Are Your Members Satisfied with Your Equity Redemption Program?
Phil Kenkel
Bill Fitzwater Cooperative Chair
Managing the equity structure is challenge that is unique to the cooperative business model. This
challenges was documented in a 2006 survey sponsored by the University of Wisconsin Center for
Cooperatives. The survey results indicated that half of the cooperative members had concern over
their cooperative’s equity redemption practices. Almost a third of the directors surveyed indicated
that their cooperative could not maintain their historic cycle of redemption with their current
redemption budgets. A similar number of directors indicated that their cooperative could not
generate sufficient additional equity to fund business growth. Two thirds of the directors surveyed
indicated that their cooperative had not changed equity management practices within the past five
years. However, many of the responding directors indicated that they were considering changes in
their equity redemption program.
In investor-owned businesses, owners supply risk capital in exchange for the prospect of profits. In
a cooperative, members defer the receipt of a portion of their profits in exchange for the services
which the cooperatives provides. An investor-owned business can get equity from anybody willing
to accept that business's particular combination of risk and potential profit. In a cooperative, the
people who must be counted on to make an equity investment are the members who are using the
cooperative. Because the equity investment entails risk without the potential for appreciation, it
needs to be spread out among all the members of the cooperative. Generating adequate profits and
distributing those profits in the form of allocated equity is an essential vehicle to maintain the
cooperative principle of “member benefits”. Redeeming equity within an acceptable cycle is
essential step to ensure that the members who are using the cooperative services are providing a
proportional share of the equity investment.
If you would like to analyze your cooperative’s future equity redemption obligations and consider
alternative structures, please let me know. The OSU Equity Analyzer Software is rested up and
ready to spring into action.
12-21-2010