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Are Cooperative Businesses Outdated? Farmland Industries, one of the largest Does this mean that cooperative businesses are outdated? No, these changes are not confined to cooperatives. The failures of Enron and WorldCom have raised similar questions about the corporations and corporate governance. Poor management, difficulties in accessing equity capital and risk associated with high level of debt can cause problems with all types of business organizations. To fully address why co-ops are not outdated, let’s gain a better understanding of cooperatives asking three more questions: Why is the cooperative business model used? Co-ops provide a wide range of products and services. Co-ops range from your traditional electric co-op to the Cenex convenience store to your local grain elevator. Financial co-ops include credit unions and Farm Credit Services—to name a few. Co-ops extend to value-added processing, marketing, hardware stores, livestock feed supply, housing, daycare and even grocery stores. Co-ops are often started to provide needed products and/or services not currently available, to increase competition within a specific market, and to take advantage of a business opportunity. When starting a business requires greater size efficiencies and capital than one person can provide, banding together to form a co-op with other like-minded people can be the answer. A cooperative works best when there are people with a strong common interest, who want to maintain a broad base of control, and the benefits of owning and controlling the business extend beyond receiving company profits and increasing share values. What are the advantages of a cooperative business? Co-ops’ organization and function are based on three core principles that focus on the owners—as users—rather than pure investors. Those principles are user benefit, user control and user ownership. User benefit: Most business structures transfer the benefits, such as profits, to their owners based upon percentage of ownership. However, a cooperative transfers benefits to owner/members based upon the percentage of use—or patronage. For example, if you purchased 10 percent of your co-op’s products or services, you would receive 10 percent of the benefit—regardless of your percentage of ownership. And the benefits of co-op ownership are not limited to the co-op’s profits. Benefits may include paying a lower and/or more stable price for the products and services such as electricity, fuel or interest rates. Or you may receive a higher and/or more stable price for the products you sold to the co-cop such as lamb, corn or sugarbeets. A co-op’s benefits focus on the users, and are distributed according to usage, not ownership. User control: The control, or governance, of a cooperative remains with the owner/user who has primary responsibility for the long-term success and growth of the cooperative business. The members elect a board of directors from within their membership and empower them to oversee the running of the business and represent their interests in the operation of the business. The members also vote on major changes to the business function, structure and governance. Typically, cooperatives use a one-member, one-vote policy in contrast to corporations, which use a one-share, one-vote policy. Generally, co-ops, unlike corporation, do not allow proxy voting. User ownership in a cooperative is achieved by purchasing one share of voting stock and doing business with the cooperative. The cost of the voting stock can be as little as one dollar or as large as a few hundred dollars. Owner equity of most open traditional cooperatives is accomplished through withholding a portion of the profit earned by the member/user as retained patronage. The “new generation cooperatives” also require members to purchase equity shares that are tied to product delivery requirements. Some of the profits are returned to members in cash with the remaining amount being retained in an individual equity account for each member, thus increasing their equity in the cooperative. Co-ops are unique in that this retained equity is eventually returned. How can cooperative businesses remain competitive? Cooperative members have a conflict of interest. A member wants the greatest individual benefit as soon as possible (lower purchase prices, higher sales prices, and larger cash dividends) and also wants the cooperative to be a profitable, well-financed and growing business. For a cooperative to meet these conflicting wants, the cooperative members recognize this conflict, stay involved and focus on achieving both goals. First, they need to elect the most qualified and responsible people to the board of directors, maintain a basic understanding of the competitive forces influencing their cooperative and communicate to the cooperative’s management and board of directors. Second, the cooperative must continually strive to meet the economic needs of its members while maintaining a profitable business. This is no small task as the cooperative becomes larger, its membership becomes more diverse and their economic needs change. Third, the cooperative and its members must constantly work to maintain an acceptable balance between equity owned by member/users and the level of use by the member. As the members and their level of business with the cooperative changes over time, the distribution of ownership in the cooperative also needs to change. The cooperative must transfer the ownership of the business from retiring members to new members. Therefore, patronage dividends retained from current members must both finance business expansion and “buy out” existing equity of retiring members. The challenge for cooperative leadership is to ensure that the people who are using the cooperative are also the ones who are controlling the cooperative and providing the equity capital needed to operate the cooperative. Cooperatives face unique challenges in management and obtaining/maintaining owner equity. However, cooperatives also provide some unique benefits for the owner/user. While it is true that some cooperatives have failed and others are experiencing difficulty, there are many more examples of success than failure. Cooperatives continue to be formed to provide a unique package of social and economic benefits to its owner/user. Cooperatives are, and will continue to be, a viable business structure as long as the cooperatives meet the needs of their owners. The |