Cooperatives have always been referred to as “member-owned” organizations, yet where they have depended too heavily on outsiders for financial support that sense of ownership has usually been lost. This is largely because the financial stake or contribution of the membership of the cooperative is small relative to the non-member stake. In spite of the one-member, one-vote principle, non-members who are the major suppliers of capital tend to determine the main priorities of the cooperative business. Cooperative member participation drops and the cooperative promise is weakened.
How can this problem be solved? The best approach, from a financial and economic perspective, is to develop more effective ways of mobilizing member capital. This should help to create a genuine sense of ownership while at the same time enabling the cooperative to perform better as a commercial entity. Better business performance is essential because markets are increasingly competitive and grants and other forms of assistance are diminishing.
Member capital is the lifeblood of true cooperatives
In developed countries, cooperatives are innovating in order to obtain more capital from their members. Some may regard these techniques as departures from classic cooperative principles, but members and leaders of the cooperatives involved see them as essential ways of continuing in business in a manner consistent with the cooperative identity. The fundamental challenge facing cooperatives today in developing and transition economies is to restructure members’ incentives in ways that work constructively, in a commercial sense, and that harmonize members’ roles as users of the cooperative’s services with their role as investors providing capital.
This challenge has two aspects: the tactical and the strategic. The tactical is largely based on short-term considerations, on members’ roles as users, primarily through encouraging more patronage and improving the efficiency of operations. The strategic is based on longer-term member perspectives and largely focuses on members’ roles as investors, and on modifications or revisions of classic cooperative principles. These innovations can be described as alterations to ownership rights in ways that keep members in control and that permit them to operate effectively as both users and investors.
Changing ownership rights to balance member use and member investment
In addition to making traditional cooperatives stronger and more efficient, new forms of cooperation can also provide greater returns to members and may be essential for survival in certain types of markets. They can also create incentives for members - incentives for investment and patronage. These new forms are based on different types of ownership rights.
Changing member ownership rights and their rights of control, can lead to improvements in agricultural cooperative performance in several ways. These changes can be made at two levels:
At the member level, change the properties of cooperative shares by making them transferable, appreciable and more easily redeemable. Each of these possibilities and combinations of them solve problems identified by economists based on the New Institutional Economics.
Three problems are addressed here: the Horizon Problem, which concerns trade-offs between efforts to obtain more in the present, relative to efforts to obtain more in the future; the Portfolio Problem, which arises when ownership rights and other forms of investment in cooperatives cannot be structured to coincide with the objectives of members seeking returns on their overall wealth or capital, within and outside the cooperative; and the Free Rider Problem, which arises when some classes of members, such as new members, receive benefits that are disproportionate to those received by other classes of members, such as long-standing members.
These three problems are also social problems. To solve them or to diminish the damage they cause requires incentives that will encourage members to engage in new ways of participating in their cooperative. For this, benefits must be larger than costs. They also have to be attractive overall relative to benefits achievable from using and investing in non-cooperative forms of enterprise.
At the level of society, allow cooperatives to control or to participate in non-cooperative enterprises. This is achieved by investment in different types of entities in order to secure strategic alliances, to achieve greater flexibility and responsiveness in governance, and to increase the scale of operations.
The main point stressed throughout this manual is that, if agricultural service cooperatives in developing and transitional regions are to successfully compete in today’s more liberalized and globalized markets, they must rethink the ways they mobilize capital from their members. They must begin to give more importance to the role of members as investors in, as well as users of, the cooperative’s services. It has also been mentioned that many cooperatives, especially in developed regions, have devised a variety of ways, compatible with cooperative principles, to increase member capital contributions, and have done so with success.
The principal aim of these reforms has been to raise members’ financial stakes (relative to other sources of capital) in the cooperative business, based on the assumption that increases in personally allocated member equity will increase the sense of member ownership in the group enterprise, make management more accountable to serving its members, strengthen member commitment and loyalty, and thus provide a true and sustainable basis for the cooperative operation.
1 Traditional capitalization models: they are or may be used by all cooperatives
|
1 |
Bank financing |
Used by and applicable to most coops. |
|
2 |
Member shares (par value shares) |
Used by and applicable to most coops. |
|
3 |
Unallocated equity or reserves |
Used by and applicable to most coops. |
|
4 |
Specialist lenders |
No lenders specifically target coops, but many government programmes offer financing to coops. |
|
5 |
Subordinated debt |
Used by some coops, primarily larger ones seeking large amounts of capital. |
2 Patronage based models: these align members investment with their patronage
|
6 |
Base capital plans |
Many variations in use. Based on historic patronage and investment activities, hence not suitable for start-ups. |
|
7 |
Capacity notes[16] |
Applicable to short-term financing, beneficial to all sizes of coops and throughout business cycles. |
|
8 |
Compulsory share contributions |
Many variations in use. Beneficial to all sizes of coops and throughout business cycles. |
|
9 |
Retained patronage refunds |
Used by most coops. Beneficial to all sizes of coops and throughout the business cycle, particularly start-ups and rapidly growing coops. |
|
10 |
Issue of bonus shares from profits |
Beneficial to all sizes of coops and throughout business cycles. Not usually an important capitalization tool because amounts are small, but as a bonus or gesture to current member-investors. |
|
11 |
Members’ retirement funds |
Not a significant source of capital, but an asset and income-planning tool or savings vehicle for members. |
|
12 |
Participation units[17] |
Used by New Generation Coops and particularly useful for start-ups and rapidly growing coops raising large sums of capital. |
|
13 |
Per unit capital retains |
Many variations in use. Works best when members are required to sell exclusively through the coop, but useful for all sizes of coops throughout the business cycle. |
|
14 |
Revolving equity plans or revolving capital retains |
Best for short- and medium-term capitalization, useful for all sizes of coops throughout the business cycle. |
|
15 |
Revolving funds |
Best for short- and medium-term capitalization, useful for all sizes of coops throughout the business cycle. Not useful for raising large amounts of capital. |
3 Direct capitalization: Members and non-members can make investments in the cooperative that are not linked to patronage
|
16 |
Coop capitalization units[18] |
Longer term capitalization tool best for large, rapidly growing coops with good reputations. Costly to implement, but can raise large sums of capital. |
|
17 |
Direct investment |
Longer-term capitalization tool, best for rapidly growing start-up coops and New Generation coops. |
|
18 |
Exempt market[19] |
Longer-term capitalization tool, complex and costly to administer. Best for large coops. |
|
19 |
Fixed term bonds or debentures |
Mid- to long-term financing tool best suited to large coops. |
|
20 |
Investment preferred shares |
Costly to administer, not suited for small or start-up coops. Departs from traditional coop principles. |
|
21 |
Redeemable preferred shares |
Costly to administer, not suited for small or start-up coops. Departs from traditional coop principles. |
4 Other forms
|
22 |
Community bonds[20] |
Applicable to small and start-up coops seeking relatively small amounts of funding over a long time period. |
|
23 |
Employee share schemes |
Not often used, but useful for all sizes of coops throughout the business cycle. |
|
24 |
Guarantees from members |
Useful for small and mid-sized coops, difficult to administer if membership is large. |
|
25 |
N on-member earnings |
Useful for coops of all sizes throughout the business cycle. Departs from coop principles unless limited. |
|
26 |
Percent of all equities[21] |
Not suited to start-ups or rapidly growing coops because a portion of retained earnings must be paid annually. |
Chaddad, F. & Cook, M. 2002. An ownership rights typology of cooperative models. Department of Agricultural Economics Working Paper No. AEWP 2002-06, May 2002. College of Agriculture, Food and Natural Resources, University of Missouri, 200 Mumford Hall, Columbia MO 65211, USA. (also available at: http://www.ssu.missouri.edu/agecon)
Chaddad, F. & Cook, M. 2003. The emergence of non-traditional structures: public and private policy issues. Paper prepared for NCR-194 Research on Cooperatives Annual Meeting, Kansas City, Missouri, October 29, 2003. (also available at http://www.agecon.ksu.edu/accc/ncr194/Events/2003meeting/ChaddadandCook.pdf
Cook, M. no date. Cooperative capital formation in North America and Europe. (draft) (see [email protected])
Cook, M. & Iliopoulos, C. 1999. Beginning to inform the theory of the cooperative firm: emergence of the New Generation Cooperative. The Finnish Journal of Business Economics, Volume 4, Vammalla, Finland. (also available at http://www.ssu.missouri.edu/faculty/mcook/cv/finnish.pdf
Ernst & Young. 2002. Canadian agricultural coops capitalization: issues and challenges, strategies for the future. A study prepared for the Canadian Cooperative Association, Ottawa, Canada. (also available at http://www.coopscanada.coop/pdf/GAP/CARD/FinalReportNov29.pdf
FAO. 1997. Mobilizing capital in agricultural service cooperatives, by Rouse, J.G. & Von Pischke, J.D. FAO Rome, Italy. (also available at http://www.fao.org/sd/2003/IN0504_en.htm)
FAO. 1999. Capital formation in Kenyan farmer-owned cooperatives: a case study, by Jamsen, Pekka, Ikaheimo, Seppo and Malinen, Pasi. FAO People’s Participation Series, No. 12. Rome, Italy.
FAO & ICA. 1999. Report on Sub-regional workshop on cooperative capital formation and management training in Eastern Africa. Moshi, Tanzania, 18-23 January, 1999.
Greenwood, C. 1996. Australian dairy cooperatives: planning for the future. Prepared for the Dairy Research and Development Corporation, Glen Iris, Australia. Substitution Pty. Ltd.
Greenwood, C. 1999. Capital-raising issues and options for Australian dairy cooperatives. Monash University, Victoria, Australia. (Masters thesis)
Von Pischke, J.D. 1995. Capital formation in agricultural cooperatives in developing countries: research issues, findings and policy implications for cooperative and donors. Paper prepared for International Technical Meeting on Capital Formation in Agricultural Cooperatives, Committee for the Promotion and Advancement of Cooperatives (COPAC), Rome, 8-10 November 1995. (also available at http://www.fao.org/sd/rodirect/Roan0003.htm
|
[15] The following list is
taken from Ernst and Young, 2002, pp. 9-10. “No perfect capitalization
model exists, as each coop is unique in how it structures itself.... Coops
generally use more than one type of capitalization tool and often change their
capitalization method depending on the needs (sic) and future
direction....” [16] Capacity notes are loans made to the coop by members in exchange for access to cooperative processing facilities in peak periods. Funds are used to increase processing capacity and may encourage more use of facilities in non-peak periods. [17] Participation units provide rights, or rights and obligations, based on members’ use of cooperative processing facilities. [18] Cooperative capitalization units exist in many forms but are basically an interest in the non-share capital of a cooperative. [19] Exempt market refers to creation of a market for a cooperative’s shares that are transferable among members or possibly non-members. Trading is conducted by a stock brokerage firm or bank. [20] Community bonds are bought by members in the community or area in which a cooperative is active. [21] Percent of all equities refers to a common arrangement in which each year the board of the cooperative determines a percentage of all equities allocated to members that are to be redeemed and returned to members, regardless of the year in which they were issued. |
