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Co-ops: They're Just More Ethical

Art_0611_Co-op_PCCAre you concerned about the ethical behavior of corporations and its social impact?

It's hard to forget the Enron scandal, the more recent financial crisis, and the collapse of firms like AIG and Lehman Brothers. In response to excesses like these, some corporate leaders since the 80's have been promoting more ethical behavior for their companies.

Cooperatives, in contrast, have been using principles with moral dimensions since the 1800's. This is because co-ops primarily exist not for profit or for charity, but to serve their members. This article details how four of seven Cooperative Principles make co-ops more ethical.

Some companies have policies promoting Corporate Social Responsibility (CSR). Companies with CSR policies self-regulate themselves to safeguard the public interest by voluntarily restraining corporate behavior. Co-ops, in contrast, are founded in seven principles, each with strong ethical dimensions.

Co-ops are important economic actors providing vital services locally, regionally and nationally. Large segments of the American population are co-op members. Co-ops provide 850,000 jobs, creating more than $74 billion in annual wages and $500 billion in revenue.

Ethical Principles of Co-Ops

The International Co-operative Alliance's (ICA) Statement on Co-operative Identity has seven principles for co-ops to operate by. These principles are not abstract or shallow; they are internationally recognized, defining characteristics that create a working framework for cooperatively structuring the economy and fostering more ethical business behavior through cooperative ownership.

The thinking behind the principles was developed with the first co-op, The Rochdale Society of Equitable Pioneers, in the mid 1800's. They created a co-op in response to the massive social inequities of England's industrialization.

The Rochdale members were individual weavers and artisans. They found that local merchants would only sell them adulterated foods at unaffordable prices. They responded by forming their own food cooperative which used three principles that co-ops still use today:

  • voluntary and open membership
  • democratic member control
  • autonomy and independence

The co-op began purchasing higher-quality foods, and selling it at affordable prices to its members. They were also the first to pay dividends based on use; dispersing their monetary surplus based on patronage, rather than investment, i.e. patronage dividends. In addition, they developed a reputation for selling foods of higher quality than established merchants.

Co-ops Formed Out of "Concern for Community" 

The Rochdale venture took root because of "concern for community" - the working community of weavers and artisans. This concern became the seventh basic principle of modern-day co-ops. The ICA further defines Concern for Community, by saying "Co-operatives work for the sustainable development of their communities through policies approved by their members."

The Rochdale Co-op laid the foundation for hundreds of co-ops developing throughout England. It also led to today's current co-ops, successfully deploying a workable form of economic cooperation in modern society.

Today's food co-ops are building upon the traditions of the Rochdale co-op pioneers. They specialize in offering locally and/or organically grown foods, which satisfies an underserved market and supports local and organic agriculture. Co-ops also build on the Seventh Principle of Concern for Community by strengthening bonds between local food consumers and local and organic growers.
Another Concern for Community example can be found in credit unions, which are consumer co-ops that provide financial services.

People Helping People 

In credit unions, "people helping people" is a real sentiment, not just a public relations platitude. Co-op credit union managers are making decisions not devoted solely to maximizing their institution's financial return to investors; they are also holding themselves accountable to the member-owners (or depositors and borrowers). As a result, these credit unions pursue more ethically responsive planning horizons and customer interaction than non-cooperative financial institutions, i.e. investor-owned banks.

This dynamic exists in all consumer co-ops, from rural electric co-ops to daycare co-ops to housing co-ops. ICA's Third Principle, Member Economic Participation, establishes that "Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the co-operative. " This means that co-ops use money left after expenses by sending their financial surplus back to members based on member use, i.e. patronage.

Patronage is more ethical than the corporate investor model. A conventional stockholder may focus solely on drawing off profits, regardless of how they deplete the company's, community's or worker's resources. In contrast, a co-op member actively participates in sustainably developing the equity they have invested in the co-op.

Credit Unions and Co-ops Benefit Their Members 

Credit unions are structurally responsible to act on their desire to benefit members over time. This commitment fundamentally shifts their notions of accountability. Rather than focusing that business' actions on return on investment, they focus on returning assets back to the membership.
The sixth ICA Principle is cooperation among cooperatives and states. "Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures."

These methods are not just "warm and fuzzy" ideals. These business methods are mutually beneficial, not destructively competitive. As the two examples below show, they are business tactics that define and strengthen the co-op business sector. They make co-ops better and more stable systems, and in turn provide greater benefit to their members.

For example, credit unions have common information technology (IT) infrastructure needs. They can help each other meet these IT needs by creating an information technology co-op that serves all these credit unions.

Another example comes from food co-ops that participate in sharing their financial statements with each other. This data sharing enables each participating food co-op to provide more accurate benchmarking and analysis of its own financial performance.

Democratic Control Helps Maintain Ethics 

Cooperatives all operate under the second ICA principle of Democratic Member Control, which is expressed through "one member, one vote." This framework gives all co-ops a standardized and accepted method of democratic governance. Any member can run for the board; if elected, she or he represents the membership. No other business model provides for this level of consumer, worker or producer involvement.

Co-ops are more able to operate with an ethical social conscience. They engage in democratic governance, and thereby subordinate capital, which can only focus on investment return. Moreover, co-ops are positioned to better aligning themselves with the interests of their member constituents than an investor-owned firm does aligning itself with its consumers. This is demonstrated thru credit unions' lack of risky behavior, or food co-ops providing natural and organic products when other stores wouldn't.

The principles that cooperatives work under are a well-established structural alternative to the concept of Corporate Social Responsibility. The legal and tax framework of co-ops make them an inherently more ethical business model than investor-owned firms.

The cooperative principles have a rich, long history of financially productive organizations.
Co-ops are providing essential services to and building equity for their members, while ethically contributing to a better society.

JC Armbruster (jc@nwcdc.coop) is a Writer/Editor and Eric Bowman (eric@nwcdc.coop) is a Co-op Development Specialist with the Northwest Co-op Development Center.