises that make a splash, take off, and then…cash out. To get the capital to go big, you need to open up to outside investors, or sell the company to a global conglomerate that’s looking for a socially responsible branding opportunity, or maybe just reward the visionary entrepreneurs and early investors who got the venture off the ground. That’s the story with Burt’s Bees, Ben & Jerry’s, Tom’s of Maine, The Body Shop, Green & Black, Stonyfield Farm, Dagoba, and countless others. That’s how the system works, right?
In the SRI world, we’re told that the job of the entrepreneur and investors is to turn an exciting, idealistic vision into reality. Hopefully, you won’t have to compromise your initial social vision when you’re faced with the harsh realities of the marketplace. And when you do relinquish the reins to outside investors or the new corporate owner, you just have to have faith that they’re still in it for the right reasons, and will do the right thing no matter what signals they get from Wall Street.
We’re trying to show that there is a different way to raise capital, and that you don’t have to put your social mission at risk. We hope it will inspire others in this still evolving field of social entrepreneurship.
Long before Equal Exchange had sold our first pound of coffee in 1986, the company’s founders, Jonathan Rosenthal, Michael Rozyne, and our current co-president, Rink Dickinson, made decisions that continue to shape the nature of our company today.
Non-profit or for-profit? That’s a question every social entrepreneur faces at the start. Jonathan, Michael, and Rink, having come from the world of co-operative groceries, chose a third path – they went co-op. For even the most progressive social enterprises this remains a path rarely taken or even considered. Who wants to put in the crazy work of launching a start-up if you know that you will be sharing ownership with everyone who works there? Yet they did, and today, with over 100 “worker-owners,” Equal Exchange is the largest manufacturing worker co-operative in the United States.
How do co-ops differ? For starters, by establishing an internal sense of fairness. For example, the average compensation range between the CEO and average paid workers in S&P 500 companies was 263 to 1 in 2009, the year that the Federal government actually capped some executive pay as part of the TARP bill. At the height of the tech bubble, it was over 500 to 1. At Equal Exchange, it’s about 2 to 1. And the top-to-bottom ratio is by rule capped at 4 to 1. There are no executive perks or bonuses to offset this egalitarian arrangement. In fact, because the generous benefit package and profits are distributed equally across the co-operative the real range in compensation is even flatter.
When we say that the workers are the owners, we aren’t talking about an ESOP, or rank-and-file owning a few shares, or even token representation on the Board. We’re talking ‘one-person/one share/one vote.’ The newest warehouse worker-owner has the same single share as the President. They both get one vote in co-op meetings, and so on. Specifically, only the 100 worker-owners can vote when we elect the nine members of our Board of Directors. Only the worker-owners can nominate candidates, and six of the seats are also reserved for worker-owners, with the remaining three reserved for outsiders. This employee-elected and dominated Board hires and fires the Executive Directors, approves budgets, major investments, and the like. Additionally, the entire worker-owner body meets regularly to vote on accepting new members, adopt changes to the company by-laws, and enact major policy decisions.
Shared ownership means shared profits and shared losses, but there are a few important steps before that. Here’s what we do when we tally up the year’s profits. After we give a chunk away to charity (7% of net income), we pay our taxes. Much to the shock of our auditors, our policy is to always pay what we owe, without exploiting any loopholes. Then we declare dividends to our outside shareholders (more on that later). We keep a portion as retained earnings to help spur future growth, and the rest is paid out as profit sharing (or “patronage,” as co-operatives call it). Everyone gets the same payment, from the woman who has been packing boxes for two years, to our co-president/co-founder Rink Dickinson. We also share the burden of losses equally—although we’ve only lost money once (back in 1998) over the last 22 years.
When you give people shared, meaningful ownership, living wages and top-notch benefits, excellent products to market/sell/distribute, enthusiastic suppliers and customers, plus weekly chocolate tastings – it makes for a loyal and motivated workforce. But if you also give everyone a vote in running the company, how do you ensure they will stay true to the company’s founding mission? Our most surprising tool might strike some outsiders as a perk: every worker-owner has to visit a farming co-operative in their first two years here – on Equal Exchange’s nickel. As an employee there’s no way you can look at (or roast, pack, or invoice) our coffee the same way after you’ve spent time working and living alongside a coffee farmer in rural Nicaragua or Peru.
But what about the capital and financing that fuels all this work?
Here, too, we’ve done things differently. Our latest innovation has been a partnership with Wainwright Bank (soon to become Eastern Bank) —a respected and progressive institution in its own right—to create a unique, branded certificate of deposit. With a conventional CD, you have no idea what the bank is doing with your money. With the Equal Exchange CD, Wainwright pools all the funds and makes up to 90% of it available to us as a line of credit at a below market interest rate. The Equal Exchange CD pays the same rate as the bank’s standard CD, yet creates a new socially responsible financial product that supports the operation of a leading Fair Trade, organic business. Wainwright Bank is FIDC insured, so if they were to fold, depositors would be covered up to the legal limit. However, since the bank is using the deposits essentially as collateral for the line of credit, depositors risk losing their money if Equal Exchange were to default on the loan. Yet a growing number of depositors seem eager to take on this additional risk in exchange for the social return.
The program recently hit a milestone when the Seward Food Co-op of Minneapolis chose to put $100,000 into an Equal Exchange CD. That was a striking example of one mission-driven organization channeling its own investments in order to support another like-minded enterprise. Seward’s investment also pushed total sales of the CD to the $1 million mark. This innovative product is now a significant part of Equal Exchange’s unorthodox financial model.
Like any social enterprise we also need equity and loans, investors and lenders, but have concluded that it’s essential to find them on our terms.
Our Fair Trade business model means that we’re more capital intensive than similar sized competitors. For example, while a conventional coffee company buys its green (unroasted) coffee as needed off the market (which keeps down their inventory-carrying costs), we intentionally take delivery from the farmer co-ops soon after harvesting – often months before we expect to sell them. This shifts millions of pounds of inventory, and its capital burden, to us. Additionally we arrange affordable financing for the co-ops, so they actually get cash before the harvest – which is when they need it most. These are two critical, but behind-the-scenes, practices that complement our Fair Trade purchasing policies. But it all takes financing.
As a profitable business with a long track record of growth and sound management, we don’t have a problem getting conventional bank loans or private capital from people who want a piece of the action if we make it into the big leagues. But that kind of money comes with a lot of strings, and a lot of pressure to put profits ahead of all other values. We’re not about to let that happen.
In the early days, Equal Exchange had to scramble for cash just like every other social enterprise startup. Rink likes to talk about how he used to practically guarantee to our earliest outside investors that they shouldn’t expect to see their money again. It probably helped that, as part of the co-operative model, everyone here was putting up some of their own money, too. In the beginning we also received some key financing from sympathetic faith-based organizations (back then we needed their prayers as much as their loans).
But the real challenges come when you start making a profit. Early on, Equal Exchange set a policy that invited outside investors to be a vital part of the company, but under our terms. The key elements included a fixed stock price, a five-year minimum holding period, no voting rights (which are reserved for workers), and a modest dividend, targeted—but not guaranteed —at 5%. The essential philosophy is that we are for profits, but against capital gains. There have been a few dips and rises in the rate, but we’ve paid a dividend every year for the past 21 years. To the amazement of those early investors who were promised a goose egg, we’ve often outperformed their other conventional investments.
Today, we don’t guarantee that we’ll lose our investors’ money (although, the financial crisis has reminded us that no business is immune from disaster), but we do assure them that we won’t make anyone rich. It’s an odd promise, but it’s been compelling enough to have brought in over $9 million in preferred stock sales through private placements. Many people are drawn by a mix of connection to our social mission and business model, as well as the unique structure I’ve described above.
What usually seals the deal, though, is perhaps the most unusual item in our by-laws—what we call the “no exit” clause. If a Starbucks, Nestle, or other deep-pocketed competitor ever dangled a large check in front of us to sell, our by-laws would require us to give away all net proceeds (after paying back our lenders and shareholders at the fixed stock price) to another Fair Trade organization. Simply put, we wouldn’t get to keep the money—and would probably lose our jobs after the sale—so there’s no incentive to sell out. Preemptively taking this little devil off our shoulder has several effects. First, it assures outside investors that they aren’t being taken for suckers by agreeing to forgo the potential of windfall profits. Second, it frees us from worrying about making decisions based on how we’re viewed by speculators with no connection to our mission. Without this clause, the worker-owners might not have voted to invest in developing a Fair Trade organic banana business, where we find ourselves fighting it out in an industry with razor-thin margins competing with global oligopolies that overthrow governments in their spare time.
The rationale of the no-exit clause is rooted in Equal Exchange’s raison d’etre and in a different conception of ownership. Equal Exchange exists to change how trade is conducted and how it’s perceived—to promote egalitarian and democratic workplaces, the co-operative business model, and more. The no-exit clause helps to ensure that Equal Exchange will not stray from its mission. Conversely, Equal Exchange does not exist to maximize capital appreciation – neither for investors nor even for the workers themselves.
But we also see “ownership” differently and do not equate it with capital. While investors provide most of the equity, those funds are just one of the many ingredients Equal Exchange requires, and investors are not granted special privileges. We also need farmers to commit their best coffee, tea and cacao; workers to give their time, their skills, and to invest their careers with us. We need land, buildings, electricity, gas, etc. We’re happy to pay for all of these inputs – especially the ones that come from our farmer partners. Ultimately, it’s probably more helpful to think of the employee’s ownership of Equal Exchange as a trusteeship. The worker-owners, the people who know Equal Exchange and its mission best, essentially hold the enterprise in trust for all its stakeholders, including future generations of farmers, workers, consumers, investors and the Earth itself.
Ultimately, for social enterprises to claim the mantle of being socially responsible, you’ve got to do more than make a great product or treat your workers with respect. To make profound changes to the economy, you’ve also got to change the way you think of ownership, investment, and power.
I suppose it’s theoretically possible to put in these kinds of limits after a company is established and doing well, but it’s like putting toothpaste back into the tube, and we’ve never heard of it being done. Nobody likes to give up power, control, or the potential for large financial gain once they have it. On the other hand, if you have the rules in place beforehand, everyone that comes to your business—investors, workers, suppliers, vendors—will have a shared set of expectations. And the sorts who are in it mainly for the money won’t want to work or invest there in the first place. In our experience, rather than feeling like limits, these kinds of ground rules have been liberating. They free us to pursue our mission.
We don’t claim to have figured out all the answers or discovered the only path forward. But we do hope that our example of success has helped create a new space for social entrepreneurs to create a truly different way of doing business.
Article by Daniel Fireside, the Capital Coordinator at Equal Exchange. He can be reached email@example.com
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