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Co-operatives and social enterprise: are they a replacement for mainstream capitalism?

2012 is the United Nations International Year of the Co-operative and as part of the celebrations I attended the National Co-operatives Conference in Port Macquarie from 24-26 October. It was an interesting event that drew together a wide cross-section of “co-operators” from around the world.

Across the many speakers and panel discussions some common and recurring themes emerged. Amongst these were the criticism of the conventional business model and its perceived failings in the Global Financial Crisis (GFC). Comparisons were made with co-operative and mutual businesses that had not suffered such appalling collapse.

Also discussed was the role of co-operatives as social businesses to lead change and offer a new way of doing business. For some delegates the co-operative and mutual business model offers a panacea to the many failings of mainstream economics and business. Rather than chasing profits and ever increasing growth, the co-operative was touted as offering a sustainable alternative that is not focused on the maximisation of profit.

However, this was not without its controversy. For within the otherwise united “co-operative” movement, there was a tension between those who viewed their co-operatives as hard-nosed rational businesses, and those who sought to promote co-operatives as a non-profit mechanism for social change. Thinking about this I was led to the conclusion that little is to be gained by arguing over whether a co-operative is for-profit or not-for-profit. Of more importance is the issue of what the business does with its profits.

The Rochdale Society 1844

Rochdale Pioneers.

The history of the modern Co-operative movement is traced back to the foundation of the Rochdale Society of Equitable Pioneers in the English town of Rochdale in 1844. In that year a group of 28 cotton weavers came together to mobilise their community to help create a community store. Their purpose was to cooperate to purchase food and other goods at wholesale prices so that they could be sold to their members at fair prices.

The Rochdale Society provided what have become the guiding principles of the co-operative movement. This early co-operative was founded on the basis that its members’ investment capital was not to accrue any direct financial return by way of speculative capital gain. The members’ economic rewards for their investment was a fixed rate of interest and the ability to trade with the co-operative and receive market prices without credit or profit taking.

Any profit generated by the co-operative was to be distributed to members commensurate with the amount of patronage each member provided. Some profits were to be set aside for the common good of enhancing member education and welfare.

Over the years the nature of the co-operative business and how it deals with members’ ownership rights and benefits has evolved. By the 1930s there was a move towards the payment of fixed interest rates on investment capital and for member-investors to have first claim on any profits, after paying out expenses and interest charges in proportion to purchases or patronage. How members’ ownership rights and rewards for differential levels of patronage are recognised has been one of the most complex areas of co-operative governance for much of the past 200 years.

The rise of the social economy and the role of the co-operative

The concept of a “social economy” pre-dates the GFC of 2008-2009, but like the Great Depression of the early 1930s it has sparked a renewed interest in co-operative enterprise as a potential alternative to capitalism. Co-operative and mutual enterprise are viewed as the answer to the “money only” profit maximisation focus of conventional investor-owned business.

Co-operatives are viewed as key instruments in the social economy. For example, in Spain where unemployment amongst youth is well over 50% the example of the Mondragon Corporation has been highlighted. Mondragon is one of the largest co-operative enterprises in the world and was hailed for its ability to maintain and even create jobs during the recent recession.

The President of the International Co-operative Alliance (ICA) Dame Pauline Green, speaking in July this year, described how young people in countries such as Spain and Greece were becoming disenfranchised by a financial system only focused on profit maximisation. As she explained:

It is young people who first fall victims to recession. They are the first to be cut when companies begin to contract and often have no safety nets on which to fall back. Youth unemployment as high as Spain’s places the very fabric of society at risk,” said Dame Pauline.

These young people have been disenfranchised by a financial system which is driven by the need to maximise profit above all else. In Spain a property boom was fed by unscrupulous banks handing out high risk loans to a public which it became apparent in a market downturn were not in a position to repay them.

In his book “The Cooperative Movement: Globalization from Below” published in 2007, Richard Williams outlined a 10-stage plan for rolling back what he saw as an uncivilised economic society dominated by rapacious and greedy corporates. He called for greater common ownership of public goods, the reformulation of corporate charters to reduce profit taking, making executives more accountable and restructuring intellectual property rights to permit greater public access.

Other measures included a greater focus on food production and distribution at the local level to reduce dependency on global food chains, reduced military spending, performance monitor international aid programs and the restructure of all world debts.

Williams also recommended widening the scope of co-operative enterprise, particularly in the area of financial services. The creation of banks and credit unions tasked with the purpose of providing micro-financing to the developing world were key objectives.

Without doubt the co-operative business can make a contribution to the social economy and William’s wide-ranging and radical agenda will undoubtedly resonate with many. However, it is unclear whether the co-operative business enterprise is necessarily the “secret weapon” that Dame Pauline Green has suggested it can be in overcoming the effects of the GFC.

It is the profit distribution that matters

group hands. microsoft clipart

During the National Co-operatives Conference there was a good deal of sympathy amongst some of the delegates with the views of Dame Pauline and the likes of Richard Williams. Yet while I am no fan of rampant, greedy capitalism or overpaid corporate executives, I am less sanguine that co-operatives or any other form of social business will replace mainstream capitalism. In fact throughout their long history co-operatives have been more inclined to foster quiet, evolutionary change than a radical overhaul of the status quo. Also, for the majority of co-operative and mutual businesses profit is not an offensive concept.

A co-operative or mutual business exists for its members and their economic and social benefit. If it is to be independent of government or charity, and not dependent on philanthropy or volunteer labour, the co-operative enterprise must generate a profit. This will allow it to pay its employees and invest in the assets and systems that will allow its members to meet their common needs. As the renowned English Economist Alfred Marshall (1842-1924) noted at his speech as President of the Co-operative Congress movement in 1889:

What distinguishes co-operative from every other movement is that it is at once a strong and calm and wise business, and a strong and fervent and proselytizing faith.”

The co-operative is therefore not a charity and cannot survive for long if it does not make a profit as a sound and resilient business. For this reason it should not be viewed as a ‘not-for-profit’ business. However, the co-operative differs from the mainstream investor owned business through its focus on delivering economic and social benefits to its members.

Not all co-operatives distribute profits to their members. They choose instead to reinvest all profits back into the business for the common good of all members. This does not make them “‘non-profit” entities only non-distributing ones.

For those co-operatives that do distribute profits to members there are numerous systems. Suffice it to say that whatever system is chosen the most important consideration should be how to balance the collective interests of the co-operative and its membership against the desires of individual members.

This can make the management of a co-operative business more challenging than for an investor owned business. For the latter is concerned primarily with maximising shareholder return and paying those with the most shares the largest returns. However, a well-managed co-operative will tend to provide stability within a market. Because it offers its members fair prices and is focused on their benefits, it is less likely to engage in the risky and ultimately reckless behaviour that has led to the problems experienced through the GFC.

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