The capital conundrum for co-operatives

"The Capital Conundrum for Co-operatives", a report released by the Alliance’s Blue Ribbon Commission explores ideas and options available to co-operatives that need suitable, long-term capital. The paper examines the relationship between co-operative capital and the Co-operative Principles and it delves deeply into the questions all co-operatives ask of themselves and their members when seeking and/or using capital for growth and expansion. It also sheds light on the challenges and opportunities arising from changing regulations.

Co-operatives face challenges in terms of access to capital; for example, the withdrawable nature of co-operative membership shares and the purported economic unattractiveness of co-operatives relative to other forms of enterprise.

"co-operative returns to members are to be seen as an adjustment of the transaction price (of purchase, sale, or remuneration) and not as dividends."
"the important difference is not what instrument is used, but rather who is raising the capital, who is controlling it, what are the expectations of those controlling it, and – most fundamentally – is it “philosophical capital” in support of the co-operative form of enterprise or is it capital invested purely to maximize financial gain."

The authors of the report identify three approaches, which require further debate and exchange. One option maintains that the Co-operative Principles provide the framework via which co-operatives ought to seek and engage with capital, even beyond member capital. Another suggests adapting tactically and pragmatically accepting the realities of a market-oriented framework while preserving the current Co-operative Principles. A third school of thought suggests co-operatives change the dominant market-oriented paradigm while also adapting or transforming the Co-operative Principles to reflect the changing context.

The authors are specialized in some specific type of cooperative and/or sector and they discusss them with the topic of this paper: capital building. There are some very interesting cases, e.g.:

  • Capital Building in Industrial and Service Co-operatives - workercooperatives

" Co-operative SMEs in countries where indivisible reserves are mandatory have shown a substantially higher survival rate than the average for SMEs"

  • Co-operative Capital of a Large Financial Co-operative: The Capitalization Evolution of Rabobank

" the largest part of the capital of these co-operative banks in Europe currently consists of reserves to which no one has an entitlement. Members of a co-operative bank have no ownership claim on the reserves of a bank and therefore do not have any incentive to dispose of their bank for personal financial gain"
"A solution was found in the introduction of a hybrid capital instrument: the member certificate. This financial title is basically a subordinated bond without voting rights and with an undefined maturity and a yield dependent on the realization of sufficient profits for capital formation"

"In order to prevent external capital from becoming incompatible with co-operative philosophy and the co-operative model, it is paramount that the entitlement of external investors does not include voting power and that their reward is unrelated to the level of profitability of the bank. Long-term continuation of providing financial services should be in the interest of all stakeholders. For this reason, there should be a sufficient level of profit, but never a drive for maximizing profits."

  • Fonterra Co-operative Case Study - capital in the biggest dairycooperative of the world, created a Fund, whereby shareholders (farmers) are able to sell the “economic rights” of their shares to these public investors through the Fund, subject to limits imposed by Fonterra. If those shares back the milk production of the farmer, the transaction does not reduce his or her voting rights. The farmer continues to exercise voting rights in respect of that production by the recording of a “voucher” in Fonterra’s register.

"... the above factors, together with a share standard that strictly linked shares held to production, resulted in farmers being required to surrender shares due to lower production and for Fonterra to purchase them during unfavourable conditions associated with the Global Financial Crisis. The result was a significant net payment by the co-operative to its shareholders. The co-operative was faced with undue redemption risk that was restricting its ability to capture growth opportunities in the market. The primary objective was to remove the obligation of the co-operative to issue and redeem its shares, which had posed significant balance sheet risk. Importantly, the objective was not to raise capital."


ICA (2016)

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