This document has been made available in electronic format by the International Co-operative Alliance (ICA) 

Translation of new Co-operative Principles to legal norms (1998)

June, 1998

(Source: Co-op Dialogue, Vol.8, No.1, Jan-June,1998, pp. 6-9)

Translation of New Co-op Principles to Legal Norms by Dr. Hans Münkner

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Clarifying the Meaning of Technical Terms

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Legal norms are rules set by people for the behaviour of people among themselves. They set out what to do and what not to do. Such norms are based on general ideas in which people believe, which influence their way of thinking and acting. One precondition for the effectiveness of legal norms, especially of those based on new concepts, is that these rules must be understood, accepted and applied by people. In many countries, knowledge of the law constitutes a major problem.

Where laws are used as deve-lopment tools by the state, it is not sufficient to make new legal rules. Effects can only be expected if an agency is created, to make the new rules known and to implement them, even against the resistance of those whose rights are affected by the reform. For many decades it has been believed that only government agencies could help to implement new legal norms (public law approach).

A better approach to using legal norms as instruments for development is to empower the citizens, to inform them of their new rights and to encourage them to claim and defend such rights (private law approach). This can only be brought about by information and life-long education, being one of the co-operative principles. It furthermore requires that people unite to fight for their right, that they form associations, federations, pressure groups and co-operatives to exercise legitimate power according to the proverb that "one finger cannot make a fist."

Co-operative Principles

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The new statement of the ICA on the co-operative identity is composed of three elements:

* A definition of the term "co-operative society" to overcome confusion and misconceptions about this form of organisation and to state in clear terms that

co-operatives are autonomous, private, user-driven and user-controlled enterprises based on self-help and self-responsibility of their members.

* A statement of the basic co-operative values, underlying co-operative activities and defining their unique character.

* A list of 7 co-operative principles which serve as guidelines for those who want to put co-operative ideas and values into practice.

With its new identity statement, the ICA has tried to give a clear answer to the questions of why do people co-operate and how can they co-operate best?

The identity statement of the ICA presents a combination of general ideas or moral/ethic norms which are usually accepted by people who wish to co-operate as being valid, just and reasonable. Self-help, self-management, self-reliance and self-responsibility on the basis of equality of members as human being are combined with solidarity and mutual assistance which is usually extended to members only but could also be extended to all persons living in the community. By restricting solidarity to members only, defining membership criteria (common bond) and practising the principle of open membership,

all persons who meet the requirements for membership and who agree to accept the responsibilities of membership have the chance to co-operate.

By including another value of social responsibility and caring for others, co-operatives find their place between egoism (group egoism) and altruism. However, experience has shown that in the long run, altruism alone is not a stable basis for co-operative work. Unless the members find their interests promoted with priority, their willingness to

co-operate and make contributions to the common cause will decrease and finally disappear.

As any workable concept of human endeavour the concept of co-operation has to respect the power of the state, the power of capital and the weakness the human being.

However, with regard to the power of capital, co-operatives follow their own rules. Co-operatives were initially formed as a means of workers to escape from exploitation by capitalists. This birthmark still determines the attitude of co-operatives vis-à-vis capital. According to co-operative philosophy, in co-operatives the role of capital must be limited. Capital is deprived of its power over people, capital shall serve rather than govern. Therefore, capital neither serves as a measurement for voting rights (one member - one vote) nor for profit distribution (patronage refund). As a concession to the power of capital, share contributions are usually rewarded by dividend, however, the principle remains "limited return on capital".

How can these general ideas and the principles derived from them be translated to legal norms?

The ICA being a world-wide movement has to find a definition of its value base which is universally accepted. After the approval of the new statement on co-operative identity at the ICA Centennial Congress in Manchester in 1995, following five years of intensive world-wide debate, the common value base and the typically co-operative structure appear to be uncontested among the member organisations of the world co-operative movement.

Co-operatives are now universally accepted to be autonomous, private self-help organisations, in which owners, decision-makers and users are the same persons (principle of identity).

This means that practices dating back to colonial times and to socialist economic systems, when co-operatives depended on government subsidies and were used as instruments for the implementation of government programmes are identified as detrimental (Laidlaw: Government money is the kiss of death to co-operatives).

Co-operative Law or Law for Co-operatives

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In the famous recommendation of the International Labour Office (ILO) concerning the role of co-operatives in the economic and social development of the developing countries (Recommendation No. 127 of 1966, para 10(a)) it was stated that governments should "detect and eliminate provisions contained in laws and regulations which may have the effect of unduly restricting the development of co-operatives through discrimination"

e.g. in regard to taxation, allocation of licenses and quotas, and failure to take account of the special character of co-operatives and their particular rules of operation and to avoid inclusion of such provisions in future laws and regulations.

The purpose of a co-operative law is among other things to distinguish co-operatives from other forms of organisation. This can be done best by stressing particular features of co-operatives which give them a strong profile, e.g. that co-operatives pursue the goal of promoting the interests of their members, do business only or mainly with their members, distribute surplus in proportion to business done by the member with the

co-operative enterprise.

Furthermore, a good co-operative law should encourage what is in line with co-operative principles (for long term success) and discourage or prohibit what is contradicting the

co-operative principles (to avoid known mistakes), e. g., co-operatives should not be forced to use their funds for tasks imposed upon them by government or to deal with non-members. Rules influencing the work of co-operatives or governing co-operatives can be found in several official documents.

Laws and Regulations

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Provisions influencing the work of co-operatives are mainly to be found in co-operative law but also in other laws like labour law, competition law and tax law.

According to para 10 of the ILO Recommendation 127 of 1966, existing co-operatives should be consulted during the law-making process and should be associated with the formulation and application of co-operative development policy (paras 4, 5 and 7).

Another question is, how detailed should a co-operative law be? It may be better to have a comprehensive law containing all crucial matters like the focus on members, the protection of members rights and the definition of members obligations, the protection of members against wrong-doings of unscrupulous board members and the definition of the responsibilities of office-bearers.

The new co-operative principles of the ICA recognise co-operatives as autonomous and independent organisations, which translated to legal norms would mean that they are recognised as legal entities in their own right. This means furthermore that co-operatives should have autonomy to make their own by-laws rather than being forced to accept model by-laws.

Another requirement for implementing these co-operative principles in practice is that the law and regulations must not be so detailed that no room is left for self-regulation.

The best way to respect co-operative autonomy in the field of by-laws would be to provide the necessary know how in a manual "How to make by-laws." This would pass on the necessary expert knowledge to co-operators, an educational effect that distribution of model by-laws would not have.

The new co-op principle of autonomy and independence defines co-operatives as possible development partners, however it is now stressed, that such collaboration, for instance between government and co-operatives, has to be on mutually agreed terms and without effect on the independence of the co-operatives.

This excludes former practices of using co-operatives as development tools and conduits for soft loans and technical aid, which undermine the self-help character of co-operative societies and make them dependent on external funding.

Tax treatment of co-operatives

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Where all registered co-operatives are offered tax exemption, such measure does not promote co-operatives but encourages clever business men/women to form bogus

co-operatives in order to qualify for tax privileges.

It would be appropriate to grant tax concessions to new genuine co-operatives during the start-up phase and to devise a tax treatment of co-operatives that takes their special character into account. This shows the importance of defining what a "genuine"

co-operative is and the need for co-operatives to have a clear profile.

According to the co-operative principles of the ICA, criteria of such definition should be the following:

Is business done with members only or also with non-members?

Is surplus distributed in proportion to business done by the member with his/her co-operative?

Are all office-bearers elected democratically from among the members?

Are the reserves indivisible?

Failure to show a clear co-operative profile would exclude tax treatment as a genuine

co-operative.

Movement Structure

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The structure of the co-operative movement of a country should not be a matter to be legislated but should be left to the co-operatives to decide for themselves. This refers to the question of whether there should be one national apex organisation only or more than one.

According to the ICA statement on co-operative identity, co-operatives are autonomous self-help organisations based on voluntary co-operation. To implement this principle it would be sufficient to prescribe in the law that co-operatives have the right to federate and to leave all other moves to the co-operatives who would also have to bear the cost of all secondary and tertiary structures they wish and can afford to establish. Article 23 (2) (iii) of the Code refers to the possibility of having more than one apex organisation.

Conclusion

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The new statement of the ICA on Co-operative Identity makes possible what for a long time has been very difficult. As long as co-operatives were left undefined and it was avoided to identify co-operatives as autonomous, user-driven and user-controlled private self-help organisations, it was difficult to criticise law-makers and policy-makers for not respecting features of co-operatives which were left in the dark.

After the Manchester congress it is now possible to translate a clear concept into clear rules and legal norms.

Law-makers who want to improve their national co-operative legislation can now do so by placing emphasis on characteristics of co-operative which sharpen their profile and which stress their uniqueness as a special form of doing business and working together.

The law-makers should keep in mind that co-operative law is made for co-operators and not for lawyers and accordingly should be written in simple language that ordinary people can understand. If the laws governing co-operatives are too complicated and too rigid, they will remain "law on the books" and people will find their ways around them.

Co-operative law will only serve its purpose, namely to encourage good co-operative practice and to discourage risky and dangerous activities, if it becomes a "law in action." To achieve this goal, the co-operators must be associated with the development of the legal norms governing their co-operatives, they must understand the norms of the law and must accept them as reasonable, just, equitable and fair.

Finally, a word of warning not to overemphasise the importance of co-operative law for co-operative development. Even the best co-operative law is no guarantee for

co-operative success. Denmark is a country known for its powerful co-operative movement, but Denmark does not have a co-operative law. The success of co-operatives depends, in the first place, on the quality, devotion and discipline of the co-operators and their leaders. A good co-operative legislation can facilitate co-operative development but cannot replace the personal efforts of those who wish to co-operate.

A bad co-operative legislation can impede co-operative development and frustrate

co-operators and their leaders. It can burden co-operatives with so many administrative, political, financial and fiscal obligations that people lose interest in co-operatives and look for alternative ways to solve their common problems.