The misunderstood world of the co-operative enterprise

Cooperatives are among the largest and oldest businesses in Australia. But the structure is often misunderstood. Flickr

2012 is the United Nation’s International Year of the Co-operative. This is a once in 25 year opportunity to acknowledge these important but often misunderstood businesses.

What is a co-operative or mutual business and why are they misunderstood? To understand why, we must first look at the nature of these businesses.

Co-operatives are important

Co-operative and mutual enterprises are among the largest and oldest businesses in Australia. There are an estimated 1,700 co-operatives in Australia, most of which are small. However, in 2011 the top 100 co-operatives, mutual and credit unions in Australia had a combined annual turnover of more than AUD $14.7 billion.

Internationally the co-operative movement is estimated to provide employment for over 100 million people. In 2012 a study of the world’s 300 largest co-ops was undertaken by the International Co-operative Alliance (ICA). These organisations were found in 25 countries across Europe, North America and Asia. They had a combined annual turnover of over USD $1.6 trillion. This is equivalent to the world’s ninth largest economy.

Co-operatives are different

The co-operative enterprise is a business created for the sole benefit of its members. This typically involves a patronage relationship where members buy and sell from the co-op.

The members are also its shareholders and owners. The price of the co-op’s share capital is generally fixed by its articles of incorporation. Its shares are not traded on an open market.

Co-ops are also designed around democratic principles. A key element of governance is the principle of “one-member-one-vote”. In some cases this can vary depending on patronage, but voting power is capped to avoid dominance by small groups of shareholders.

Rather than maximise profits, co-operatives aim to offer their members better prices and lower costs. They may also refund the member part of the cost of their transactions. Co-ops may also enjoy some tax exemptions.

All these things make co-ops distinctly different from investor owned firms (IOF). The IOF are typically designed to benefit their shareholders who may or may not trade with them. Put simply, the IOF is established to maximise profits and returns to investors. The co-op is created to maximise benefits to members.

The co-operative enterprise performs both an economic and social capital building role within the broader economy. This makes the purpose of the co-op more complex. It must maximise benefits to its members while also ensuring that it can operate sustainably as a business.

Co-ops can be “distributing” or “non-distributing” in nature. The first issues dividends to members while the second does not. Australia’s largest co-operative business, Western Australia’s Co-operative Bulk Handling (CBH Group) is a non-distributing co-op.

Co-operatives have principles

Historically, the co-operative enterprise can trace its origins back at least to the 15th Century. However, the benchmark for the modern co-operative movement is the establishment of the “Rochedale Society of Equitable Pioneers” in 1844.

The Rochedale Society was founded in Britain by a group of impoverished weavers with the purpose of achieving economic self-determination. An important aspect of the Rochedale Society was its establishment around a set of guiding principles. These included voluntary and open membership, one-member-one-vote democratic governance, and no discrimination on racial, religious, gender, political or social grounds.

Today these guiding principles remain at the core of what defines a co-op throughout the world. The seven guiding principles of co-operative enterprise are:

  1. voluntary and open membership; 
    
  2. democratic member control;
  3. member economic participation;
  4. autonomy and independence;
  5. education, training and information;
  6. co-operation among co-operatives; and
  7. concern for the community.

Co-ops are independent of government and should not be confused with charitable or not-for-profit businesses. However, they do have a social business purpose and work for the sustainable development of their communities.

Co-operatives national legislative structure

Within Australia a challenge for some co-operative enterprises has been their state based legislation. The federal Corporations Act (2001) provides a national legislative structure for IOF businesses and some co-operatives that fit into the non-distributing category, allowing for ease of expansion across state jurisdictions. However, this is not the case for the co-ops sector which operates mostly under state or territory statutes.

Throughout much of the past 100 years the co-operative movement in Australia operated under a series of ageing state and territory Acts. These often restricted their ability to operate commercially and made it difficult to expand across state borders. This changed in part over the past twenty years with new Co-operatives Acts being introduced in each state and territory.

For example the New South Wales Co-operatives Act (1992) was followed by the Victorian Co-ops Act (1996), the Queensland, South Australian and North Territory Co-ops Acts (1997); and the Tasmanian Co-ops Act (1999). The ACT Co-ops Act (2002) then followed and finally the Western Australian Co-ops Act (2009).

However, the patchy nature of legislation has led some co-ops to move across into the Corporations Act (2001) while seeking to retain their co-op principles, governance, and tax exemption.

In a submission to NSW Fair Trading in 2010 the Law Council of Australia argued that while there were only 1,726 co-ops registered under state and territory Acts, there were 1.7 million companies registered under the Corporations Act (2001). They made the comment that this “suggests that a cooperative (as a corporate entity) is increasingly becoming an anachronism”.

However, it must be noted that this is an unfair comparison. The Corporations Act includes every Pty Ltd company regardless of size. What this type of comment does reflect is a lack of understanding of the co-ops sector and its contribution to the national economy.

There is now a move towards the creation of a Co-operatives National Law (CNL) to be established in 2012 via mutual agreement between state and territory governments.It has been a subject of discussion for many years. The objective of this will be to harmonise core aspects the of state and territory statues governing co-ops.

Of particular importance is the ability for co-ops registered in one jurisdiction to be mutually recognised across other Australian jurisdictions. The seven guiding principles of the co-operative movement are also to be enshrined in the legislation.

The CNL will also introduce the concept of a financial instrument known as a Co-operative Capital Unit (CCU) into each state and territory statute. This is already a feature of the Co-ops Acts of NSW, Victoria and WA. The CCU is not share capital but forms a part of a co-operative’s capital that could be issued to both members and non-members.

One of the major problems facing co-ops is often their inability to raise capital via third party equity. This restricts their funding to member contributions, retain earnings and debt. CCUs can be structured as equity or debt under the legislation. However, the way CCUs are used can have significant implications for the co-op in terms of its debt-equity ratios and tax liabilities.

How best to design a CCU remains a matter for future research. At UWA we have researched this and found that the CCU is best structured as equity, but that the lack of voting rights by non-member investors may be a challenge in making it an attractive investment proposition.

Different equity structures involving CCUs are now being explored. These may link CCU dividends to share dividends and require co-op members to also hold CCUs. This may provide greater security to non-member CCU holders.

The CNL will be a welcome boost to the co-operatives sector. However, it does not represent an equivalent to the Corporations Act (2001). It will not result in a Federal Minister having responsibility for co-operatives law.

Co-operatives are under recognised

Despite its importance and the value of its contribution the co-operative remains without adequate recognition at the national level. The federal government has been supportive of the CNL. However, there is limited federal engagement at an executive government level with the co-ops and mutual sector. This is disappointing given the potential for financial mutual businesses (e.g. credit unions, building societies) to offer lower fees and interest charges.

Canada, for example, has had a Co-operatives Secretariat within its national government since 1987. This is dedicated to economic growth and social development via co-operative enterprise.

Co-operative and mutual enterprises can play a significant role in the enhancement of economic and social capital in Australia. They can be operated successfully in almost all industries and offer significant competitive advantages to their members. For example, dairy co-op Murray Goulburn essentially maintains the stability of farm-gate milk prices within much of eastern Australia.

It would be hoped that in this UN International Year of the Co-operative Australians give more attention to these unique and highly valuable businesses. Hopefully, this recognition is provided at the national level by the federal government and non-government parties.