Innovative financing for social change
In this month’s Social Velocity interview we are talking with Ted Howard. Ted is the driving force behind an exciting experiment in social innovation going on in Cleveland. Evergreen Cooperatives are employee-owned, green, start-up, for-profit companies that are designed to completely revamp inner city Cleveland’s economy by drawing on assets already there. Ted is one of the principal architects of Evergreen Cooperatives through his role as Senior Fellow for Social Justice at the Cleveland Foundation. He is also the executive director of The Democracy Collaborative at the University of Maryland. I found out about Evergreen Cooperatives at this year’s Social Capital Markets Conference and was so blown away, I asked to interview Ted.
Nell: Like any social entrepreneur, Evergreen Cooperatives has huge plans for growth. The goal is to create 5,000 jobs in inner city Cleveland, and you currently have created about 50. How do you plan to scale Evergreen Cooperatives to that level?
Ted: The Evergreen strategy is based on leveraging the economic strength of Cleveland area anchor institutions – hospitals, nursing homes, universities, museums, cultural centers, and the like. We tend to think of these types of institutions in terms of their social missions – providing health care, educating students. But they are also important businesses – albeit usually nonprofits. In Cleveland, three of the city’s biggest anchors – the Cleveland Clinic, University Hospitals, and Case Western Reserve University – annually procure more than $3 billion in goods and services. This is in addition to their very substantial personnel and construction budgets. Yet virtually none of that $3 billion of annual spend makes its way into the low-income neighborhoods that surround the campuses of the institutions.
Our strategy is to work closely and in partnership with these anchors to identify supply chain purchasing opportunities that could be sourced locally. For example: laundry services, food, renewable energy, recycling, and so forth. Evergreen then develops locally-based businesses matched to these procurement needs. The goal is to drive as much of this $3 billion into the community as possible, and in the process, catalyze a network of locally based businesses that hire their workforce directly from the neighborhoods.
In truth, we don’t know how to move from a few companies with 50 or 100 employees to a robust network of dozens of companies that can employ thousands. But clearly the opportunity exists due to the presence of these anchors. The institutions aren’t going anywhere (unlike corporations, universities and hospitals almost never move) and their need for goods and services continues to grow.
Nell: There have been countless attempts over the years to solve inner city poverty. Why do you think this model could be the solution? What makes it different and more promising than past attempts?
Ted: Evergreen represents a new “paradigm” in community economic development. By that, I mean to suggest several important elements in the Evergreen design that are significantly different from traditional anti-poverty approaches.
First: this is not a welfare or subsidy strategy. We are building a network of for-profit businesses committed to hiring their workforce from among local low-income neighborhoods. Each business is closely linked to area anchor institutions that can provide ongoing contracts to support the company.
Second: because our workers live in low-income households (the median annual household income in our target area is below $18,500), we believe that jobs alone are not enough, even when those jobs offer a living wage and no-cost health benefits, as our jobs do. People need to be supported in building their family assets and wealth beyond their weekly paycheck. The way we are addressing this is by incorporating Evergreen companies as worker-owned cooperatives. Once someone has joined the coop, they become eligible for annual profit distributions into their capital accounts. The goal of our business model is to generate enough profit in each company so that a worker who has been with Evergreen for 8 years has amassed $65,000 in his or her account. This is their property, their asset, and when they leave the company, they take this money with them. While most of us can’t imagine retiring on $65,000, in our neighborhoods, this amount of money can be life-altering.
Third: the long-term goal of the Evergreen Cooperative Initiative is not simply to create business or provide jobs, not even to build the work of workers and their families. The ultimate commitment is to stabilize and then revitalize six neighborhoods that are home to 43,000 residents. In the past decades, these communities have been radically disinvested as jobs and business have left the area. We are trying to rebuild community, and a key to that is creating new capital (in the form of Evergreen businesses) that won’t get up and leave the community (as so many individual entrepreneurs and businesses often do). By broadening ownership of our businesses to the workers who live in the community and are employed in the company, it becomes much less likely that these companies will exit the area.
Rather than a trickle down strategy, Evergreen focuses on economic inclusion and building a local economy from the ground up. Rather than offering public subsidy to induce corporations to bring what are often low-wage jobs into the city, the Evergreen strategy is catalyzing new businesses that are owned by their employees. Rather than concentrate on workforce training for employment opportunities that are largely unavailable to low-skill and low-income workers, Evergreen first creates the jobs (in our network of companies), and then recruits and trains local residents to take them.
Nell: The financing to get the Evergreen Cooperative up and running was a pretty innovative mix of public, private and nonprofit capital. How were you able to get those three players to the table and investing?
Ted: Access to low-cost capital is one of the great challenges faced by low-income communities. Typically, they are starved for investment – banks don’t want to make loans and investors don’t tolerate the risk level. We think we are beginning to crack the code on this problem – we still have a lot to learn, but we are making progress. To date, we have raised about $6 million in grant funding which in turn has helped unlock an additional $35 million (approximately) in long-term, low-interest federal loans (such as HUD108), tax credits (including solar and New Markets Tax Credits), state grants and loans, and even growing participation from commercial banks.
What has helped bring all of this to the table has been the leadership of local philanthropy (in particular, the very strong commitment made by the Cleveland Foundation) and by partnership among the city’s large anchor institutions. By putting their reputations, relationships and resources on the line, they have been able to reassure public and private investors that investing in Evergreen is a sound investment. I should also say that the very strong support from the Mayor and the City’s Department of Economic Development have been crucial in building a funding bridge between Evergreen and Federal and State sources.
Some might ask: why are local universities and hospitals and other anchor institutions so intimately involved in the Evergreen strategy? Why are they at the table at all? The answer is simple, actually. They realize that in order for their businesses to succeed, the neighborhoods surrounding them have to be strengthened and rebuilt. It is never good for business to be surrounded by depressed and dangerous neighborhoods. Parents won’t want to bring their children to those schools; doctors and nurses won’t want to work for those hospitals. If people aren’t employed, they can’t pay for the services these institutions offer. So, even beyond the moral or humanitarian reasons, there are sound business reasons for these institutions to be at the table.
Nell: What are your long-term financing plans for the Evergreen Cooperative? Will you ever be able to fully exit and allow these businesses to stand on their own?
Ted: There is essentially no equity investments in the Evergreen cooperatives – almost all of the financing is debt financing that will be repaid over time. The goal is to have each company become profitable, repay its debt, and become a sustainable and successful business. That said, we also are intent on tying the businesses together into a coherent network with a shared mission and shared values. In 2011, we will establish the Evergreen Cooperative Corporation which will be a kind of holding company that will coordinate the entire network. ECC’s board will be comprised of a range of stakeholders – representatives of the individual coops, the anchor institution partners, local philanthropy and so on. In building this structure, we have been inspired by the example of the Mondragon Cooperative Corporation in the Basque region of Spain. There, over a 50 year period, a group of 120 cooperatives employing more than 100,000 people, with annual revenues of $20 billions has been built. While each company has great autonomy, they are all networked together, which provides business resilience and ensures that the cooperative vision and mission are shared by all,
Nell: Aside from the fascinating model and financing, yours is also an interesting study in managing diverse stakeholders. There are many stakeholders in this project (city of Cleveland, businesses, employee-owners, funders, etc). How do you keep them all aligned on both the long-term vision and the day-to-day tasks?
Ted: Certainly, Evergreen embraces a broad and diverse group of stakeholders. At one end of the spectrum, you have world-class, multi-billion dollar institutions that are the economic engine of our region. At the other, you have men and women who have grown up in some of the most disadvantaged neighborhoods to be found anywhere in America. Any many other types of institutional actors in between. Keeping all of this aligned and moving forward together is one of the essentials to our success to date.
We have established many mechanisms to nurture and sustain this alignment. Each quarter, for example, the Cleveland Foundation’s president, Ronn Richard, convenes a meeting of the leaders of the city’s major anchor institutions, foundations, city agencies, etc. – the most recent gathering had about 30 people around the table. They update each other on ongoing plans related to community development, job creation, transportation issues, and so on.
There is also a leadership team of people working on Evergreen at the staff level – the managers of the cooperatives, program staff at the Cleveland Foundation, consultants working on different elements of the project.
Continuing education and constant information flow are essential to keep the network and system of relationships whole and aligned. One element that has been quite important is an annual study trip to Mondragon (sponsored by the Cleveland Foundation). To date, about 35 civic leaders from Cleveland have participated in these trips, which have been important learning experiences about how cooperative development strategies can move to significant scale. I imagine that the City of Cleveland has a greater percentage of its leaders that have visited Mondragon than any comparable city in America.
Finally, it has to be said that the role played by the Cleveland Foundation as an honest broker and convener, in addition to its role as a funder, has been essential. The Foundation has been able to bring people to the table, and to keep them on board over a period now going on six years.
Nell: What is still holding the project back? Where are the hurdles in this project going forward and what are you doing to overcome them?
Ted: While we have had some success to date, we very definitely are facing big hurdles and significant challenges. Three stand out:
First: we have more business opportunities related to our anchor partners than we have solid management talent to bring new Evergreen companies into existence. We are now aggressively looking for seasoned managers who want to play key roles in this initiative – and who buy into the broader cooperative ownership and community stabilization vision. This is not typical for most business people, to say the least. But if any of your readers out there are interested in this, they should contact us!
Second: it will be critical to our long term success to build a strong culture of cooperative ownership within Evergreen companies. Being a worker-owner is a very different proposition from showing up at work for 8 hours a day and then clocking out. In Evergreen, each person is an owner – and with that comes enormous responsibility and accountability. Building that culture, and empowering our worker-owners to become leaders, both within their companies and within the communities, is essential.
Third: while we have had some success at accessing and placing capital, we are going to need to expand our capital pool considerably. In 2011 we will be launching our new Evergreen Cooperative Development Fund and will be seeking a broad range of investments – from foundation grant and program related investments to mission related investments, private equity (that is willing to take a below market rate of return), and government loans and grants. We are thinking of something on the order of raising $50 – $100 million in the coming period to capitalize the next generations of Evergreen companies. This is going to be a challenge in these difficult financial times, to say the least. But we believe we can do it.
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