Coops and capital: keep the fire bucket at hand

I think this may be an appropriate moment to repeat a comment from George Jacob Holyoake, one of the pioneers of the British cooperative movement, which I admit I’ve quoted a number of times before.  Holyoake, who was making the Inaugural Address at the 1887 Co-operative Congress, said this: “The co-operator is not against capital. Capital is exactly like fire – an excellent servant when it warms the inmates, but a bad one when it burns down the house.”

Capital remains a knotty problem for cooperatives, and indeed it is one of the five issues identified as needing attention in the International Co-operative Alliance’s current strategic plan. The ICA has a high-level ‘Blue Ribbon’ commission investigating the topic, and the commission has now published a new report The Capital Conundrum for Co-operatives. It’s worth a read.

Here’s the start of the report’s preface, which very much echoes Holyoake’s 1887 comment: “Capital is necessary and desirable for co-operatives, because it enables us to conduct business, grow, and meet the demands of our key stakeholders. At the same time, unlike other enterprises, co-operatives’ Principles and structure exhibit a profound guardedness and unease about capital and its power.”

The new ICA report is a series of separate essays from across the cooperative movement (both sectorally and geographically). There are some interesting discussions of the appropriateness or otherwise of cooperatives accessing standard equity capital by establishing plcs which they part-own, a model which has been common recently for some agricultural coops and indeed in banking. The problem with this approach of course is that it creates a wedge which investors can use, so that what was once a cooperative business can quickly be lost to the movement. (Cue a reference here to recent developments at the UK’s Co-operative Bank).  I am pleased to note that the report includes some voices warning of the risks of this practice, the first time for many years I’ve seen this view prominently expressed in the coop world.

There’s an essay I particularly like from two authors working for The Co-operators insurers in Canada, and I will end this blog with a quote from their conclusion “The thesis of this article has been that co-operative capital is inherently incompatible with investor-owned capital, and that there is an abundance of co-operative capital available to support co operatives. The real issues, however, relate to the Co-operative Principle of Co-operation among Co operatives and how co-operatives may be empowered to access the co-operative capital that is available.”  There are, as they say, both ‘capital needy and capital rich’ cooperatives: there must be mechanisms in place to enable them to cooperate together and realise the capital resources which, collectively, are held within the movement.

The report is at ica.coop/en/media/news/new-report-capital-conundrum-co-operatives (Actually, the link wasn’t working today, but I’ve sent an email to the ICA to tell them, so hopefully it will be soon).

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Wake-up messages in new international coop report

Oh, a new report on capital and cooperatives… yawnorama.

But no, get those yawns under control. Capitalism seems somehow to have persuaded us that an understanding of finance is something that only well-rewarded bankers and their kin can have, but that’s not true at all. What we do with money (and particularly what we can do differently with money to remake our world) is really rather interesting and important, I’d suggest, and surely no more difficult as a subject than, say, learning to drive a car or to produce an unlumpy cheese sauce.

The International Cooperative Alliance has said that capital is one of the key issues which the cooperative movement has to tackle. (Personally I think it’s the probably the most important of the five themes in the ICA’s current strategic document.) The ICA has quite rightly stressed that the challenge is to develop forms of cooperative capital which enable the maintenance of cooperative principles and member control, rather than which undermine them. Too often in the past the introduction of external capital, particularly equity capital, marked the start of a slippery slope away from cooperation and towards demutualisation.

The ICA has established a high-level panel to work on capital and one of its first steps has been to commission this excellent new report from a Canadian financial writer Mike Andrews. The report may be prosaically called Survey of Cooperative Capital but it is the best analysis of the various forms of capital available to coops, and the ways that different coops worldwide are using these vehicles, that I have read for a long time. The report looks both at the issues facing start-ups and larger enterprises, with a particular focus on the regulatory requirements for banks and financial cooperatives. There’s also a table showing (and I think this is the first time this has been produced) the percentage of external capital held by the top 200 cooperative and mutual businesses worldwide.

The lesson I draw from this study is perhaps paradoxically that our focus needs to be not on the technical features of the various capital instruments which can be employed but rather on the ways these are to be implemented within the cooperative framework. Or in other words, how in practice can you successfully link access to new capital with cooperative governance and member democracy?

The report is here.

On capital and cooperatives

My series for the Guardian on the theme can coops compete? comes to an end today, with the final piece now published (here).  It’s about the often tetchy  relationship between coops and capital.

As you’ll see,  I begin the piece with a quote from coop pioneer George Holyoake who wrote in 1878 that “Capital is like fire, or steam, or electricity, a good friend but a bad master”.  The problem of capital  – as we saw last year when the Co-operative Bank had to nuzzle up to the hedge funds – remains as acute today as in Holyoake’s time.  How do you satisfactorily defend member self-determination in cooperatives when investors are there as well, wanting their share of the cake?  How do you fill the capital gap, if you can’t access equity?  (Is the – highly controversial – answer in fact to accept investors as fellow-stakeholders in the business and devise a multi-stakeholder coop model which gives them membership rights too?)

I’ve felt for a long time that the big issue facing the cooperative movement at the moment is this one of capital, and I’m pleased that the International Co-operative Alliance has recognised this in its strategic Blueprint for a Co-operative Decade.  I’m currently playing a small part in relation to a UK working party that’s exploring capital solutions internationally for cooperative banks and insurers, which we hope will feed in to the ICA’s recently established ‘Blue Ribbon’ commission on capital.

The Guardian piece explores some of the possibilities around member-provided capital.  And I also float the idea that cooperatives need to develop financial instruments to tap into the growing pool of ethical/socially responsible investment capital, most of which (ironically) currently finds its way into plcs.

Going up: limit for individual investments in coops to be £100,000

The Treasury announced today an important change potentially affecting all cooperatives and ‘bencoms’ (societies for the benefit of the community) registered under the Industrial & Provident Societies Act. From next year, the maximum amount which an individual member can invest through the usual ‘withdrawable share capital’ route is to go up from the current £20,000 to £100,000.

There’s been criticism for some time that £20,000 is too low (the threshold was last increased in 1994).  Some agricultural cooperatives in particular have argued that the number of farmer-members in a typical agri-coop is small relative to the amount of capital that can be required,  and that therefore a £20,000 limit unduly restricts their development.  Co-operatives UK has also warmly welcomed the increase in the limit.

The increase to £100,000 will potentially apply to the rapidly growing number of community share issues, including those for community pubs, village shops, and community-led renewable energy projects.  Major projects using community share issues could now find it possible to raise quite significant amounts of capital.

The fundamental cooperative principle that all shareholder-investors have one vote regardless of how much they have invested remains, of course. But the new £100,000 limit will be discretionary and each individual coop and bencom will need to discuss whether they really want to have investments of this size held by individuals in their business.  One point to consider is whether, even with a one-member-one-vote rule, big investors might in practice be able to make their views count for more.  Another is the cash flow implications for a business if an individual with a major investment requested the return of their money.

The change is coming in during 2014.  The government has also tabled today in parliament a consolidation act covering coops and bencoms, and this is expected to get royal assent next year.  A consolidation act merely tidies up previous legislation (there are no new provisions) but is still a welcome move.

The Treasury report is available online here.

Ethics and the Co-op Bank

Organisers of the Save Our Bank campaign to keep the Co-operative Bank ethical, which is being led by the Ethical Consumer magazine (itself a cooperative, of course), last week met with the Co-op Group’s chief executive Euan Sutherland. The campaign issued its latest online newsletter last Thursday.

My own view is that, with the capital restructure and the arrival of the hedge funds, the Co-op Bank will be well outside what could legitimately be called a cooperative business so in that sense the moment to ‘save’ it has passed. But nevertheless it is clearly valuable to pressure the bank to retain an ethical approach to the banking business. We need to remember though that (even given recent media attention) its reputation as an ethical bank is currently the Co-op Bank’s USP so it is hardly in the investors’ own interests not to support it, at least with lip-service.

Perhaps the most interesting discussions within the Save Our Bank campaign, I think, are around the possibilities of future re-mutualisation.  I would be delighted to see this, although realistically I think you have to conclude that the prospects are currently very distant.  But this links directly to the issue of suitable cooperative capital instruments for cooperatives, which I have been banging on about endlessly in recent months and which I will seize this moment to mention yet again.

The lurking danger of demutualisation

Vivian Woodell, the chief executive of the Phone Coop, has sent me an email link to a recent article in The Australian.  It begins, “The nation’s second-biggest wheat exporter, CBH Group, is facing calls to abandon its co-operative model amid rising investor interest in the agribusiness sector, with estimates that corporatisation could unlock $5 billion in value for more than 4000 growers.”

In fact, I understand indirectly from the Australian cooperative movement that this story comes from a Murdoch-owned newspaper trying to stir things up.  It’s good to know that there are many who believe CBH should stay resolutely cooperative.

Nevertheless, demutualisation – which has caused such problems in Britain over the past twenty years –  remains a worldwide threat to the cooperative movement, and one which needs to be tackled head-on.  This is yet another reason for the importance of discussing new capital instruments for coops.

Capital for coops: not a chocolate biscuit

Journalistic integrity demands that I admit to a mistake.  I was wrong when, in my last blog,  I described the new initiative on capital for cooperatives from the  International Co-operative Alliance as their Blue Riband Commission.  Chuck Gould their director-general has put me right.  The ICA have named it their Blue Ribbon Commission.

And when I admitted to Chuck that I wasn’t really any the wiser, he told me that this has traditionally been a US term for a high-level enquiry led by experts.

So I hope that helps put things right. The substantive point remains that this is potentially a very valuable initiative.  See below!