The term “Industrial and Provident Society” sounds very old fashioned. But, says Shaun Fensom, Chair of Manchester Digital, this structure, used by co-operatives since 1862, is a useful model for modern social enterprises and could have some interesting new applications in the age of the internet.

An IPS is not necessarily a co-operative, and co-operatives can take other legal forms (such as a company limited by guarantee). Organisations that use the structure range from the giant Cooperative Group with a turnover of £10bn, to the smallest co-operatives and community-owned ventures. The Financial Services Authority, rather than Companies House, looks after registration and regulation.

An IPS is a business; but unlike a share company it is not designed as a mechanism to allow investment for profit. As such it corresponds with the usual definition of a social enterprise – a business run for social benefit rather than profit.

But there are two aspects that appear to contradict this and which social entrepreneurs – particularly those coming from the community and voluntary sector – may find strange. Firstly, an IPS must issue share capital; share capital that is put at risk. And secondly many IPS co-operatives not only set out to make a profit, they proudly distribute that profit to their shareholders. How is that compatible with social enterprise?

The answer lies in the way that profit – or surplus – is shared. The shareholders of an IPS are the members. They may make a small return on their investment but this is limited by the regulator, and is usually a fixed rate of interest. The members can’t speculate with their shares – they can withdraw them and be repaid what they put in (plus any interest they have earned), but they can’t sell them on to someone else at a profit.

Further, the distribution of profit to the members is normally in proportion to their “trade” with the co-operative, not the value of their shares. Thus The Co-op gives members a share of the profits in proportion to what they have spent (the so-called “divi”) and worker co-ops pay their employee members either an equal profit share or one related to their salaries. So members can benefit from business success, irrespective of how much they can afford to invest. And customers or employees can have a real stake in the business because they benefit directly when things go well.

But perhaps the most important characteristic of a co-operative IPS that distinguishes it from an ordinary company (and some social enterprises) is the notion of democracy. Except in special cases, IPS members have one vote each, irrespective of their investment, normally entitling them at the very least to elect and call to account the people that manage the business.

The rules governing an IPS can be adapted to suit the enterprise. You can – as the Co-operative Group now does – limit all members to £1 investment. Or you can allow them to invest anything up to the (current) legal limit of £20,000 each. You can re-invest all surpluses back into the enterprise; a strict non-profit. Or you can reward members with some form of “divi”.

This flexibility can be very useful for forward thinking social enterprises.

An IPS can attract share capital from members without the need to issue a prospectus and satisfy the other rules governing public share issues for ordinary companies. Significant sums can be raised to invest in new equipment and projects, and members have a real feeling they can help the enterprise prosper.

Aside from the ethical responsibility involved in attracting other people’s money, there are two key things to watch. Firstly, if the rules allow members to withdraw their capital on request (which is normally the case), there must be enough money to repay them. It is reasonable to assume that a limited number of members would ever want do that at once, and withdrawals can be suspended in special circumstances. Nevertheless, a sensible proportion should be kept in a liquid form, or in the form of some solid investment against which money can readily be borrowed to repay members. Secondly, an IPS is not a savings bank and the regulator does not approve of co-operatives attracting capital with “competitive” interest rates, higher than those typically offered by financial services companies.

The “web 2.0” revolution has seen a new wave of enterprises that use the net to involve their customers directly in the business. This offers the prospect of an exciting new form of IPS. With the right controls and safeguards, it should be possible to sign members up online where they can be kept informed about the progress of the enterprise, and to have some real say in how it is run. The Co-operative Group recently attracted 500,000 new members mostly through the Internet, but few if any co-operatives have really used the power of the net to engage and empower their members. Imagine Wikipedia as a member-owned IPS co-operative, able to raise capital from its members, and you begin to see the potential for this old and distinguished legal form.

Ethical Consumer - restructuring as a multi-stakeholder co-operative

Ethical Consumer Research Association (ECRA) has been run successfully as a not-for-profit workers co-operative since 1989. Based in Manchester, it publishes Ethical Consumer magazine, a consumer website ethiscore.org, a research database called CorporateCritic.org, and performs consultancy services on ethical issues for the third sector.
In 2006 ECRA’s directors became concerned that its current business structure (company limited by guarantee) was not dynamic enough for the fast changing world of internet and consumer publishing. After some research into alternative business models, it developed plans to blend its current worker co-operative structure with ideas of consumer co-operation to create a new form of multi-stakeholder co-operative.
Based around a not-for-profit IPS (Industrial and Provident Society), the new Ethical Consumer co-operative would have worker members (5), consumer members (2) and non-executives (2) elected to the board. There are other co-operatives with this kind of blend of representation. Greenwich Leisure Limited, which runs 30 leisure centres within the M25, has a board consisting of elected staff, council members, a trade union representative and customers. And Salford Community Leisure Limited, which provides sports centres, swimming pools, and other facilities for sport and leisure activities in Salford, has a similar multi-stakeholder board.

The new ECRA co-op is likely to be different because:
it plans to retain majority control for the workforce
its consumer members are likely to be investing capital in the business (though membership will be available for £1)
ECRA is an ordinary trading company rather than a public sector enterprise

Access to capital and experience
There are two main reasons ECRA has chosen to go down this route. The first is because an IPS structure gives access to a more flexible type of capital. In the past, ECRA has tended to raise finance by issuing ‘loanstock’, or fixed-term loan offers, to its readers. The most recent issue, in 2003, raised £90,000.
These types of loanstock issue are quite cumbersome and costly. With an IPS, a co-operative has rules in place to accept new money or pay back money at pretty much any time.

In 2003, ECRA also experimented with raising conventional share capital by setting up a for-profit subsidiary. Although around £45,000 of shares were sold, it was not as successful as hoped, with conventional investors seeking far higher returns than ECRA was able to project. One successful element of the for-profit subsidiary, though, was the introduction of non-executive directors onto the board. And this is the second main reason that the new IPS structure has been designed as it has. Setting up the Board in a way that creates access to a wider range of external experience has been a key part of the project.

In March 2008, ECRA heard that it had received grant funding from the Co-operative Fund to help bear some of the costs of the restructure. ECRA has been influenced in its choice of structure by the success of the Phone Co-op model as a modern consumer co-operative. Hopefully, if this new multi-stakeholder model of worker co-operative proves successful, it might become attractive to other organisations across the UK.

Rob Harrison, www.ethicalconsumer.org