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Wednesday, August 14, 2013

Want to Own a City?

Shares in Incorporated Co-op Cities Might Be the Next Big Thing

Consider the city as an enterprise—as a particular type of corporation. Who owns it? Not you. Not anyone. Not really. Why?

A conventional city does not have shareholders—at least, not in the usual sense of the word. The city’s residents have some stake in its fortunes, true, but they do not own fractional undivided interests in the city qua corporation. You can own and trade shares of Apple, Inc. You cannot own and trade shares of Palo Alto, California.

Why can’t you own a city the way you can own a for-profit corporation? Because cities don’t issue shares in the first place. Unlike a private for-profit corporation, a municipal corporation is not co-owned by various shareholders, each of whom holds a fractional undivided interest in the enterprise as a whole. Cities just don’t work like that.

Instead of shareholders, a conventional city has residents and voters. Instead of investors, it finances its operations through taxes and debt. Instead of profit, cities promise to promote for the public good. And when cities fail? Instead of ceding the field to better competitors, they lumber on and on

Those who own property in a city—houses and businesses, say—probably come the closest to qualifying as its shareholders, but they do not own undivided interests in the city as a whole. Even the most entrenched bureaucrat, though a direct beneficiary of the city’s revenue flow, owns nothing like a share in it. Nobody owns a city qua city. Perhaps then we should not be surprised that, like unowned property everywhere, many cities suffer looting, abuse, and neglect. 

How can we improve this state of affairs? Here, as elsewhere, the public sector can learn from the private sector. Two facts: Workplaces resemble cities and worker-owned businesses thrive. One conclusion: Cities should tap the power of shared equity.

Workplace City

Consider how much a private workplace resembles a city. Each factory, office, or store has its own internal streets and addresses, its own waterworks and power—even its own weather (hence struggles to control the office thermostat). Most workplaces mimic real cities only partially, on a charmingly tiny scale, with hallways instead of avenues and bosses instead of politicians. Workplaces sometimes rival cities in size and services, however.

Boeing’s passenger plane plant in Everett, Washington, fills the largest building in the world (in terms of volume) and includes its own internal highways (for electric cars), railway station, fire department, security force, and water treatment plant. To serve the 30,000 or so employees that pass through daily, Boeing’s workplace includes a bank, a medical center, a childcare center, five Tully’s Coffee stands, and 19 cafeterias. Some large factory complexes include grocery stores, restaurants, recreational facilities, and even on-site housing. As I described in an earlier column, the Ford Motor Company once built—and lost—an entire city in the Amazon rainforest. Because workplaces resemble cities in size and scope, they can teach us a lot about how to improve municipal government.

Worker-Owned Businesses … Work

What can cities learn from successful workplaces? Lots of things, of course. As Oliver Porter demonstrated when he helped establish the town of Sandy Springs, Georgia, cities may benefit from the same plug-and-play business model routinely used by general contractors. Sandy Springs uses an open bidding process to hire outside parties willing and able to fulfill most of the obligations that the city owes to the public—street repair, park maintenance, etc.—keeping only a lean supervisory team on the city’s payroll. Other cities have started following Sandy Springs’ lead, much to the benefit of their budgets, operations, and residents.

The widespread success of worker ownership offers another lesson for municipal government. The United States currently has more than 11,000 employee-owned companies and more than 130 million worker-owners. Worker-owned businesses range in size from sole proprietorships to professional associations to companies the size of Basque-based multinational Mondragon Corporation, which earns over $18 billion in revenues a year and holds over $47 billion in assets, and U.S.-based Publix Supermarkets, which employs over 152,000. 

Far from the province of woolly-headed hippies, worker-owned businesses predominate in the accounting, legal, medical, and investment banking professions, as well as in securities and futures exchanges, and throughout the taxi and trucking industries. Equity sharing plays a central role in helping startup companies get off the ground; convertible notes, stock options and other equity-distribution mechanisms make Silicon Valley’s economy go not just around, but up and up.

Equity Sharing in Startup Companies and Startup Cities

Why do worker-owned businesses thrive? Because equity sharing aligns the incentives of the workers with those of the business as a whole. Field studies indicate that, holding all else equal, a worker-owned firm can generate between six and fourteen percent greater outputs than its conventional counterpart. That is not to say that co-owners always work harder than mere wage earners; it is only to say that they tend to work more efficiently.

Equity sharing fosters a convergence of interests between those working in the corporation and the corporation as a whole. Shared management protects both investors and worker-owners. The likely result of applying that same equity-sharing system to cities? Civic peace, prosperity, and harmony.

Why Not Resident-Owned Cities?

Suppose that a startup city wanted to follow the example set by startup companies and distribute shares of the city to its investors and residents. A conventional municipal corporation would not allow that kind of distributed ownership. If structured as a share-issuing corporation, in contrast, a startup city could invoke the power of equity sharing, using it to align the interests of the city’s residents with the interests of the community as a whole.

In that, the shared startup city would resemble a conventional residential cooperative corporation, in which the co-owner residents possess voting shares of the same corporation that owns the property the residents lease. In other words, co-op residents own their landlord. Some co-ops already rival cities in size; the Bronx’s Co-Op City has over 55,000 residents and its own stores, offices, schools, parks, and houses of worship. Equity sharing would let the residents of a startup city jointly own their hometowns, too.

What about vesting schedules? At first, as in other startups, founding investors would hold most of the shares of a startup city. Through a standardized process, however—by vesting residents with one voting share per year, say—those who live in the city would, over time, come to own and control more and more of it.

Cities are not simply for-profit corporations with live-in owners, of course. Cities have residents. Residents have rights. Any startup city structured as an incorporated co-op would have to offer very convincing guarantees of individual rights, fair and efficient judicial procedures, and the rule of law. In particular, as I explained in an earlier column, the city should guarantee truly impartial resolution of any disputes between it and its residents.

Residents and others holding voting shares of a city would, of course, get to vote for directors, amend bylaws, and otherwise engage in governance of the co-op corporation. As a further safeguard of individual rights, however, a startup city could implement corrective voting, which affords each natural person one vote against any select law, rule, ordinance, or order. Even conventional shareholders don’t exercise that sort of veto power over the corporations they own. With corrective voting, a startup city can update corporate law for civic purposes.

Cooperative Corporate Government

Many questions remain about how best to implement cooperative ownership of startup cities. Some answers will come from applying the Oliver Porter-style plug-and-play management technique even to questions of city governance. The Model Business Corporation Act (2010), which has been adopted by 24 U.S. states, offers a particularly good source of basic rules for governance of a cooperative corporate city. Other answers will have to wait for further study and actual practice.

Cities ultimately fail because their residents do not care enough to save them. And when do residents stop caring? When a city takes them for granted, exacting painful sacrifices without supplying basic services. Perhaps these problems arise because cities need owners.  

The examples set by private workplaces can help cities find new solutions to old problems. Worker-owned co-ops, in particular, demonstrate how equity sharing can promote the common good. What would happen if a startup city let its residents own voting shares of their city?  Theory suggests that practice should try.

Disclosure:  These are the personal views of Tom W. Bell and not those of any employer, client, or advisee.


  • Professor Tom W. Bell is a professor at Chapman University School of Law.