Decision-making should be made at the lowest level if possible. We practice subsidiarity in our democracy — with local governments making some decisions and federal decisions making others. What does it mean as we analyze the firms we invest in?
Last year, I got to meet Molly Hemstreet, co-founder of Opportunity Threads, a 60+ worker cooperative in North Carolina. The Guatemalan immigrants who are 70% of their workforce are all learning the “Great Game of Business” which is a methodology for learning to read the P&L and the key metrics of their business’s financial health. They practice full financial and salary transparency. Others call it open-book management. It’s a growing field for all kinds of companies serious about the gender and racial pay gaps and seeking to operate with greater human flourishing and human dignity. When I met Walter (one of the worker-owners) this fall — and his wife Esmeralda (who runs their quality control at the end of their plant) — he explained why they keep 12+ month cash-on-hand. It’s because of the conservative nature of most of the workers. I was surprised by their unconventional practice, but it’s because it’s one of the decisions that’s had significant input from the worker committees. They’re risk averse, love their jobs, and realize they want to be conservative to be resilient and able to weather the unexpected.
Two years ago, I was helping the owner of an 80+ waste hauling company consider whether to sell to an ESOP or a worker co-op. In both cases, the workers would be incentivized with an ownership stake in the company and would accrue $70,000 to $100,000 in assets they wouldn’t have otherwise gotten over the upcoming 7 years. The difference was their role in decision-making. The worker co-op that was offering to acquire the firm, was proposing a multi-year process to implementing the advice process — a decision-making process that involves those most affected by decisions.
What is the advice process?
It comes in many forms, but the essence is consistent: any person can make any decision after seeking advice from 1) everyone who will be meaningfully affected, and 2) people with expertise in the matter.
Advice received must be taken into consideration. The point is not to create a watered-down compromise that accommodates everybody’s wishes. It is about accessing collective wisdom in pursuit of a sound decision. With all the advice and perspectives the decision maker has received, they choose what they believe to be the best course of action.
Advice is simply advice. No colleague, whatever their importance, can tell a decision-maker what to decide. Usually, the decision-maker is the person who first noticed the issue, or the person most affected by it.
In practice, this process proves remarkably effective. It allows anybody to seize the initiative. Power is no longer a zero-sum game. Everyone is powerful via the advice process.Reinventing Organizations Wiki
At the Community Purchasing Alliance Co-op (where I’ve spent the last 8 years), we’ve implemented a distributed leadership structure as a series of circles. After a couple years of talking about and trying to move to a “hierarchy-lite” decision-making structure, we realized what we wanted was something highly distributed. We wanted to empower many staff members to make decisions responsive to the member-owner-customers they worked with. We wanted them to have ownership over the vendor and customer relationships they were most responsible for. We realized our budget goals and aspirations for growth would be most effective if we empowered each program director with decision-making power. In every case, these empowered leaders, sought advice from more tenured colleagues, but they themselves got to make the ultimate decision.
What we’ve transitioned to in 2021 is a modified Sociocracy, where aims and domains for circles and sub-circles are made by the “General Circle” (made up of all current staff). While it has taken a little while to set up, the culture of trust and belief in each other has been remarkable. We see all kinds of initiative coming from every corner of the organization. It’s very consistent with the research of Reinventing Organizations has found with other “Teal” organizations.
By distributing decision-making to the lowest level — the most appropriate level — organizations of all sizes can and have shown to be able to embody the CST principle of Subsidiarity and perform with a new level of human flourishing.
Focusing on Subsidiarity in an organization leads to integral human development.
People are inherently valued in an organization that allows decisions to be made at the lowest reasonable level. The owners of the firm trust and believe in the dignity and thoughtfulness of the people most affected by the decisions to be leading the decision-making process.
How do you translate subsidiarity into investing?
I’m using this subsidiarity lens to prioritize a closer review of specific investment opportunities. For example:
- Main Street Phoenix Worker Cooperative is raising $7M to convert a group of restaurants in Phoenix to worker co-ops. As I do my due diligence, I’m going to ask about their organizational structure and how decisions get made.
- Do they use some form of the advice process?
- Do they use sociocracy, holocracy, self-management or similar?
- Do they practice open-book management, financial and salary transparency?
- Do they have worker committees and trainings that develop the financial accumen of all the workers to understand the key metrics to track the financial health of the business? (i.e. Great Game of Business uses sports statistics to show that anybody can learn the key things you need to track to have a pretty good handle on the business’ well-being)
- Driver’s Seat Co-op supports UberEats, DoorDash, and other gig drivers with an app that helps them optimize their earnings. It’s a co-op and all the data is held in trust. Workers have seats on the board and are involved in decisions where the most valuable assets of the co-op are involved. Small groups of drivers help set the priority list for what features are developed next on the app.
- Arizmendi Co-op – 9 bakeries in the Bay Area with 200+ workers has a super well-developed processes for on-boarding, conflict resolution, performance reviews, team building and more. They embody subsidiarity to one of the highest levels I’ve seen.
Towards a CST Embodiment Index: A Quick Review
- Arizmendi Co-op ===> High Embodiment of Subsidiarity
- Driver’s Seat Co-op ====> Medium Embodiment (still early stage, hard to know)
- Main Street Phoenix Worker Co-op =====> (still early stage, not enough info)
- Opportunity Threads ====> High Embodiment
- Community Purchasing Alliance Co-op ====> High Embodiment
What about Funds?
Kachuwa Impact Fund has non-extractive real estate relationships for 60% of the $25M portfolio. These non-extractive financial relationships (nice description of non-extractive financial terms here from Seen Commons) demonstrate an interesting form of subsidiarity where the borrow is involved in the decision-making around repayment of the loan. Because they are involved in setting the terms and the terms are such that they won’t be worse off because of the loan, I believe these real estate holdings are a HIGH embodiment of subsidiarity. The other 40% of the funds are spread across more than 40 other funds, co-ops and other enterprises. A few are worker co-ops (including a decent-sized stake in Namaste Solar – a 80+ person worker-co-op in Colorado). Without a close look, the few firms I do know a decent bit about like Namaste and Equal Exchange, I know there is a High embodiment of distributed decision-making. As a result, I’d rank this fund as medium to Medium-High given the 60-70% of the holdings I have a decent bit of data on.
Apis & Heritage Capital Partners are building an ESOP Fund. While they’re still early stage, from what I know about their priorities and their Private equity model, my hunch is that decision-making will still be concentrated at the top of the firms they invest in. While ownership will be distributed, decision-making of the firm will still be highly centralized and concentrated. I would give them a LOW embodiment of subsidiarity.
In general, public equities mean publicly traded companies where the vast majority of decision-making power is concentrated with the Board of Directors, driven in a large part by shareholder interests. In some cases, there are firms where workers have some representation on the Board, In some cases there are also firms where organizational structure has delegated meaningful amounts of decision-making to people most affected by those decisions. In these more federated structures the Subsidiarity embodiment may be higher. More development would be needed to be able to figure out what questions could be asked.
Some thoughts on next steps.
I would review the questions B-corps have to answer on the B-Impact Assessment and how many of those questions could be proxies for subsidiarity.
At the end of the day, I know my colleagues at CPA Co-op are flourishing with their responsibility and ownership they’ve been given with the adoption of sociocracy and the advice process. Walter’s comments to me about their cash position reflected something I’d never experienced before. Anecdotes from trainers around the Great Game of Business give me hunches that there are firms everywhere that embody CST because it’s good for business.
The “continuous learning” organizational culture pioneered by Toyota several decades ago points to similar dynamics of empowering front line workers with decision-making authority to actualize changes that they have unique insight on. I believe the field of I/O Psychology, the world of business management, could use embodiment of Subsidiarity to learn and help us all develop management structures that lead to human flourishing and human dignity.
As investors, I believe we can be powerful catalysts for change by asking the hard questions of whether subsidiarity is embodied in the investments we’re in and the ones we’re considering.