More on Mission and Capital
Readers have responded positively to recent editorials on social capital. In this column I will review our co-op mission, the treatment of capital, and other co-op practices.
Social capital is but one manifestation of the cooperative mission. I consider that mission, fundamentally, to be expanding the democratic ownership and control of capital. Capital is the measure of ownership. More specifically, what we are considering here is internal or equity capital rather than external or debt capital; these are the two sources of financing for your assets.
Although all cooperative capital is democratically controlled, social capital is represented on the balance sheet as the portion of capital that is not allocated to member accounts but is owned by all, and as such is an especially important piece. Such reserves represent a critical commitment to future co-op members and a recognition that the cooperative has capital needs that transcend present members' needs for immediate return of co-op earnings.
Failure to address cooperative capital needs often takes the form of member discounts being set too high. Overdiscounting makes achieving a positive net margin on operations dependent on one or both of (a) non-member sales and (b) supplementing sales with member fees - fees which are not treated as member owner equity but rather as an expense to the member and taxable income to the co-op. Ideally, the essential function of services to members will meet its own revenue needs as well as contribute to the capital needs of the business.
A very different kind of immediate member return, yet likewise detrimental to the health of the co-op, was the subject ofa recent report in The Atlantic Co-operator. A common member recruitment strategy among several Nova Scotia co-ops has been to promise that the co-op would repurchase shares at par value whenever a member chose to resign. Member application forms, promotional materials, and dialogues with prospective members have included this promise. At the co-op where the ongoing return of member shares at par value was first questioned, there was negative member equity and no reserves. But under co-op statutes, repurchase of shares is limited to book value or par value, whichever is less. The board's desire for continuing member recruitment had led them to overlook their responsibility to protect the co-op's assets. A government inspector warned 10 different co-ops that repurchasing shares cannot be permitted if such a withdrawal would impair the co-op's financial stability or its ability to satisfy creditors. The essential point: "share capital investment by co-op members is understood to be risk capital." Board members, including the article's author, "are now fully aware that their responsibility to protect the co-op, and the personal liability they might incur, reserves for them the ultimate decision on share capital payout, even if it goes against the wishes of the membership or management."
The report ended on a positive note:
"Although this new share capital policy is not yet fully understood by the members, it is already apparent that share capital refunds are not the first priority for co-op members," since member rolls are increasing for the first time in several years. "Evidently, the members ... do not want to consider resigning. They just want their co-op to meet their needs."
The Canadian example reminds us that co-ops cannot avoid the pairing of owner benefits and risks. But co-ops are distinguished by the other ways they handle capital: allocating earnings according to patronage rather than investment level, limiting interest paid on share capital, and upholding the one member/one vote rule. Yet a member-driven outlook sometimes undervalues reinvestment. Earnings are an essential source of increased cooperative capital, and many co-ops that issue patronage rebates prudently retain most of it by allocation to member accounts. In addition as mentioned, an important use of earnings is reinvestment in unallocated form. This opportunity to build social capital or reserves often gets lost in the rush for immediate member benefits.
Which practices will enable our cooperative businesses to thrive and flower, to fulfill our potential and purpose? And what is that purpose - beyond controlling capital, but also beyond each store's particular community, product mix, location, and age? A few features seem essential to our ongoing evolutionary success. I offer here a "generic" version of consumer food cooperatives' mission:
- Govern and operate businesses according to the cooperative principles.
- Operate profitably.
- Provide quality services and products.
- Sell to increasing numbers of the general public.
- Maintain or aim at a high level of member sales.
- Maintain or aim at a high level of member ownership.
These points reflect a belief that our coops must be committed to continuing growth as a means of securing our market position and bringing more people to cooperative services and ownership.
The list may seem unexceptionable, but each point merits further consideration. Few co-ops consistently meet all these aims; improved results and education of staff and members are continuing challenges. I have mentioned a few examples of self-limiting practices. Especially common, as I look at food co-ops today, is heavy reliance on non-member sales. In such situations, if the trend is anything other than growth in members' portion of sales and growth in member capital, then something is wrong in the marketing of membership. Something may also be amiss in the handling of member earnings and co-op capital.
On the other hand, there are examples of food cooperatives carrying out all of the above points in our mission. Many of these co-ops undertook years of difficult work to design and win support for practices around membership earnings and equity which are rational and will sustain the cooperative and its mission into the future.