This topic explains the co-operative business model in terms of its unique ownership, governance, and beneficiary structure. It then shows how cooperatives use their distinctive characteristics to operate within the market and compares them with other models of enterprise.

• discuss the essential elements of the cooperative business model;
• compare and contrast the co-operative business model with other enterprise models;
• identify rights and responsibilities entailed in ownership of a co-operative.

• Co-operatives exist for the purpose of providing maximum benefits to members by satisfying a defined common need.
• Members own a co-operative on a collective rather individual basis.
Ownership of a cooperative is dependent on a member’s willingness to support the business for the collective good rather than as the individual owner of private property.
• Members of a co-operative are entitled to a share of any surplus (profit) generated in proportion to their patronage of the co-operative.
• Capital is an instrument in a co-operative rather than a driver of business operations.

Co-operative enterprises are member-based. This means they are:
• member-owned;
• member-controlled;
• distribute benefits (including surpluses) to members.
A member is someone who uses the services of the co-operative and agrees to accept the responsibilities of membership.

The purpose of a co-operative is to provide maximum benefit to its members by engaging in economic activities or, to put it another way, by intervening in the market.
What are these benefits?

Members derive:
• Economic – reduced prices, increased buying power, share of the surplus (profit);
• Social – local community development, charitable initiatives, democratic participation;
• Psychological – being part of a collective, self-reliance benefits.
How does this compare with the benefits of being a shareholder in an investor-owned firm?

Co-operatives usually require users to purchase a share before becoming a member.
Shares are sold and remain at par value.
Why?
To prevent the interests of capital superseding the interests of members.

Another crucial distinction between the shares in a co-operative and the shares in an investor-owned company relates to the payment of interest (or dividend). In co-operatives, this payment is either limited, usually to around five per cent, or else forbidden altogether. Again, this is a measure to prevent the co-operative being run in the interest of capital rather than for the benefit of members.
D. A. Frederick, ‘Co-ops 101: An Introduction to Cooperatives’
Cooperative Information Report 55 (US Department of Agriculture,
1997), chapter 2.

)
One final distinction that can be made between shares in a cooperative and the shares in an investor-owned business is the issue of transferability. It is impossible to transfer your share in a co-operative to another individual or organisation. This is because your membership reflects your ability to use the cooperative, unlike shares in an investor-owned company which can be sold and inherited.

• Income rights
• Voting rights
• Transfer rights
• Information rights
• Appreciation rights
• Liquidation rights
Apply to most forms of enterprise ownership.
How do these rights apply in co-operatives?

Members have a number of responsibilities in a co-operative:
•
Finance it
• Use it
• Participate in governance
Member capital (equity) is important because:
• it helps to generate commitment and loyalty amongst members;
• it can act as collateral when securing debt finance;
• member equity can be used as a ‘shock absorber’ in times of financial crisis.
M. A. Abrahamsen, Cooperative Business Enterprise (New York: McGraw-Hill, 1976), p.
291.

The ‘member-control’ concept means that members of the co-op govern the business directly by voting on significant and long-term business decisions and indirectly through their representatives on the board of directors. Voting rights are tied to membership status.
Zeuli and Cropp, Cooperatives: Principles and practices in the 21st century, pp. 1 –2.

The members of a co-operative can exercise this right to participate in governance in two ways:
Directly – members can vote on issues at the annual general meeting
(AGM). Policy and long-term business operations are typical issues that members are required to vote on directly.
Indirectly – members have the right to elect a board to represent their interests. The board can then hire a management team to look after the day-to-day operations of the business. The salient point is that any governance body in a co-operative is accountable to the members, not another stakeholder group.

Distribution of benefits on the basis of use describes the principle of proportionality, another key foundation for co-operatives. Members should share the benefits, risks, and costs of doing business in equal proportion to their patronage. It is an equitable system.
The amount to which each member is entitled is dependent on the amount that member patronised the co-operative during a given year. The amount that a member receives is called the ‘ patronage refund ’.
Zeuli and Cropp, Cooperatives: Principles and practices in the 21st century, pp. 1
–2.

The patronage refund is calculated annually and is the amount of surplus, if there is one, which an individual member is entitled to through his or her use of the co-operative. This entitlement comes from the idea that the co-operative has overcharged its members for goods/services during the year and members are owed a rebate.
A member’s entitlement to a share of the surplus of the cooperative is one of the fundamental rights of ownership.

Calculating the patronage refund:
Step 1 – Decide how much of the surplus is to be allocated for patronage refund.
Step 2 – Calculate each member’s contribution to the surplus.
Step 3 – Decide how much of the patronage refund should be in cash .

A note on loss
While co-operatives are profit-making enterprises, there will be times where losses are generated. It is just as important that members contribute to a co-operative when it generates a loss as it is when a surplus is made. Members are responsible for addressing any losses that the co-operative suffers, either by contributing more capital in the form of equity, or by increasing trade with the business. This is also done on a proportional basis, whereby those who make most of the use of the co-operative are responsible for bearing most of the loss incurred.

The co-operative business model has three core elements:
• the values and principles;
• the member-based structure of the business; and
• the business processes relevant to the type of industry in which the co-operative operates.
Where all of these elements meet on a productive basis, a competitive advantage over other forms of enterprise is created.

Business processes
Values &
Principles
Member-based purpose, ownership, governance, and beneficiary structure

1.
Revenue model
2.
Gross margin model
3.
Operating model
4.
Working capital model
5.
Investment model
J. Mullins and R. Kumisar. Getting to Plan B: Breaking Through to a Better Business Model (Boston: Harvard Business
School Press, 2009).
The cooperative’s unique business model means that it needs to treat these elements differently than conventional businesses.

Purpose
Co-operative Investor-owned Company Social Enterprise
Improve the quality of life for members
Members
Create wealth for shareholders Achieve a social purpose
Ownership
Control
Beneficiary
Financed by (excluding debt finance)
Motivational driver
Market-oriented
Distribution of surplus
Distribution of assets on dissolution
Basis of organisation
Democratic basis - one member, one vote
Shareholders
Property right basis - one share, one vote
Members
Member contributions and retained earnings
Self-help and self-responsibility
Yes – market intervention to benefit members
Three methods:



Members
Reinvested in the business
Allocated to social/charitable initiatives
Not to members – controls are put in place to prevent individual members benefiting from the liquidation of the co-operative
Shareholders
Sale of shares and retained earnings
Personal wealth creation
Yes
Yes in form of dividend related to shareholding
Yes – to shareholders
Co-operation Ownership of wealth
Usually a community, charity or quasi-governmental body.
Sometimes owned by individual entrepreneur.
Trustees or equivalent group that may or may not be democratically elected
Target social group
Retained earnings and grants
Altruism or public policy
Yes
Not to individuals, usually reinvested in the enterprise
Yes – usually passed onto another community benefit company or social enterprise
Patronage

•
Co-operatives are member-based organisations; their purpose is to satisfy member needs rather than to focus on the best return of capital.
• Co-operatives seek to maximise member benefits through the achievement of one or more objectives.
•
Members own a co-operative on a collective rather individual basis. Ownership of a cooperative is dependent on a member’s willingness to patronise the business.
• Members of a co-operative are entitled to a share of any surplus generated in proportion to their patronage of the co-operative.
• Capital is an instrument in a co-operative rather than a driver of business operations.

Scottish Agricultural Organisation Society http://www.saos.co.uk/.
National Cooperative Business Association http://www.ncba.coop/.
Co-operatives UK http://www.uk.coop.
Understanding the Cooperative Business Model http://vimeo.com/6081590 .
Global co-operative statistics http://www.ica.coop/coop/statistics.html.
The Cooperative Curriculum http://cooperativecurriculum.wikispaces.com/.
There is an Alternative http://www.vimeo.com/22896857.
UN Year of Co-operatives 2012 http://social.un.org/coopsyear/.

Abrahamsen, M. A. Cooperative Business Enterprise . New York: McGraw-Hill,
1976.
Bateman, D. I., J. R. Edwards, and C. Levay . ‘Agricultural Cooperatives and the
Theory of the Firm’ Oxford Agrarian Studies 8 (1979): 63 –81.
Frederick, D. A. ‘Co-ops 101: An Introduction to Cooperatives’ Cooperative
Information Report 55 . U.S. Department of Agriculture, 1997.
Ridley-Duff, R. and M. Bull. Understanding Social Enterprise: Theory &
Practice . London: Sage, 2011.
Zeuli, K. and R. Cropp. Cooperatives: Principles and practices in the 21st century. Wisconsin: University of Wisconsin Center for Cooperatives, 2004.