Cooperatives as a Community Development Strategy

The social and economic contributions of cooperatives to their communities are certainly acknowledged, but largely as unintentional outcomes, or “community externalities,” emerging from the process of organizing and operating a cooperative. The credulity of believing that communities will look to cooperatives to achieve local development objectives other than jobs and income is reflected by Fairbairn: “After all, how many citizens… sit down and say, ‘What our town needs is more democracy: let’s form a co-op!’” .

Community development scholars and practitioners, on the other hand, are now advocating that communities do just that. Although for the most part they never mention cooperatives per se, they promote locally owned and controlled businesses. The fact that cooperatives, or any actual legal business structures, are largely ignored in both community development theory and practice may reflect either a lack of detailed knowledge about business structures or an erroneous assumption that their differences (beyond local ownership and control) are trivial in a community development context. When cooperatives are mentioned, their potential use is narrowly defined (e.g., worker-ownership). By providing relevant information about the distinguishing traits of the cooperative model and examples that reflect a more comprehensive function for cooperatives in community development, serious omission in the community development literature is addressed. The need for this type of information is timelier than ever. In the past decade, new cooperative models have evolved. Some of these models hold new promise for community development initiatives, while others pose unique challenges. Comprehensive guides for cooperative development already exist; the objective should be to motivate community development scholars and practitioners to start thinking about cooperatives in new ways, as part of their theory and strategies.

The Cooperative Business Model
A standard definition of cooperatives in the U.S., a user-owned, user-controlled business that distributes benefits based on use, combines the model’s three fundamental principles: user-ownership, user-control, and the distribution of net income based on patronage rather than investment. A coop’s user is a person that supplies its raw product (e.g., grain for processing) or purchases its goods and services. The “user-owner” principle implies that the people who use the co-op help finance the co-op in return for ownership shares. Cooperative patrons (or users) become members by investing equity (either up-front or over time) in the cooperative. Members generally contribute thirty to fifty percent of the capital required to finance the enterprise. The collective investment of equity creates joint ownership of the business. Cooperatives may receive grants and loans (debt capital) from lending institutions (there are banks that specialize in providing cooperative credit) but there are limitations on receiving equity capital from individuals or organizations that will not patronize the cooperative. Cooperatives may obtain equity from non-members, but the investors may not be granted any voting rights and their returns from the investment are limited by state cooperative statutes (in most states dividends may not exceed eight percent annually).

        The “user-control” concept means that cooperative members govern their organization. They approve and amend the co-op’s governing principles—the articles of incorporation and bylaws. They also elect a board of directors and are required to approve all mergers and any bankruptcy decisions. State statutes governing cooperatives and cooperative bylaws usually dictate that only active co-op members (those who use the coop) are eligible to become voting directors, although non-members sometime serve on boards in a nonvoting, advisory capacity. Advisory directors are becoming more common in large agricultural cooperatives in the U.S., where complex financial and business operations may require the expertise of financial and industry experts. `Voting rights are generally tied to membership status, usually one-member, one-vote, and not to the level of investment in or patronage of the cooperative. 

        Cooperative law in a number of countries, however, also permits voting rights based on the volume of business the member transacted the previous year with the cooperative. Generally, however, there is also a maximum number of votes any member may cast to prevent control by a minority of members. Equitable voting, or democratic control, is a quintessential attribute of cooperatives. In most cooperatives, the board of directors hires a (nonmember) manager to oversee business operations (worker-owned cooperatives and collectives are exceptions). The manager, the only employee that answers directly to the board, is responsible for carrying out the mission and vision of the cooperative as established by the board of directors. “Distribution of benefits on the basis of use” refers to the allocation of a cooperative’s annual net profits, all or part of which are returned to members in proportion to their patronage (thus, they are aptly called patronage refunds). Cooperatives can also return a portion of their profits as dividends on investment. 

        Unlike other business structures, cooperatives are guided by a set of business principles and values.5 The International Cooperative Alliance, the organization that represents cooperatives worldwide, has adopted three sets of principles (in 1937, 1966, and most recently, in 1995). The seven principals for cooperatives include the following: (1) voluntary and open membership; (2) democratic member control; (3) member economic participation; (4) autonomy and independence; (5) education, training, and information; (6) cooperation among cooperatives; and (7) concern for community. The seventh principal, which proposes that “cooperatives work for the sustainable development of their communities through policies approved by their members,” was added in 1995 (ICA) in recognition of the link between cooperatives and community development. 

        The cooperative business model, formally developed in 1844 in Rochdale, England, has never remained static. New laws and applications have created two distinct offshoots from the traditional structure outlined above (Table 1). New generation cooperatives (NGCs), which generated a lot of interest in the 1990s, have three characteristics that distinguish them from the traditional model. First, they limit the number of members they allow based on the size of their business. Traditional cooperatives have always had open membership policies, allowing anyone who patronizes the cooperative to join. Second, they tie membership shares to delivery rights. Members purchase shares that give them not only the right, but the obligation to sell a certain quantity of product to the cooperative. In traditional cooperatives, members have the opportunity to sell to the cooperative but are usually under no legal obligation to do so unless they enter into some type of supply contract. Third, the membership shares can be sold by members to other patrons, meaning member equity may increase or decrease in value over time. In contrast, membership equity in traditional cooperatives does not change in value. When members wish to leave, they simply sell their shares back to the cooperative at par value (the price they originally paid). Patron-investment cooperatives (PICs) are a more radical departure from the traditional model. This type of cooperative allows non-patron investors (individuals who do not use the cooperative but invest equity capital) to become members and bestows on them all the rights of patron members (including voting). The relatively new Canadian multiple stakeholder model (also called a solidarity cooperative) allows three categories of members: users, workers, and “sustainers,” the latter including any person or organization that has invested in the cooperative. For example, community non-profits and government agencies in Canada often invest in these cooperatives, which are concentrated in personal and home service sectors. Because of their multiple membership classes, the PIC and multiple stakeholder models offer new opportunities for local governments and community residents to jointly meet community needs through a cooperative organization. Worker-owned cooperatives are another prevalent form of cooperative in the United States. Under this form of co-op, the employees own the business. Often, equity is paid to the co-op through “sweat equity,” meaning that the member (owner) must work a certain number of hours to fulfill their equity investment requirement. Similarly, the co-op’s benefits may also be distributed based on individual labor contributions rather than patronage. Worker-owned cooperatives are often confused with Employee Stock Ownership Plans (ESOPs), which are corporations that give employees an ownership stake in the company. Most ESOPs are not completely employee-owned and they are usually not democratically governed. 

        Democratic governance and user-ownership makes the cooperative development process more complex than is the case with other business models. The degree of difficulty depends on who initiates the process, the diversity of the stakeholders, and the complexity of their objectives. The cooperative development process can be initiated by a group of people in a community who are interested in creating a cooperative to meet a collective need or opportunity (a bottom- up approach). Alternatively, the process can be initiated by an external party, such as a community development agent, who is interested in developing a cooperative to meet a specified or general community need or opportunity (a top-down approach). Or, in contrast to either of these two approaches, the entire cooperative development process can take place outside of the community, in what we call a peripheral approach. In this case, the community is chosen as a location for the co-op based on strategic business reasons (e.g., market access or transportation infrastructure) at the end of the cooperative development process. The initiators and goals of the cooperative development process, as well as the cooperative structure, have important implications for community development, as will be discussed in greater detail in the following section. There are certainly other factors that distinguish the cooperative model from other legal businesses structures (e.g., unique tax treatment) and determine whether the cooperative model is the appropriate choice for any community development initiative.

        From a local development perspective, a critical feature of the cooperative model is that it can be owned and controlled by community residents. Therefore, a cooperative is more likely to be interested in promoting community growth than an investor- owned firm controlled by non-local investors. Since community residents control the firm they can ensure their own objectives are met, and not those of people who live elsewhere. Cooperatives do not have to be concerned about generating high profit values for stockholders. Their objectives are set by their members and often focus on providing services rather than on maximizing overall profit for the business. Many non-agricultural cooperatives, for example, are created to serve a local need, not to generate profits. Investor owned firms can be under considerable pressure to grow as fast as possible, often outgrowing their community and relocating to a location where the supply of labor is larger and other inputs can be more easily obtained. Cooperatives are eligible to apply for loans and grants from a number of federal and state agencies designed to support cooperative development. These can provide significant sources of low cost start-up and operational funds for the cooperative business. In addition, other non-governmental financial intermediaries such as co-op banks provide relatively low cost loans to cooperatives. Cooperatives can also benefit from significant tax advantages. Finally, cooperatives may also be able to take advantage of of lower labor costs, as members may be willing to contribute labor instead of capital as a form of investment in their business.

Table.1 Comparison of Alternative Cooperative Types

Traditional

Cooperative New Generation
Cooperative Patron Investment
Cooperative Worker-Owned
Cooperatives
Membership
(Ownership) Open membership
and generally no
contractual use requirement.
Only patrons
are members. Closed membership
and ownership is
linked to product
delivery contract.
Only patrons are
members. Open or closed
membership; non
patrons may also
become members. Closed membership
limited to the number
of jobs in the cooperative;
only workers
are members.
Equity Membership certificates
or common
(par value) stock for
patrons; preferred
(non-voting) stock
for non-patrons. Common stock, but
membership shares
have “market value”;
members sell their
stock to other patrons
when leaving co-op. Common stock with
two different membership
classes: patron
and investor. Membership certificates
or common
stock. Equity in cooperative
is generally
generated through
sweat equity.
Investment & Risk Generally low upfront
investment;
relatively low financial
risk to members. Generally high upfront
investment; increased
financial risk
for members. Low or high upfront
investment; mixed
financial risk. Low or high upfront
investment; mixed
financial risk.

The Potential Contribution of Cooperatives to Community Development
In this section we more explicitly examine the ways cooperatives can be used as a strategy under three contemporary community development paradigms: self-help, asset-based, and self-development. Since these approaches overlap in many areas, the discussion of each paradigm and the potential role for cooperatives will be additive rather than comprehensive.
Self-help community development
The self-help model places community members at the core of a development process with two goals: to improve the quality of life within the community and to increase the community’s internal capacity to create further change by institutionalizing the community development process. It advocates creating enterprises that have a broad-base of community support and serve the interest of many in the community (in contrast to projects that serve the interest of a small sector of the community). Some cooperatives are established by a group of people in a community primarily to meet their own needs (e.g., affordable housing or health care services), but the cooperatives also benefit the community in general. Other cooperatives are developed by individuals within a community (e.g., community development agents and civic leaders) to realize a larger community development objective; these cooperatives have a dual bottom-line, financial and social. They are sometimes called community cooperatives or community business corporations.

        Perhaps the most well known example of such a cooperative is Mondragon in the Basque region of Spain. The Mondragon “experiment” in community economic reform has grown into a complex of cooperatives that comprise over 100 individual businesses. Other notable cases include the Evangeline region in Prince Edward Island, Cheticamp in Nova Scotia, Emilia Romagna in Italy, and the kibbutz of Israel.9 The more recent innovation of “social cooperatives,” first founded in northern Italy in the early 1980s, is also receiving a lot of attention, especially in Canada. They were initially developed to provide jobs for people with disabilities but now also deliver general social services (health care, social services, education, recreation, etc.) in many communities in northern Italy. Each of these cases represents an integrated system of co-ops working together to meet collectively the needs of the community. Independent community cooperatives, single cooperatives designed by individual communities to meet diverse social and economic community objectives, are less well known, but more ubiquitous. In Great Britain, Canada (the solidarity cooperatives), and Sweden, each cooperative often has multiple objectives while in the U.S., the cooperative typically only offers a single primary service. Housing cooperatives, for example, have been developed in urban and rural areas across the U.S. to provide affordable housing for low-income populations, including the elderly. In housing cooperatives, which can be single family homes, apartment buildings, mobile homes or virtually any other structure, the cooperative owns the buildings and land. Members own a share in the cooperative (the business), which gives them the right to occupy a particular unit in the cooperative. Cooperatives often restrict appreciation on units and strive to keep costs low for their members. In addition, since the cooperative, not the individual member, obtains financing, the members do not have to meet the credit requirements of the lender. The transfer of membership shares is also cheaper and more straightforward than real estate transactions. 

        The three cooperative development processes (bottom-up, top-down, and peripheral) described in the previous section have different impacts on community efficacy, the ability of community members to engage in collective action to pursue a common objective. The first of these three processes (bottom-up) has the greatest potential for community residents to learn a development process that could be replicated for other enterprises because it requires the greatest degree of individual involvement. The impact of the second process depends on the extent of the involvement of the external agent. If the agent is primarily acting as a facilitator and guiding a group through the process, the impact would be similar to the group acting on their own. If the external agent is acting as the sole or primary cooperative organizer, the opportunity for the community to gain additional internal capacity decreases. The third process, which involves a cooperative development process outside of the community in which it is eventually located, generally falls outside of the self-help model. Instead, it reflects a more traditional community development strategy (business attraction or recruitment). The choice of a cooperative model is an equally important consideration. The development of NGCs and PICs may have less “broad-based” support than traditional cooperatives because of their closed membership policies (NGCs) and the inclusion of investors who may not be located in the community (PICs). The non-local investors may be more concerned about the return on their investment than the welfare of a community in which they do not reside. If the investors are local residents, however, the PIC model may comprise a more diverse set of community supporters than either the NGC or traditional cooperatives, which are limited to patron members. Whether or not the cooperative continues to serve the community at large also depends on its internal structure. For example, proportional voting rights may allow a small, coalition of members to effectively control the cooperative. Their interests may not represent the entire cooperative membership (and by extension a broad base in the community).