User Owner versus User Benefits

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

As I discussed in recent newsletters, a few cooperatives across the US are experimenting with redeeming common equity into a dividend bearing preferred stock.  At the tactical level this provides the opportunity to use the after tax margins from non-member business to supply dividends to members.  At a more general level this is a re-examination of the balance between the user-owner roles and the user-benefit role in a cooperative.

The concept of user-benefit or patronage is central to the cooperative business model.  It is this structure that creates the difference between cooperatives and investor-owned firms and which creates most of our complexity in cooperative finance.  Cooperative members are both owners and users.  In the traditional U.S. cooperative we have not placed must emphasis on the user-owner role.  Members make only a trivial initial investment and receive their ownership out of the profit stream.  There is no benefit to stock ownership.  Agricultural cooperatives have traditionally issued qualified stock and have had relatively long equity revolving period.  This implies an immediate tax obligation and a much deferred benefit from equity ownership.  It is not surprising that this structure has created little excitement for the user-owner role.

There have been two basic strategies to rebalancing the user-owner role in a cooperative.  New Generation cooperatives and cooperatives using the base capital plan link ownership directly to use.  Profit distribution and benefits are still linked solely to use but users are required to match ownership to use.  These models clearly emphasize the member’s responsibility to finance the firm.  The other approach to enhancing the user-owner role has been to reduce the equity revolving period and/or pay dividends on cooperative equity at some point in the ownership cycle.  This approach is a different balance of user returns (cash patronage) and user-owner returns (equity revolvement and dividends.  The original Rochdale cooperative principles did not preclude a return on ownership.  They specified that ownership return should be limited to a reasonable level so that a good portion of profits could be distributed as patronage.

Do cooperative members place a value on their equity?  Have we downplayed the member’s responsibility to invest?  Have we got the right balance between cash patronage, equity revolvement and infrastructure investment?  Those are all excellent questions for your next strategic planning retreat.