In my last post, I talked about how capital looks like in a traditional business. As a recap, traditionally, capital is invested in the business with a goal of extracting profits and controlling how the business is done – the more money an investor (owner or shareholder) puts in the business, (i) the more return that investor expects and, sometimes, (ii) the more control that investor expects to have in the business.
Jason Wiener talked about it in the context of infrastructure and platform coops and Linda Phillips recently posted this article about how money moves in and out of a cooperative. I highly recommend the read.
In a cooperative, the capital investment works differently. The financial model of a cooperative may be referred to as generative and is centered on producing returns to the owner-members as stakeholders, and not simply due to their shareholder status.
A cooperative member typically owns one share in the business, with the rights attached to that share (or shares, when more than one class of ownership is available). Cooperative members are business owners, much like any other business owner: they invest money in the business, they work in and for the business, they vote and influence decision-making, they receive financial returns.
However, while the stockholder in a traditional business will receive returns based on how much they put in the business (in terms of money, number of shares, equity percentage), the cooperative member-owner’s return on membership-ownership will not be a “return on investment.” The co-op owner’s return does not depend on the number of shares they hold.
Unlike the traditional model (where the financial purpose is to maximize profits in the short term, the ownership is often disconnected from the life of enterprise, and the governance is controlled by the capital markets), in the cooperative model, the purpose is to create conditions for life over long term, ownership is in human hands, and the governance is controlled by those dedicated to social mission.
So how does the cooperative “return on investment” looks like? The original capital investment (equity capital, which is the money the member-owner used to purchase their share) returns to the member-owner when the member-owner leaves the cooperative. This happens when they retire, sell their share (when allowed), or otherwise become ineligible for membership: the cooperative will then redeem the share, paying that member the same amount the member originally paid (sometimes with some interest, but rarely a requirement).
The “real” financial return happens through patronage activity. Our team has talked about patronage here and here. Essentially, patronage refers to the member’s use of the cooperative. Patronage can be hours worked (in a worker cooperative), services and products sold or purchased (in producer, purchasing, and consumer co-ops) through the cooperative. The return generated by the member-owner’s patronage activity is known as patronage return, patronage allocations, or patronage dividends (they all refer to the same thing).
In a traditional business, profits are generated by the efforts of the workers. Simply put, the business recognizes the profits from the sale of their products or services, and pay workers their wages; it may retain some profits and will distribute profits to the shareholders.
A cooperative business “will seek to generate profit” through its activities (sale of goods and services). But in a cooperative, profits are produced, in the first place, through the efforts of the member-owners. As a result, cooperative shareholders (aka member-owners) will receive their share of the business profits (patronage allocations) based on their patronage activity (how much they sold through the cooperative, how much they purchased from the cooperative, how much they worked for the cooperative), and not based on their capital investment. If the member-owner is a worker-owner, then the member will also receive their wages based on the employment relationship. Linda Phillips shared more details about this in her recent blog post.
For a cooperative owner, it is not a matter of “I invest therefore I receive profit,” rather, it is a matter of “I use therefore I generate profits that I get to receive.” A consequence of this is that once the owner stops using (patronizing) the co-op (either because of lack of patron activity or membership termination), the owner will no longer receive profits, not because they are not entitled to it but because they are not producing the income so there is nothing to receive. It’s like pedal powered electricity – you can only benefit from the power for your devices as long as you keep pedaling, even though some of that energy could end up saved for future used (think notices of allocation, which will be later redeemed).
I am curious to hear your reactions to these distinctions. Does this change anything about your understanding of the cooperative model? Let me know via email at email@example.com.