Cooperative Finance

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Robin Murray:

"One of the central principles of co-operatives is that they should be governed by one member one vote, rather than votes being allotted according to the size of financial contributions. As the Rochdale Pioneers put it, labour should employ capital rather than capital employing labour. The problem has always been how co-ops raise the capital necessary to fund their expansion, when the amounts needed exceed the accumulated resources of the co-op and its members.

One method has been to invite in investment capital and give it rights to appoint a certain number of Board members. The danger is that this introduces a financial imperative that threatens to corrode the social purposes of the co-op. It is possible to put a ceiling on the proportion of the co-ops equity that can be subscribed by non members, on the number of members the investors can elect to the Board, and an asset lock to prevent the finance driven sale of the co-op’s assets. But too often the introduction of this imperative into the centre of co-operative governance has begun a process hat has led to eventual de-mutualisation.

What are the alternatives? The problem is to raise the equity, since too great a reliance on debt increases the burden of interest charges on a co-op’s cash flow. There are a number of ways in which equity can be raised without conflicting with the co-op’s principles of governance:

i) mezzanine finance. There are forms of preferred shares which rank above the holders of equity in any break up of the co-op, but have no direct voting rights. In the private financial market this means that the investors require higher rates of return, often with rights to convert the shares into core equity. But with co-ops the invitation is for investors to share the goals of the co-op and accept a lower prospective rate of return with rights of conversion. In this way the interest of investors are brought in line with the goals of the co-op

ii) community shares. There has been a growing movement for community shares – 200 such have been issued in the last 5 years, raising from between £20,000 and £4.5 million. It is a form of distributed shareholding, close in many ways to some types of crowd funding, with contributors becoming members, but receiving one vote irrespective of the sums contributed.

iii) crowd funding. There are other types of crowd funding where investors do not become members but have rights to payments in kind, commonly in the products or services provided by the co-op. This is equivalent to a loan without pressure being put on the co-op’s cash flow.

iv) charitable investment. Charities and Foundations have traditionally been required to invest surplus funds in secure publicly quoted companies. But recently the UK authorities have softened this requirement, permitting charitable fund to be invested in starts up and co-operative quasi equity. The rationale is that if the funds are given away there will be a certainty of no return, whereas there is a possibility of return when the funds are invested as quasi equity.

v) co-operative bank equity. In some of the most successful co-operative systems, a central co-operative bank can provide quasi equity and retain some control with voting rights by requiring the submission of monthly accounts along with rights to intervene where thee are problems of performance. In these cases (where the productive co-ops have a stake in the governance of the co-operative bank) the interests of the co-op and its bankers are aligned, and if the bank intervenes it is to restore the co-op to health and return it tom its members." (email, June 2014)