User Owner versus User Benefits
Phil Kenkel
Bill Fitzwater Cooperative Chair
As I discussed in recent newsletters, a few cooperatives across the US are experimenting with
redeeming common equity into a dividend bearing preferred stock. At the tactical level this
provides the opportunity to use the after tax margins from non-member business to supply
dividends to members. At a more general level this is a re-examination of the balance between
the user-owner roles and the user-benefit role in a cooperative.
The concept of user-benefit or patronage is central to the cooperative business model. It is this
structure that creates the difference between cooperatives and investor-owned firms and which
creates most of our complexity in cooperative finance. Cooperative members are both owners
and users. In the traditional U.S. cooperative we have not placed must emphasis on the userowner role. Members make only a trivial initial investment and receive their ownership out of
the profit stream. There is no benefit to stock ownership. Agricultural cooperatives have
traditionally issued qualified stock and have had relatively long equity revolving period. This
implies an immediate tax obligation and a much deferred benefit from equity ownership. It is
not surprising that this structure has created little excitement for the user-owner role.
There have been two basic strategies to rebalancing the user-owner role in a cooperative. New
Generation cooperatives and cooperatives using the base capital plan link ownership directly to
use. Profit distribution and benefits are still linked solely to use but users are required to match
ownership to use. These models clearly emphasize the member’s responsibility to finance the
firm. The other approach to enhancing the user-owner role has been to reduce the equity
revolving period and/or pay dividends on cooperative equity at some point in the ownership
cycle. This approach is a different balance of user returns (cash patronage) and user-owner
returns (equity revolvement and dividends. The original Rochdale cooperative principles did not
preclude a return on ownership. They specified that ownership return should be limited to a
reasonable level so that a good portion of profits could be distributed as patronage.
Do cooperative members place a value on their equity? Have we downplayed the member’s
responsibility to invest? Have we got the right balance between cash patronage, equity
revolvement and infrastructure investment? Those are all excellent questions for your next
strategic planning retreat.
8-29-2014