Lauded for weathering the 2008 financial crisis, but still snubbed in the business ecosystem, the co-operative sector now has reason to be back under the limelight.
The largest 300 co-operatives worldwide have a turnover of US$2.2trn (£1.4trn), according to the 2014 World Co-operative Monitor released two weeks ago at the International Summit of Co-operatives in Quebec City, Canada.
If the top 300 co-operatives formed a country, the report suggested, their combined turnover would be roughly equivalent to the national income (or gross domestic product) of Brazil, the seventh largest economy in the world.
“Our movement is a global economic player with an important stake in the world’s economy,” said Dame Pauline Green, president of the International Co-operative Alliance, which produced the report.
“Not only is it a crucial tool which we can use to raise the profile of co-operatives to policymakers and industry professionals, but it also provides an incredibly useful starting point for researchers and academics alike,” she added, noting that data on co-operatives before the Monitor was patchy at best.
Johnston Birchall, professor of social policy at Stirling University, said a previous edition of the Monitor helped him write a report on the governance of large co-operatives after the UK’s largest one, the Co-operative Group, revealed a £2.5bn loss amid a major fiasco with its top brass.
“Critics were saying that large co-operatives in general might be ungovernable,” Mr Birchall said, adding that the Monitor allowed for a more ‘scientific’ study. “It showed that there is no wider crisis, and that the Group’s problems stem from its peculiar history and unique governance structure,” he said.
The experience of the troubled Manchester-based group, however, should serve as a wake-up call for all co-operatives, according to Ed Mayo, secretary general of Co-operatives UK.
To him, it is all about staying connected to members.
“The risks of losing focus should keep any co-operative business awake, and the experience of the Co-operative Bank in the UK is a reminder that the co-operative business form is not immune,” Mr Mayo said.
He said that, while proportionately fewer co-operative banks fail or come close to bankruptcy compared to investor-owned banks, those who have experienced difficulty have turned to their members for support.
Japan
He cited how the Norinchukin Bank, a Japanese co-operative focused on agriculture and forestry, turned to the farmers it represented during the 2008 banking crisis to make up for a US$900m (£566m) loss incurred from bad US securities.
Japan and Sweden are among the few countries that prohibit consumer co-operatives from lumping banking and financial services into their portfolio, Mr Mayo said.
The UK’s Co-operative Bank, by falling under the umbrella of the Co-op Group, is not directly owned or governed by its customers and so it suffered from the lack of banking professionals in top executive positions.
Meanwhile, the trade association in the US is also concerned about good governance. The Washington, DC-based National Co-operative Business Association, which represents 29,000 co-operatives across the country, developed a governance training programme a few years ago.
Its goal is to get boards of directors using their regular meetings to go beyond reports and set strategic direction (“how” to achieve the co-operative’s mission) while asking questions of management on the way it steers the organisation (“what” is being done to work towards that mission).
“I think that how-what approach is really effective in making sure both sides – board and management – play in the right spaces and interact together effectively,” NCBA’s chief executive Mike Beall said.
But while governance and management issues exist across both shareholder and co-operative models, the key difference lies in the ownership structure. Banks, typically riskier financial intermediaries, look to maximize profits and create shareholder value. Credit unions, caisses populaires and other mutually owned financial co-operatives instead focus on serving their members.
So, with investor-owned banks still barely recovering from the crisis in some of the world’s major economies, including the UK and US, are co-operatives a beacon of hope for the future of banking and financial services?
A new report released at the summit by an American think-tank certainly paints an optimistic picture.
“Co-operatives play a significant role in financial innovation. In particular, they are especially strong in identifying innovations that are both good for the financial health of consumers and financial institutions,” said George Hofheimer, lead author and head of research at the Filene Research Institute.
The report cited examples of Canadian credit unions’ solid impressive record of financial innovations, many of which are largely unknown to the general public.
Mr Hofheimer said that from being the first to offer loans to women to their introducing the first full-service automated teller machines network in Canada, credit unions were best fit for developing “human-centered” innovations based on real customer needs.
A prime US example of financial innovation is the “Save to Win” programme, currently rolled out in four states, which offers credit union members a compelling proposition: for every $25 deposited, they earn a chance to win both a $100,000 (£62,000) grand prize jackpot and a number of smaller monthly prizes. In its first year, more than 11,000 new accounts were created, generating more than $8.5m (£5.3m) in new savings.
In the UK, co-operatives tackled one of the sector’s major challenges – access to capital – by launching the first online community shares platform, Microgenius. When it launched in 2012, the idea was to link people with an interest in renewable energy to communities with relevant projects, but now Microgenius has expanded its scope beyond renewables, namely with the support of Co-operativesUK.
“We’ve seen that it’s been the co-operative sector that has led the new crowdfunding platforms for equity investment, and that’s one of the most exciting areas of development in terms of business finance,” Mr Mayo said.
The technology-enabled financing platform allows co-operatives and community projects to sidestep “mainstream capital markets with money that is quite aggressive and distant from the business needs”, he said.
Ultimately, by putting “people before profits,” Mr Mayo said, co-operative banks largely continued lending to businesses throughout the banking crisis, whereas investor-owned banks curtailed their loans in order to rebuild their broken portfolios.
Likewise, Mr Beall thinks the crisis triggered a “coming out” of sorts for financial co-operatives. “The consumers in the Great Recession rejected Wall Street, they stepped back from ‘Big Box,’ they stepped back from big companies with bad service,” he said.
The banking crisis caused people to rethink how they do business and where they spend and save their money, and clients increasingly opted to make loan decisions at a neighbouring credit union instead of going to call centres outsourced by big banks, he said.
America
This summer, US credit unions reached a landmark 100m members, roughly a third of all economically active people in the country, Mr Beall boasted. Local control, fair treatment and simply not being used to the profit of shareholders are all reasons cited by customers for switching to a co-operative’s banking services.
“All of those things are linking back to why co-ops are, in a sense, coming out now and getting a bigger spotlight put on them,” Mr Beall said.
Globally, there are 55,000 credit unions with more than 200m members, managing US$1.3trn (£817bn) in deposits and $1.1trn (£692bn) in loans, according to the World Council of Credit Unions.
Surely, there is enough firepower among financial co-operatives to keep driving innovation and restore people’s faith in the fragile banking sector.
Philippe de Montigny is a freelance business journalist based in Canada
Key points
The largest 300 co-operatives worldwide have a turnoverof $2.2 trillion (£1.4 trillion).
The UK’s Co-operative Bank is not directly owned or governed by its customers, and therefore suffered from the lack of banking professionals in top executive positions.
The banking crisis caused people to rethink how they do business and where they spend and save their money.
