The Fourth Cooperative Principle

The Fourth Cooperative Principle

The International Cooperative Alliance (ICA) has established seven principles as guidelines by which cooperatives put their values into practice.

The Fourth Principle is Autonomy and Independence:

Co-operatives are autonomous, self-help organizations controlled by their members. If they

enter into agreements with other organizations, including governments, or raise capital

from external sources they do so on terms that ensure democratic control by their members

and maintain their co-operative autonomy.

The key to the Fourth Principle is the phrase “controlled by their members.”  Autonomy and self-help flow from member control.  Therefore, protecting member control should be a fundament of any negotiations, and structuring of any agreements with other organizations.  Such organizations may be other businesses or may be one of the many governments that facilitate, regulate, and tax a cooperative. 

The Seven Principles overlap and reference each other, and this one is no different.  This principle of autonomy and independence should not be a deterrence to agreements and relations with other organizations – we know that cooperation among cooperatives is also essential for success.  Co-ops will do best if they are part of an ecosystem of like-minded entities.  This should be a web of interdependence, not a predator-prey relationship.

Cooperatives should best be familiar with not only their own governance structure, but also the governance structures of the more common enterprises (corporations and LLCs), so as to spot underlying assumptions in contracts and deals.  Contractual rights and responsibilities may be premised on ideas of who has the power to make decisions within an organization.

RELATIONSHIPS WITH OTHERS

Relations with government may be less direct.  This may take the form of advocating for the creation, via legislation, of new business entities that are more suitable for cooperative purposes.  This may also mean simply being fluent with the existing statutes: understanding the advantages and the limitations of your state’s laws for cooperative entities, as well as the ways in which corporate and LLC forms can be modified into cooperative organizations.  Do not underestimate the need for both clarity of vision and informed imagination to perform these tasks.

Agreements and relations with government will also be influenced by the degree to which a Co-op can effectively self-regulate.  If a Co-op can successfully keep its own house in order without burning and pillaging surrounding communities (in contrast to some corporate practices we can observe in the world today), it may convince the government that strict regulation and oversight are unnecessary.  Government routinely gives corporations incentives and advantages that may ultimately discriminate against cooperative organizations.  Co-ops should be considered and treated at least as favorably as other entities when policy, law, and regulations are made.  Regardless, the fourth principle demands that any government support must not usurp member control of the cooperative enterprise.

Protecting member control should also be a primary consideration when raising capital.  There is always a price to be paid for capital, and in the non-Co-op world, that price is often paid by giving up some degree of decision-making power.  An investor may obtain voting rights in proportion to the equity she has purchased, or she may acquire a seat on the board of directors.  There are many stories of founders effectively losing their companies as a result of multiple investors taking a bite out of the equity apple and eventually leaving the founders empty handed.

So, what’s a capital-hungry Co-op to do?  There are many ways to take capital without giving up decisional control, the challenge may lie in finding investors who like the deal.  Well known tools include debt and non-voting preferred shares. 

Co-ops must examine agreements for explicit attacks on autonomy, but also for the less obvious ways that a contract could undermine member control.  For instance, what are the consequences for defaulting on a loan?  Or breaching a contract?  What would the other party be allowed to do in that situation?  How might a particular contract subject a Co-op to the influence of monopoly-minded parties?  Sophisticated risk analysis is called for.

LEADERSHIP

Co-ops are often governed by the members themselves.  One of the distinctive features of a cooperative is that everyone must learn how to be a business owner.  This can be highly beneficial to the organization to have dispersed knowledge and competence throughout the staff, but given the steepness of the learning curve, it is not uncommon to find Co-op members unequipped for the leadership roles they must fulfill.  Many Co-ops shift towards having managers, directors, and advisors who are more experienced, but are really “outsiders”.  While this strategy may provide needed leadership, it can also erode the autonomy of the Co-op.  Another approach is to incubate qualified leadership from within through a structure of education and training.  There must be such education and training not only for leadership, but for all members.  Member control, autonomy, and self-help necessarily require that the general membership have oversight of the board.  Meaningful oversight requires sufficient insight to render judgment on the board’s and management’s actions.

_______________________

We believe that structures implement principles. Thoughtful and considered formation, or re-formation, of your business can give you bylaws, agreements, contracts, and policies that can place these values at the core of your organization, not just an afterthought.

What does autonomy and independence mean at your business?