Rogationist College

St. Anthony’s Boys Village

Lalaan II, Silang, Cavite

SYNTHESIS PAPER

A Paper Submitted to:

Mr. Armando Bañares, CPA
Governance Business Ethics Risk Management and
Internal Control Professor

In partial Fulfilment of the Requirements in

Governance Business Ethics Risk Management
and Internal Control

COPIAR, RAYMART M.
BSA-401

January 31, 2020

THE AGENCY THEORY
Agency Theory is a management and economic theory that explains the various

relationships and areas of self-interest in companies. It is a useful framework for

designing governance and controls in organizations, adding that the theory helps

management to evaluate the company's strengths and weaknesses, and it uses case

study evidence to demonstrate how the theory has been applied in different industries

and contexts. Agency theory can be quite helpful to companies in a variety of industries

and contexts. For example, fully functioning supply chains are crucial for nearly every

business, but supply chains can develop problems.

Agency theory is a management and economic theory that attempts to explain

relationships and self-interest in business organisations. It describes the relationship

between principals/agents and delegation of control. It explains how best to organise

relationships in which one party (principal) determines the work and which another party

(agent) performs or makes decisions on behalf of the principal.

Agency theory defines the relationship between the principals (such as

shareholders of company) and agents (such as directors of company). According to this

theory, the principals of the company hire the agents to perform work. The principals

delegate the work of running the business to the directors or managers, who are agents

of shareholders. The shareholders expect the agents to act and make decisions in the

best interest of principal. On the contrary, it is not necessary that agent make decisions

in the best interests of the principals.

 The agent may be succumbed to self-interest, opportunistic behavior and fall

short of expectations of the principal. The key feature of agency theory is separation of

ownership and control. The theory prescribes that people or employees are held

accountable in their tasks and responsibilities. Rewards and Punishments can be used

to correct the priorities of agents.

Agency theory is used to understand the relationships between agents and

principals. The agent represents the principal in a particular business transaction and is

expected to represent the best interests of the principal without regard for self-interest.

The different interests of principals and agents may become a source of conflict, as

some agents may not perfectly act in the principal's best interests. The resulting

miscommunication and disagreement may result in various problems and discord within

companies. Incompatible desires may drive a wedge between each stakeholder and cause

inefficiencies and financial losses. This leads to the principal-agent problem.

The principal-agent problem occurs when the interests of a principal and agent

conflict. Companies should seek to minimize these situations through solid corporate
policy. These conflicts present normally ethical individuals with opportunities for moral

hazard. Incentives may be used to redirect the behavior of the agent to realign these

interests with the principal's concerns.

Corporate governance can be used to change the rules under which the agent

operates and restore the principal's interests. The principal, by employing the agent to

represent the principal's interests, must overcome a lack of information about the

agent's performance of the task. Agents must have incentives encouraging them to act

in unison with the principal's interests. Agency theory may be used to design these

incentives appropriately by considering what interests motivate the agent to act.

Incentives encouraging the wrong behavior must be removed, and rules discouraging

moral hazard must be in place. Understanding the mechanisms that create problems

helps businesses develop better corporate policy.

To determine whether or not an agent acts in his or her principal’s best interest,

the standard of “Agency Loss” has emerged as a commonly-used metric. Strictly

defined, agency loss is the difference between the optimal results for the principal and

the consequences of the agent’s behavior. For example, when an agent routinely

performs with the principal’s best interest in mind, agency loss is zero. But the further an

agent’s actions diverge from the principal’s best interests, the greater the agency loss

becomes.

Agency costs refer to the conflicts between shareholders and their company's

managers, according to Investing Answers. Suppose a shareholder, a principal, wants

the manager, the agent, to make decisions that will increase the share value. Managers,

instead, would prefer to expand the business and increase their salaries, which may not
necessarily increase share value. In a publicly held company, agency costs occur when

a company's management, or agent, place their own personal financial interests above

those of the shareholder or principal.

Agency costs are important because although they are difficult for an account to

track, they are just as difficult to avoid. This is because principals and agents can have

very different motivations, Investing answers explains, adding that management may

have more information than shareholders – principals – and can take advantage of their

decision-making power over the company.

Agency theory provides clear parameters for corporate officers and board

members making strategic decisions. It comes in handy if decision makers have a

tendency to be greedy and profit at the expense of the company. It is also an invaluable

guideline when a company's long-term interests conflict with actions that may provide

lesser but more immediate benefits to stakeholders.

Decision-making protocols. In theory, buying a share of company stock gives you a

vote in major company decisions. This right is diluted by the fact that some stockholders

may own a single share, giving them a single vote, while others own thousands of

shares, giving them thousands of votes. Executives and board members should

represent all shareholders, but they might over represent those who own the most

equity. Agency theory is a step toward navigating these complexes and sometimes

conflicting obligations.

Greedy executives. The people with the power to make high-level corporate decisions

are often directly in line to benefit from some of these decisions, especially with regard
to issues of corporate pay. In a perfect world, high pay and large bonuses for executives

would motivate and reward them for quality work that brings in extra income for all

shareholders. In the real world, high corporate pay can come at the expense of the

bottom line that is divided among the broader pool of shareholders.

Long-term vs. short-term interests. It may be in the best interests of a company to

invest in the future, but these outlays often come at the expense of short-term rewards

such as shareholder dividends. Executives’ conscientiously practicing corporate agency

theory will use the knowledge and skills that landed them in management positions to

make the best calls possible for the organization as a whole.

In order to explain agency theory, it's useful to think in terms of different

perspectives on risk assessment. Unless shareholders are unusually well informed

about the inner workings of a company, they're likely to want to invest company

resources in ways that will bring the most income in the short term. However,

investments that bring about quick returns tend to be riskier than strategies that unfold

more slowly, allowing a company to adapt and adjust.

Shareholders purchase their shares and then enjoy returns over time if the

business is successful. Although the value of their shares may be at risk from

speculation and approaches geared toward reaping short-term benefits, the

shareholders themselves aren't taking on any additional risks from these ventures. In

contrast, managers and board members who are more actively involved in the

company's day-to-day activities have a more sober assessment of the risks associated

with aggressive short-term strategies

STAKEHOLDER THEORY
The stakeholder theory of corporate governance focuses on the effect of

corporate activity on all identifiable stakeholders of the corporation. This theory posits

that corporate managers (officers and directors) should take into consideration the

interests of each stakeholder in its governance process. This includes taking efforts to

reduce or mitigate the conflicts between stakeholder interests. It looks further than the

traditional members of the corporation (officers, directors, and shareholders) and also

focuses on the interests of any third party that has some level of dependence upon the

corporation. Stakeholders are generally divided into internal and external stakeholders.

The traditional definition of a stakeholder is “any group or individual who can

affect or is affected by the achievement of the organization’s objectives”. The general

idea of the Stakeholder concept is a redefinition of the organization. In general the

concept is about what the organization should be and how it should be conceptualized.

The organization itself should be thought of as grouping of stakeholders and the

purpose of the organization should be to manage their interests, needs and viewpoints.

This stakeholder management is thought to be fulfilled by the managers of a firm. The

managers should on the one hand manage the corporation for the benefit of its

stakeholders in order to ensure their rights and the participation in decision making and

on the other hand the management must act as the stockholder’s agent to ensure the

survival of the firm to safeguard the long term stakes of each group.
 These stakeholders exert influence but are not directly involved in the process.

Key to the stakeholder theory is the realization that all stakeholders engage in some

manner with the corporation with the hope or expectation that the corporation will deliver

the type of value desired or expected. The benefits may include dividends, salary,

bonuses, additional orders, new jobs, tax revenue, etc.

Stakeholder theory incorporated the accountability of management to a broad

range of stakeholders. It states that managers in organizations have a network of

relationships to serve – this includes the suppliers, employees and business partners.

The theory focuses on managerial decision making and interests of all stakeholders

have intrinsic value, and no sets of interests is assumed to dominate the others

The stakeholder principle has gained increased recognition in corporate

governance in the recent times. It is understood, by and large, as a refinement of the

more limited conception of business corporations as vehicles whose function is to

promote the economic interests of their shareholders.

 The stakeholder idea has always been present in corporate law. Its scheme of

creditor protection, which is one of the foundational principles, is proof of this fact. The

stakeholder vision articulated in the recent times is, however, more expansive and

proactive. It covers a large number of non-shareholder groups-employees, suppliers,

communities, and so on-and seeks to promote active corporate engagement in

protecting the interests of these groups and promoting their welfare.

The definition of a stakeholder, the purpose and the character of the organization

and the role of managers are very unclear and contested in literature and has changed

over the years. Even the “father of the stakeholder concept” changed his definition over

the time. In one of his latest definitions he defines stakeholders as “those groups who

are vital to the survival and success of the corporation”.

In one of his latest publications he adds a new principle, which reflects a new

trend in stakeholder theory. In this principle in his opinion the consideration of the

perspective of the stakeholders themselves and their activities is also very important to

be taken into the management of companies. He states “The principle of stakeholder

recourse. Stakeholders may bring an action against the directors for failure to perform

the required duty of care”.

All the mentioned thoughts and principles of the stakeholder concept are known

as normative stakeholder theory in literature. Normative Stakeholder theory contains

theories of how managers or stakeholders should act and should view the purpose of

organization, based on some ethical principle. Another approach to the stakeholder

concept is the so called descriptive stakeholder theory.

 This theory is concerned with how managers and stakeholders actually behave

and how they view their actions and roles. The instrumental stakeholder theory deals

with how managers should act if they want to flavor and work for their own interests. In

some literature the own interest is conceived as the interests of the organization, which

is usually to maximize profit or to maximize shareholder value. This means if managers

treat stakeholders in line with the stakeholder concept the organization will be more

successful in the long run.

In the past view years the concept of stakeholders has boomed a lot and

academics wrote a lot about the topic. But also non-governmental organizations

(NGOs), regulators, media, business and policymakers are thinking about the concept

and are trying to implement it in some way or the other. Most contributions are

particularly about the normative principle. They promote the vision of the company and

the role of managers whose objective is mainly to maximize shareholder value in order

to be sustainable.

However, this perspective seems to be giving way to that business has more and

broader responsibilities. Those are best defined in terms of the stakeholder approach.

Another reason why this topic is very popular and contested among theorists is that

there is quit an amount of contesting literature around which is tried to be replaced and

up dated. Along with the popularity has come a profusion of different overlapping

approaches to the stakeholder concept. This has led to a confusing situation in this

sector. In order to deal with this conceptual confusion a number of classification

schemes have been developed.

LIFE CYCLE OF SAVINGS
The standard life-cycle consumption model introduced by Modigliani and

Brumberg (1954, 1980) assumes that individuals try to smooth consumption over their

lifetimes. Since labour income flows are uneven over the course of life, this theory

implies that savings rates will be uneven over the course of life. In particular, savings

rates will be low during early adult years, will rise with age as income increases, and will

decrease and become negative in retirement as earnings fall.

The life-cycle model is important for, if correct; it underpins how

macroeconomists think about saving, interest rates, and the capital stock. It implies that

the equilibrium size of the domestically-owned capital stock is independent of the

aggregate saving rate, even in a closed economy, but that saving rates are an

increasing function of income growth rates.

 Moreover, the model is important to central bankers because, if correct, asset

price revaluations have different effects on the young and the old. An increase in the

present value of asset prices associated with a decline in interest rates should have

much less effect on the young than the old because the young recognize that the future

value of their retirement savings is little changed whereas the old will be enticed to

spend immediately.

The life-cycle hypothesis (LCH) is an economic theory that pertains to the

spending and saving habits of people over the course of a lifetime. The concept was

developed by Franco Modigliani and his student Richard Brumberg in the early 1950s.

It presumes that individuals plan their spending over their lifetimes, taking into

account their future income. Accordingly, they take on debt when they are young,

assuming future income will enable them to pay it off. They then save during middle age

in order to maintain their level of consumption when they retire. This results in a “hump-

shaped” pattern in which wealth accumulation is low during youth and old age and high

during middle age.

The life-cycle model predicts that aggregate saving rates should be an increasing

function of the overall growth rate. This is because the lifetime income of the young is

high relative to the old when economic growth is high, so the saving of the young should

exceed the dissaving of the old. This prediction is broadly consistent with the evidence

from cross-country data – countries that have higher growth rates tend to have higher

saving rates.
 While the evidence is broadly in favour of the hypothesis, caution is needed as

the direction of causality between saving and growth rates is not clear cut. Economic

models suggest that countries that save more will also grow faster, at least in transition.

Moreover, there are several reasons to be cautious about the extent to which economic

growth primarily affects young cohorts.

For instance, if technological innovation primarily increases the returns to

capital, then it will lead to an increase in the incomes of the elderly but not of the young.

Similarly, if a large component of individual saving comprises a mandatory public

pension scheme, and if pension benefits are related to average wages, higher wages

for young people will also mean higher pension benefits for older people.

The theory states consumption will be a function of wealth, expected lifetime earnings

and the number of years until retirement.

Criticisms of Life Cycle Theory

 It assumes people run down wealth in old age, but often this doesn’t happen as

people would like to pass on inherited wealth to children. Also, there can be an

attachment to wealth and an unwillingness to run it down.

 It assumes people are rational and forward planning. Behavioural economics

suggests many people have motivations to avoid planning.

 People may lack the self-control to reduce spending now and save more for

future.
  Life-cycle is easier for people on high incomes. They are more likely to have

financial knowledge; also they have the ‘luxury’ of being able to save. People on

low-incomes, with high credit card debts, may feel there is no disposable income

to save.

 Leisure. Rather than smoothing out consumption, individuals may prefer to

smooth out leisure – working fewer hours during working age, and continuing to

work part-time in retirement.

 Government means-tested benefits for old-age people may provide an incentive

not to save because lower savings will lead to more social security payments.

The life-cycle hypothesis has been utilized extensively to examine savings and

retirement behavior of older persons. This hypothesis begins with the observation that

consumption needs and income are often unequal at various points in the life cycle.

Younger people tend to have consumption needs that exceed their income. Their needs

tend to be mainly for housing and education, and therefore they have little savings. In

middle age, earnings generally rise, enabling debts accumulated earlier in life to be paid

off and savings to be accumulated. Finally, in retirement, incomes decline and

individuals consume out of previously accumulated savings.

MODERN PORTFOLIO THEORY
Modern Portfolio Theory is an investment strategy first published in 1952 that’s

since become popular with professional and average investors. Understanding that an

investment’s potential returns are directly tied to the level of risk involved, modern

portfolio theory (also known as MPT) offers investors a framework that can be used to

construct a portfolio that is designed to maximize potential return while minimizing risk.

Modern portfolio theory was created and pioneered by Harry Markowitz with the

1952 publication of his essay “Portfolio Selection” in the Journal of Finance. Since then,

in addition to eventually earning Markowitz the 1990 Nobel Prize in Economics, modern

portfolio theory would come to be one of the most popular investment strategies in use

today—more than 67 years later.

Modern portfolio theory (MPT) is a theory on how risk-averse investors can

construct portfolios to optimize or maximize expected return based on a given level

of market risk, emphasizing that risk is an inherent part of higher reward. According to

the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering

the maximum possible expected return for a given level of risk.

Modern portfolio theory argues that an investment's risk and return

characteristics should not be viewed alone, but should be evaluated by how the

investment affects the overall portfolio's risk and return. It shows that an investor can

construct a portfolio of multiple assets that will maximize returns for a given level of risk.
 At its heart, modern portfolio theory makes (and supports) two key arguments:

that a portfolio’s total risk and return profile is more important than the risk/return profile

of any individual investment, and that by understanding this, it is possible for an investor

to build a diversified portfolio of multiple assets or investments that will maximize returns

while limiting risk.

These arguments are built upon an understanding of three key concepts: The

risk-return relationship, the role of diversification in building an investment portfolio and

something called the “efficient frontier.”

All investments involve at least some risk (whether business risk, volatility risk,

inflation risk, etc.) which can limit your investment gains or even lead to a loss of capital.

While riskier investments bring with them a higher potential for loss compared to less

risky investments, they also tend to bring with them a higher potential for gain.

Conversely, less risky investments bring with them a lower potential for loss, paired with

a lower potential for gain.

Once the risk-return relationship is understood, it must be accounted for.

Typically, this is achieved through diversification: The process of constructing a portfolio

out of different investments in order to reduce the exposure risk of holding too much of a

single investment.

There are many different ways in which an investor might choose to diversify

their portfolio in order to mollify this risk. You might diversify within asset classes—by

investing in stocks from multiple companies, for example—or between asset classes—

by investing in a mix of different stocks and bonds.

 The ideal portfolio will be the one that maximizes the potential for return while

minimizing the risk of loss. The portfolio will be only as risky as it needs to be in order to

realistically achieve the investor’s desired returns. This concept is often referred to as

the “efficient frontier,” which forms the bedrock of modern portfolio theory.

In seeking to build an investment portfolio that falls along the efficient frontier to

build their investment portfolio, an investor who follows modern portfolio theory is

typically working towards one of two goals.

Some investors are incredibly risk-averse. These investors are driven by a

primary goal of limiting their potential for loss. Their secondary goal, though, is to grow

their money as safely as possible. Risk-averse investors who understand the level of

risk that they are comfortable accepting from their investments (their risk tolerance) can

use modern portfolio theory to build a portfolio which falls within their acceptable risk

range but also maximizes returns.

Other investors are comfortable taking on any level of risk in order to reach their

investment goals. Their primary goal is growth. But even the most risk-tolerant of

investors likely has at least some desire to limit their risk. Why take on more risk than is

necessary to reach your goals? Investors who know their investment goals can use

modern portfolio theory to create a portfolio that has the greatest likelihood of reaching

their investment goals while only taking on as much risk as is necessary.

According to MPT, there are two components of risk for individual stock returns.

• Systematic Risk: This refers to market risks that cannot be reduced through

diversification, or the possibility that the entire market and economy will show losses

that negatively affect investments. It’s important to note that MPT does not claim to be

able to moderate this type of risk, as it is inherent to an entire market or market

segment.

• Unsystematic Risk: Also called specific risk, unsystematic risk is specific to individual

stocks, meaning it can be diversified as you increase the number of stocks in your

portfolio.

In a truly diversified combination of assets—or portfolio—the risk of each asset

itself contributes very little to overall portfolio risk. Rather, the covariances among the

individual assets determine more of the overall portfolio risk.

Modern portfolio theory says that it is not enough to look at the expected risk and

return of one particular stock. By investing in more than one stock, an investor can reap

the benefits of diversification – chief among them, a reduction in the riskiness of the

portfolio. MPT quantifies the benefits of diversification, or not putting all of your eggs in

one basket.

For most investors, the risk they take when they buy a stock is that the return will

be lower than expected. In other words, it is the deviation from the average return. Each

stock has its own standard deviation from the mean, which modern portfolio theory calls

"risk."
 The risk in a portfolio of diverse individual stocks will be less than the risk

inherent in holding any one of the individual stocks, provided the risks of the various

stocks are not directly related. Consider a portfolio that holds two risky stocks: one that

pays off when it rains and another that pays off when it doesn't rain. A portfolio that

contains both assets will always pay off, regardless of whether it rains or shines. Adding

one risky asset to another can reduce the overall risk of an all-weather portfolio.

For a well-diversified portfolio, the risk – or average deviation from the mean—of

each stock contributes little to portfolio risk. Instead, it is the difference—

or covariance—between individual stock's levels of risk that determines overall portfolio

risk. As a result, investors benefit from holding diversified portfolios instead of individual

stocks.
THE ATTRIBUTION THEORY
Attribution theory is concerned with how individuals interpret events and how this

relates to their thinking and behavior. Heider (1958) was the first to propose a

psychological theory of attribution, but Weiner and colleagues developed a theoretical

framework that has become a major research paradigm of social psychology. Attribution

theory assumes that people try to determine why people do what they do, i.e., attribute

causes to behavior. A person seeking to understand why another person did something

may attribute one or more causes to that behavior.

A three-stage process underlies an attribution: (1) the person must perceive or

observe the behavior, (2) then the person must believe that the behavior was

intentionally performed, and (3) then the person must determine if they believe the other

person was forced to perform the behavior (in which case the cause is attributed to the

situation) or not (in which case the cause is attributed to the other person).

Weiner focused his attribution theory on achievement. He identified ability, effort,

task difficulty, and luck as the most important factors affecting attributions for

achievement. Attributions are classified along three causal dimensions: locus of control,

stability, and controllability. The locus of control dimension has two poles: internal

versus external locus of control. The stability dimension captures whether causes

change over time or not. For instance, ability can be classified as a stable, internal

cause, and effort classified as unstable and internal.

 For example, students who experience repeated failures in reading are likely to

see themselves as being less competent in reading. This self-perception of reading

ability reflects itself in children’s expectations of success on reading tasks and

reasoning of success or failure of reading. Similarly, students with learning disabilities

seem less likely than non-disabled peers to attribute failure to effort, an unstable,

controllable factor, and more likely to attribute failure to ability, a stable, uncontrollable

factor.

Attribution theory has been used to explain the difference in motivation between

high and low achievers. According to attribution theory, high achievers will approach

rather than avoid tasks related to succeeding because they believe success is due to

high ability and effort which they are confident of. Failure is thought to be caused by bad

luck or a poor exam, i.e. not their fault. Thus, failure doesn’t affect their self-esteem but

success builds pride and confidence.

On the other hand, low achievers avoid success-related chores because they

tend to (a) doubt their ability and/or (b) assume success is related to luck or to “who you

know” or to other factors beyond their control. Thus, even when successful, it isn’t as

rewarding to the low achiever because he/she doesn’t feel responsible, i.e., it doesn’t

increase his/her pride and confidence.

IDEAS OF ATTRIBUTION THEORY

According to Heider, there are two main ideas of Attribution Theory, which hold

major influence.

Dispositional Attribution (Internal Attribution)

Internal attribution refers to the tendency of assigning the cause or responsibility

of a certain behavior or action to internal characteristic, rather than to outside forces.

Internal attributions that we often hold responsible for others behavior are motives,

personality, beliefs and so on.

Situational Attribution (External Attribution)

External attribution is exactly in contrast to internal attribution. The tendency of

assigning the cause or responsibility of a certain behavior or action to outside forces

rather than international characteristic is called external attribution. We often explain our

new actions and b behavior using the environment or situational features, something

that is beyond our control.

THEORIES OF ATTRIBUTION

Common Sense Psychology

The concept of common sense or naive psychology was developed by Fritz

Heider in an attempt to explore the nature of interpersonal relationship. The idea of

common sense psychology was espoused because he believed that every individual

observed analyzed and explained behaviors and actions with their explanations.
Correspondent Inference Theory

Correspondent Inference theory was formulated by Edward E. Jones and Keith

Davis in 1965, which accounts for a person’s inferences about an individual’s certain

behavior or action. The major purpose of this theory is to try and explain why people

make internal or external attributions. Internal attribution is easily understandable

because of the correspondence we see between motive and behavior.

Factors that affect people’s inferences:

 choice

 expectedness of behavior

 effects of behavior

Covariation Model

Covariation Model was proposed by Kelley, which deals with both social

perception and self-perception. In simple words, covariation means that an individual

has information from multiple observations and is thus capable of perceiving he

covariation of an observed cause and the effects.

According to Kelley, there are three kinds of evidence.

 Consensus

 Distinctiveness

 Consistency
Three Dimensional Model

Bernard Weiner proposed a theory suggesting that a person’s own attributions in

attempt to explain their success or failure determines the effort they are willing to exert

in the future. Affective and cognitive assessment influences the behavior in the future

when similar situations are experienced.

Three categories of Weiner’s attribution theory are:

 stable theory (stable and unstable)

 locus of control (internal and external)

 controllability (controllable or uncontrollable)

One of the major criticism of the attribution theory has been the assumption of

people as logical and systematic thinkers. Because of this, attribution theory is criticized

for being mechanistic and reductionist. Attribution theories also fail to take social,

historical, and cultural factors into consideration, which shape attributions of cause.

Weiner’s theory has been widely applied in education, law, clinical psychology,

and the mental health domain. There is a strong relationship between self-concept and

achievement. Students with higher ratings of self-esteem and with higher school

achievement tend to attribute success to internal, stable, uncontrollable factors such as

ability, while they contribute failure to either internal, unstable, controllable factors such

as effort, or external, uncontrollable factors such as task difficulty.

PRINCIPLE OF COOPERATIVISM
Cooperatives around the world operate according to the same set of core

principles and values, adopted by the International Co-operative Alliance. Cooperatives

trace the roots of these principles to the first modern cooperative founded in Rochdale,

England in 1844. These principles are a key reason that America’s electric cooperatives

operate differently from other electric utilities, putting the needs of their members first.

Credit unions are financial cooperatives and, like cooperatives around the world,

they generally operate according to the same seven core principles and values adopted

in 1995 by the International Cooperative Alliance. Cooperatives can trace their roots to

the first modern cooperative founded in Rochdale, England, in 1844.

The Seven Cooperative Principles are a set of fundamental values and

philosophies that guide credit unions and cooperatives in equality, fairness, and mutual

self-help. Today, more than 1 billion people are members of cooperatives, or co-ops.

You will find co-ops involved in a variety of businesses, from food to hardware stores

and taxis; and though their businesses differ, their mutual goal is a commitment to

community and improving the life of their members.

While they have been updated from their original form, many credit unions use

the Seven Cooperative Principles as part of their mission to serve their members; and

they communicate these principles to members as a strategic differentiator.

SEVEN COOPERATIVE PRINCIPLES

1. Voluntary Membership

Credit unions are voluntary, cooperative organizations, offering services to

people willing to accept the responsibilities and benefits of membership, without gender,

social, racial, political or religious discrimination.

Many cooperatives, such as credit unions, operate as not-for-profit institutions

with volunteer board of directors. In the case of credit unions, members are drawn from

defined fields of membership.

Membership in a cooperative is open to all persons who can reasonably use its

services and stand willing to accept the responsibilities of membership, regardless of

race, religion, gender, or economic circumstances.

Cooperatives 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.

2. Democratic Member Control

Cooperatives are democratic organizations controlled by their members, who

actively participate in setting policies and making decisions. The elected representatives

are accountable to the membership. In primary cooperatives, members have equal

voting rights (one member, one vote) and cooperatives at other levels are organized in

a democratic manner.
 Cooperatives are democratic organizations controlled by their members, who

actively participate in setting policies and making decisions. The elected representatives

are accountable to the membership. In primary cooperatives, members have equal

voting rights (one member, one vote) and cooperatives at other levels are organized in

a democratic manner.

3. Members’ Economic Participation

Members are the owners. As such they contribute to, and democratically control,

the capital of the cooperative. These benefits members in proportion to the transactions

with the cooperative rather than on the capital invested.

For credit unions, which typically offer better rates, fees and service than for-

profit financial institutions, members recognize benefits in proportion to the extent of

their financial transactions and general usage.

Members contribute equitably to, and democratically control, the capital of their

cooperative. At least part of that capital is usually the common property of the

cooperative. Members usually receive limited compensation, if any, on capital

subscribed as a condition of membership. Members allocate surpluses for any or all of

the following purposes: developing the cooperative, possibly by setting up reserves, part

of which at least would be indivisible; benefiting members in proportion to their

transactions with the cooperative; and supporting other activities approved by the

membership.
 4. Autonomy and Independence

Cooperatives are autonomous, self-help organizations controlled by their

members. If the cooperative enters into agreements with other organizations or raises

capital from external sources, it is done so based on terms that ensure democratic

control by the member and maintains the cooperative autonomy.

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 the cooperative.

Credit unions place particular importance on educational opportunities for their

volunteer directors, and financial education for their members and the public, especially

the nation’s youth. Credit unions also recognize the importance of ensuring the general

public and policy makers are informed about the nature, structure and benefits of

cooperatives.

6. Cooperation Among Cooperatives

Cooperatives serve their members most effectively and strengthen the

cooperative movement by working together through local, state, regional, national, and

international structures.
 7. Concern for Community

While focusing on member needs, cooperatives work for the sustainable

development of communities, including people of modest means, through policies

developed and accepted by the members.