Capital Formation for a Democratic Economy (Part 1) (1992)

This document has been made available in electronic format
by the International Co-operative Alliance (ICA)
October, 1992
(Source: Co-operative Values in a Changing World (1992) 

(PART 1)
Challenging perspectives of applications
("For non-co-operators the solutions seem
evident: co-operatives must simply reorganize
and become joint stock companies, and all their
troubles will be over. This is, however, a very
narrow-minded and unsatisfactory point of view.
A co-operative society is clearly defined
within its constitution: to serve the members,
and to act as their agent in matters concerning
their own society. It was never the idea that
other people or groups should profit from the
activities of co-operatives.
If co-operatives want to increase the influx of
risk capital, they will have to reconsider their 
position. I think it would be possible to work 
out a system of two parallel democracies, one 
for the members and one for the employees.
And within such a system it would be possible
for the members and the employees to agree upon
a sensible distribution of the surplus among
members, employees, and the society itself, a
distribution which would secure the continued
existence of the society."
-K. Ollgaard, Danish Agricultural Co-operative
       Federation, 1989)
 Issues of co-operative capital formation have also 
been critical during the past decades, especially 
during the 80's. And, certainly, these are closely 
connected to the issues discussed in the previous 
chapter. Capital formation has been recurrent on our 
co-operative agendas, nationally and internationally, 
and the applications discussed and practised have 
often had significant consequences for the co-operative 
way. This is not surprising, since the issue of capital 
formation concerns the fundamentals of the co-operative 
economic system. Most basic ideas and values are, in 
one way or the other, linked to and influenced by capital 
formation. As we have seen, the changes in co-operative 
environments during recent decades have more than 
usually challenged the traditional methods and practices. 
Among other things, we have experienced a period of: 
*  Increasing inflation.
*  Discount rates permanently higher than those of the
    50's and 60's.
*  Monetarist approach to economic policy in many
*  Increasing liquid capital resources, nationally and
*  Increasing growth and importance of the stock
    exchange markets. 
*  Rapid institutional changes in capital markets,
    nationally and internationally; new financial
    institutions, investment bodies of various kinds,
    more international collaboration.
*  Decreasing barriers to capital transfers across
    national borders, especially within the European
    Common Market.
*  Increasing importance of the stock company form
    (limited company) of organizing economic activities
    and the consequences of, for instance, government
    tax and financial investment policy, etc.
*  Increasing importance of cash management and
    financial investments in business management.
*  Stronger competition for people's savings in money
    and capital markets.
As a general judgement, one may say that these trends 
and tendencies have not been in favour of traditional
co-operative capital formation, but rather of capital-
based associations. Co-operative organizations have 
been faced with more challenges in looking for and
selecting economically efficient applications which are
consistent with other basic co-operative values and
principles. It seems as if pragmatic considerations 
have characterized the applications so as to at least 
maintain the essential long-term character of the 
co-operative way. 
I will discuss some aspects of these experiences and, in
doing so, I concentrate on the financial perspectives and
on the special issues concerning co-operative equity
capital. I approach these from the traditional co-operative 
point of view, in order to gradually discuss the need for 
reinterpretations of that view. 
1. Background issues
When defining the co-operative framework for capital
formation, we can immediately observe that the
institutional pattern of co-operative practice in this
context has become very complex, even when the issues are
restricted to the financial aspects. I refer back to the
previous chapter; we are facing quite another
co-operative reality to that which existed only 20 - 30
years ago. Furthermore, the various types of
co-operatives have experienced different problems as a
consequence of their structures and aims; some have
experienced difficulties in raising capital, others in
investing it in a co-operative way. Older and established
co-operative organizations are in quite different
positions to new co-operatives, among other things in
their socio-economic situation (members' capacity to
save) and the crucial relation to state (legislation and
tax system). There are also quite different relations
between the member and his/her society: in some types 
of co-operative the members have invested relatively 
large amounts of capital and are deeply connected to 
their  societies; in other types the investments are 
relatively small, as is the dependence. 
These differences in basic structural conditions
certainly influence the ways in which the values relating
to capital are interpreted and carried out, and one might
pose the question as to whether it is meaningful to
discuss capital formation in a general way: because there
seem to be many types of co-operative capital formation.
Nevertheless, there are some well-founded views on the
universal "essence" of capital formation in the co-operative 
economic system, and I will keep myself to those. 
1.1.  Framework of values and essential principles 
Co-operative organizations have usually specified the
values and the principles as some basic guidelines for
their approaches to co-operative capital formation.
Generally, it has been stated that capital inside the
co-operative system:
-  Should not interfere with the process of
    decision-making, since that should be the domain of
    democracy. This has been regarded as an imperative
    for primary societies, while there might have been
    some modifications for secondary and tertiary
-  Should not be given more than a limited rate of
    interest, if any. It should not be possible to buy
    and sell the shares and these should not appreciate
    or depreciate in value. 
-  Should be a condition for membership and the
   exercise of member rights to participate, almost as
   a "member fee" (there is some flexibility in
   practice). Members should participate individually
   and collectively in financing the activities. The
   individual part of the capital, the shares, should
   be redeemable at their nominal value, and should be
   at risk.
Many co-operative organizations have also considered it
necessary for a stable and viable performance that the
members will remain the (main) owners of the capital and
take long-term responsibility. This has  been stressed by
special rules and as supplements to the ICA Principles,
saying that capital: 
-  Should be raised and administered in such ways that
   the independence and the stability of the
   co-operative organization will be maintained. 
In practice this has often implied a policy to carry out
capital formation in collective forms; large parts of the
annual surplus have been distributed as non-allocated
reserves: as members' collective savings. This, however,
is currently being hotly debated.
The overall intention behind these basic guidelines has
been to define capital formation within the framework of
co-operative economic democracy. The members should
control the effective use of capital in at least three
ways: as financiers, as participants in the processes of
decisions about how to invest it and as users of the
services of their co-operatives. In other words: the
member is the master, and the capital is the servant. 
1.2.    Issues for the future 
Facing the future, I have understood that some issues are
universally topical. Experience from past decades tells
us that: 
-  Many co-operative organizations are worried about
   how to maintain, expand and mobilize their equity
   capital. The reasons are many: increasing needs for
   capital, more capital-intensive methods of
   production, inflation, limited capacity for member
   savings (quite a high proportion of members from the 
   middle and lower classes within society), stronger
   competition for savings, changing structure of
   membership (e.g. an ageing membership) and
   increasing difficulties in achieving sufficient
-  Some co-operative organizations (more established
consumer and agricultural co-operatives) especially
need capital for lines of development which are
often offensive and penetrating activities with
relatively high risk involvement. This is especially
true of co-operative organizations which are trying
to find new ways for internationalization of their
-  Some co-operatives need improved ways and means for
   making co-operatively good financial investments.
   This is especially true of co-operative organizations 
   which administer large funds of capital as a 
   consequence of their activities.  

-  New co-operatives, mostly outside the established
   co-operatives, need capital for the early phases of
   development. The existing and potential members need
   capital to pay their shares: many of these co-operatives 
   have been started in times of economic depression 
   and unemployment and often by persons with 
   relatively low incomes. There is also an urgent  need 
   for proper finance in the phases which come after 
   that period, when supporting bodies have taken
   away their initial assistance. Without sufficient
   capital, new co-operatives are often obliged to
   resort to less capital-intensive activities, to play
   a background role in the reconstruction of economic
   life, and to stay outside various types of
   collaborative branch bodies for technology,
   marketing, etc. 
-  Co-operative organizations in trouble need support
for long-term reconstructions, and temporary
financial help to overcome a difficult situation. 
-  Many have also stressed the need from an overall
view (at local, regional and international levels)
to pool financial resources in order to consciously
use them for new development purposes, particularly
in developing countries. 
Some of the "new" approaches have challenged the
traditional co-operative values. I will concentrate on
these. Then, we can observe that activities during the
70's, and especially the 80's, have to quite an extent
been carried out in a combination of changes to the basic
forms and structures of co-operative organizations. I
will say that this has belonged to the significant
characteristics of the 80's. One might ask whether this
combination is necessary for an efficient capital
formation: perhaps not. Such structural changes, however,
have usually been represented as being the crucial for
capital formation. 
I look upon that as an important subject for discussion
and I therefore  distinguish between the following
categories of `new' application: 
a) Those undertaken without changing the basic form and
    structure of the co-operative organization. 
b) Those undertaken in combination with a
    transformation of the co-operative society into
    various types of joint-stock companies. 
c) Those undertaken with the main aim of raising,
    pooling and channeling resources in order to
    actively encourage new lines of co-operative
It goes without saying that these changes make the issues
of democracy, which I discussed in chapter IV, even more
2. Raising share capital
Turning to the first category, during recent decades we
have observed many innovations, practised or planned, to
increase share capital. Some of these might be considered
as critical from a traditional value point of view. 
2.1.    Voluntary member shares and quasi shares
A common way to try to mobilize equity capital has been
to encourage members to invest in various forms of
"voluntary shares" as a supplement to the compulsory
membership investments. These shares get a normal rate 
of interest, they usually have no voting rights but are, of
course, redeemable. To some extent there might be special
offers connected to such shares and there are even 
examples when co-operatives have introduced exceptions
from the rule of "one member - one vote". 
There are also various examples of practices (B-shares,
ownership securities, preference shares, sponsor shares,
special certificates, etc.) designed to attract financial
investments from more or less external sources of
capital. Among others, from employees, trade unions,
pensions funds, public investors and closely-related
co-operative organizations. The conditions usually
resemble those above, though shares are sometimes 
more easily transferable. 
I have no general picture of the efficiency of these
innovations. In Sweden, however, practice demonstrates
that these latter possibilities have not been much used.
The problems seem to have been that the offer is not
sufficiently attractive compared with other investments
and that there is no market on which to buy and sell such
2.2.    Revisions of the limited rate of interest 
As a consequence of the problems outlined above, the
Co-operative Principle of limited rate of interest has
been repeatedly questioned. In fact, it has been one of
the most debated issues about co-operative formation
during our history, and is coming to the forefront again. 
(" Many co-operative experiments have failed through 
want of capital, because the members thought it 
immoral to take interest, and yet they had not 
sufficient zeal to lend their money without interest. 
Others have had a moral objection to paying interest, 
and as money was not to be had without, of course 
these virtuous people did nothing - they were too moral 
to be useful."
-Holyoake, `The History of the Rochdale 
Pioneers', 1874, p. 24)
There are some moves to abandon this Principle totally,
but the usual revisions in practice have maintained the
`limited' character of the return on capital, but the limited 
degree has been moved upwards, toward some level
above the official discount rate. This has been regarded
as necessary to attract capital, both from members and
from outside resources, and to guarantee at least a
stable value in times of inflation. Furthermore it has
come to be considered as `fair' that members of
co-operatives will get a rate of interest that is
comparable with alternative investments of this kind.
This is especially true if the co-operative is using
supplementary sources for equity capital as referred to
above. Why, then, should members' share capital get a
lower interest rate than the shares of other financiers? 
The main reasons for such opinions and revisions are, of
course, the changes in environmental conditions. It is a
pragmatic adoption in order to apply efficient methods
for raising equity capital. It is impossible to tell if
this also implies a changed attitude to the values of
equity and equality - a fair distribution of benefits
between capital and labour. An interesting question in
this  context would also be about the experiences of the
balance between the interest rate as a cost of production
and as an incitement for raising capital. I have not been
able to enter deeper into such questions. The motives,
however, when discussing and revising the Principle of
limited interest seem to be mainly connected to the
issues of how to raise capital. For the investing part of
the co-operative sector it is probably more usual to take
the standpoint that this Principle should be totally
abandoned. The ICA Banking Committee expressed this
clearly at the ICA Central Committee in Berlin last
autumn (see my final recommendation in chapter VIII).
2.3.  Nominal value or changing values? 
Closely related to the above are the discussions, and to
an increasing extent also the applications, about how to
let (members`) shares reflect the economic value of the
society. The nominal value principle has always been
looked upon as an "Achilles' heel" of co-operatives and
as a serious "non-incentive" for members and others to
invest in co-operatives. Two of the arguments for a
change are: 
-  How is it possible to encourage members to invest
   more (or to attract capital from outside sources) if
   they do not get a chance to participate in the
   increased value (property) of the society as a
   consequence of their invested capital? (The
   `management' perspective).
-  Why is it necessary to become so wealthy as a
   collective? Why should not the individual shares
   also get some benefits? (The `member' perspective).
Such issues start to make the relationship with
traditional values a sensitive one. One can say that this
reflects an increasing tendency to want the bread
buttered on both sides. The `old' answer is clear-cut:
the benefits of the co-operatives should, as much as
possible, be reflected by the services to members, and to
some extent by the part of the surplus paid back to the
members in proportion to their use of the society.
Capital should be considered as a means to obtain these
results and should not get any special reward except a
limited rate of interest, previously determined. This
stand is easy to maintain from a consumer co-operative
point of view, when the capital investments are
relatively small. On the other hand, it is much more
difficult from a producer co-operative point of view,
especially in periods of success and when the values are
Gains (or losses) on individual shares have never
belonged to the mainstream of traditional co-operative
theory and practice. I do not know how widespread these
tendencies have been during recent years. They seem to be
increasing as more of the members are becoming "investing
partners" and not so much interested in the services of the 
co-operatives. Perhaps this is most critical for agricultural 
co-operatives, as land is taken out of production and an 
increasing number of members are no longer active farmers, 
but still want to retain their membership. Nevertheless, 
these are signs of changing attitudes to (re-interpretations 
of) basic co-operative principles, and they move co-operative 
organizations closer to capital associations. The next 
logical step is to transform those into joint-stock companies. 
2.4. Individualized capital 
In connection with the above, the old question about the
proper balance between collective and individual capital
has resurfaced. In order to avoid too much non-allocated
collective capital some co-operatives, for instance
agricultural co-operatives in the USA, have practised a
special method: instead of ploughing back part of the
surplus as non-allocated capital they issue new shares
every year to the members (according to their use of the
society), corresponding to part of the annual increase in
collective savings. These shares have no voting rights,
have a nominal value and cannot be redeemed until a
specified time. In this way, the capital goes on to work
in the co-operative, but the collective character is
transformed into a more individual one. 
(" . . . few American co-operatives rely on the
accumulation of non allocated earnings, frequently 
called surplus, to capitalize their co-operatives. 
The reason is really very simple: members do not 
feel that they have a committed investment in their 
co-operative. Complacency by members often follows 
and results in loss of control. The co-operative's
management then views the capital and its use as 
discretionary. This often results in investment unrelated 
to member-use of the co-operative and thereby erodes 
the basic nature of the organization itself. In some
cases, the co-operative evolves into just another 
business that happens to be partially  owned by farmers. 
The orientation to the farmer as the primary beneficiary 
is lost."
-R. E. Torgerson, USDA (speech to Danish farming
  co-operatives 1989)
Such issues have recently been analyzed in an interesting
way by Jacobsson/O`Leary (1990) in relation to the
serious and challenging experiences of Irish dairy
co-operatives (c.f. Nilsson 1991). To some extent these
have been transformed into stock companies in various
ways and have introduced their shares on the stock
exchange markets. Since these co-operatives had
traditionally ploughed back much capital from their
surpluses and so built up `hidden' values, the members
have achieved a rapidly-increasing value on their shares
when introduced at stock exchange markets. They have
suddenly become individually rich. Some members have sold
their shares, transforming their savings into money for
consumption, and the ownership of the societies has been
changed in unforeseen ways. 
Issuing special shares might be a co-operative alternative 
to the transformation into a joint-stock company  on the 
stock exchange market. Members can be said to have a 
return on their investments; not as raised share values, 
but as more shares according to the success of the Society. 
This also might encourage the members to make larger 
investments and make the capital less `anonymous' in 
the eyes of the members. This might also help to strengthen 
the responsibility of management, since the members 
will control larger parts of the capital. On the other hand, 
this brings into focus the old question about the proper 
balance between individual and collective equity capital 
in order to obtain a stable co-operative performance. 
The central power of the society as a whole might become 
weaker through such methods, especially if there is a 
heterogeneous membership and conflicting interest 
between members. At the same time, however, such 
methods seem to `favour'  larger members, since they 
have greater economic transactions with their societies 
and will consequently get more shares. 
I do think that these are important issues which deserve
further analysis, as such methods might offer some
solutions to the problems of value-based shares. 
For co-operative organizations in the Eastern European
countries these issues of relations between individual
and collective capital are crucial in their on-going
process of transformation. The discussion, however, is
carried out against quite another background of
experiences, because the collective capital has been
state-owned. In the new approaches, it can be observed
that the pendulum has swung towards forms of
individualized capital formation, as for instance could
be heard by reports at the last Central Committee meeting
in Berlin (October 1991). Such an emphasis on individual
capital is quite understandable in these periods of
reconstruction. But in the longer perspectives it is
crucial to consider the proper balance between individual
and collective capital, and especially the ways to guarantee 
that the co-operative will stay in the hands of its members.
2.5.    Conclusion: Capital is becoming more than `servant'
Turning to conclusions so far, one can say as a general
judgement that these have mostly modified the
interpretation of the traditional co-operative values and
of the principles based on them. The basic structures are
mostly maintained, but the place and role of capital have
become more appreciated. It still has the role of servant, 
but a more distinguished and influential servant. Some 
aspects are especially problematic: 
-  There might be increasing tendencies to draw
    interest away from the co-operative activity in
    itself and from the purpose of the co-operative in
    serving its members. This is further emphasized by
    practices that give individual capital a part of the
    increasing value of the society. 
-  Restricting the growth of collective capital by
   turning more of the capital formation into
   individual capital is interesting for the future.
   There are some risks, however, with such
   applications. These need further analysis with
   reference to practical experiences before any
   conclusions are drawn. 
-  It will be dangerous if it becomes too easy to\
   substitute other sources of capital for member
   capital. In other words, the members' capital will
   no longer be so important, nor will active member
   participation in financing. 
These conflicts do not seem to be insurmountable. 
It is a matter of how much these new applications are 
used, and in which part of the co-operative activities. 
It is a question of pragmatic balancing for wise and 
committed co-operators and managers. The demand 
for innovative applications for co-operative capital 
when looking to the future justifies some pragmatic 
reinterpretations of the traditional co-operative values. 
All these new approaches, however, sum up in the crucial
issues of how to make shares redeemable and transferable.
This will sooner or later call for some kind of markets
as alternatives to the usual stock exchange markets: some
kind of a co-operative `market' for co-operative shares,
nationally and internationally, in order to keep the
transactions within "the co-operative family" or just to
make the shares transferable and hence attractive for
investments. I have not seen much of such applications,
nor discussions about them, because we have never 
needed them. The Mondragon model seems to be of 
crucial interest in this context, where the bank has the 
strategic role as  a "clearing house", serving as an active 
link between those parts of the co-operative movement 
which have capital to invest and those which need 
If we go on with these kinds of applications, we will
eventually need some kind of co-operative `market'
solutions. Perhaps some international capital funds? 
3. Co-operative joint-stock companies
The easiest way to `solve' many of the above issues, from
a viewpoint of economic efficiency, seems to have been to
apply the joint-stock company form of organization. Until
now, this has mainly been used at the secondary and
tertiary (union and federation) levels, but there are also 
an increasing number of examples at primary levels. The 
latter is especially true of the development during the 80s. 
There are many ways in which co-operative activities may
be transformed to the joint-stock company model: 
1) The stocks might be totally owned by the individual
     members themselves, or by primary societies at the
     secondary and tertiary levels. 
2) The stocks might be partly owned by individual 
     members, by primary societies, by co-operative
     unions together with other persons and/or
     organizations etc.
3) The stocks might be mostly or partly co-operatively
     owned, but introduced on the stock exchange market
     and so available to be sold or bought. The shares
     gain value and become transferable. Of course, only
     profitable parts of co-operative activities can use
     this way.
There are so many variants and mixtures between (1) -( 3),
I cannot go into details here. It should be noticed,
however, that a transformation into stock companies might
be carried out in many ways. There is not just "one way",
as the discussions often tend to imply.
3.1.    Pragmatic approach
Methods (1) and (2) above are used quite often. The first
is  usual for applications of "co-operation between
co-operatives" at the union level in order to organize
common activities. For several decades it has been seen
as an efficient way to handle these relations, often
motivated by the prevailing tax system. The capital
formation motive has been there, but not as the
outstanding motive. The same is true for (2), even if the
intention to facilitate capital formation has been more
emphasized; this way has also been increasingly debated
during the co-operative history and in later decades. 
One can say that those models have been considered as
just a pragmatic way to organize some types of
co-operative activities, nothing more. In order to
maintain co-operative characteristics the company by-laws
have often been supplemented with special rules for
voting, selecting the board of directors, redemption,
selling stocks, etc. The characteristics of the stock
company model have been "tuned down".
During the 80's the capital formation motives seem to
have increased in importance. Environmental change has
made the joint-stock model more efficient. Model(2) has
mostly been used to broaden ownership in order to bring
new knowledge and capital in to co-operatives, especially
at secondary and tertiary levels. This mixture of
ownership has been regarded with some suspicion by
co-operators, since it seems to contain a conflict with
the widely-agreed principle of unity (chapter II section
(3). The seriousness of such conflicts, however, depends
on what part of the co-operative activity this model is
used for and on who the co-owners will be. Usually, there
have been co-owners with interest in the long-term
investment rather than in short-term speculations: mostly
other co-operative organizations and insurance and
pension funds (depending on the legislation), which have
an understanding of co-operative aims. The co-operative
organizations themselves have also been in the position
to decide which co-owners they prefer. 
The problematic aspects of the stock company will emerge
when, and if, not only the form, but also the logic and
the characteristics of the joint-stock company are
transformed to co-operative activities and thinking. The
80's have been characterized by an enterprise culture in
which joint-stock company principles have become
dominant, popular and `in mode'. So, it would be
surprising if co-operative organizations had managed to
remain totally outside such influences (see chapter VI
section 3.3). 
3.2     The critical step
The critical step in this respect is especially connected
to model (3). The use of this model is quite a new
experience for the 80s and taken by itself, without any
reference to contexts, implies a break with most of the
traditional basic co-operative values. The long-term
danger, as has been expressed by many, is above all that
such applications will gradually phase out member control
and participation and start to introduce new interpretations 
of the values of equity, equality and mutual self-help. 
From a co-operative value point of view, in the long 
term, such transformations are like playing with  fire. 
It needs to be emphasized that, looked upon in isolation,
these applications can never be seen as co-operative
applications. The only co-operative value in such
applications goes back to the fact that they are made by
co-operative organizations and more or less owned and
managed by co-operatives and by co-operatively committed
persons. It is an extreme expression of pragmatism,
nothing more, but hopefully with the possibility of being
transformed back to co-operative forms at some time in
the future. 
I have, however, seen and heard interesting explanations
of motives which have changed my (in this respect)
dogmatic mind. Such applications might be efficient in
some parts of the co-operative activities where:
1) the needs of the members are peripheral and marginal,
2) the risk is considered too high to use members` savings,
3) the need for risk capital is large, and difficult to
    foresee and to raise in traditional ways,
4) the conditions of the environment (taxes, the stock
    exchange market, investors) favour these applications.
Against this background, the question is raised: should
these activities be carried out by a co-operative
organization at all? If the members' needs for these
activities are highly doubtful the traditional answer
would surely be `no'.
3.3.    A crossroads
This takes us to a crossroads for the future. Because 
it cannot be true that all activities which are not
immediately and directly needed by the majority of
existing members should be abandoned: or can it? In this
case, the co-operative sector will have great difficulty
in diversifying by expanding its activities to new areas. 
Co-operative organizations must certainly maintain their
basis in the traditional areas, those which reflect the
needs of the existing members. But, on the other hand, it
is not possible to simply `hand over' new parts of the
future to other organizations. This has been done too
much already during the past decades: co-operative
organizations have mainly been outside the whole
expansion of people's motorization, for instance. Why not
a `co-operative' Volkswagen, Mazda or Volvo?
Co-operatives have also been outside the electronic
revolution - and now we are seeing the high technology
new service industry as a need of the people. Are
co-operative organizations ready? So, with this kind of
approach, the constructive question should be: who will
take the responsibility for developing co-operative
activities in these new areas? Are we going to wait for
some new co-operative pioneers from outside the existing
co-operative organizations? And what is the proper form
necessary to make contributions in these areas of
One solution might be co-operative development
institutions to encourage innovations and the forms of
organizations to carry these out, for instance in
connection with co-operative development banks with the
aim to pool resources and to actively channel them to
interesting projects of this kind. We are, however, not
there for the time being. Of course, there are some
consulting bodies, but not coupled with this kind of
capital for these kinds of investments; and probably not
with the necessary "know-how" and "development spirit"
3.4.    A long-term transformation?
In my interpretation of my discussions with committed
co-operators the only possible short-term application
within the prevailing institutional situation has been to
use the stock company model, even introduced at the stock
exchange market in order to get capital. This has been
done only after careful discussions and consultation with
the members. The alternative has been to do nothing. Well
done, it might also be combined with visions for the
longer term, in which those stock companies could be
transformed back to "real co-operative organizations"
again. Why not, to follow Knud Ollgaard (introduction)
among others, develop visions with forms of association,
where the membership is built up as a combination of
primary members, employees and co-operative investors
(c.f. 4.2 below)? In other words, visions that make these
applications temporary measures with a return to proper
co-operative forms of development for the long-term
It is much too easy to escape to the temple of
co-operative orthodoxy: in other words to do nothing.
However, the contexts within which such applications are
made are the crucial point. Looked upon as isolated
phenomena, such applications are alien to co-operative
values. But within the context of a good co-operative
climate and a long-term strategy for co-operation? Not
necessarily, in my opinion. But again: the more pragmatic
the applications, the more important it becomes for
co-operators to have a deep and a long-term faith in
co-operative ideas! Otherwise such applications will soon
move outside the sphere of co-operative values and stay
So, there is a delicate balance between co-operative
orthodoxy and pragmatic creativity - of course within an
overall climate of co-operative consciousness. 
3.5.    A pragmatic strategy
From the above we can see that some co-operative
practices are coming increasingly into conflict with
traditional values: the members are taking less part in
co-operative activities, their identity with the
co-operative whole will weaken and the organization's
autonomy is threatened. This is especially true for the
use of the stock company model where stock has been
introduced on the stock exchange markets. Here we
approach the outskirts of co-operative values, and there
is an apparent risk that the activities will move totally
outside the control of the members. The activities will
be looked upon only as capital investments, not as
something of interest in itself. I agree with all those
who have said that we must be very careful when taking
this step. 
However, it does seem that there is currently a need to
get access to capital for expansion of co-operative
activities, to gain expert knowledge and to enter into
new and innovative projects, especially internationally.
As I said in chapter IV, we must apply a diversified and
pragmatic approach. It is not realistic to rely on member
capital for all activities if the co-operative way is to
have an overall impact in the future. The leading
principle should be member democracy, participation and
control in vital parts of the co-operative organization.
These must be characterized by a high degree of identity
and autonomy. In other words, those which are close to
the members, and those which directly concern the needs
of the members. In other parts of the organizations this
leading principle can be modified; the interest of the
members can be represented more indirectly and other
financiers can be brought in.
Such a strategy might be the following:
1) The primary societies should be organized as member
     societies, where the members are the (main) owners
     of the capital. Mostly according to the `user' unity
     principle, but also according to various co-partnership 
     views of the concept of membership.  
2) At secondary and tertiary levels there might be
     various forms of organizations: 
-    The union should be owned by the member
     societies and organized in the society form. 
-    Common functions and activities closely related
     to the member interests should be owned by the
     members and organized either as a society or as
     a stock company with special by-laws. The
     choice depends on the environmental situation,
     for instance the tax system.
-    Common functions and activities of special
     character and more distant from the member
     interests might be organized as stock companies
     with ownership from other parts of the
     co-operative family, or partly also from outside, 
     in order to attract long-term capital and "know how". 
-    Joint-stock company models with stock on the
      stock exchange markets might be used to a
      limited extent for activities of marginal or no
      interest for the direct needs of the existing members, 
      which require relatively large and unplanned 
      amounts of risk capital. 
I understand that this strategy coincides with the
co-operators` views on practical applications. We must
realize, however, that this is only a way to raise and
administer capital more easily. It does not imply that
members are not interested in these activities; that
would be no less than a fatal mixture of basics and
practical necessities. The members must be given all the
opportunities possible to participate in these activities, 
by continuous information, etc. By members, I mean 
primary members: the basis of co-operative democracy. 
We always put forward the view that all co-operative 
activities are of interest to all members, and encourage 
that interest.
These strategies imply a delicate balance between
pragmatism and co-operative values for the future, 
a touchstone of the overall co-operative leadership.
Because we are starting to climb a tiger: the more the
total organization is characterized by the stock company
model, the stronger is the risk that the co-operative
culture will gradually be influenced and characterized by
the basic principles of such ways of organizing. The
countervailing power will be, now as before: committed
and conscious co-operators in management, membership 
and among leaders and employees.  
4. Capital co-operation between co-operatives 
It has long been observed that the co-operative way needs
active means of capital formation in order to pool `idle'
financial co-operative resources for use in co-operative
development. And vice versa, there is a need for ways of
organizing co-operative capital formation to be able to
receive capital from such sources. In other words, we
need effective models for "co-operation among 
co-operatives" in the area of capital formation.
There are various examples of such models, and there 
is increasing interest in these; in Italy and France for
instance, and in many of the Co-operative banks
worldwide. The Credit Union Movement is growing in
importance, and there are on-going plans within the
European Common Market to establish closer financial
co-operative networks. I have never, however, seen any
survey of these development tendencies, especially 
during recent years. 
On the other hand, I have the impression from
co-operators, that (too) much of our potential financial
resources is not co-ordinated enough and that (too) much
is disappearing outside the co-operative sector, thus
helping to support our competitors. I cannot estimate the
amount of this, but I see it as a bad tendency in times
when we need to economize with scarce co-operative
resources and to make them effective in productive
co-operative use!
Below, I will briefly draw your attention to two
examples, still at the micro level, but interesting as
heralds for the future. 
4.1.    Pooling resources for development
The Mondragon model is especially interesting in this
context because of its capacity to use scarce
co-operative savings wisely for development in the local
community. The bank is serving as the multiplying link
between savings and productive needs, as do all banks of
course, but supplemented with an active and highly
competent department for giving advice on the allocation
of resources from an overall perspective and on
management aspects. (There are examples in other parts of
the world. See for instance Soulage 1989, Ravoet 1990). 
We need similar solutions on a larger scale in the
future, at local, national, regional and international
levels. Regarding the last-mentioned, we had some
visions, and took early steps to build up an
international co-operative financing system some decades
ago. These have been repeated several times in reports,
speeches, motions, resolutions etc. We had INGEBA (the
co-operative world bank) and some others, but never
succeeded to implement our vision at the global level.
Today, we have a successful world credit union movement,
the co-operative banks and the co-operative insurance
companies. How about collaboration between these, for
instance to develop some types of regional "co-operative
development banks" working together with the ICA regional
("That brings us to the second of the persistent dreams 
of co-operators ...: it is the dream of  co-operation among 
co-operatives. In this case, it is the dream of a worldwide 
network of co-operative banks. Of course, there are
already networks of co-operative banks. ... But
the dream of an inclusive, worldwide network of
co-operative banks remains elusive.."
-R. Beasley in ICA Banking Journal, 1990)
Such institutions are vital against the background of the
needs of the Third World countries, and now also of the
former USSR and Eastern Europe. Lacking this, we are too
dependent on other banks and on the World Bank. I have
not heard any complaints about their services, but still
the co-operative sector is of marginal interest in these
contexts. We need some "regional co-operative world
banks" and a "co-operative world bank" to pool
co-operative financial resources and to specialize in
active co-operative development. This is a challenge for
the thrift and credit co-operatives, the co-operative
banks, the insurance and the housing co-operative parts
of the world co-operative sector in particular. These are
mostly on the `supply' side of these resources and might
consequently be expected to be those in power for active
initiatives for experiments and innovations.
A cry for the moon? Perhaps, but I prefer that to being a
prisoner of the impossible.
4.2.    Partners in ownership
Partner ownership has not been very popular in the
mainstream of co-operative thinking and practice during
most of this century. There have, of course, been
examples of it, some of them successors of the
co-operative `co-partnership' ideas, which were developed
and practiced in the middle and end of the last century.
Today, such applications with two or more parties as
owners have become quite usual, as mentioned above. These
are not based on explicit ideas of `co-partnership', they
are more of a practical solution to the capital needs
experienced. Many sources of capital might be combined in
this way (see note 8) in chapter IV). 
An interesting way to encourage new lines of co-operative
development is the Canadian `Stakeholder model',
developed by Co-operators and with its roots in the
Canadian insurance co-operative movement. Of course, 
I cannot describe it in detail, but the main thought is
that membership should be open to those for whom the
activities are important, those who have a stake in the
activities: usually the customers, the employees, the
financiers and perhaps the suppliers of, for instance,
raw material. These form a member association, contribute
with capital and apply special rules for voting rights
and distribution of benefits, etc, which are close to the
common co-operative principles.
The particularly interesting aspect of this model is the
conscious linking of financial resources with new
co-operative development. A common problem for new
co-operatives is raising the capital necessary for the
initial stages of development. The main role of the
financiers is initially taken by the insurance
co-operatives (c.f. the Mondragon case) that, to start
with, invest quite a large part of the owner capital of
the co-operative. But, as the development has begun to be
stable, the co-operative association will successively
redeem some of that capital in order to get a balanced
composition of the capital among the `stakeholders'.
This model also gives the insurance co-operatives an
opportunity to invest some of their resources to
encourage co-operative development. Although this
practice has only had a brief history, experiences to
date are good.
-  The Co-operators believe people have a right, and a
    responsibility, to influence the direction of their
    organization and share in its results according to 
    co-operative principles and values.

-  The Co-operators have a fundamental respect for
    people, as individuals and collectivity.
"*  The Co-operators are committed to delivery of
      excellent products and service.
*   The Co-operators value growth, expansion and
*   The Co-operators acknowledge what is right and what
      is true as standards for our activities.
*   The Co-operators pursue open and honest
*   The Co-operators believe in an organizational
     culture which promotes the spirit of teamwork and
     team approaches to management.
*  The Co-operators believe in a socially-responsible
    co-operative organization.
*  The Co-operators are an integral part of the
    co-operative sector and have an active presence in
    the business sector.
-The Co-operators' Core Values)
4.2.1.  No limits 
The objections from the traditional value point of view
will be about the deviation from the `unity' principle,
i.e. that the user of the services should also be the
member and the owner. In this context there are, of
course, serious objections. These, however, depend to
quite an extent to which activities these models are
applied, and who the co-owners will be. Probably, this
model has its best applications in contexts where there
are some common overall aims and interests, for instance
in developing a local community (as in Mondragon) or to
make co-operative profits. Probably, this model also has
its best applications in small- and medium-sized
industries and in various forms of service production. It
also offers a solution to the problems of new co-operatives 
in entering capital-intensive areas of activities. 
The practical applications are few (as far as I know),
but those which exist are successful. It is consequently
important to study these experiences and to test them on
a larger scale. They might be combined with, for
instance, the "development banks" mentioned before. In
fact, there are no limitations on the possibilities, only
our imagination is the limit - and, of course, our will
to put this into practice. We need more such "brave
experiments". The conditions for this will increase in
the future, when the "human capital" gradually replaces
"financial capital" in importance. In post-industrial
societies especially, this will become a significant
character of economic life as will the potential for such
co-operative solutions. I also think that this is a model
for co-operative community development at village levels. 
4.3.    Need for overall approaches
Most of the issues of capital formation have been
oriented towards how to raise capital inside co-operative
organizations. This is symptomatic of the traditional
co-operative approach, because co-operatives have focused
on member-raised capital and on capital as an agent of
production. We have not used the same energy and
creativity in considering proper ways of overall
financial management at co-operative sector levels, for
instance how to efficiently link together various sources
of co-operative investment resources to various
co-operative needs for development capital. My general
impression is that we are lagging behind in these
contexts. Perhaps I am unfair and, of course, I hope I am
wrong. I hope there will be strong objections from the
banking co-operatives and the insurance co-operatives in
particular, saying that they are full of such ideas,
ready for implementation. Because I do think that we must
organize capital much better within the co-operative
sector locally, nationally, and internationally. 
There have long been dreams about this in the
international perspective. We need some co-operative
financial statesmen to transform these dreams into
5. The main principle: member-based capital
In this chapter I have tried to balance the traditional
co-operative view on values with a pragmatic view 
based on changes in co-operative reality. It would have
been much easier to stick to the traditional values and
consequently consider most of the new plans and
applications as conflicting with, or as outside, the
co-operative way. I cannot do this, because I do not
think that these times of rapid and radical changes in
the environments for capital formation can justify too
orthodox a co-operative position. 
In the co-operative context of economic democracy, 
the members are the basis. So, I totally agree with H.
Nielsen, K. Ollgaard and J. H. Pederson (interview 1991)
of the Danish Farmers` Co-operatives, who stress that we
must not give way in these times of 'the fashionable
stock exchange market" to the temptation to abandon the
member orientation in capital formation. We must first
seriously examine the member-based way, before we
consider any other. Let that wise statement represent the
overall conclusion of this discussion about the crucial
issues for future capital formation.
1) The ICA Principle about  "restricted interest on
     capital" should be abandoned as a special Principle.
     The situation is changed in most contexts, and the\
     need to compete for savings and capital has
     increased. It now only partially reflects an
     "essential principle". Instead, I will suggest that
     this Principle is included in the Principle about
     the distribution of surplus. Still, it is probably
     necessary to maintain the limited character of the
     interest rate, even if the limited degree might be
     moved upwards towards some level above the official
     discount rate (see chapter VIII). 
2) The main aspect of capital formation (the "essential
     principle") for the future is the independence,
     autonomy and stability of the co-operative
     association necessary to provide services to the
     members and to keep the society in the hands of the
     members for democracy and participation. I recommend
     a special Principle with this orientation (see chapter VIII).
3) It is necessary to more closely examine ways of
    developing bodies to pool finances in order to
    economize scarce resources, initiate new
    co-operative development projects and to combine
    supply and demand in more overall ways. The bodies
    for this might be "regional co-operative development
    banks" and ultimately a "co-operative world bank". 
4) The various tendencies to make member shares reflect
    the value of the co-operative society are deviations
    from traditional co-operative principles. The various 
    methods, used or planned, ought to be  studied more 
    closely by the ICA. 
This chapter is mostly theoretical in character. I look
upon the co-operative theory and ideology behind it as
common co-operative knowledge reflected in textbooks,
articles and reports on capital formation. See also many
of the references to chapter II above. For a recent
survey of this, and for discussions about main methods of
applications, problems, etc, I refer especially to Chukwu
(1990, chapter 2), the Plunkett Foundation Yearbook of
Co-operative Enterprise 1989 (part II) and 1990 (part I)
and ILO (1988, chapter 12-14). Some of the contents are
based on non-written material, such as interviews,
lectures, conferences, etc.