One of the major issues for co-operatives worldwide, especially agricultural and processing co-operatives, regards access to capital to expand or enhance activities. Research carried-out on hybrid equity structures and co-operatives, suggests that they are using a variety of subsidiary business structures to remain competitive and access new capital.

In the US, Wyoming State recently adopted the Wyoming Processing Co-operative Statute, which is the first of its kind in the nation. The Statute permits co-operatives to maintain two primary member categories: patron-members and investor-members. It also allows co-operatives to customise their by-laws to meet their needs for distribution of earnings, to both patron and investor-members, as well as to address board control. Other states are considering enacting similar legislation to permit co-operatives to attract outside equity.

Randall E. Torgerson, Deputy Administrator, United States Department of Agriculture Rural Business-Co-operative Service, cautions about these changes in co-operative law. He suggests that the changes promote "... a limited liability corporation-like business structure (with a modicum of co-operative characteristics) to process and market agricultural products". He adds, "... co-operative leaders in each state should decide whether to embrace entities formed under a statute such as this for at least two reasons. First, such entities may be incompatible with the traits that distinguish a co-operative from an investor-owned firm. Second, serious questions exist as to whether such an entity is eligible for the public policy benefits available only to co-operatives".

Torgerson writes that a business formed under the new Wyoming law can have several traits that are at odds with those usually associated with being a co-operative. One of them is that "... Under this law, a co-operative can have an unlimited number of investor non-patron members who are not required to do business with the association, but are entitled to vote and share in its earnings on the basis of their level of investment. Patron members are limited to one vote each, while non-patron members may have an unlimited number of votes". He argues that this violates the three unique characteristics of a co-operative:

• It is owned by the people who use its services.
• It is controlled by the people who use its services.
• Earnings are allocated to the users based on patronage, rather than to investors based on investment.

The statute also provides for only one, of an unlimited number of directors, to be elected by producer patron members. Director(s) chosen by the producer-patron members are entitled to 50 percent of the voting power on the board. Togerson asserts, "... this may fall short of the level of producer control that is necessary to operate as a farmer co-operative". Moreover, "... No limit is imposed on the rate of return investor-members can realise on their investment, and up to 85% of each year's earnings may be distributed to investor members based on investment. One, or more, outside investors with two-thirds voting control can merge or consolidate the entity into another entity, or liquidate it without any support from the producer patron-members".

Togerson asks co-operative leaders to ask themselves: "Is a law that permits this much deviation from the co-operative norms of user-ownership and user-control, coupled with a provision, that only 15 percent of earnings must be returned to users based on patronage, really a law that can authorise the formation of cooperatives?" If someone can answer this question "yes," a second question needs to be addressed: "Just what, if anything, does the term co-operative mean?". He states that the enactment of the law in its present form "... tarnishes the credibility of other co-operatives".

Togerson's article was published in the May-June 2002 issue of the Rural Co-operatives Magazine and is available at http://www.rurdev.usda.gov/rbs/pub/jul02/commentary.html.

Robert Heuer of the National Council of Farmer Co-operatives (NCFC) presented a different view on 7 May 2002. Quoting Bill Horan, an Iowa Co-operative board member, he suggests that the accumulation of investment capital is "a fundamental flaw in the way co-operatives are set up ... All other forms of business that need capital to pursue new opportunities just simply go out and get it". Horan's view is that "... co-operatives will play a vital role in the future of agriculture, but not entirely in their present form".

Heuer writes

"Since the 1930s, co-operative ownership has been a driving force in America's agricultural production system. Federal and state governments have enacted an array of tax, antitrust and financing tools to enhance the growth and development of these rural enterprises. USDA calculates that in 2000, 3,346 farmer-owned co-operatives generated nearly $100 billion in sales (and had) combined assets worth $49.7 billion.

Today, the co-operative industry is entering a new "new generation." Co-op boards and management move forward without a roadmap. Do they continue to work within the confines of a narrowly-defined co-operative structure that links local control and local capitalization? Or must they turn to outside sources to finance future growth?"

Heuer's article is available at http://www.ncfc.org/forum/2002-05-07-Heuer.shtm.

In contrast, an act, proposed by the Co-operative Party in the UK , that gives greater protection to mutual organisations against carpet bagging, has been passed by the Parliament. The Act safeguards the mutual status of a wide range of organisations including consumer co-operatives, worker co-operatives, housing associations, credit unions, social clubs, footballer supporters' trusts, and working men's clubs.

Gareth Thomas, Chairman of the Co-op Party said that mutual organisations "... provide essential, value-for-money services to many communities, but have been hampered by the threat of asset-stripping. This legislation provides a strong and stable framework for community mutuals to grow and prosper, on a level playing field with other businesses." The Act extends the voting threshold required for demutualisation from 50% to 75% with a minimum of 50% member turnout.

The Co-operative Party is the political voice of the co-operative and mutual sector. There are 29 Labour and Co-operative MPs and 10 Peers. The Co-op Party has also proposed that the new community benefit societies should secure their assets in perpetuity. To read more, please visit Co-op Party website.

Comment

The first question to answer is, how to balance any external capital obtained by a co-operative, with the democratic control of the user members. The NSW co-operatives legislation provides for Co-operative Capital Units that have restricted rights attached to capital investments in a co-operative. However, the Wyoming Statute has gone beyond this and attached voting rights to external capital that can change the very nature of co-operatives.

The challenge, as Togerson says is "... how to build flexibility into the co-operative model without destroying the unique features that justify favourable public policy treatment".

It is interesting that the UK has acted to 'preserve' mutual organisations, by recognising the mutual status of organisations and legislating to safeguard the targeting of their assets by commercial interests.