One of the biggest challenges for co-operatives and mutuals is gaining access to capital for growth, while ensuring control by members.
A session at the International Summit of Cooperatives explored this challenge, following on from the publication of The Capital Conundrum for Co-operatives by the International Co-operative Alliance last year, which looked at the problems co-operatives face when seeking capital.
“The raising of external capital (e.g., issuing debt) elicits concerns from co-operatives on the preservation of democratic control,” said the report’s forward from Tan Suee Chieh and Chuin Ting Weber.
“This is sometimes translated into national legislation requiring membership approval for incurrence of external debt, but not for issuance of new shares. In contrast, most company shareholders are happy to allow management to use leverage insofar as it increases return to equity without adversely impacting the credit or regulatory standing of the company, but would definitely be concerned about issuance of new shares.”
To further examine this issue, the Alliance established the Blue Ribbon Initiative which addresses issues and solutions for capitalisation and financing.
During the debate, moderator Arnold Kuijpers, vice president of regulatory affairs at Rabobank, said co-operatives may want to seek to protect their “essence”, but encouraged co-ops to see what can be achieved through added capital. He said the capitalist model is a “little bit obsolete”, but asked whether co-operatives should be more lenient on their principles.
He asked the panel of speakers one question, which was “which way would you feel comfortable in capitalising your co-op” on the following scale of one to five.
1. Retaining profits instead of distribution to members
2. Capital from other co-operatives, respecting existing governance
3. Raising capital with third parties, without voting rights
4. Raising capital with third parties with minority voting rights
5. Raising capital with third parties, no limitation to voting rights
The panel responded:
Celso Ramos Régis, President, Confebras, Brazil
Item five does not fit within the co-op structure because it would lose control of the governance. Because we follow the principles of one member one vote, we would have difficulty. Every co-op needs capital. Members need to being more capital into their co-op. We have to pursue alternatives, through not only the members, but other ways to guarantee our co-ops to be longer lasting. We need to pursue innovation and modern practices of governance and sustainability.
Ed Mayo, Secretary General, Co-operatives UK, United Kingdom
My caution is about power. The fundamental co-op principles are about ownership, benefit and control. Therefore we do not want to lose that. Where you are in terms of those options depends on whether you dilute or cede member control to a very focused and disciplined need for capital. I would also go through to four with caveats. There is a risk that if you bring in minority investors, the return on capital dominates. We have to go back to the idea of member control. We have seen coops that have brought in member investors with caveats about retaining member control.
George Hofheimer, Chief Knowledge Officer, Filene Research Institute, United States
The last bullet point, five, draws the line. Idealistically I would go to number two, but I could go to four without feeling uncomfortable. We’ve done research on capitalisation on credit unions around the world. Alternative forms of capital are already being used in a wide variety of co-op sectors. We’ve seen in a lot of sectors low activity of new coops being formed, so we may not be the ultimate model in today’s economy. We need to think more innovatively and progressively. Also the regulatory environment helps tremendously.
James Truter, Founder and Chief Executive Officer, True Wealth Harvest (TWH) and TWHBiz Network, South Africa
I’m head of the audit committee of a financial co-operative, perhaps it’s my youthful bias, but we should never compromise on the DNA of co-operatives. I would draw the line at number 3, raising capital with third parties. Co-operatives have been founded on the principle of self-help and reliance and we should not compromise this.
Kathy Bardswick, Chair of the Blue Ribbon Commission on Co-operative Capital, President and Chief Executive Officer, The Co-operators Group, Canada
I would default to four, but then I start asking myself, what scenarios would work in five. We talk about third parties and our thoughts immediately jump to the investment structure. But I would like to challenge our thinking on number five. We have to fundamentally rethink how we view capital ourselves. We have talked about capital being a servant, maybe it’s time to say we’ve got to find a way of partnering differently.
Peter Hunt, Managing Partner, Mutuo, United Kingdom
I would draw the line at number four. I have been involved in new types of quasi-equity instruments, which is a reasonable approach in a modern context. The original co-operative structures were designed in a world that is different today. We have to look at how the principles work in a modern environment. If we look at some of the complex financial services, it would be hard for them to work within all of the co-operative principles. When a co-operative bank gets a loan, they’ve got a new stakeholder. So, we can try to develop new ways of having investment without ceding control.
- For more of our coverage of the International Summit of Co-operatives, visit thenews.coop/summit.
