What Is a Cooperative? A Business Owned by the People Who Use It
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An ordinary company is owned by investors, who supply capital and receive the profit, and votes are counted by shares. A cooperative is owned by the people who use it or work in it, distributes surplus according to how much each member used it rather than how much they invested, and gives every member one vote regardless of their stake. That last rule is the whole difference, because it decouples control from money, and almost every strength and weakness of the form follows from it.
The principles
An international set of seven principles, revised most recently in 1995, defines the form and is used by cooperative federations worldwide:
- •Voluntary and open membership, without discrimination
- •Democratic member control, with one member one vote in primary cooperatives
- •Member economic participation, with members contributing capital equitably and surplus distributed in proportion to use rather than to shareholding
- •Autonomy and independence from external control
- •Education and training for members and staff
- •Cooperation among cooperatives, which is why they federate and form secondary institutions
- •Concern for community, added in the 1995 revision
The kinds
The form covers several arrangements distinguished by who the members are. Consumer cooperatives are owned by their customers, which is the origin of the movement and the model of the retail societies. Worker cooperatives are owned by their employees, who elect management and share surplus. Producer cooperatives are owned by farmers or craftspeople who market and process collectively while operating their own holdings, which is the dominant form in agriculture and covers a very large share of dairy processing and farm supply in many countries. Credit unions and mutual banks are financial cooperatives owned by depositors. Housing cooperatives are owned by residents. Purchasing cooperatives let independent retailers buy at the scale of a chain, which is how many hardware and grocery groups operate, and mutual insurers are owned by policyholders. Several of the largest businesses in agriculture, insurance and retail in Europe and North America are cooperatives, which surprises people who think of the form as marginal.
Where it came from
The movement's founding event is conventionally the Rochdale Society of Equitable Pioneers, opened in 1844 by twenty-eight weavers and others in a Lancashire mill town who pooled a pound each to open a shop selling unadulterated food at honest weight, in response to the routine adulteration of flour and the truck system that paid workers in tokens redeemable at the employer's store. Their written rules, the Rochdale principles, established open membership, democratic control, limited interest on capital and the distribution of surplus as a dividend on purchases, which is the ancestor of every modern loyalty scheme. The model spread rapidly, with cooperative wholesale societies, banks, insurance and manufacturing following. The Raiffeisen and Schulze-Delitzsch movements in Germany built the credit cooperative model at roughly the same period, and it spread across Europe and then worldwide, becoming the basis of rural finance in many developing countries.
The advantages and the constraints
The form has structural strengths. Aligning ownership with use removes the conflict between serving customers and extracting profit from them, which is the argument for mutual insurance and for credit unions offering better rates. Worker ownership is associated in research with lower pay inequality, greater employment stability during downturns, since members prefer to cut hours than jobs, and comparable or higher productivity. Cooperatives are harder to move or asset-strip because the owners are locally rooted. The constraints are equally structural. Raising capital is difficult, since the form cannot sell equity without surrendering the one-member-one-vote rule, so growth is funded by retained earnings and debt, which limits expansion into capital-intensive sectors. Decision-making is slower. Members may under-invest in assets whose returns arrive after they leave. And successful consumer and financial mutuals face persistent pressure to demutualise and distribute the accumulated value to current members, which happened to most British building societies in the 1990s and transferred substantial institutional value into one generation's hands.
The example everyone cites
The Mondragon Corporation in the Basque Country is the largest worker cooperative federation in the world, founded in 1956 by a priest, Jose Maria Arizmendiarrieta, who started a technical school and then a small stove factory with five graduates. It now comprises dozens of cooperatives across manufacturing, retail, finance and education, employs around eighty thousand people, and runs its own bank and university. Its internal arrangements are studied closely: pay ratios between the lowest and highest paid are capped at levels far below those of comparable firms, members hold a capital account rather than tradeable shares, and cooperatives support each other through a shared fund, with workers from a failing cooperative relocated to others. The federation's difficulties are equally instructive, since its largest industrial member, the appliance manufacturer Fagor, failed in 2013, and a substantial proportion of employees in its foreign subsidiaries are not members at all, which is the criticism most frequently levelled at it.
The takeaway
A cooperative is owned by its users or workers rather than by investors, gives each member one vote regardless of stake, and distributes surplus according to use rather than shareholding. The form covers consumer, worker, producer, credit, housing and purchasing arrangements, and several very large agricultural and insurance businesses are cooperatives. It began with the Rochdale weavers in 1844, whose rules invented the purchase dividend. Its structural strength is aligning ownership with use, and its structural weakness is raising capital without selling the votes.