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The Third Cooperative Principle

The International Cooperative Alliance (ICA) has established seven principles as guidelines by which cooperatives put their values into practice.

The Third Principle is Member Economic Participation:

“Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefitting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership”

Co-ops are created to meet the needs of their members through mutual self-reliance, not to generate a return on investment for speculative investors. A central, underlying concept is that the members themselves are the primary source of capital, and the members share common ownership and control of the capital of the Co-op. In other words, capital is the servant, not the master in a cooperative enterprise. When external capital is required, it should be raised in a manner that comports with the other cooperative principles and should not subvert the autonomous and democratic identity of the cooperative business. Ideally, there will be a balance between capital contributed by members and capital raised from external sources. Excessive external capital risks giving outside investors direct or indirect control over the business, which conflicts with cooperative principles of member control.

Skin in the Game

Typically, Co-op membership requires some degree of buy-in or contribution. This can range from $100 to join the neighborhood food Co-op, to $10,000 to become a worker-owner of an industrial enterprise. This capital “investment” made by a member is not the kind of investment one makes when buying publicly traded stocks. The Co-op capital contribution will be pooled with the contributions of the other members to make possible the operation of the enterprise – and by that operation shall the members derive their livelihood or otherwise meet their needs. Co-op membership share prices should be chosen with some degree of care. Different types of enterprise will require different amounts of capital in order to commence, or continue, operations. These needs of the business must be balanced against the reasonableness and accessibility of the price of membership. If the buy-in is set too high, the people who actually need to use the Co-op may be excluded from membership. If the member share price is too low, however, it diminishes the value of the voting rights that accompany the share, and a low price may select for members who do not take the cooperative endeavor seriously, thus degrading the integrity of the enterprise. And, of course, if the member contribution is insufficient to meet the Co-op’s capital needs, the business faces a sustainability problem and a threat to its autonomy.

Keep Your Eye on the Goal

In stating, “Members usually receive limited compensation, if any, on capital subscribed as a condition of membership”, the principle is articulating the idea that member contributions do not provide a return on investment. The buy-in will be redeemed at, or only slightly more than, the purchase price. Again, the purpose of the enterprise is not to maximize the ROI on the capital contribution, but rather to meet the needs of the members. If financial resources are diverted to pay high interest rates, those resources cannot be used to achieve the organization’s goals. As the Internal Revenue Service artfully puts it, “a cooperative may not be operated for the purpose of paying a return on equity investments.”

Where’s the Payout?

What, then, is a “surplus”? After bills and wages are paid out of revenue, there should (hopefully) be some extra money. In a typical business entity, this would be deemed profit and distributed to the owners in various ways. But in a cooperative, the members decide what to do with the surplus as it is specifically that portion of the extra money that is attributable to the members’ efforts and activities. It can be re-invested in the Co-op, held in reserve to protect against less-profitable times in the future and ensure long-term viability of the business. It can be invested in other cooperative businesses to help create and support a cooperative ecosystem. The surplus can also be distributed back to the members in the form of patronage dividends.

“Indivisible reserves”? This kind of Co-op capital is held in-common, not individually. When surplus is allocated to the reserves, no portion may be withdrawn by an individual member (thus, it is indivisible). In this way, the Co-op protects its long-term interests and the interests of both current and future members.

What are patronage dividends? This is a financial return to the Co-op’s members of a portion of the surplus, in an amount to be determined by the members. As a Co-op may have earnings from various sources, it is important to note that patronage dividends only result from business done with or for the members (i.e., benefitting members in proportion to their transactions with the co-operative). Dividends can take a variety of forms: cash, discounts or refunds, written notice of allocation, and more.

We believe that structures implement principles. Thoughtful and considered formation, or re-formation, of your business can give you bylaws, agreements, contracts, and policies that can place these values at the core of your organization, not just an afterthought.

What does economic participation mean at your business?


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