By Mary Elizabeth Fratini | Special to the Vermont Guardian
Posted November 3, 2006
A lthough history shows that Babylonians practiced co-operative farming, the Chinese used savings and loans associations, and Benjamin Franklin formed a mutual insurance company in 1752, the modern co-operative business model is generally traced back to a group of 28 workers in Rochdale, England, in 1844. Their rules — including democratic control, limited interest on capital, and patronage refunds of profits to members based on usage — have remained the foundations for cooperatives for more than 150 years.
Today, half of all Vermonters are a member of at least one co-operative, but they don’t always know it.
“People confuse co-ops with communes or communism and don’t realize that they are beyond political party or governmental ideology,” said Roberta MacDonald, vice president of marketing at Cabot Creamery and organizer of the first statewide summit of cooperatives, held in Burlington on Oct. 10. “Everyone rises or sinks on a unified commitment to a product or service. Co-ops were socially responsible long before other companies started talking the talk.”
The summit, sponsored by Cabot Creamery, the Vermont Sustainable Jobs Fund (VSJF), the USDA Rural Development Fund, the National Cooperative Business Association (NCBA), the Association of Vermont Credit Unions (AVCU), and the recently formed Alliance of Vermont Co-operatives, featured a morning panel on why co-operatives offered a superior model to investor-owned corporations, followed by a candidates’ forum for the U.S. House and Senate races, a discussion of state and federal legislation addressing co-ops, and workshops on using the co-op model as a marketing advantage.
“A number of individuals, many farmers, are interested in forming a biodiesel-based or renewable energy co-op and we’re trying to get a better sense of if this is the best business model for that,” said Ellen Kahler, executive director of VSJF. “One thing we do is provide technical assistance to businesses and we are interested in exploring if there is a role for us to play in supporting groups in the process of forming the co-op.”
The International Co-operative Alliance defines a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise” based on values of “self-help, self-responsibility, democracy, equality, equity, and solidarity.”
According to the NCBA, co-ops serve four out of every 10 people in the United States, providing telephone service to 2 million households, financial services for 84 million credit union members, maintaining almost half of all electric distribution lines in the country, marketing 30 percent of all farmers’ products, and providing homes for 1.5 million households. National co-ops include brands like REI, Land O’Lakes, Florida Naturals, and the Ace and Tru-Value hardware stores.
The primary distinction between cooperatives and investor-owned business lies in each model’s underlying motives, namely to meet members’ needs for goods or services as a co-op or to maximize profit for shareholders as a corporation. This difference is reflected in the way co-ops are regulated and taxed at both the state and federal level in numerous ways. For example, a co-op is generally taxed only on income kept within the co-op for investment or reserve purposes because surplus revenues are returned to member-owners, who are responsible for taxes on that income.
The most common, and least recognized, cooperatives in Vermont are the 31 credit unions serving more than 260,000 members. “Forty-two percent of the population are members, but the general public is very mystified by credit unions; many people don’t know they are cooperatives, or understand what that means,” said John Cote, director of information services for AVCU.
Credit unions pool money from members to provide financial services to people within a specific geographic area or employee group. As a co-op, any profits are returned to members through either patronage refunds, or more commonly for credit unions, improved rates on deposits and loans.
“How many people can go out and buy stock in Microsoft? Not a lot. But how many can benefit from better interest rates, lower loan rates, things that credit unions offer?” Cote said. “I think the biggest message out of the summit is that there is not one industry where the co-op model cannot work, if it is done properly and ethically by people with vision.”
Nationally, credit unions face increased pressures to demutualize, or cease to be a cooperative, often becoming investor-owned companies. Although the number of credit unions in Vermont has decreased, none have demutualized and the total number of members continues to grow. “We have leaders with strong commitments to the co-op model; converting to a bank runs contrary to that,” Cote said. “Some of the most controversial attempts have been about the ethics of board and leadership — after a stock offering, those with the most money on deposit stand to benefit the most.”
The other sector facing the most pressure to exchange the co-op model for a corporate structure is agricultural producer co-ops. Blue Diamond Nuts, a California-based walnut grower co-operative, recently opted to demutualize as a way to meet market needs to expand beyond walnuts.
Agricultural co-ops have a more difficult time raising sufficient capital to remain competitive, particularly in producing value-added products, said Peter Langrock of Langrock, Sperry & Wool of Burlington and Middlebury. He represented the farmers of Cabot Creamery when the cooperative faced bankruptcy and a potential buyout from private investors in 1992, ultimately merging with Agrimark, a southern New England dairy cooperative incorporated in Delaware. The final compromise offered members the option of rolling their equity at value into Agrimark or cashing out at 50 cents on the dollar.
“As you grow the brand, you need to invest in slotting fees at retailers, deal with the pressure for trade ads and consumer ads, and additional equipment, all while the farm base is shrinking. Fundamentally, they demutualize to get cash,” MacDonald said.
The principles of co-op members retaining democratic and economic control, as well as legislation originally passed to exempt farmer co-operatives from anti-trust laws in the 1920s, can limit the pool of available capital. Some co-ops in the West, led by a sheep-growers cooperative in Wyoming in need of a packaging and processing plant, have created new legislative categories to expand their financing options while remaining cooperatives.
The Vermont Legislature began considering similar reforms, but agreed to wait until the National Conference of Commissioners on Uniform State Laws finishes drafting a Uniform Cooperative Association Act next year. Langrock, who chairs the drafting committee, describes the new category of “co-operative association” as an add-on, not a replacement for existing cooperative law. “There’s nothing a co-op can’t do as a limited liability corporation, except be a co-op,” he said at the summit. “The co-operative association is a separate type, geared to allow great principles to meet modern market conditions and modern financing.”
Vermont’s Agriculture Secretary Steve Kerr raised several questions about the potential effect of the cooperative association model on Vermont farmers. “I can’t imagine agreeing to a cooperative rewrite that would endanger farmer control. But that said, there is no way to generate more equity from our farmer base. I don’t know if we would demutualize, but those become real issues,” Kerr said.
“The more people realize where we are heading, the less opposition we have,” Langrock said later, about the response from cooperatives to the proposal. “Their first reaction is often, if it ain’t broke don’t fix it. My answer is, it may or may not be broken, but the train is leaving the station, so let’s make sure it’s ready to go.”
One particularly controversial proposal would allow equity investment from investors in exchange for voting rights, which Langrock agreed contradicts the co-op principle of one member, one vote. “It’s directly conflicting — capital wants control, but members have to have control. We are trying to strike an unholy alliance and balance,” he said.
“Our concern all along has been that the co-op model not become weakened by creating a different statute,” said Paul Hazen, president and CEO of NCBA. “Moving quickly on this is not appropriate; we are saying, be cautious and make sure they are benefiting members.” NCBA supports alternative statutes that require members to contribute more than half of the capital.
Likewise, a proposal to allow non-members to serve on governing boards raises concerns about retaining member democratic control. The proposed act would require 80 percent of the board to be co-op members, which Langrock said would allow co-ops to seek needed expertise without endangering member control.
The NCBA’s position would require two-thirds of the board to be elected by member patrons, but Hazen is even more cautious on this count. “It can be appropriate, but it can also start to change the culture of the board,” he said. “I encourage co-ops, if they need a specific kind of expertise, to go out and hire it. That way, they can be sure to get someone who will be looking out for the interests of the co-operative.”
Although the Uniform Cooperative Association Act could technically apply to any co-op, some sectors are regulated under different statutes, including credit unions and utilities. The latter industry also has a unique relationship with membership because they are required to provide services to everyone within a regulated area, even if they choose not to join as a member. Washington Electric Coop (WEC), for example, was founded in 1938 and now supplies power to parts of 41 towns in Washington, Orange, Caledonia, and Orleans counties.
Utility co-ops did face an analogous conversation in the 1990s, however, when Vermont rewrote the industry statutes in anticipation of electric deregulation. Ultimately, Vermont became the only New England state to retain a regulated electric industry, but according to Avram Pratt, general manager of WEC, “great care was taken by co-ops and legislators to limit the kind of activities [in addition to selling electricity] and not throw the door open to doing anything, which they can do in some other states.” In a later interview, Pratt added that in any attempt to rewrite cooperative statutes, “I would emphasize that they should not allow co-ops to stop acting like co-ops, but retain democratic governance and member rights.”
With many Vermonters remaining without high-speed Internet access and Verizon’s announced plans to sell many of its systems in New England, several people have suggested that co-ops could offer expanded broadband access similar to their role in bringing electricity to rural areas in the 1930s and 1940s. “The problem is the kind of public efforts to expand technology into rural areas are all competitive grants and pilot projects,” Pratt said. “Electrification is one of the great absolute successes of government and it was accomplished because of leadership and resources from the top.” In the interim, WEC has opted to partner with local groups expanding community wireless networks into rural areas.
The post-summit plans for existing Vermont co-ops remain largely unchanged, but several attendees said they were grateful for the opportunity to work with co-operatives in other industries. Kari Bradley, general manager of Hunger Mountain Co-op in Montpelier, noted that the food co-op movement was just beginning to provide more guidance for directors in developing a strategic plan.
“I do think the co-op is a better model, despite some of the inefficiencies, because there’s a level of responsibility or accountability back to the member-owner that you just can’t get in other businesses,” he said.