Cooperative

What Is a Cooperative?

A cooperative, often shortened to "co-op," is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.³⁷ This organizational structure falls under the broader financial category of Organizational Structures, differing significantly from traditional corporations that prioritize shareholder profits. In a cooperative, members are typically the users, producers, or employees of the business, and they share in both the control and the financial benefits. The core principles guiding cooperatives emphasize self-help, self-responsibility, democracy, equality, equity, and solidarity.³⁶

History and Origin

The roots of the modern cooperative movement can be traced back to the Industrial Revolution in the 19th century, a period marked by harsh working conditions and economic disparity. Robert Owen, a Welsh social reformer, is widely considered a foundational figure in the cooperative movement, advocating for improved worker environments and access to education.³⁵ He implemented these ideas in his New Lanark cotton mills in Scotland, even establishing one of the earliest cooperative stores there.

While earlier forms of cooperation existed, such as the Fenwick Weavers' Society in Scotland in 1761,³³, ³⁴ the generally accepted birthplace of the modern cooperative movement is Rochdale, England.³² In 1844, a group of 28 cotton workers, known as the Rochdale Equitable Pioneers Society, established a cooperative store at 31 Toad Lane in Rochdale.³⁰, ³¹ Their aim was to provide affordable alternatives to poor-quality and adulterated food, using any surplus to benefit the community.²⁸, ²⁹ The principles they developed, known as the Rochdale Principles, became the prototype for modern cooperative societies worldwide.²⁷ The Rochdale Pioneers Museum is now housed in the original building where the society began trading. The International Co-operative Alliance (ICA) was founded in London in 1895, formalizing and promoting cooperative principles on a global scale.²⁵, ²⁶

Key Takeaways

• A cooperative is a member-owned and democratically-controlled enterprise established to meet common needs.
• Cooperative principles emphasize self-help, democracy, and economic participation.
• Surpluses generated by a cooperative are typically reinvested in the business, used to provide services, or distributed to members based on their patronage, not solely on capital contributions.
• The modern cooperative movement originated in Rochdale, England, in 1844 with the Rochdale Equitable Pioneers Society.
• Cooperatives exist across various sectors, including agriculture, finance (credit unions), retail, and housing.

Interpreting the Cooperative

Interpreting a cooperative involves understanding its dual nature: it is both a business enterprise and a social organization. Unlike a traditional corporation focused on maximizing Shareholder Value, a cooperative prioritizes the needs of its members. The success of a cooperative is not solely measured by its financial profits, but also by how effectively it serves its members and contributes to the community.²⁴

Key aspects to consider when interpreting a cooperative include its adherence to the International Co-operative Alliance (ICA) principles, which guide its operations and governance.²³ These principles include Voluntary and Open Membership, Democratic Member Control (typically "one member, one vote"), and Member Economic Participation.²² Understanding how a cooperative allocates its surpluses, whether through reinvestment, improved services, or patronage refunds, is also crucial.²¹ This contrasts with Dividend payouts in conventional companies.

Hypothetical Example

Imagine a group of independent farmers in a rural area who struggle to get fair prices for their produce and access to affordable supplies. They decide to form an agricultural cooperative. Each farmer contributes a small amount of capital to become a member and has one vote, regardless of the size of their farm. The cooperative collectively purchases seeds, fertilizer, and equipment at lower bulk prices, reducing Operating Costs for individual farmers.

The cooperative also pools their produce for sale, gaining greater bargaining power with distributors and potentially securing better prices than any single farmer could achieve. Any profits generated by the cooperative are not paid out as traditional dividends to investors. Instead, a portion might be reinvested to upgrade cooperative facilities, another portion could be used to offer new services like technical assistance or educational workshops, and the remaining surplus could be distributed to members as a Patronage Refund, proportional to the amount of produce each farmer sold through the cooperative or the supplies they purchased. This directly benefits the members by reducing their costs or increasing their income.

Practical Applications

Cooperatives are diverse and found in numerous sectors of the economy, providing a wide range of goods and services. In agriculture, farmer cooperatives help members market their produce, purchase supplies, and process goods, often leading to better Market Access and pricing.²⁰

Financial cooperatives, such as Credit Unions, provide banking services to their members, often with lower fees and better interest rates than commercial banks. Utility cooperatives bring essential services like electricity and telecommunications to rural areas where for-profit companies might find it unprofitable to operate.¹⁹ There are also housing cooperatives, consumer cooperatives (like grocery co-ops), and worker cooperatives, where employees own and control the business.¹⁸

The U.S. Department of Agriculture (USDA) Rural Development, through its Rural Business-Cooperative Service, provides financial assistance and technical support to cooperatives in rural communities, recognizing their role in economic development.¹⁷ For instance, the USDA offers programs like the Rural Energy for America Program (REAP) and Value-Added Producer Grants (VAPG) which can be accessed by cooperatives.¹⁶

Limitations and Criticisms

While cooperatives offer many benefits, they also face certain limitations and criticisms. One challenge can be raising sufficient Capital for expansion or large-scale projects, as member economic participation, while equitable, might not generate the same level of external investment as a traditional corporation.¹⁵ Banks and governments may sometimes provide unequal treatment to cooperatives compared to conventional firms, potentially limiting their access to institutional and financial resources.¹⁴

Another potential drawback is the challenge of maintaining active member engagement and balancing the diverse interests of all members, especially as the cooperative grows.¹³ Decision-making in a Democratic Governance structure can sometimes be slower than in a hierarchical corporate structure.¹² Some research also suggests that agricultural cooperatives may sometimes be less technically efficient than non-cooperatives under certain assumptions.¹¹ Ensuring strong Internal Controls and clear communication is vital to mitigate these challenges.¹⁰

Cooperative vs. Corporation

The fundamental distinction between a cooperative and a Corporation lies in their primary objectives, ownership, and control structures.

The confusion often arises because both are legal business entities. However, a corporation typically exists to generate financial returns for its investors, while a cooperative aims to provide goods, services, or support to its members. A cooperative's Equity structure is designed to reinforce its member-centric mission, rather than attracting external investment for speculative gains. A cooperative is driven by a Mission Statement focused on collective benefit, whereas a corporation's often emphasizes profitability.

FAQs

What are the key principles of a cooperative?

The International Co-operative Alliance (ICA) outlines seven key cooperative principles: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; cooperation among cooperatives; and concern for community.⁶, ⁷

How do cooperatives distribute profits?

Cooperatives typically do not distribute "profits" in the same way corporations do. Instead, any surplus generated is often reinvested into the cooperative, used to improve services for members, or returned to members as Patronage Dividends or refunds, based on their use of the cooperative's services.⁴, ⁵ This differs from a traditional Return on Investment.

Are cooperatives non-profit organizations?

Not necessarily. While some cooperatives may operate as non-profits, many are for-profit businesses. The key difference is that their "profit" (or surplus) is primarily for the benefit of their members, not outside investors. They aim to break even after serving member needs, and any excess funds are handled according to cooperative principles.

Can anyone join a cooperative?

Generally, yes. The principle of Voluntary and Open Membership means that cooperatives are open to all persons able to use their services and willing to accept the responsibilities of membership, without discrimination.³ Specific requirements may vary depending on the type of cooperative and its purpose.

What is the role of the USDA in supporting cooperatives?

The U.S. Department of Agriculture (USDA) supports cooperatives, particularly in rural areas, through its Rural Development agency. They provide financial assistance opportunities, technical assistance, and educational resources to help establish, expand, and improve rural cooperatives across various sectors like agriculture and utilities.¹, ²