Value creation in the Co-operative and Mutual Business Model

Co-operative and mutual enterprises (CMEs) have a long global history, dating back to at least the sixteenth century. Australia’s first friendly society was established in Sydney in 1828, and the first retail co-operative was in Brisbane in 1859.

In Western Australia, the first co-operative was the Albany Co-operative Society, established in 1867, by the employees of the P&O Shipping company to help lower the cost of food and merchandise.

What types of industries do CMEs operate within?

CMEs today comprise a range of different types of firms that operate within most industries. They include co-operatives engaged in agricultural production, consumer, cultural and community services and worker ownership.

There are also financial mutuals engaged in superannuation, banking, and insurance. This comprises building societies, credit unions, customer-owned banks, and friendly societies.

Among these firms are well-known brands such as HCF and HBF in health insurance, Australian Super, HOSTPLUS in superannuation, and Australian Unity and P&N Bank in financial services.

In addition, there are associations and member-owned companies operating in the motoring services area, such as the Royal Automobile Clubs of WA, South Australia, Victoria, Queensland and Tasmania.

There are 1,848 active CMEs operating in Australia, consisting of 1,491 co-operatives, 293 mutual enterprises, 36 friendly societies, and 28 member-owned superannuation funds.

Their combined gross annual turnover is over $2.6 billion and their combined assets are more than $1.469 billion. Based on available data, their combined active memberships exceed 33.3 million.

What is unique about the CME business model?

The five areas to be considered when examining the difference between a CME business model and those of other enterprises are purpose, ownership, governance, control, and funding.

A CME is usually created by its members to address an economic and/or social problem that is commonly shared by its membership.

This purpose or “mission” is the strategic reason the enterprise exists and is typically a problem that its members cannot solve alone, or that isn’t being adequately addressed by alternative business models.

The ownership and control within a CME vest with its members, who are the shareholders and it applies a governance framework that is democratic in nature, usually following a one-member-one-vote principle at general meetings. In most co-operatives and some mutuals, the board of directors comprises members or a mixture of members and independent directors.

In relation to funding, a CME is owned mutually, and its share capital is held by active members and, where it is individually identified, distributed in proportion to patronage.

Capital within a CME plays a different role from that found within investor-owned firms (IOFs).

While both use the equity in their balance sheets to offset debt and acquire assets needed to operate, the CME uses its capital to deliver services and benefits to members, while the IOF is focused on increasing the value of the share price for investors, who may or may not be engaged in trading with it.

IOFs are usually created to market goods and services, but overall, their purpose is to maximise the returns to their shareholders. Ownership is via shareholding, but governance is based on one-share-one-vote, which can allow a few shareholders to own and control the company.

Not-for-profit enterprises (NFPEs) may also be driven by a mission aimed at addressing economic and social needs, and many CMEs are not-for-profit, or even registered charities. However, capital is not distributed and is usually held in trust for the purpose of the enterprise.

State-owned enterprises (SOEs) are also focused on the purpose of addressing economic and social issues, they are not CMEs.

They are owned by the government not members, are usually governed under statutory authority provisions, and their boards are appointed with directors drawn from the public sector or by political decision-makers. Any share capital is effectively owned by the government on behalf of the public.

How is value created within a CME?

Value is multi-dimensional, comprising functional, financial, social, emotional, epistemic (e.g. curiosity, interest), and image factors. Its importance is only relevant from the perspective of the customer, or in the case of CMEs, that of the member.

The creation of value is a fundamental focus of any business model. A key element is the ability to identify a customer value proposition (CVP), or in the case of a CME, a member value proposition (MVP). It is around this MVP within the business model that value can be created for members.

 

Within IOFs, value for shareholders is an appreciation of the share capital held within the enterprise. The value of an IOF is best measured by the valuation that can be placed upon its assets.

These can be both tangible assets such as buildings, plant and equipment, and intangible assets such as intellectual property (IP) rights (e.g. patents, trademarks, brand names), and goodwill. As the assets and equity in the balance sheet grow in financial value, the perceived value of the firm to its shareholders will increase.

By contrast, in a CME, share capital is just a resource that allows the enterprise to deliver goods and services to its members.

Its assets and equity are owned mutually and value for the member is linked to patronage, with any share capital, if it is available, being allocated in proportion to the amount of trading the member does.

So, within a CME, value is cocreated between the member and the enterprise through their commercial interaction. This speaks to two roles that the member has within a CME their role as a patron engaged in trading (e.g. buying and selling) and their role as investors, where share capital, accumulated through patronage, delivers dividends and returns to investment.

However, the value that a CME generates for its members is more than just an economic transaction, it is also about a sense of ownership and belonging to a community of common purpose.

These are psychosocial motivations and underlie the fundamental essence of what makes a CME a unique business form. It recognises that the value of a CME is not just its non-human assets and how it creates economic value, it is about its members as human beings.

Members who identify with the common purpose of their CME, as well as its principles and values are more likely to be engaged, committed and loyal to the enterprise.

There is strong evidence from research to support this view. In addition to the creation of economic capital, successful CMEs create social capital, which consists of interpersonal networks, mutually beneficial reciprocity and trust.

The CME as an associative democracy

The need to view the CME business model as a generator of both economic and social capital draws on the concept of Associationalism, or associative democracy. This is a political theory originally proposed by French diplomat and political philosopher Alexis de Tocqueville (1805-1859).

This views economic and political life based on voluntary rather than compulsory engagement, where self-governing, independent and democratically governed associations channel common collective action, solidarity, and shared needs and goals, to address economic and social problems. It contrasts with IOFs and SOEs that are either controlled by a minority of owner-shareholders or by the state.

Historically, the concept of Associationalism grew in popularity in the late nineteenth and early twentieth centuries but disappeared in the aftermath of the first World War.

The rise of extreme right-wing and left-wing political movements created political and commercial systems opposed to alternative systems based on pluralism and the decentralisation of authority.

However, since the end of the Cold War (1990-1991), the political theories of both socialism and neoliberalism have demonstrated their inability to deliver economic and social value to the majority of the world’s population.

Although the IOF and SOE business models remain relevant and important within any economic system, the presence of CMEs with their foundation of associative democracy, offers an important alternative business model for addressing economic and social issues.

They serve as a ‘shock absorber’ within the economy, maintaining member ownership and control, sharing wealth through mutuality, and focusing on the creation of value for all members of the community rather than a minority.

The great British Economist Alfred Marshall was a keen supporter of CMEs and saw them as offering a middle path between state control as promoted by Marxism, and the free-market system advocated by neoclassical economics.

His view of co-operative and social economics was not ideological in nature but based on a pragmatic assessment of the value that such business models could offer.

He argued that the aim of a CME should be a production of “fine human beings” rather than the “abundance of material goods” and that its purpose should be to give all people the opportunity to overcome socioeconomic disadvantage caused by a lack of capital.

In turn, the co-operative endeavour provided people with the opportunity to “lead a full life by working with others for some broad and high aim.” This, he felt, would encourage people to achieve their goals through common collective action working with others in a context of mutual trust.

These ideas, originally proposed in the late nineteenth century remain relevant today, and the CME business model provides a vehicle for their implementation.

Where to from here?

The Co-operatives and Mutuals Strategic Development Program focuses on the sustainability, performance and resilience of co-operative and mutual organisations.

Developed by industry expert Winthrop Professor Tim Mazzarol, this program offers a deep dive into the individual issues and opportunities faced by these organisations. Reserve your place