Withdrawable shares are one way to secure capital

In exploring new approaches to capital, a discussion paper has been supported by Co-operatives UK. The report's author, Dr Mark Hayes, summarises his findings here . . .

The ICA Blueprint for a Co-operative Decade contains two key sentences which summarise the challenge. Co-operative capital needs to offer ‘a financial proposition which provides a return, but without destroying co-operative identity; and which enables people to access their funds when they need them. It also means exploring wider options for access to capital outside traditional membership, but without compromising on member control’.

Capital is neither subordinated debt nor a deposit. Withdrawable share capital, in particular, is best understood as a form of partnership capital with limited liability. Withdrawable capital enables a community

to share the risk of their co-operative enterprise. We should defend their freedom to do so. This is especially important for small societies with small offers that cannot justify the costs of regulated offers.

The price of exemption from statutory regulation is strong self-regulation. Both societies and the public need a better understanding of the nature and appropriate use of community shares. The sector should introduce robust measures to help aggrieved investors pursue claims against societies, directors and promoters for misrepresentation in share offers. The regulator must continue to protect the sector from the unscrupulous through the registration conditions.

The co-op principle of limited return on capital needs to be asserted clearly but also understood more imaginatively than it has been in the past. Profit-sharing is incompatible with democratic governance in the long run, but this does not mean that capital can receive only an uncompetitive annual interest rate.

The best solution to the tax bias against investment in societies would be to take share interest out of tax altogether, making it neither deductible nor assessable. The policy case is that this would be revenue neutral for both Treasury and societies, substantially reduce red tape and unleash co-operative enterprise.

Societies, as human communities, cannot offer investments compatible with the methods of venture capitalism, where the gains on selling the winners cover the cost of backing losers.

The risks of early stage and start-up business have to be managed, not offset, which requires the development of specialist intermediary institutions in order to reduce the risk premium demanded by external investors to viable levels.

The need to protect the society from external investors has to be matched by protection for the external investors from abuse by the society, if external investment is to be forthcoming.

The holders of more than 75 per cent of the share capital in a society should be allowed the right to petition a court, through the society, for the society to be wound up if the court judges this to be fair. Voting should otherwise be democratic and often will be limited to users.

Permanent transferable shares offer societies the prospects of significant advantages for the finance of their business and of institutional investment on a large scale. External investors need both an exit and liquidity, and in the case of transferable shares, this can only be provided for institutions by a secondary market or stock exchange. This means variable share prices and some degree of speculation, although in this context society shares are no different from bonds.

If societies are to issue transferable shares, the larger societies will have to engage with institutional investors and the stock exchange.

There is a case for establishing a large society as a financial intermediary, to hold permanent shares in other societies pending their listing, and itself funded with withdrawable capital, prior to its own listing

• To read the full discussion paper, visit Co-operatives UK.