What’s the Right Value for Membership Stock?
Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma statues require every agricultural cooperative to issue a certificate of a membership to eachmember.This is usually a special share of membership stock which is treated differently from all other types of allocated equity. The price of a membership share of stock varies across cooperatives. Some cooperatives require their members to purchase the initial share, while others allow members to earn the membership share. Most cooperatives have not changed the cost of a membership share since the cooperative was formed. That raises the question of how membership shares should be priced.
The consumer price index has increased roughly fifteen fold since most Oklahoma cooperatives were incorporated. The “real” or inflation adjusted price of a cooperative membership share has clearly decreased over time. Several principles can be considered in setting the ideal price for membership. First, the user-owed and user-controlled principles tell us that cooperatives should be controlled by the user members with investment in the cooperative. The membership shares should provide the members a sense of ownership. This “skin in the game” concept would suggest that an individual should make a non-trivial investment before they obtain the right to influence the cooperative’s direction.
The second principle is proportionality. A member’s investment should be proportion to their use of the cooperative. At first glance this principle would suggest a low or even zero price value for membership. A new member is not using the cooperative and therefore should not be expected to be financing it. Presumably, as their use increases they will build ownership through retained patronage. Equity redemption confounds this simple picture. If the cooperative has an aggressive age-of-patron based revolvement system, members could reach the trigger age while they are still doing significant business volume. They would be under-invested until they gradually rebuilt equity through retained patronage. A higher membership share value would shift more of their equity to the non-revolving category and keep their investment somewhat more proportional.
With these principles in mind, what are the pros and cons of a higher membership stock value? A higher price could become a barrier to attracting members. If members are allowed to earn their membership share, a higher value delays the point at which they gain membership rights. Some members might never do enough business to earn a $1,000 or $2,500 membership. On the other hand, a higher value increases a sense of ownership and directs control to individual that have made some meaningful investment or business volume with the organization. A higher value maintains more investment by members reaching the equity revolvement threshold. Increasing the membership share value moves equity from a revolving to a semi-permanent category. This may allow the cooperative to pursue a slightly shorter revolving period or a younger trigger age.
If you and your board would like a profile of your equity, consider alternative equity redemption systems or examine the impact of changing your membership share value, let me know. The OSU Equity Analyzer is ready to spring into action.
10-26-2009