Credit Union and Cooperative Patronage Refunds - Filene ...

If the co-op’s earnings are not distributed to the member in cash,
they are distributed with allocated equity, each dollar of equity being
identified with a member on the basis of the member’s proportional
use. Each dollar of allocated equity that is eventually redeemed is
redeemed at no more than its face value. But in the meantime, until
the allocated equity is redeemed, it does not appreciate in value. In
fact, the longer the co-op uses and holds the equity, the more the
equity is depreciated from the effect of the time value of money.
But as soon as the co-op has surplus working capital, allocated equity
is redeemed and returned to members. The co-op is motivated to
distribute surplus working capital rather than reinvest it in the co-op
because aggrandizing itself over its members benefits no one and is
counter to the philosophy under which the co-op is formed. The
board of directors is motivated to distribute surplus working capital
through equity redemptions because each director—like every other
member—eventually wants that surplus capital if and when the
co-op can afford to return it.
This same dynamic does not exist in an IOF, because the principles
of subordination of capital, service at cost, and co-op agency theory
are not in play. Obviously some investors desire dividends, while
others desire retention of earnings and appreciation in the value of
their holdings. But the IOF decides what to do with its earnings by
reference to their impact on the IOF’s value, not, as a co-op does,
by reference to the extent that the co-op integrates and adds value to
members’ lives or businesses. An IOF is a supplier to customers, not
an agent of its members or an extension of their lives or businesses.
Finally, consider that an IOF’s universe of investors is narrow, limited
by the number of shares of common stock the IOF has issued.
Hence, the number of claims on earnings is finite. A finite number
of shares means that as the value of the business increases, the same
number of shares is now more valuable than before the increase in
the value of the business.
By comparison, an open membership co-op’s universe of members
is dynamic and expanding all the time. The number of claims on
earnings in an open membership cooperative is infinite, limited
only by the number of co-op members and their proportion of the
business of all members combined. Because at the co-op’s dissolution
the remaining proceeds are distributed on the basis of historical
patronage to present and former members, the longer that an open
membership is in business before dissolution, the more claims that
are created from present and former members who are entitled to a
portion of the remaining proceeds at the co-op’s dissolution.
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