When coops bring in external investors

So imagine this:  you, your family and, let’s say, your three much loved cats have been living happily in your house for many years, regularly paying all the household bills and sometimes even having a little left over at the end of the month.  But then times get tougher.  Without some assistance with the bills, you may even find yourselves homeless.

But someone you meet down the pub offers to help.  They offer to pay 40% of your household bills. In exchange, they simply want to put a tenant in your spare bedroom and take the rent the tenant pays.

You’re not sure, but you need the money.  And the deal is done.

My story may not be exactly analogous but something very like this happens when a coop takes in external investors as minority shareholders….

…which of course is just what the Co-op Bank is about to do.

I wrote recently, both on this blog and for the Guardian,  on multi-stakeholder cooperatives, but since then I’ve been reading the excellent new Co-operatives UK booklet from Johnston Birchall, Good governance in minority investor-owned cooperatives.  This is an extremely valuable piece of work which I recommend without hesitation

Johnston Birchall explores in detail what happens around the world when cooperative bring in external investors as minority shareholders. He considers among other examples the ownership and governance arrangements at Crédit Agricole,  the Kenya Co-operative Bank, the Italian insurer Unipol, the Irish agricultural business Glanbia and the Swiss milk processor Emmi.  He also reminds us of the (problematic) route followed by Kent Reliance Building Society which chose to join up with a partner private investor in a holding company OneSavings.

Johnston Birchall’s conclusion is necessarily a cautious one:  “The conversion of cooperatives into hybrids that have a minority of investor owners has uncertain outcomes,” he writes.  There have been examples of cooperatives which have found the hybrid model too difficult and have tried to move back later into a purer coop format, he reports.  On the other hand, others have gone the other way: “Others find that the co-operative share is diluted over time so that the cooperative becomes just one institutional investor among others.  When the model works, it does seem to lead to a dilution of the meaning of ownership among cooperative members,” he writes.

My first encounter with these issues came in relation to the former workers’ coop Poptel, when it was forced to take in a minority external investor.  A little later, the minority investor became the majority investor. Poptel has now gone (though a little part of it was later absorbed into the Phone Coop),  but the story of its demutualisation, which I recounted at the time on my website,  was a regrettable one.  Partly as a consequence, I remain unconvinced that minority investor-owned coops are anything but an emergency measure when all else fails.  And the lesson I draw is the same one I reported on earlier this year in another Guardian piece: it is that the cooperative movement internationally urgently has to explore possible new capital instruments for large cooperatives which, whilst having some of the properties of equity capital, don’t allow investors to become cuckoos in the nest.

One thought on “When coops bring in external investors

  1. Perhaps we need to look at different types of financial instrument to those currently employed? I know there is the Evergreen Direct Investing model that’s been developed by the Capital Institute for one (http://www.capitalinstitute.org/sites/default/files/docs/EDI%20FG-1.pdf).

    I should mention that I share your lack of enthusiasm for investor capital in coop structures, however, if as I hope the cooperative sector is to expand (e.g. successful single site services and retail coops expanding to a number of sites) I believe a wider “arsenal” of funding options are required.


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