What Do You Call Patronage?
Phil Kenkel
Bill Fitzwater Cooperative Chair
Distribution of a cooperative’s surplus in proportion to their members in proportion to their
transactions is one of the fundamental principles of a cooperative. Basing member payments on
business volume rather than ownership creates a fundamental difference between cooperatives and
other firms. Unfortunately there is not a consistent terminology for these member payments. The
terms patronage allocation, patronage distribution, patronage refunds, patronage dividends,
patronage rebates, patronage returns, surplus, members privileged scheme, and others have been
used to describe the payments that share profits with member/owners. The terms become more
confusing when we describe non-cash payments. Terms for the allocated non-cash portion include
stock refunds, stock dividends, allocated retained patronage, allocated surplus, capital credits, book
credits, allocated retained capital and others.
This raises the question as to what term best communicates the cooperative difference to our
member/owners. The term for non-cash distribution is probably the most important since it refers to
a deferred and less tangible asset. The term non-cash patronage dividend is consistent with IRS
sub-chapter T. However it may be a poor choice since it creates confusion with dividends that are
paid on each share of stock owned. The term “patronage distribution” is also not ideal since it
could be confused with an equity retirement payment. Using the term “retained capital” for
allocated retained equity is also potentially confusing with funds retained as” unallocated reserves”.
The term “rebate” is problematic since it doesn’t emphasize the cooperative difference. Many
firms, including agricultural chemical companies offer rebates. Cooperatives are the only firms that
distribute profits to their customers. I don’t like the term “allocated surplus” because a member
might conclude that “surplus” funds should have been simply paid in cash. The terms “stock
credits” or “book credits” reflect the fact that most cooperatives have given up on issuing and
tracking physical stock certificates. I’m not sure they are as effective in communicating the
member’s process of building equity ownership.
The adoption of uniform terminology for member payments would probably benefit the cooperative
industry. It would certainly simplify teaching a cooperative class. Consistent terminology would
help our financial statements communicate the nature of our member and non-member transactions
and ownership claims. If I were king of cooperative terminology I would settle on “cash patronage
refund” and “equity patronage refund”. Drop me an email at phil.kenkel@okstate.edu and share
with me the terms you use, and your thoughts on the subject.
5-25-2010