The Co-operative Formation Decision

The following table briefly summarises the differences between co-operative, investor and public businesses:

A co-operative is owned by the users of the co-operative who benefit from their membership.

This difference is expressed in the statement of co-operative values and principles adopted by the International Co-operative Alliance. The values and principles of co-operation are integral to and essential for co-operative practice. The potential members need to understand and accept the principles of co-operation - voluntary and open membership, co-operative education training and information, democratic member control, member economic participation, autonomy and independence, co-operation among co-operatives and concern for community. Click here for a copy.

This is where the co-operative principles are very important. The philosophy and practice of member ownership and control is fundamental to a decision to form a co-operative and the group needs to be convinced about the desirability and practicality of the co-operative form of business. Member ownership and control is fundamentally different from investor ownership and control.

In considering the formation of a co-operative, therefore, it is necessary to study co-operative philosophy and principles – what they mean in practice and whether or not you agree with them. The principles are included in Victoria’s Co-operatives Act 1996.They are not just rhetoric. They are designed to guide the practice of co-operatives. The co-operative principles should be examined and discussed for they are practical guides.There must be agreement that there is a co-operative difference and that there is a co-operative reason for forming a co-operative that makes co-operative different from private and public enterprises.

Individuals and organisations become members of co-operatives to secure services that are not available individually e.g. lower energy costs. Investors become shareholders of a company to secure a return on an investment - not to use the business service or product.

The decision to form a co-operative must be based on a group of individuals and /or organisationsand/or businesses in a community who have a common need and a commitment to work together on a mutual basis to meet their needs.

The purpose difference is a logical outcome of the philosophical difference. It is important, therefore, to discuss the purpose difference. A co-operative exists to serve its members through mutual action. The primary purpose of an investor owned company is to generate profits for its investors.

Co-operatives have benefits and limitations and these need to be clearly understood and accepted. Co-operatives are influenced by the same economic forces, legislative requirements and laws that influence other businesses.

There is a need to distinguish between and separate common business issues and specific to co-operatives business issues and how they reflect and reinforce the purpose difference.People problems can influence all forms of business. In a co-operative, people problems can be aggravated by the users being the owners. Members may use the co-operative but not understand and accept the obligations of ownership. Members must have a sense of ownership beyond their actual membership. A manager may be committed to maximizing profitability at the expense of service to members and genuine accountability to the board.

In recent years, there has been increasing concern about the corporate governance of investor owned companies and the need for independent directors who do not have financial dealings with the business. For a co-operative, however, all or a majority of directors should have financial dealings with the co-operative as user-members.

It is common in investor owned companies for the board to determine the remuneration of CEO's and managers and argue that only the board is qualified to make this determination. In a co-operative, however, the members decide who decides and how they decide the remuneration of CEO's and managers.

While co-operatives are service orientated, they can also have the future dilemma of choosing between building the financial strength of the co-operative or increasing returns to its members.

A co-operative is also democratic i.e. there is one vote per member irrespective of their use of and shares held in the co-operative. Any dividends and rebates paid to members are, however, based on use.

In theory, large and small users belong to co-operatives because of a common commitment to mutual action to meet a mutual need through a democratic business. But, a co-operative can develop structural tensions if there are large users who either initially or over a period of time develop a view that their control of the co-operative should be in direct proportion to their use.

Co-operatives are democratic. This does not mean that co-operatives are ineffective and inefficient. Important decisions may be discussed with members and this requires time and resources and may delay decisions but this is not necessarily an impediment to efficient and effective business decision-making. It does mean, however, that members have to be consulted and involved. In contrast, in an investor-owned company votes depend on the number of shares owned and it is only a minority that has to be consulted and involved - if at all.

A co-operative’s democracy depends on the active involvement of its members. This may be difficult and members may not be fully committed to attending annual meetings, providing capital and using the co-operative. But, then, the board and/or the manager may not themselves be committed to co-operative education - educating members about the obligations of co-operative membership. A lack of commitment, however, could encourage large users to question co-operative democracy and, therefore, the continuing relevance of the co-operative business structure.

Having decided to become a member of the proposed co-operative, the individuals and organisations who are involved need to establish whether or not as potential members of the co-operative they have the necessary understanding and commitment to work co-operatively together – and what this means.

All co-operatives must develop a criteria for active membership. To be a member of a co-operative it is necessary to be an active user of the co-operative's services and products. There is no value in having any members who are not active users. Inactive members undermine the co-operative and members who become inactive should be removed from membership.

An active membership criteria is required under the Co-operatives Act but it is also a fundamental principle of co-operative practice. It is important for members of the group to decide whether or not they are committed to use the co-operative’s services and be active in the affairs of the co-operative by attending meetings, voting on issues, asking questions, voting for directors and standing as directors.

In contrast, a company is capital driven and, therefore, the shareholders are primarily interested in a return on their investment – rather than democratic ownership and control of the company. Investors are not required to use the products and services of companies in which they invest - to be active shareholders. If the primary concern of individuals and organisations is a return on investment, the formation of a co-operative is an inappropriate response. An investor owned company is created to generate wealth for its founders and profits fror its shareholders. Of course, members of a co-operative are concerned to protect the value of their shareholding but their primary interest is service from the co-operative and that the co-operative is efficient and effective.

The Education Difference

The initial basis for testing the ability of potential members to be active members is the willingness of individuals and organisations to work within a group and to study and assess the proposal for the development of a co-operative - including co-operative values and principles - during the co-operative formation decision process.

What is the scope and structure of the co-operative movement in Australia and overseas?

What is the history of co-operation in Australia and what have been the milestones?What are the co-operative values and principles?How are these values and principles applied in practice by a co-operative?What is the distinct role of a board in a co-operative?

What is the distinct role of managers in a co-operative?

If the potential members are willing to work together to educate themselves about the co-operative option and how co-operative values and principles will be practiced in their co-operative, then, there is a basis to form a co-operative. If this willingness is absent, then, the co-operative should not be formed.

These characteristics and differences are important. It is critical that there is a realistic discussion of what co-operatives can and cannot do.

Having made the formation decision, individuals and organisations can now initiate the formation process.

The CFV's The Co-op Start-Up Manual should also be consulted and purchased. The cost is $50 for a print copy including postage and $20 for a printable electronic copy. You can download:

	Co-operative Business	Investor Business	Public Business
Purpose	Service-driven	Profit-driven	Mix of service and profit-driven
Ownership	Ownership vested in members	Ownership vested in capital	Ownership vested in State and/or capital
Owners	Member users	Investor owners of capital The owners are not members.	Investor and/or State owners of capital The owners are not members.
Voting	One vote per member irrespective of number of shares and usage	Number of votes depends on number of shares owned.	Number of votes depends on number of shares owned.
Management	Management responsible to members	Management responsible to capital	Management responsible to investor and/or State capital
Shareholding	Choice of shareholding or non-shareholding. If shareholding, constant value and limit on proportion held.	Changing value of shares and no limits on shares owned.	Changing value of shares and any limits on shares owned dependent on legislative requirements.