The Cooperative Code defines a cooperative as “a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.” (Section 3)
Despite some divergences, co-operatives are conceived to follow the internationally accepted co-operative principles articulated in the Statement on the Co-operative Identity, a basic document that is used to distinguish cooperatives from other business forms, which was adopted by the Centennial Congress of International Co-operative Alliance (ICA) in 1995. This document defines a co-op as “autonomous association of persons united voluntarily to meet their common economic and social needs and aspirations through a jointly-owned and democratically-controlled enterprise.”
In general, cooperatives are governed on a “one member, one vote” basis. Co-ops thus combines the equal control shared by members of partnerships with the legal personality conferred on corporations. Membership is open: anyone who satisfies certain non-discriminatory conditions may join. Economic benefits are distributed proportionally according to each member's level of economic participation. Depending on the type or purpose for which the co-op is organized, a member receives higher dividends, or patronage refunds, the more the member borrows funds from, or purchase goods from, or delivers supplies to, the co-op, aside from the interest on capital shares. Interest paid on share capital is limited. Some part of the co-operative's surplus is devoted to cooperative education and training. Co-operatives cooperate among themselves. Lastly, co-ops are guided by concern for community. If a firm is consistent with these principles, then its success depends on operating an economically viable and democratically managed business in which the members have the knowledge and capacity to participate in the decision-making process and ultimate control of the co-operative. See Annex for the full text of the Statement on the Cooperative Identity.
There are at least four different forms of business organization: (1) single proprietorships, in which the proprietor owns 100% of the capital; (2) partnerships, in which ownership and the capital required is shared between two to three partners; (3) corporations, in which ownership is shared by a minimum of five stockholders, each of whom must own a minimum of one share of stock (which means that four incorporators may hold just one share of stock each and the fifth incorporator holding all the rest of the shares of stock.) In contrast, ownership of a cooperative is shared by a minimum of 15 members or shareholders, provided that not one member may own more than 20% of the capital.
A cooperative differs fundamentally from other firms that are owned and controlled by the individuals who invested the capital of the firm. Control of a cooperative is based on the member’s personal rights derived from his/her patronage of the service of the cooperative aside from his/her property rights derived from his/her capital contribution. As owners of the firm, they have another right: to appropriate the residual income of the firm.
Cooperatives may be generally classified as either consumer or producer cooperatives. Classification is also often based on their function or type of economic activity. The Cooperative Code lists 6 types of cooperatives: credit, consumer, producers, service, marketing, and multipurpose cooperatives. The typology is based on the kind of activity the co-op is undertaking. Thus, a credit co-op provides credit services while a consumer co-op is engaged in the distribution of consumer goods, and so on. However, the type of activity a producer co-op is supposed to be undertaking is not specific, as it is defined simply as “one that undertakes joint product whether agricultural or industrial,” and especially when we can think of any co-op as undertaking the production of some goods or services. Service co-ops are defined as those that provide particular services identified in the Code as “medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and power, communication and other services.” The Code further contains special provisions on public service co-ops. The typology therefore is specific in some types and yet too general in others.
The type into which a co-op is organized is essential to the co-op’s business and organizational strategy. It must be able to be quite sure about its primary stakeholder structure and be clear about it before its own members, business partners, government regulators, and other stakeholders.
An alternative or adjusted typology is herein proposed, one which follows Henry Hansmann’s theoretical models of firm ownership. In this typology, business forms are determined by the primary stakeholder group controlling the firm and the nature of its transaction with the firm. Co-op type is based on the nature of transactions the co-op owners have with their co-op. In other words, the type of co-op is determined by who, or what set of stakeholders, are cooperating in the first place. Figure 1 shows the basic stakeholder groups of a cooperative firm, or of any firm for that matter. A firm would have its suppliers or capital (the investors), the suppliers of raw material goods used by the firm to produce its own output (the suppliers), and the suppliers of labor (the workers, including management). The other group of stakeholders includes the users of the output or product of the firm (the customers).
In a conventional firm, the suppliers of investment capital are the firm owners in their capacity as suppliers of capital. In the cooperative business form, ownership is assigned to other stakeholder groups. Thus, a co-op is owned by the customers themselves, or by the suppliers themselves, or by the workers themselves, who at the same may or may not also supply the capital to the firm.
A user cooperative is one which is owned by the users or consumers of the products and services produced by the cooperative, or one the members of which are at the same time the market for the co-op. It is owned by the users in their capacity as users. Thus, credit co-ops, consumer co-ops, water service co-ops, electric co-ops, the mutual insurance co-ops and other co-ops whose users are at the same time the owners are all users’ cooperative. User’s cooperatives are actually the more traditional and mainstream cooperative form.
The actual producers of the products of these services are someone else with which the user co-op has a contractual relationship, such as the staff of credit co-ops, suppliers of consumer goods, or suppliers of water and power. The purpose of user co-ops is to realize economies of scale in bulk procurement and therefore to reduce the cost of goods for the consumers. In principle, consumers join together to combine their purchase transactions to realize cost discounts and other advantages that are afforded to large buyers. The users themselves may or may not supply the capital required – usually they do as part of their membership obligations – but their control of the co-op is assigned to them in their capacity as users rather than as source of capital.
Users cooperatives are organized as such because that is the ownership set-up that will most minimize the costs that the firm has to face (according to Hansmann, they face the least ownership and market contracting costs). For instance, water supply co-ops and electric distribution co-ops are organized as user cooperatives since water and electricity provisions are natural monopolies due to the nature of technology for producing these services. Under a monopoly, the firm has the tendency to restrict output in order to maximize the firm’s profits. There is therefore a basis for government intervention either to regulate the prices of the monopoly firm’s output to approximate the competitive level or to undertake the operation of the water or electric utility. Regulation is costly, while government ownership has its own associated agency problems. Given these alternatives, best option is for the market of the firm product itself to assume ownership under a cooperative set-up.
In other public services, there would seem to be no compelling theoretical reasons for user ownership. For instance, slaughterhouses, ice storage plants, transport services, and public markets can be owned and operated by other set of stakeholders, such as the producers or workers in such services without the need to resort to price regulation to approach competitive levels since there would be many others producers that can supply these services. A public market can be owned exclusively by vendors/stallholders without sacrificing efficiency (in fact the most efficient public markets are owned by corporations or single proprietors).
User ownership may be justified in rural electricity, in solid waste management as well as in other services that have a monopoly by virtue of the high sunk cost, the relative smallness of the market, implying a high cost of duplicating delivery mechanisms and correspondingly low exit options for consumers of the service. If exit is not easy voice needs to be exercised. In the case of other services e.g., public markets – where exit is not always possible – such as in rural areas – then maybe voice in the form of user ownership of aspects of an operation may be important. In public markets (consumer and vendor) voice is important because local officials are not profit or welfare maximizing, they have multiple objectives. The market also fails or is incomplete in other respects. For instance, in the case of solid waste management there is a need for downstream collection and then processing of waste. In the case of agriculture processing – see Hayami – there are also common facilities that can serve different producers (economics of clustering). The regulation need not always be about protecting the consumers, but making sure that win-win strategies indeed happen. I don’t know if consumer/producer cooperatives can substitute for the need for regulation in such instances.
Take the case of transport service co-ops, a distinct class of the cooperative tradition in the Philippines. The organization of transport service co-ops is formerly regulated by the Executive Order No. 898 issued in 1983. EO No. 898 changed the name of the Committee on Transportation Cooperatives created under Memorandum Order No. 395 issued in 1973 into the Office of Transport Cooperatives (OTC). It also transferred all the powers and functions of the Bureau of Cooperatives Development over transportation co-ops to OTC. Since the passage of the Cooperative Code (RA No. 6938) in 1990, transportation co-ops are governed by the “Special Provisions on Public Service Cooperatives” under Chapter XII of the Code. The Cooperative Code classifies all co-ops organized under the provisions of EO No. 898 as public service cooperatives.
Article 97(2) of the Code provides that the articles of cooperation and by-laws of a public service co-op must provide for the membership of the users and/or producers of the service of such cooperatives. This provision must be reviewed. There seem to be no compelling theoretical and practical basis to allow only for the membership of users, or of users together with the producers, in such public services such as public markets, slaughterhouses, and even transport services. These services can be owned and operated by producers or workers only.
The registered transport service co-ops (involving jeepneys, buses or taxis) are usually composed of the operators, the drivers, and support workers such as mechanics, although the dominant stakeholders are really the operators who hire drivers and mechanics. Because of this, transport service co-ops can be classified as producers’ co-ops, since they are composed of the producers of the transport service. At the same time, they also provide producer services to the producer-members, including franchise management, providential credit as well as loans for drivers to acquire their own vehicles, vehicle insurance, third party liability insurance, motor vehicle supply, gas and oil, and others. The customers of these co-ops are nonmembers, the riding public (as the customers of a farmers’ marketing co-op are the consuming public). There should be no compulsion that transport service co-ops should include users (the riding public) in its membership, as suggested by Article 97(2) of the Code.
There are some assertions that the problems of the transport co-ops (they are generally financially small) are due to the fact that the owners are the operators rather than the consumers. The premise of this assertion is that genuine co-ops must deal only with members. This is false since producer co-ops deal with the general market while user co-ops deal with members only. Existing transport co-ops are composed of operators (and drivers) since there is no compelling economic rationale for commuters (users) to form their own transport service co-ops, as transport services can be competitively provided by many firms.
There are other services that could be supplied by many providers and yet user ownership is still the best ownership option. It is costly for financial firms to cater to the more numerous smaller savers and borrowers. However, lending costs can be mitigated if borrowers themselves have a financial stake in the financial firm and if they possess enough information, trust and bonding with their peer borrowers that allow for less costly monitoring and enforcement of loan contracts. This is in fact the case in savings-and-credit co-ops, which are able to provide services to small savers and borrowers, who are their owners, better than banks and informal lenders.
Co-ops owned by suppliers of inputs are more unconventional. Cooperatives owned by suppliers of either capital, labor or raw materials inputs can be generally classified as producer co-ops. They produce goods and services for the outside market. A producer can be an owner, operator, or holder of any enterprise producing goods and services for the market. A producer can also either be a holder who directly contributes most of the labor inputs to the enterprise (such as farmer-tillers, craftsmen, and micro-entrepreneurs) or one who primarily manages his holdings and hires workers. The most common type of producer co-ops is the marketing co-op, which aggregates and markets the products of its members for the best price in the market. For example, vegetable and fruit farmers supply or deliver their products to the cooperative to undertake collective marketing in their behalf. Marketing coops therefore are co-ops owned by suppliers of the goods being marketed.
In general, co-ops owned by the suppliers of raw materials inputs to the co-op in their capacity as suppliers can be called suppliers’ co-ops. These are actually the kinds of co-ops that are usually referred to as producers’ co-ops. The most common examples of this type are the agricultural marketing and processing co-ops owned by member-farmers, such as the dairy co-ops in Denmark or India (and there dairy co-ops too in the Philippines) to which the member-farmers supply milk for processing into various dairy products for sale in the market. A farmers’ co-op that receives palay produce from member-farmers for milling and sale to the market is another example. These agricultural co-ops, owned by farmers who deliver their produce as inputs to the firm, usually also provide producer services for their members, such as the bulk procurement of farm supplies, technology, and equipment as well as the provision of credit.
Non-agricultural producers can also form suppliers’ co-ops. This type of co-op is relevant to small and numerous producers of bags and footwear, leather crafts, trinkets, furniture and home decors, processed food including sweets and delicacies, and other small and home-based industries. The industries in these products are composed mostly of small proprietors that employ few workers. They face encroachments from both the high-technology competitors and the cheap labor competitors from abroad. Due to trade liberalization, some of these once-thriving industries in the provinces are facing extinction. Supplier’s co-ops of such proprietors that collectively market their products can bring them back to a competitive footing here and abroad. Such co-ops may also provide other producer services for the member-entrepreneurs, such as procurement of supplies, technology, and product quality standards for the member-producers. In Korea, an example of co-ops of this type is the KIMICO, which markets and distributes agricultural machineries produced by its members who are the manufacturers.
Non-agricultural suppliers’ producer co-ops must be too few to count and there is no educational and promotions program for this type of co-op. One possible reason is the view that “co-ops are for the poor” and that proprietors and small entrepreneurs (larger than micro) are not supposed to benefit from the provisions of the Cooperative Code. This is false. Producer co-ops can help small entrepreneurs become competitive in the marketplace and create jobs. Those concerned with cooperative development must promote producer co-ops among the small entrepreneurs.
Another type of producer co-op would be one in which the producers use the bulk procurement services of the co-op. The producers directly deal with the outside market but source their merchandise and inputs from the co-op that secure the input goods at the least possible cost in behalf of their members. One community co-op leader observed that instead of organizing consumer-owned co-op stores, a co-op that performs collective procurement in behalf of sari-sari store owners (who are producers of retail service) may enjoy more support. School canteens operated by teachers’ co-ops under the Federation of Teachers’ Cooperatives (FTC) have in fact organized a central procurement system that negotiates for better terms with food manufacturers
Workers’ co-ops are producer co-ops whose owners are the suppliers of labor inputs or workers in their capacity as suppliers of labor inputs. Workers co-ops are popular in the US (particularly in the plywood industry), in Italy, and in Spain (which has the Mondragon group of cooperatives owned by workers). More on this are found in the discussion in subsequent sections.
How about co-ops whose owners are the suppliers of capital? First let us clarify that in all the preceding types of co-ops, the member-customers, or the member-suppliers, or the member-workers also provide capital shares to the co-op. However, they differ in nature and function due to the different capacities in which their members own them. A workers’ co-op is owned by the workers of the co-op firm or plant in their capacity as workers. A farmers’ suppliers’ co-op is owned by the farmer-suppliers/farmer-members in their capacity as suppliers. Firms owned by the suppliers/owners of capital in their capacity as suppliers/owners of capital can be called as an “investor co-op.” There is no such thing actually under the cooperative law, since such co-op would simply be the conventional investor-owned firm to which the Corporation Code applies.
However, this framework has implications for co-operative and business regulatory laws: There has to be a unification of business laws covering co-ops, corporations and other business forms. A cooperative should also be able to own and control a corporation, as supplier of capital. It is allowable under existing laws for a cooperative to invest in and operate businesses other than its primary business. Thus, some cooperatives operate stores, travel and tours service, funeral care, and other services. However, it is not clear if a cooperative may own and control a corporation that involves other investors. A co-op should be able to take advantage of the same powers and privileges afforded to private firms under the Corporation Code.
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