Member Input on Equity Retirement

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Grain and farm supply cooperatives use a variety of systems to retire equity,  These range from special systems that only retire estates to systems based on age of patron,  age of stock, or pool systems where a percentage of the equity in a category is retired.  At least one cooperative in Oklahoma uses a base capital system which matches ownership in the cooperative to business volume.  The systems vary in their ability to keep member equity proportional to use, in the realized return to the member and in compatibility with managing the cooperative’s balance sheet.  Some cooperative boards examine their equity retirement system during strategic planning retreats and consider goals for shortening the revolving period and/or changing the system.  That leads to the question as to whether formal or informal member input is required before changing the equity retirement program.

The articles of incorporation and bylaws of a cooperative specify the decisions that require a vote of the membership.  In most cases the board of directors has discretion to manage equity retirement in a manner that safeguards the cooperative’s liquidity and solvency.  The board of directors can usually establish the equity retirement budget and even change equity retirement systems without a vote from the membership.  However, cooperative boards often go beyond their legal obligations and take decisions to a membership vote if they feel a vote is justified.

Each board must be guided by the culture of their organization.  However, there is good rationale to leave the decision of the equity retirement system at the board level.  Managing equity retirement is a balancing act which impacts member returns and the cooperative’s financial reserves.  Most members do not have a full understanding of the cooperative’s financial position.  Alternative equity retirement programs also impact membership groups differently.  Voting on those types of issues tends to pit one group of members against another.

While a formal vote on an equity retirement system may not be the best path, member communication and input is important.  Members need to understand the cooperative’s need for equity and how equity is created through retained patronage and returned through equity retirement.  Your membership doesn’t need to vote on your equity retirement program and strategy but they do deserve to understand it.