Haute Lumière
Commerce · V.06 · MMXXVI · daylight
ASSESSMENT · Chapter V.06 — The Cooperative Firm, Audited
Three instruments: a ten-point quiz, eight reflection questions, five essay prompts. The quiz checks comprehension rather than recall. The reflections are private and first-person. The essays are arguable from more than one side.
THE QUIZ — ten points
Four on recall.
1. State the volatility trade the cooperative firm makes, and name two of the three datasets on which it has been found.
The cooperative moves volatility off employment and onto pay; the conventional firm does the reverse. Craig and Pencavel on the Pacific Northwest plywood cooperatives; Pencavel, Pistaferri and Schivardi on Italian firms; Burdín and Dean on Uruguay. One mark for the direction of the trade, one for two named sources. Credit any answer that adds: the shock is not abolished, it is routed.
2. Why does a cooperative member's capital claim carry a higher cost of equity than a listed share?
It cannot be sold. There is no market, no buyer, and the account is usually withdrawn at book value on leaving, so the holder bears an illiquidity discount — and, separately, holds it undiversified alongside her labour income in the same firm. Full marks require naming both illiquidity and the absence of diversification as distinct effects.
3. What does IFRIC 2 decide, and on what does it turn?
Whether members' shares in a cooperative are equity or a financial liability. It turns on whether the entity holds an unconditional right to refuse redemption. Written into the rules, the instrument is equity; omitted, it is debt and the gearing covenant moves.
4. State the degeneration test in one ratio, and say what governs it.
Worker-members divided by total people employed. It is governed by the admission rate relative to the hiring rate — admitting at the hiring rate holds the ratio exactly.
Four on application.
5. A board member says: "Fagor proves cooperatives do not work." Give the audited answer.
Fagor failed and the federation did not pretend otherwise: reported liabilities of about €850,000,000 against group income near €12,000,000,000 — 7.08 percent — with roughly €300,000,000 of support beforehand, 2.50 percent. What the structure changed was not whether the business failed but what the failure did to people: 1,900 Basque worker-members, 2.57 percent of group employment, carried by inter-cooperative provision and relocation while Spanish unemployment stood at 26.9 percent. The strongest answer states the claim at its honest width — the structure alters the conversion rate between business failure and household catastrophe, and nothing more.
6. Your cooperative declines a project with a 6.4 percent internal rate of return. Your conventional competitor takes it. Who is wrong?
Neither. The project sits inside the refused band between a conventional WACC of 5.65 percent and a cooperative WACC of 7.11 percent. Both firms are applying their own cost of capital correctly. Credit heavily any answer that then asks the useful question: how much of what we declined in three years fell inside that band, and is the total large enough to justify an instrument?
7. A cooperative has held employment flat for eight years. Where would you look for the cost, and what is the limit?
In the pay series. Employment stability bought with a shrinking residual is real but financed by members — the John Lewis bonus fell from a five-year average of 15.0 percent of pay to 1.0 percent, a decline of 93.3 percent. The limit is reached long before anything is reported as a problem, because nothing in the accounts flags a residual that is quietly doing all the work.
8. Your member share has fallen and the board wants to know who is responsible. Reframe the question usefully.
Nobody is. A firm hiring at 5.0 percent and admitting at 2.0 percent reaches 59.9 percent members in a decade with no decision ever taken. The useful question is what admission floor the rules should carry, and the answer is at least the hiring rate — with 2.94 points a year above it required to recover the lost ground over ten years.
Two that require the arithmetic to be done.
9. A member has eight years left before retirement. The cooperative is considering an investment costing €100 that returns €12 a year in perpetuity; the discount rate is 10.0 percent. Compute her NPV, the firm's, and the horizon at which she becomes indifferent. Show your working.
The firm, holding a claim it could in principle sell, values it at
12 / 0.10 − 100 = €20.00. She values eight years of the flow:12 × 5.3349 − 100 = −35.98. She votes no, and she is right to. Indifference requires12 × a(T) = 100, soa(T) = 8.3333, giving1.10^−T = 0.1667andT = ln 6 / ln 1.10 = 18.80 years. Credit any method reaching eighteen to nineteen. The point of the question is that the horizon problem is a number, and a number can be bought off: credit half the retained value to her capital account and the break-even falls to 14.55 years, a gain of 4.25 years.
10. Two firms earn 12.0 percent on equity and retain 60.0 percent. The listed one issues net new equity worth 3.0 percent of opening equity a year; the cooperative's only external equity is member stakes of €15,000 against €150,000 of capital per worker, with headcount growing 3.0 percent. Compute both sustainable growth rates and the size of the capital base gap after twenty years.
Member-stake inflow:
15,000 × 0.030 / 150,000 = 0.30 %. Conventional:12.0 × 0.60 + 3.0 = 10.20 %. Cooperative:12.0 × 0.60 + 0.30 = 7.50 %. Gap 2.70 points. After twenty years:(1.1020 / 1.0750)^20 = 1.6423— the conventional base is 64.2 percent larger. The stronger answer names what this does and does not say: the cooperative is not less profitable, it is less able to convert profit into scale, and that is a financing problem with a financing answer.
REFLECTION — eight questions, for one person and a pen
These are not for a room. Write the answers by hand if you can; the slowness is the point.
- Think of a year when your own income moved with your employer's fortunes rather than against them. What did that feel like, and would you take that deal again knowing what you know now?
- Where in your working life have you held an asset you could not sell — a pension, a stake, a reputation, a relationship — and what did you do differently because you could not get out?
- Recall a decision you declined because you would not be there to see it finish. Write the honest reason, not the presentable one.
- What is the thing about the organisation you work in that you would defend to a stranger, and what would you need to see in the accounts to keep defending it in five years?
- When have you preferred a smaller, steadier outcome to a larger, riskier one — and what does that tell you about where your own break-even sits?
- Which number about your organisation have you never gone and looked up because you suspect you would not like it? What has that suspicion cost you already?
- Think of somebody who joined after you and has less standing than you do for no reason you can defend. What would it take to change that, and what would it cost you?
- If you had to hand one measurement to whoever runs this place after you, which one would you choose, and why that one rather than the obvious one?
ESSAY PROMPTS — five
Each is arguable from more than one side. Each requires at least one source the chapter cites and at least one it does not.
1. The premium nobody quotes. The chapter computes a cooperative cost of equity of 12.16 percent against a conventional 8.50 percent, and a refused band between 5.65 and 7.11 percent. Argue either that this premium is a real and permanent structural cost that cooperative advocacy systematically omits, or that it is an artefact of applying a valuation framework built for tradable securities to a claim that was never meant to be traded. Use Damodaran on illiquidity and total beta, and one source on cooperative finance that the chapter does not cite.
2. Was Fagor a failure of structure or a failure of strategy? Fagor was a founding Mondragón cooperative competing in white goods against global manufacturers with far deeper capital. Write the case that its collapse indicts the cooperative form — then write the strongest rebuttal, that it indicts a sector choice any owner would have lost. Use Errasti, Bretos and Nunez, and at least one account of the European appliance industry that the chapter does not cite.
3. Risk aversion and the limits of the insurance frame. The chapter finds a break-even relative risk aversion of 3.446 and sets it against Chetty's estimate near one. Argue either that this decisively weakens the income-smoothing case for cooperatives, or that the expected-utility frame is the wrong instrument — because it prices income and not control, security of tenure, or the option value of the firm still existing. Engage Chetty directly, and one source on the non-pecuniary returns to employment that the chapter does not cite.
4. Degeneration: tendency or policy? The chapter reduces degeneration to an admission rate and shows a firm reaching 59.9 percent members in a decade with no decision ever taken. Argue whether Ben-Ner's stability argument describes a genuine structural tendency of cooperative organisations, or whether Cornforth is right that the thesis collapses once you look at firms that reversed it. Use Cornforth and Storey, Basterretxea and Salaman, and one longitudinal study of a cooperative sector that the chapter does not cite.
5. The state's cheapest option. On the chapter's arithmetic the Marcora route costs €14,000 a job against €24,000 of benefit — a ratio of 0.583. Argue either that worker buyouts are the most cost-effective active labour market policy available to a European state, or that the comparison is unsound because it ignores selection, survivorship, and the firms that would have been rescued anyway. Use Vieta, Depedri and Carrano, and one evaluation of active labour market policy that the chapter does not cite.