By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University
Unlike investor-owned firms, cooperatives are not generally for sale to the highest bidder. However cooperative memberships do have the option of liquidating the firm. This is not a scenario that most boards and managers spend much time worrying about. They conclude, probably correctly, that their best defense is to ensure that the cooperative operates efficiently and adds value for its member owners. However there are practices that enhance or diminish the likelihood of voluntary dissolution by the membership.
Retaining member-based profits in the form of unallocated reserves is a practice that has long troubled cooperative scholars. Cooperatives need reasonable amount of unallocated reserves to cover an unexpected loss or regional stock write down. However, unlike allocated retained patronage, profits retained as unallocated reserves are only distributed to members upon dissolution. If you recall the movie “It’s a Wonderful Life,” you might remember the scene where Jimmy Stewart examined the terms of his life insurance policy and concluded he was worth more dead than alive. Members are unlikely to liquidate a cooperative just because the ratio of unallocated to allocated equity is too high. When other factors tempt them to liquidate, excessive unallocated reserves create the scenario where they discover that their equity is worth more dead than alive.
While excessive unallocated reserves enhance liquidation potential by violating the “user benefits” principle, other practices create issues by violating the “user control” principle. A cooperative’s membership role determines the individuals that are eligible to vote on dissolution or any other major issue. Keeping membership rolls current by removing inactive members keeps decisions in the hands of members who are actively using and actively benefiting from the cooperative. Achieving this is a topic in and of itself and is likely to require a bylaw change along with advice from your legal counsel and auditor. However, under a one-member, one-vote system, an inactive member with a small equity balance has the same influence as your largest producer.
A final practice that diminishes the likelihood of a dissolution vote is keeping the asset base aligned with member needs. This also relates to the “user benefits” principle. A number of studies have examined why producers patronize a cooperative. Patronage refunds are usually not one of the highest ranked factors and equity retirement payments rate even farther down. Service, which includes access to the right mix of equipment and infrastructure, generally tops the list. A cooperative that exits unprofitable business areas and reinvests in the areas where it can add value for the membership is unlikely to face a dissolution vote.
The best defense against dissolution? Manage the cooperative to be an efficient business and adhere to principles to be a good cooperative. It’s a wonderful life and you are part of a wonderful cooperative industry!