What Are Cooperative Principles?
Cooperative principles are a set of widely accepted guidelines that define the operational framework and ethical values for cooperatives globally, forming a distinct category within business models. These principles distinguish cooperatives from traditional investor-owned firms by prioritizing member needs over profit maximization. Rooted in the concept of democratic governance, cooperative principles emphasize self-help, self-responsibility, equality, and solidarity among members. They guide how cooperatives conduct their business, interact with their stakeholders, and contribute to their communities.
History and Origin
The foundation of modern cooperative principles can be traced back to the mid-19th century in England. In 1844, a group of 28 weavers and artisans, known as the Rochdale Society of Equitable Pioneers, established a grocery store in Rochdale with a unique set of operating rules. These rules, aimed at ensuring fairness and equity for members, included principles such as open membership, democratic control (one member, one vote), and the distribution of surplus profits based on patronage rather than capital invested.,15,14,13
These original "Rochdale Principles" were later codified and refined by the International Co-operative Alliance (ICA), a global non-governmental organization representing cooperatives worldwide. The ICA formally adopted a set of cooperative principles in 1937, which were updated in 1966 and again in 1995. The current iteration, known as the Statement on the Cooperative Identity, outlines seven core cooperative principles that are widely recognized and applied by cooperatives across various sectors globally.12,11
Key Takeaways
- Voluntary and Open Membership: Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without discrimination.
- Democratic Member Control: Members actively participate in setting policies and making decisions, typically through "one member, one vote," ensuring that control is democratic and not based on capital contributions.,10
- Member Economic Participation: Members contribute equitably to, and democratically control, the capital of their cooperative. Surpluses are often allocated for developing the cooperative, benefiting members in proportion to their transactions, or supporting other member-approved activities.,9
- Autonomy and Independence: Cooperatives are autonomous, self-help organizations controlled by their members. Any agreements with other organizations or external capital raising must ensure democratic control and maintain the cooperative's autonomy.,8
- Education, Training, and Information: Cooperatives provide education and training for their members, elected representatives, managers, and employees to contribute effectively, and they inform the public about the nature and benefits of cooperation.,7
- Cooperation Among Cooperatives: Cooperatives strengthen the cooperative movement by working together through local, national, regional, and international structures.
- Concern for Community: Cooperatives work for the sustainable development of their communities through policies supported by their membership.
Interpreting the Cooperative Principles
The cooperative principles serve as a moral and operational compass for cooperative enterprises, guiding their day-to-day activities and long-term strategy. For a member-owned organization, these principles dictate a focus on member needs rather than external shareholder returns, influencing decisions on pricing, service quality, and reinvestment. For instance, the principle of "Member Economic Participation" often means that any surplus generated is reinvested in the cooperative or distributed to members based on their usage of services, rather than their initial equity capital contribution. This structure inherently aligns the cooperative's success with the well-being of its members and the broader community it serves. The commitment to social responsibility and community development further reinforces their distinct interpretation of business success beyond purely financial metrics.
Hypothetical Example
Consider "GreenHarvest Co-op," a hypothetical agricultural cooperative formed by local farmers. Adhering to cooperative principles, GreenHarvest Co-op operates on the basis of voluntary and open membership, allowing any local farmer to join if they agree to its responsibilities. Each farmer, regardless of the size of their farm or the amount of produce they supply, has one vote in the cooperative's decisions, exemplifying the principle of democratic member control.
When GreenHarvest Co-op generates a surplus from selling its members' produce, the profits are not distributed based on initial investments but are rather allocated based on the volume of produce each farmer contributed (member economic participation). A portion of the surplus is also reinvested into shared resources, such as new processing equipment or training programs for sustainable farming techniques, demonstrating the cooperative's commitment to education and development. The cooperative also collaborates with neighboring agricultural cooperatives on larger supply contracts (cooperation among cooperatives) and actively supports local food banks (concern for community).
Practical Applications
Cooperative principles are applied across a diverse range of sectors globally, shaping the structure and operation of various enterprises. For example, credit unions, which are financial cooperatives, adhere to these principles by providing financial services to their members, who are also their owners. Unlike traditional banks, credit unions aim to provide affordable services and return profits to members through lower interest rates on loans, higher rates on savings, and reduced fees.
The principles also manifest in consumer cooperatives (like retail co-ops), worker cooperatives, housing cooperatives, and agricultural cooperatives. These entities prioritize the needs of their members and the community, often promoting sustainable practices and local economic participation. The United Nations recognizes cooperatives as vital tools for sustainable development, highlighting their contributions to achieving various Sustainable Development Goals (SDGs) by fostering inclusive growth and community resilience.6,5,4 Additionally, the International Monetary Fund (IMF) has noted the role of cooperative banks in promoting financial stability, suggesting they can be more stable than traditional commercial banks due to their member-focused, less volatile return structures.3,2
Limitations and Criticisms
While cooperative principles offer a unique and often beneficial organizational structure, they are not without limitations or criticisms. One common challenge arises from the "one member, one vote" principle. While promoting equity, this can sometimes lead to slower decision-making processes compared to investor-owned corporations where voting power is proportional to ownership stakes. Furthermore, raising external capital can be more difficult for cooperatives, as their non-profit-maximizing nature and limited returns on investment for external funders may deter traditional investors. This can restrict growth opportunities and the ability to compete with larger, well-funded corporations.
Another critique can involve the potential for member apathy. If members do not actively engage in the cooperative's governance, the democratic ideal may not be fully realized, leading to control by a small, active minority or management. The Federal Reserve Bank of San Francisco has discussed governance challenges within cooperative structures like credit unions, noting the need for boards to provide effective oversight and adapt to evolving competitive and regulatory pressures.1 Maintaining a balance between member benefits and the need for sufficient capital reserves for long-term sustainability can also be a perpetual challenge.
Cooperative principles vs. Mutual societies
Cooperative principles define the operational and ethical framework for cooperatives, emphasizing values such as voluntary and open membership, democratic member control, and member economic participation. They are a set of guidelines that underpin the structure and decision-making processes of a cooperative.
In contrast, mutual societies are a broader category of organizations that are owned by their members, often for the purpose of providing services to those members rather than generating profit for external shareholders. While all organizations adhering to cooperative principles are mutual societies, not all mutual societies strictly follow the comprehensive set of cooperative principles as defined by the International Co-operative Alliance. For instance, a mutual insurance company or a building society operates for the benefit of its policyholders or depositors, who are also its owners, akin to the cooperative model. However, their specific governance or capital distribution rules might vary and not always align perfectly with all seven detailed cooperative principles, particularly concerning aspects like "cooperation among cooperatives" or explicit "concern for community" as central tenets. Essentially, cooperative principles provide a specific, well-defined framework for a particular type of mutual organization.
FAQs
What are the seven cooperative principles?
The seven cooperative principles, as defined by the International Co-operative Alliance, are: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; cooperation among cooperatives; and concern for community.
How do cooperative principles benefit members?
Cooperative principles ensure that the organization operates for the benefit of its members. This often translates into better services, fair pricing, and direct influence over the cooperative's direction through democratic control. Economic benefits, such as dividends, are often distributed based on member patronage rather than investment.
Are cooperative principles legally binding?
While not universally codified as strict laws, cooperative principles are foundational to the legal frameworks governing cooperatives in many jurisdictions. Most cooperative laws are designed to enable or require adherence to these principles, making them effectively binding through organizational bylaws and legal recognition as a cooperative.
Can a for-profit company adopt cooperative principles?
A for-profit company, in the traditional sense of maximizing shareholder profit, would find it challenging to fully adopt cooperative principles because of inherent conflicts, especially regarding member economic participation and democratic control. However, some companies may incorporate elements of cooperative values, such as strong social responsibility or employee participation, without fully transitioning to a cooperative legal structure or adhering to all principles.
What is the difference between a cooperative and a non-profit organization?
While both can prioritize social goals over profit, a key difference lies in their ownership and purpose. A cooperative exists to serve the economic and social needs of its members, who are also its owners, through mutual enterprise. Surpluses are often reinvested or distributed to members. A non-profit organization typically exists to fulfill a charitable, educational, or social mission for the public good, with no owners and surpluses typically retained to further its mission.