All posts by JohnVinson

As part of the Black Star Co-op Board’s continuing educational activities, we’re delving into the history of co-op: how and why they came about, how they’ve evolved in waves over the last two centuries, and how Black Star has ridden the most recent wave to be as successful as it is. In this blog post the early of history of co-ops will be outlined (other parts of co-op history will be the topic of subsequent posts.)

Cooperation among humans is the oldest form of social task accomplishment. It’s likely that our primate ancestors basically cooperated, as we know some other species seem to cooperate beyond primal levels. But cooperatives as we know them today started in the early- to mid-1800s. The first co-ops were essentially simple grocery businesses created as a reaction to unpredictable quality and quantity issues, predatory pricing, and the desire on the part of consumers to be able to have some significant say in how the food chain operated. The most celebrated early co-op was the Rochdale Equitable Pioneer Society located in the millenary center of England near Manchester. After strikes by the weavers in Rochdale failed to have any significant effect on wages and living conditions, the weavers looked to some other mechanism for improving their situation. They turned to the ideas of several prominent liberal, socialistic thinkers of the time who advocated for workers/consumers benefiting directly from the fruits of their labor though cooperative trading so members of an enterprise could see an immediate self-created benefit. The Rochdale Pioneers, who early on in their history created the basic principles of cooperation we still have today, admitted unlimited numbers of members, required the same small capital investment of all members, gave each member one vote for all relevant co-op decisions, and distributed part of the co-op’s profits as a dividend on purchases (patronage). In December of 1844, and with 28 members, they started the first successful cooperative enterprise (their original shop now houses the Rochdale Pioneers Museum). 

The Rochdale Pioneers’ modest beginnings included the sale basic necessities to their members such as butter, flour, oats, candles, soap and blankets. The goal was to supply high quality goods, cheaply and to return any profit to members of the co-op. They would do this based on values that revolved largely around the ideas of democracy and self-help, and the key principles which are now recognized internationally as the Seven Co-operative Principles (discussed in many past Black Star bog posts).  Because of the remarkable success of the Rochdale Pioneers, the co-op movement spread rapidly and by the end of the 19th century it was already an international movement. The International Co-operative Alliance (ICA) was founded and held its first congress in Manchester in 1896. Today the Seven Co-operative Principles are promulgated by the ICA and are successfully applied throughout the world to a vast array of co-op businesses – farming co-ops, electric co-ops, fishing co-ops, credit unions, grocery/retail co-ops, manufacturing co-operatives, web hosting/IT co-ops, workers co-ops of all sorts — and since 2010, brewpub co-ops!

Like the Rochdale Pioneers, Black Star ventured into an area that was once an unexplored frontier of the co-op movement, and with our five-year anniversary coming up, I think we can all say that Black Star has been a huge success. There are now many other cooperative brewing businesses in the US and beyond, many of which have used Black Star as their model. I think the Rochdale Pioneers would be proud of Black Star.  I also suspect they would love a Vulcan with our fish & chips.      

Part 1 of this series outlined the basic principles governing traditional cooperatives, with reference to the operations of Black Star reflecting each principle. Part 2 explored the fundamentals of patronage refunds.  In Part 3, we’ll explore cooperative investment arrangements.  The rules and practicalities of co-op investment, and how such investment jibes with patronage rebates, are fairly complex. While a detailed presentation is beyond the scope of this short article, here are the basics: 

Like many co-ops, BSC periodically offers a preferred share program allowing Owners to invest in BSC beyond the membership payment required of all Owners.  This program — called the Member Investment Share Offering or “MISO” program — provides crucial funds for the development and expansion of our Co-op. BSC’s initial MISO phase raised more than $630,000, which is part of the reason why the brewpub was able to open so quickly and become so successful.  The Board anticipates another round of fundraising soon after plans are solidified for a new brewing facility, first, and then a new brewpub.  Because we want to allow as many members as possible to invest, we’ll likely set the minimum purchase amount at $1000 (10 shares at $100 apiece).  

Some co-ops do not offer investment shares beyond the required membership payment, but co-ops may appropriately offer investment shares if the program is carefully structured to maintain both the cooperative nature of the business and their favorable tax treatment.  Co-ops also do not want run afoul of state and federal securities laws—but, happily, there are exemptions available to co-ops.  One of these exemptions, for example, applies to an entity selling shares only to intrastate members. It is virtually prohibitive for a small business to pay the fees and comply with the regulatory requirements of a state/federal registered stock sale, so exemption from such laws is critical.  

The various limitations on co-op investment reflect the cooperative principles of Democratic Member Control, Member Economic Participation and Autonomy and Independence.  It would not be very cooperative to allow investors to control a co-op by purchasing large amounts of stock.  Therefore, co-ops would want to restrict sale of shares to persons who are members of the co-op and limit the amount of their investment.  State and federal laws also limit the amount of return on co-op investment (up to 8%), and limit the amount of the co-op’s assets that can be used to pay interest on the investments (Texas law allows only 50% of the co-op’s net profits to be used for investment dividends).  Perhaps most significantly, co-ops should apportion no additional voting power based on an additional investment. All these limitations are referred to as the subordination of capital requirements for co-ops — that is, the structure and control of the co-op should be strictly based on the principle of one person, one vote.  Co-ops are free to raise money, but they must also retain the attributes of a co-op.  

Some co-op experts contend that additional member investment alters the nature of a co-op, necessarily shifting its goals from generating only a return to members on patronage to a combined goal of return on patronage and return on investment.  The co-op now has two potentially conflicted types of members, each with different types of property rights and different expectations.  Some view the use of such additional investment, particularly from nonmember investors, as subverting or diluting the co-op business model.  Others view such investment as far preferable to loans from predatory banks and other outside sources.  Additional member investment keeps the equity and interest payments “in the family.”  The Directors of the co-op must be mindful of the dual interests in carefully managing the potential conflict.

Based on the above considerations, BSC intends to continue its program of raising expansion equity with a blend of new MISO investment and bank loans, as well as through increased sales of our delicious food and beer — now including beer distributed to other pub and retail locations around town. The BSC Board will continue to carefully analyze the interplay between patronage rebates and MISO dividends to ensure that all members are treated fairly and beneficially.  

John Vinson is an elected member of Black Star Co-op’s Board of Directors.

Part 1, published in April’s newsletter, presented the basic principles governing traditional cooperatives and illustrated these principles with reference to BCS’s operations. Here in Part 2, we delve into the fundamentals of patronage rebates or refunds.

(The rules and practicalities of cooperative patronage are fairly complex, and a detailed presentation is beyond the scope of this article. For more detail, see http://www.cdsconsulting.coop/patronagedividend).

Patronage refunding, based on the amount of business a member does with the co-op, is one of the primary features distinguishing co-ops from other business and associational entities. Co-ops are run for the purpose of providing various benefits to members, and return of any net profits of the business is an important one.  However, earned patronage can also be appropriately retained and used by a co-op and still provide significant benefits to members — even if a cash amount is not directly paid to the individual members. The IRS allows two subgroups of patronage to be tax exempt by the co-op. These are “distributed patronage,” or patronage amounts that are actually paid in cash to members; and “retained patronage,” or amounts that are kept as an asset of the co-op but still allocated or booked to individual members. Retained patronage can be used by the co-op — again, tax free — as capital for expansion, for reduction of charges or prices for the co-op members and users, and for other co-op member benefits or community purposes. By IRS regulations, when a co-op decides to make a patronage allocation, it must distribute at least 20% of the amount allocated as a cash payment to individual members. Thus, 80% of the allocated amount may be retained. 

(For more on the use of retained patronage by co-ops, see: http://www.cooperativegrocer.coop/articles/2010-06-04/waking-sleeping-giant).

When all or a large portion of retained patronage is not needed by the co-op itself, it is a good idea — and actually a primary duty of a co-op — to pay as large a percentage as possible of the allocated patronage directly to members. But there are very good reasons to not distribute the maximum allowable amount. For example, when it’s economically feasible to begin allocating patronage to member-owners, Black Star will likely retain as much tax-free patronage as possible (80%) for its continued expansion, a second/third/fourth(?) brewpub, additional brewing facilities, expansion outside of Austin, etc. Black Star, because of its particular co-op mission, would also likely use such capital to reduce the costs of brewpub bar and menu items, and, importantly, to enhance worker remuneration and benefits. But rest assured that the Black Star Board is committed to making at least the minimum cash payments of patronage to member-owners as soon as possible.

On a broader co-op society note: Imagine a community that offers cooperative options in all or most economic/industry sectors. In addition to co-op options for particular consumer goods (grocery stores, beer/brewpubs, donuts), consumer services (housekeeping, screen printing), banking (credit unions), residential housing, web hosting and electricity, other co-ops could provide goods and services fulfilling a much larger percentage of consumer need. Instead of a household benefiting and receiving patronage rebates from just the operations of the co-ops listed above, imagine the additional benefits of cooperatively owned department stores, energy companies (even oil/gas and service stations), transportation companies (automobile and bicycle sales), insurance companies (life, health, home, auto, commercial, business), laundries, home improvement/furnishing stores, professional service firms, plumbers, electricians, building contractors, etc. The amount of potential member patronage to a person or family using most or all such cooperative businesses could be enormous.  And many of those businesses could be worker co-ops providing living wages and salaries and generally great places to work. Oh, if only…

In Part 3 of this series, we’ll explore the details of member-owner investment share offerings and how they mesh with patronage rebates.

(This article was originally published on March 4, 2014)

Black Star Co-op, as a cooperative organization, is part of a world-wide resurgence of member-owned businesses that are democratically organized to provide goods and services to owner/members. According to a report issued to mark the 2012 launch of International Year of Co-operatives, there are now three times more members of co-ops of all sorts ($1 billion) than individual shareholders (300 million) worldwide. Like most co-ops, Black Star provides highly valued good and services to members as well as many benefits to the community at large just by operating as a co-op. As the co-op model of business is rapidly gaining in popularity and is seen by many as an antidote to the problems facing our economy presented by undemocratic, even dictatorial, large corporate enterprises, it is important that newer Black Star members understand what it basically means to be a co-op and a co-op member.  Many long-time Black Star members can also use a refresher on this subject. This is Part 1.

Let’s start with the 7 Cooperative Principles adopted by the International Cooperative Alliance in 1995, including additional explanations of each principle. These principles are widely adopted by co-ops, and to some degree or another, all cooperative businesses follow them. To fully appreciate what co-ops, understanding these principles is critical.

1. Voluntary and Open Membership.  Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.

Co-ops must offer their benefits to all persons who will comply with the co-op’s basic terms of membership based on the 7 principles. Co-ops can limit membership when required for economic or practical reasons, and worker co-ops can hire competitively like any business, but co-ops should be open to anyone without discrimination. Black Star, for example, welcomes all persons as co-op members (of course, because alcoholic beverages are part of Black Star’s mission, and because Texas law is clear on the point, you must be over 21 to join). If a co-op ever gets to the point of turning members away, it’s probably time to expand or start a new co-op. When viewed in the context of the next principle, this principle is truly part of what makes a co-op a co-op.

2. Democratic Member Control.  Member-owners democratically elect board members and make some decisions directly. In most co-ops, one member gets one vote, no matter how much stock the member owns, what the position the member holds, how much business is done with the co-op, or how many hours a member works.

With the principle of open membership, democratic member control defines how co-op members make broadly participatory decisions. Members can and should be active in setting policy and giving broad direction to cooperative activities so that no member has a greater voice than any other member. People serving as elected representatives are accountable to the membership, not distant and/or disinterested stockholders. The principle allows for different voting procedures to reflect participation of members which are themselves co-ops or other democratically organized entities (this also promotes principle 6 — helping empower other co-ops). Black Star’s Board of Directors and Workers Assembly, in all their interactions with members, strive to engage with them to make democracy a reality. Democracy in a brewpub may seem insignificant in itself, but when our economy embraces the cooperative model in more and more sectors, this more expansive democratic model could truly transform our society. Black Star’s worker-managed operations further enhance the democratic nature of Black Star.

3. Member Economic Participation.  Members all contribute to the capital of the co-op, so all members are also owners.

Further bolstering their democratic attributes, co-ops have largely operated on the twin premises that capital is the servant of the enterprise, rather than its master, and that co-op activities should foremost meet member needs, not accumulate capital for investors who are often entirely disinterested in the particulars of the enterprise. Co-ops traditionally, and now by state and federal law, strictly limit returns on invested funds so that no one person or group of persons can financially control the co-op.  Investment is permitted, but it is circumscribed (many laws, including that of Texas limit any such return to 8% annually and prohibit accumulation of dividends). Co-ops also usually do not allow any additional vote or representation based on large investment. It is important to the democratic nature of co-ops that members patronize the co-op, contribute and own the co-op’s capital equally/equitably, and democratically control the capital and other assets of the co-op. This collective pooling of resources maintains the community centered nature of co-ops and provides financial strength that is possibly otherwise unavailable to co-op members. Profits from the co-op’s operations are to be allocated in such a way as to prevent any member from profiting at the expense of any other. Profits may or may not be returned directly to members as the board of a co-op, or the members themselves, may choose to use the money for improvements, expansions or new services for the membership, or other activities supported by the members. Black Star, like most co-ops, raises its capital from the profits of its business operations, as well as member-owner joining fees, paid on joining Black Star, and through Black Star’s Member Investor Share Offerings, the first of which was used for initial construction of the brewpub, with a likely second offering to come for Black Star’s expansion plans. Although only 3+ years in business, Black Star has been able to pay dividends on the MISO shares, and discussions are underway for a possible patronage rebate in the near future.

 4. Autonomy and Independence.  Co-ops are autonomous, and exist for the benefit of the members. If co-ops enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.

Co-ops must be free of control or intervention from governments or other entities so that the members are able to control the business and community of the co-op — co-ops should not give up any aspect of their fundamental identity or democratic governance in order to get governmental favors, money or business partners. A co-op that allows the interests of its members to be subverted by politics, religion, corporate business expectations, etc., would not be a co-op consistent with these principles.

5. Education, Training, and Information.  Cooperatives provide education and training for members, elected representatives, managers and employees so they can contribute effectively to the development of their cooperative. Members also inform the general public about the nature and benefits of cooperatives.

Education of an ongoing nature for members, managers, board members, and employees, is critical to the development of a co-op. Many co-ops also educate the general public about the possibility of doing business cooperatively. This means more than simply product advertising or distributing information. Engaging the minds of members, elected leaders, managers and employees to appreciate the cooperative business model, with its complexity and richness is the ideal. Educating young people about co-ops will hopefully significantly lead to increased participation in co-ops. If co-ops are to continue their inroads into established business realms and form part of the solution to many community problems, people must be aware of the co-op movement and they must participate in it.

6. Cooperation Among Cooperatives.  Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures.

Working together makes all co-ops stronger, increases general co-op awareness, builds buying power and keeps the co-op business stable. In building a larger cooperative community (and hopefully world!), co-ops should strive to share experience and best practices with each other. This principle may seem odd to a mainstream businessperson who sees competition for customers and profits as the driving force of for business, but for co-ops, profit is a means, not an end. The goal of the cooperative model is to serve the needs of member-owners, who are usually also the primary customers of the co-op. Ideally, adherence to this principle will bring about co-op unity in a way that is beneficial to all co-ops. In the same way that individuals form cooperatives to achieve common goals, co-ops themselves can join forces. In game theory, one actually wins the most by cooperating. Through various organizations such as the National Co-op Business Association, and our own Austin Cooperative Business Association (Black Star belongs to both), co-ops lobby governmental agencies for laws that are favorable to co-ops, credit unions and related entities. By learning about and supporting each other’s business, mission and members, co-ops are helping to bring about a more democratic and economically stable world.

7. Concern for Community.  While focusing on member needs, cooperatives work for the sustainable development of communities through policies and programs accepted by the members.

Increasing democracy in the business world and building the values of social responsibility and caring for others, co-ops make significant contributions to a better society at large. “Cooperatizing” increasingly large portions of our economy says, in effect, that individuals can meet their needs and the needs of others in the community better than they are currently being met. Co-ops are uniquely able to contribute to the health and longevity of communities which is referred to as sustainable development. Some of the benefits that co-ops bring to a community are: stability in that co-ops don’t pull out of a community because there are higher profits to be made elsewhere; needs-based initiative in that co-ops start as a response to a perceived need, not just some new way to make a profit; and increased community income in that co-op spend and invest locally and directly benefit from paying higher wages, thus overall profit stays in the community. Not insignificantly, co-ops have traditionally led the way in areas such as human rights and environmental awareness.

In Part II, we explore the wonderful world of member-owner investment share offerings and patronage rebates.

John W. Vinson is a member of the Black Star Co-op Board of Directors. He was present at the first SXSW, when bands played 20 minute sets at a single venue.