Cooperative Values

According to the International Cooperative Association the cooperative principles are:

1st Principle: 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 gender, social, racial, political, or religious discrimination.

2nd Principle: Democratic member Control

Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives members have equal voting rights (one member, one vote) and cooperatives at other levels are organized in a democratic manner.

3rd Principle: Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. They usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing the cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership.

4th Principle: Autonomy and Independence

Cooperatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy.

5th Principle: Education, Training and Information

Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public – particularly young people and opinion leaders – about the nature and benefits of cooperation.

6th Principle: Cooperation among Cooperatives

Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures.

7th Principle: Concern for Community

While focusing on member needs, cooperatives work for the sustainable development of their communities through policies accepted by their members.


Profits and Principles

The first cooperative principle, that of voluntary and open membership has never applied to worker cooperatives. Open membership is usually taken to mean anyone who wants to join a cooperative can. But worker cooperatives vote on accepting new members, and new membership opportunities are not unlimited. If they were no one would be out of work. So much for open membership.

The third cooperative principle of member economic participation is more complex. The common interpretation of this principle is that profits are distributed in proportion to the members transactions with the cooperative, or in the case of worker cooperative in proportion to labor provided. This is taken in practice to mean patronage in proportion to hours worked or in proportion to salary or wage. This is already violated in practice for worker cooperative startups where profits are first distributed in based on investment loss, not labor contribution. A misdescription of the underlying transactions hides this fact. The key problem with this principle is the implicit acceptance of the modern financial framework where investments are never expected to decline in value.

The issue concerning profit distributions can be viewed as two distinct questions. Probably the more straight forward one is the distribution of non-labor earnings/losses in a worker cooperative. It it valid for the capital gains/losses from asset purchases and sales be passed to non-members? The more complex question is whether bearing a loss (particularly in startups) generates a future claim on profits independent of labor (as is currently practiced) and whether that claim can be greater than the loss (as proposed).

The loss based compensation models for worker cooperative startups clearly conflict with the third cooperative value. In particular, at what point does compensation become tied to capital and become independent of labor?

In its simplest form, the loss based models represent a redistribution of profits among members of the cooperative. But the distinction between wages and profits is arbitrary, since it is the total compensation (wages plus profits or losses) that matters. Having an unequal distribution of profits among members is not much different than having different wages among the members, which is already takes place in many worker cooperatives. And the profit distributions are usually tied to compensation (wages) or hours worked, so that some members have a higher claim to the profits already.

Do the loss based compensation models reward capital contributions with more that a fixed return? In the loss factor model compensation is structured so that the return is bounded, but with no guidance on what a reasonable bound is. Similarly a cooperative may take a predatory loan with a very high interest rate. Since the rate is capped, high interest loans are theoretically permitted.

The returns in the loss models ultimately result from the labor of the members. But this is true of all returns, including interest payments on debt. The interest payments on debt are already a non labor based return to capital. While the loss factor model permits a claim on future profits, based on a realized loss, the current system does too. Setting the future claim on profits equal to the loss merely allows the transaction to me mis characterized as fixed value debt, and the losses to be ignored.

The loss models have an effective interest rate that can be calculated after the member is compensated, but the effective interest rate cannot be known before hand. However, the effective interest rate is capped in both loss models. The effective rate may end up be greater or less than interest on coop debt depending on how long it takes for profits to occur. But not all interest rates need to be identical. A single coop may have multiple loans outstanding with different interest rates. Bank loans, credit card debt, and member capital will likely carry different interest rates. The founding members will have an incentive to achieve profitability faster with loss based compensation, as this increases their effective interest rate.

Given the distinct break with the traditional treatment of worker cooperative capital, some serious reflection and debate about the cooperative principles is probably in store. Violation of this principle come up in all types of cooperative startups (consumer, producer, housing, etc.) where there is an initial loss. The effects are just most significant in worker cooperative which have relatively small number of members and relatively large investment per member. For a consumer cooperative with a $20 buy-in it probably matters less to the members if they suffer an initial loss on that investment.

Worker Ownership

One of the underlying principles behind worker cooperatives is worker ownership. This has often been interpreted to mean that outside investment returns could not be tied to the revenue or profit of the cooperative.

The other common interpretation of worker ownership is that only members of a cooperative could appropriate any profit or loss. Members in this case are taken to mean current members and not past or future ones. This latter interpretation has never been strictly applied in practice. By accepting the given accounting framework where startup losses are spread forward in time, losses in startups are appropriated by future members of the cooperative.

There is often a mismatch between the period of membership in a cooperative where labor is expended, and the duration of a production function where expenses are incurred and profits are realized. This can make membership timing an overriding factor in determining the financial fortunes of the member, largely independent of their labor contribution. The problem is present in startups that have an extended production cycle. It is also present in cyclical businesses such as agriculture.

The question is one of a strict interpretation of worker ownership where profits or losses only go to current members, or the spirit of the worker ownership where participants in a productive activity collectively share the profits based their labor. A fair distribution of profits is impeded by a structure that enforces a strict implementation in all circumstances.

It is easy enough to sum profits or losses over an extended period and distribute them later based on labor contributed during that time. However, that alone is also insufficient. There is an asymmetry in the production process where expenses are paid upfront and profits are realized later. The earlier members disproportionately bear those expenses (and losses) through capital contributions to the cooperative. It is not possible for those expenses to be covered by those who have not yet joined.

Member Investors

It is often said that members of a worker cooperative have three roles. They are the workers because they are the ones contributing labor. They are the managers because they govern themselves and make the decisions. And they are the owners because they appropriate the profits of losses of the business. But there is a fourth role that is never mentioned but equally important. Members are sometimes required to be investors who contribute capital to the cooperative.

Founding members are required to cover losses, forcing them to invest capital. This is a requirement later members are not theoretically required to make, even if a fixed buy-in is artificially imposed.

The mantra of the worker cooperative community and larger labor movement has been profits based on the contribution of labor, not capital. It seems the answer is not quite that simple. Capital contributions are required by some members in a worker cooperative, and the unique nature of these loss bearing contributions have been largely ignored. The capital issue never really disappears in worker cooperative, it merely gets bundled with labor, management, and ownership as part of the membership package.

It is often said that equality is achieved by requiring equal capital contributions from members regardless of when they join. This perceived equality is untrue. A buy-in from a founding member is different than an equal dollar buy-in after the cooperative is profitable. The founder suffers a loss on their buy-in, while the latter member’s investment doesn’t decline in value. Treating them equivalently as debt is both inconsistent with the underlying transaction and unfair to the members.

Some other questions related to profits.