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5: Summary and Conclusions

  • Page ID
    4279
  • Cooperatives and mutuals are firms. The choice of organizational form is based on a number of issues. As discussed in these chapters, these choices depend on the economic costs of the Make or Buy Decision and the ownership structure desired, which may include consumers, investors, producers, suppliers, and workers. Cooperation and mutualism are based on the desire to Make something which is owned by consumers, producers, suppliers, and workers, but not by investors. These owners have chosen to vertically integrate their business or household through a cooperative or mutual. Social reasons may underlie why they decide to do so but ultimately, in a market economy, the economic transaction by a customer will determine the success of the cooperative or mutual.

    A number of thought leaders, including Nobel Prize Laureates, have been recognized for their contributions into understanding this Make or Buy decision. A cooperative or mutual is collectively owned, in most cases, by a large group of consumers, producers, suppliers, and workers. A large ownership structure helps create an equity structure on a balance sheet that enables the cooperative or mutual to survive business shocks and cycles. For example, in an agricultural cooperative with highly perishable perennial crops, the concept of a marketing year is important. Building an ownership structure that enables the cooperative to simultaneously help its owners survive each year and add value to their agricultural commodities over the coming marketing year when the full value is not known until 12 months after harvest is crucial. Similarly, a mutual insurance firm must have an ownership structure that enables it to insure the risk profile of its members, which may not be fully understood but yet allow it to offer competitive premiums to purchase the insurance.

    This decision to Make something must be understood within the context that ownership structure also includes those who patronize the cooperative or mutual and share in its economic success based on the volume of business transacted with the cooperative or mutual. These owners participate in the control of the cooperative or mutual through their election of directors who monitor their ownership and through their direct participation in certain activities as presented in their articles of incorporation and bylaws. This control function, which is part of corporate governance, may be accomplished through democratic voting (onemember-one-vote), proportional voting based on business volume, or a combination of the two.

    Members in a cooperative and mutual thus participate in the economic benefits, ownership, and control of the firm. Because of this participation, an important function of cooperatives and mutuals is education of their members. This education includes knowledge on the three ways of participation and the roles of responsibilities of membership. As a closed buying or supply channel, cooperatives function best when the majority of their business is done with members. The financial decisions of a cooperative are probably hardest for any member to understand due to economic and social issues.

    There is no evidence to suggest that the cooperative or mutual form of business is no longer a viable business model. Indeed, many examples of successful cooperatives and mutuals exist globally. Certainly industry conditions may change, and if a cooperative or mutual does not change its strategy to reflect changing industry conditions, the economic viability of the business may be called into question. Furthermore, if issues of property rights are not clarified, members may become dissatisfied with remaining a member of the cooperative or mutual and may seek to demutualize. Such incidences are rare but widely studied by academics.