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David Brodwin's blog

A Cleveland Success Story

As Republicans gather in Cleveland, it's easy to miss an important experiment taking place a few minutes away from the convention center. Evergreen Cooperatives – an unusual worker-owned business – is emerging from its startup phase. It brings an innovative model of job creation with the potential to scale up and improve lives across America.

Evergreen got its start in 2008, when the Cleveland Foundation brought local leaders together to improve lives for low-income residents of the depressed local economy. The founding institutions (which locals call "anchor institutions") include the Cleveland Foundation, Case Western Reserve University, University Hospitals, the Cleveland Clinic and local government.

Rather than pour grant money into conventional anti-poverty programs, the anchors sought to create jobs that would fund themselves without ongoing subsidy. But they rejected the conventional strategy of luring employers with tax breaks; these deals often go bad. Instead the anchor institutions sought a "sustainable business model, one that could be replicated and expanded," according to Tom Zenty, CEO of University Hospitals, one of the anchors as well as an important customer of Evergreen.

Initially, Evergreen took on the challenge of providing laundry services to local hospitals. Cleveland is a major medical center, with University Hospitals alone needing more than 3 million pounds of linen cleaned each year. The startup team integrated social responsibility and environmental sustainability into the business plan:

  • A lower-income inner-city workforce – the business was designed to employee people with limited education, limited work experience and in some cases nonviolent criminal records.
  • A co-op ownership model – teaching and training workers to think like owners, giving them a financial stake in the business and an opportunity to create some wealth for themselves.
  • A sustainability focus – An LEED-certified facility that avoids toxic cleaning chemicals, reduces waste and lowers carbon emissions.

With seed capital provided by the anchor institutions and contracts for laundry services, Evergreen opened its doors. Like many startups, Evergreen ran into problems and made some mistakes: It expanded too quickly into new areas before it had made its core business profitable. And it wasn't utilizing its capacity fully which led to losses.

A new CEO, John McMicken joined in 2014. He began taking Evergreen through a transition, hiring stronger managers to head each business unit, improving marketing, fine-tuning the ownership structure, restructuring contracts, boosting sales and more. Two of the anchors – University Hospitals and Case Western – provided additional grant funding and two private individuals lent capital to help it through.

It was a particular challenge to get the employee-ownership dynamic working right. "We hadn't done a good job educating people on how the role is different as a worker-owner" said McMicken. "How are profits shared, how are profits calculated, what can you vote on, what can you not vote on?" All these questions needed to be sorted out.

With strong leadership, additional capital and solid execution, Evergreen has reached solid ground. Two of the three businesses – Evergreen Cooperative Laundry and Evergreen Energy Solutions (a retrofitting business) – are now profitable. The third business, Green City Growers, provides hydroponically grown gourmet produce, and it is on track to break even this year. The company now employs about 120 people, many of whom would otherwise have a hard time finding work. Revenue streams are more diversified: At this point only about 15 percent of revenue comes from the original anchor institutions. "This has been a very successful enterprise," says Zenty.

Evergreen is a closely watched test case for socially responsible and environmentally sustainable business everywhere. Can a business like this survive on its own after an initial infusion of patient capital? Or is it a not-quite-real business that needs continued subsidy – either a direct cash infusion or a commitment from customers willing to pay above-market prices?

Evergreen's experience suggests three important lessons. First, having a social or environmental mission won't save a business if it can't execute on the basics. If anything, it's harder to manage the triple bottom line than the conventional single financial bottom line.

Second, if a business is pursuing a social mission that leads to a higher cost structure, it needs to identify a market segment that pays a premium. For Evergreen's hydroponics business that meant carving out a niche between low-cost conventionally grown lettuce and premium-priced fully organic lettuce. The social justice story "gets us in the door," says McMicken, but not much more. Evergreen has found a quality-sensitive customer who gladly pays more for cleanliness, size, flavor and consistent year-round availability.

Going forward, businesses like these have an opportunity to monetize the social impact they are able to deliver. Social impact bonds (also called "pay for success" bonds) open up a path for companies to get compensated for reducing poverty, homelessness, recidivism or other ills. These bonds have the potential to fill the gap between the cost structure of a social enterprise like Evergreen and the prices it can charge.

As cities struggle to create jobs and reduce poverty, the possibilities for replicating Evergreen have never been greater. This unique enterprise is charting a path that many will follow.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report July 28, 2016.

Is It Time for a Financial Transactions Tax?

No economy can be truly sustainable unless its financial services sector is in good shape. A healthy financial services sector supports the rest of the economy in three ways: It makes capital available to promising startups and growing businesses. It works reliably and consistently – without recurring panics that destroy jobs and savings. And it works efficiently – collecting enough fees and interest to operate but not extracting so much that it undermines the rest of the economy.

A good financial system should have something in common with a well-run water utility: Just like everyone needs water, everyone needs money. The water should come reliably and affordably. It needs to flow without fail every time you turn on the tap.

Wall Street arguably earns a score of one out of three: It works well in terms of making capital available. It tends to overshoot and crash, as we were reminded in 2008. And it takes a greater and greater share of the pie from the rest of the economy. In 1980, the financial sector needed about 5 percent of GDP to do its essential work of moving money to where it's best deployed. But by 2010 this cost had nearly doubled, to 9 percent, even as computers and telecommunications dramatically cut the cost of bookkeeping and funds transfers. Where did that 4 percent go?

When we compare the profits captured by the financial sector with the rest of the economy, the shift is even more stark. In 1950 the financial sector earned about 8 percent of the profits in the entire U.S. economy. By 2012, the profits in the financial sector had soared and reached 24 percent of the combined profits of all other industries. (In the mid-2000's it was even higher.)

As the Democratic National Convention approaches, the Sanders team and the Clinton team are debating policy solutions that could shrink the financial services back to something resembling "normal" by historical standards. No one sane wants to close banks by fiat, so the search for policies focuses on indirect approaches that would tamp down speculation and lower costs incrementally.

The hunt has focused on ways to discourage extremely fast trading and extremely short-lived positions that have come to dominate U.S. stock exchanges. It's a natural target: the fast trading (called "High Frequency Trading" in the best-selling book "Flash Boys: A Wall Street Revolt") gives an edge to market insiders who pay millions to eke out a micro-second advantage so they can place their trades (and fake their trades) in advance of everyone else. It provides a way for insiders to skim the market, to the detriment of retail investors and other mere mortals. High frequency trading has become so pervasive that in the U.S. the average holding time for a share of stock is now an astonishingly short 22 seconds. Really, it's hard to see how trading the same stock back and forth 10,000 times a day creates value for the U.S. economy.

Bernie Sanders has proposed a transaction tax to slow this down. A transaction tax is a very small sales tax that's charged each time a share of stock is bought or sold. Rep. Peter DeFazio, D-Ore., has introduced a bill that would tax each trade at a mere three one hundredths of one percent (3 basis points). A tax this miniscule would be invisible to the long-term retail investor and similar mutual funds. It's roughly 1/300 of the sales tax that many Americans pay every day. But it could shut down the flash-traders who hold stock for less than 22 seconds on average.

Of course, a transaction tax is vehemently opposed by Wall Street and by Wall Street's servants in both houses of Congress. If it could be imposed in a way that was hard to game (a big if) it would benefit the broader economy: It would reduce market volatility. It would reduce the share of GDP that Wall Street eats up. And it would probably motivate some of America's brightest, best-educated and hardest working young people to seek careers outside finance, in real industries, inventing real things that people actually want and need.

While Sanders supports a transaction tax, Hilary Clinton's team advocates a more limited set of speed bumps. She has proposed to charge a fee on orders that are placed and then canceled without being executed. These orders make a tempting target for regulatory action: Placing and canceling orders in rapid succession is a trick used by high speed traders to fake out the market, leading people to offer too much or ask too little. But Clinton's solution has been called "nibbling around the edges." It's palatable for a candidate with close ties to Wall Street because it focuses on relatively small trading firms with less political power.

For now, it looks like Clinton and Sanders have agreed to disagree. The party platform text says "there is room within our party for a diversity of views on a broader financial transactions tax." But this disagreement will be moot unless a November landslide brings both House and Senate under Democratic control.

Even if our government finds the political will to penalize high speed trading, the global nature of financial markets will make it hard to enforce. Traders circle the globe seeking the most favorable regulations and business conditions. Unless countries negotiate international limits, traders will simply evade tight U.S. policy by shifting trades elsewhere – and that means we'll see no improvement in market volatility or market fairness.

Wall Street's rising profits and rising share of the economy show clearly that it has managed to rewrite the rules in its favor. High speed trading is just a small part of the overall problem, and even this small part will be very hard to fix.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report July 18, 2016.