This document has been made available in electronic format by the International Co-operative Alliance (ICA) 

Value Based Professional Management in Co-ops (1998)

June, 1998

(Source: Co-op Dialogue, Vol.8, No.1, Jan-June,1998, pp. 9-16)

Value Based Professional Management in Co-ops

by Dr. Peter Davis, Director, Unit for Membership Based Organisations

Management Centre, University of Leicester, UK

************************************************************

Let me first of all start by saying that it is a tremendous privilege to come here and address you. Itís been really exciting, listening to the many presentations, that has going on in the Think Tank for the past couple of days, from some really wonderful people, who are trying to take their co-operative movements forward in, letís face it, really difficult times.

And having just listened to Ian MacPherson, I must congratulate him on covering such a complex area so well, so clearly, and in such a brief period of time. But I would just like to make one point in response to what he was saying about Europe, and the Enlightenment, and the foundation of the co-operative movement.

Of course it is true, that we can always look at and see our differences. But at the outset, I would like to emphasize the similarities. What we shouldnít forget here is that those people in Germany, and particularly of my own people, the Rochdale Pioneers, in England, were people who knew what hunger was. They knew what is was to be without a job, not to own any property, to be at the beck and call of others, to be defenseless against market forces, that tore down their occupations, ripped out their communities, and destroyed their lives. And I think, in that aspect, the experience of the European working class, in founding co-operatives in the nineteenth century, mirrors very clearly the experience of the working peoples of Latin America, Southeast Asia, and Africa, today.

When I had the privilege to be in Namibia, last year, I canít think of a country or region more different to the one that I come from, in England. But I went up to the north of Namibia to a farmers co-operative. And it was a very moving experience for me, because I went to this desolate, poverty-stricken place, into this one little store, that represented the Northern Namibian Farmers Co-op. And I have to tell you, that I didnít feel a stranger there. I felt an immediate sense of recognition. And I couldnít quite understand why, at first.

I stood in this one room, looking around me. And I thought, what is it that makes this scene familiar? And I realized, it was identical, in its structure, in its content, to the very first store that those early Rochdale pioneers established. That miserable little shop, with its few bags of flour in the corner, hardly any commodities to sell. That was the starting place for the British Co-operative Movement.

So I think that we have a lot in common. And that today, of course, although we may be from different perspectives, with different histories and cultures, we are all facing a global market, which is threatening our people in many respects. We shouldnít forget, that the co-operative movement was not founded by the state. It was not founded by well-meaning people from above. It was founded and made to work by people at the bottom, not by the big names, but by ordinary working people. And it was founded in response to the market economy.

Anybody who tells you that because we have now moved to a market economy, that we are now deregulated, that we are now entering into a transition, that there is now no need for a co-operative movement, couldnít be more wrong, because itís precisely in a laissez faire free market economy, that we need co-operative organizations, to defend our people, and to put right the many injustices and failings that come from a free market economy.

So letís be clear that the destiny of the co-operative movement into the twenty-first century is absolutely assured, on the basis of need. And that the global market economy is something that we all have to address, whether we are from the relative privilege and well-being of the west or from desperate parts of the world. We still have the same issues to confront.

And let me also say that Britain didnít become an affluent, liberal democracy, by accident or because of an enlightened ruling class. If you go back a hundred years, my country had no democracy whatsoever. We had no one-person-one-vote. We didnít have a consumer society and mass affluence. We didnít have a welfare state. These things were established through the democratic organizations of labor, that forced the British ruling class to establish a liberal democracy. It was as late as 1921, when Britain, the so-called mother of parliament, had one-person-one-vote.

And let me just say for the record, there is a lot of angst in the west, about child labor in India. But my grandfather was a child laborer. He was in a factory at eight years of age. My grandmother lost three fingers in a cotton mill when she was just thirteen years of age. We had child labor, almost within living memory, in the United Kingdom. And I represent the very first generation of English working class children to be born without endemic rickets. And I was born in 1947.

So, you know, we are not so far in advance of the so-called third world today. Within living memory, our people have suffered, and let me say, if we are not vigilant, they will suffer greatly again, because those who donít learn the lessons of history, are forced to live it. We need a co-operative management and leadership that recognises this and whose vision for the future is built on this appreciation of our past and present.

My topic is Practicing Co-operative Management for Co-operative Development. And I am therefore focusing very much on the management sphere, that Ian brought to your attention there in his general overview of the dynamics of the co-operative movement. I want to focus upon some modern management techniques like quality management. However it is Quality linked to Mutuality that I want to emphasize.

I also want to suggest that its this approach that must form the basis for much of the re-engineering that we must achieve within co-operative structures and processes today if we are to respond effectively to the new market conditions. This may sound like a lot of jargon. But itís not. One of the things that I want to suggest is that co-operatives can utilize some of these latest management techniques, more effectively than private sector companies can. That the co-operative ownership basis, and indeed this very central value within the whole co-operative identity, this value of mutuality, makes the co-operative, in value terms, in organizational terms, in ownership structure terms, very well placed, to utilize, some of the latest management ideas. So we shouldnít be turning our back because the ideas come from the Harvard Business School. Because we are better placed than many of the private company competitors to utilize these ideas. And these ideas, will help us in the market context, to turn the market in our direction, to ensure that we can operate effectively in that market, that we can grow and respond, and be competitive, and provide social justice for our people, which is the bottom line of what the co-operative is there for.

If I have any criticism of the current Identity Statement - which is a tremendous document that takes the co-operative movement much farther forward than it was previously - it is that it spends a little bit too much of its focus on process, and not enough focus on purpose. And I think that we need to be clear on what our co-operative purpose is.

Our co-operative purpose, I would argue, in a market context, is to provide that market leverage, that our members cannot achieve individually, whether they are individual workers, farmers, consumers of housing, or financial services. We need that market leverage. We need that ability to gather together the poor and dispossessed, who through their incremental investments, employment, trade, and production are able to acquire and grow some truly massive and successful, modern organizations that we see in the world. Those organizations came from very, very small and humble beginnings. And that should give us all enormous pride and courage, that when we start from our own efforts, we can do it.

The reality of the market economy is that we are going to have to grow faster. It means we are going to have to restructure. Thatís really why I have this question of re-engineering. I believe, as we move more and more, to confront the global economy, we are going to have to confront the question of economies of scale in our movement. And what co-operative development is probably going to mean is fewer co-ops, not more. Those fewer co-ops are going to be bigger. Maybe they are going to be - as Ian has indicated, and I certainly agree with him - trans-national, certainly regional and maybe global. Already, there are moves in that direction. Partnerships are being formed.

These collaborative partnerships, within the sectors of the co-operative movement, face up to the fact, that if we are going to compete, with businesses that have huge multinational markets, it stands to reason, that when they come into a national market, and are competing with us, on a national basis, they will have economies of scale, that will make us look uncompetitive.

We do have however some tremendous advantages that can meet these challenges once we recognise how to use some of the latest management strategies.

In order to approach this subject I need to discuss six questions . First of all, I want to talk about the evolution of quality management. I want to use quality management as one of the examples of a modern management technique that actually the co-operatives can use much better than our rivals.

Secondly, I want to explain why quality management had a limited impact, when its been operated by the private sector. Why in fact quality management has not lived up to expectations in every respect. And then, third, why I think co-ops can do it better. Fourthly, I must address the issue of why co-operative reality has not lived up to its potential. What has gone wrong with our movement in many respects. And how we can learn from our mistakes. This brings me to the fifth point which is the development of co-operative management, because I would point to the failures of co-operative management as the root cause of co-operative failure. The sixth and final point is what differentiates a co-operative manager what is it that lies at the heart of developing co-operative managers.

Thereís no doubt that as co-ops grow, and as they become more significant businesses, professional management increasingly takes hold of the helm. We have to look at what that means for protecting co-operative purpose, for defending co-operative identity, as well as for developing co-op businesses, because it is at that critical point, when we are actually being successful, that we tend to fail. We fail in the sense that we become just another big business, or we fail because our boards are not able to control corrupt managers. I regret to say that I have the experience of senior executives going to jail in the United Kingdom.

Corruption is not something that just happens elsewhere. It happens everywhere. Wherever human being are. Where people can exert power, without ideals, principles, and proper controls. But it is not just a question of corruption. It is also a question of effectiveness. The trouble is, a lot of the professional management that we have hired in the past, and continue to do so as our businesses grow, are not trained as co-operative managers.

They are trained on an ideology based on a modern MBA program, on capital based organizations. What happens is - and we have seen this if I can talk of my countryís experience in the building society sector, a membership based sector - management after management has sold out their building societies to banks. And there is absolutely no long term or middle term commercial advantage to the membership. In doing that, they have used the lowest common denominator of bribery. We have to confront this issue. But we canít do so by going back. I donít believe that we can expect lay boards, to manage multi-billion pound organizations effectively. We need to have professional management. And in that assumption lies the basis of all that I am going to say, and most of what I have been writing.

That assumption also suggests to me that if we are going to have a dependency on that kind of professionalism, then we better make sure that it is co-operative professionalism, and not another kind. We must address the issue of what it means to be a co-operative manager. What it is to have a co-operative management organizational culture. How it is that we are going to have the relationship between the co-operative management and the democratically elected governance of these co-operative societies.

So what Iím proposing is that there is a problem that we have to address. A co-operative development without management development is not going to be possible. That is an assumption that I hope everybody initially will agree with. What is different about a co-operative manager ? I am not trying to say that co-operative management is something that happens in isolation from the actual technical requirements of the business.

If you are running a dairy business, a credit union, consumer society, or housing society, obviously there are certain technical issues about your market, about the processes, production and management that are related to the specific sector that you are operating in.

What I am saying is, that co-operative management has to provide a general managerial framework, which ensures managing within the technical disciplines of the industry or trade that you are in, while still providing a co-operative context, which is managing with a co-operative purpose, and relating to the democratic and value base of the co-operative movement. So when I come to the point of talking about what does a co-operative management do, I want you to bear in mind that I am not suggesting that thatís all.

The Evolution of Quality Management

------------------------------------------------

Quality management has gone through a number of stages of evolution in management thinking. Starting with quality control, which is basically an engineering based standard.

The idea of quality control was that you had a product, it met certain key engineering specifications, when it came off the production line. Somebody checked it over and said that yes it met those specifications. However, if it didnít meet specifications, it was thrown back in and brought through the process again. Quality assurance took that one step further, and said what we need to do is to manage the process that ensures that the standards are maintained, before the product comes off at the end of the production line. So it ensured that the whole process was geared to providing and maintaining that standard.

Total quality control was the third stage. Up to now, quality management has been in the field of scientific management, that sees management as measurement or has an engineering perspective of management standards.

With total quality control, the emphasis shifts somewhat. It doesnít ignore or go away from the engineering concept. It simply says that the whole of the employment of the organization, whether one is directly in production or in one of the service functions, are all committed to ensuring the improvement of standards and quality.

So total quality control was really a shift, from not simply emphasizing the engineering perspective, but to ensuring guaranteeing quality taking into context the organizational culture and human aspects of maintaining quality. Which meant that we were into more of the human relations theories of management.

Then we came to what really was a major paradigm shift in the way we thought about quality in management. Total quality management took the burden of determining the standards outside of the organization and management. Because what total quality management does, and this is something that I think is totally appropriate to membership based organizations, is to say it is not the organization or the engineers or the managers that determine the quality standard of our service or product. It is our customers that determine the quality standards. So we now go to a market led paradigm of what is quality management.

The latest stage in this evolution, world class manufacturing, recognises that in order to meet world class quality standards a partnership is required involving stakeholders beyond the staff and customers to include all suppliers right down that product / service supply chain. All stakeholders must be working together to ensure that standards and quality required by our customers, our market, and end users are met. It seems to me that that is a very progressive transition.

So my first point really is to say that modern management theory is actually moving very much more in the direction of the customer and service, which is what co-operatives are all about. The customer actually owns the co-operative. But even in situations like producer co-operatives or farmer co-ops providing services to farmers because of their mutual status, concern for community, ensures that the co-operative movement anyway, even when its customer is not its member, is much more transparent in its market dealings and relationships.

But the question remains if this is such a good idea, why has it not worked better? Why has it not been more successfully applied? Which bring me to my next point, why has its impact been limited?

The first point is that the private sector take a very one dimensional view of the customer, You see, I donít believe, this notion that the customer is king, particularly when I hear it from organizational structures that legally, have to put the shareholder first, not the customer. Management is there in a private share based company to put the shareholder first, not the customer.

Any company that is going to survive has to ensure a rate of return on its share price and capital investment, to keep its share price up, otherwise the share price starts to fall, predators come in, the company is bought, and the management is shown the door. So the point is, there must always be a conflict between the pressures on management to maintain expectations in their capital market, and the requirements of their consumer market. And when a choice has to be made, it is going to be made in terms of the capital market returns, not the customer, because otherwise that management is out of the job. This is not a problem for co-operatives with non-tradeable shares.

Another reason why the quality management perspective has been badly managed by private companies, is that the human dimension has not been very well managed within the organization.

You see, a lot of Harvard professors talk about stakeholder management. But one of the key stakehol-ders that they always tend to ignore are the workers. When they talk about stakeholders, they are usually talking about suppliers, contractors. The truth of the matter is that labor has always been a tricky partner in a modern business enterprise, precisely because of the profitable substitution of technology for labour. This does mean that there is a clear conflict of interest between the interests of the shareholder and labour, which management has to manage. Well, if you have a management that is committed by law to upholding the shareholders interests first, itís clear, that they canít always expect the loyalty and support of their staff.

But you see, if you want to maintain total quality management, commitment to your customer and standards of service, you must have your staff on board. They must be fully committed to you. So we need an organizational culture that can deliver on that.

But not only that, if you look at this so-called free market, what you find of course, is that it is not particularly free. Markets tend to be dominated. Very often, suppliers themselves are in a position of being exploited by the company that they are supplying. The main company can go to the market and take its pick of suppliers. And so often it can tie its suppliers to a very bad set of agreements. Now, that doesnít mean a lack of standards, because obviously, the suppliers want to try to maintain their profit. That means that they will cut corners somewhere.

So itís not surprising that this system, that is constantly trumpeted in the management press and literature isnít actually very effectively applied by the mainstream company.

Why Co-ops could do QM better than the private sector

----------------------------------------------------------------------

First, there is, the reduction in the conflict between customer and owner, in a co-operative situation. Second, when it comes to the consumer, if you look at private sector marketing and market research, what the company is really interested in, is what it needs to know about that customer, in order to sell its product to that customer. Itís a very one dimensional view of the customer. Itís based on the question what will it take to sell this product or service? But actually a co-operative can afford to look at the whole person, and remember that this isnít just a one dimensional person that buys services from us.

This is a person that is also a parent, a citizen, one who lives in an environment and cares about that environment. Therefore, when we market our products and present our services, we can look at the whole person. And we can actually provide real value added, by providing products and services that meet the needs of the whole person.

A good illustration of this, is to go to financial services and the British Co-operative Bank, which undertook the market research of its customers and identified their main concerns. Many of these concerns at first sight had nothing to do with financial services directly, but just what people were concerned about as people. But then the bank took those general concerns, and brought them back to its business, and said how can our business, which is a banking business, respond to these general points, while giving one hundred percent banking services. Not in substitution to good banking services, but in addition - providing additional value added. And thatís when they realized, that by taking an ethical banking stand and saying, we will not invest money in the arms trade, in organizations that are known major polluters and destructors of the environment they were giving added value to customers. By taking the whole person perspectives, they started to make profits again, to attract more customers, and became really the first positive co-operative quality national brand image in the UK for the last thirty years.

So we donít have to be tied in with this one dimensional market view of the customer. That means that we can really, in terms of the definition of quality of our product, get into the very heart and soul of the needs of the individual consumer, in their communities. Because their community is our community, thatís what we need to get to. This gives us another critical competitive edge.

Also, working on the basis of mutuality, our partnerships and trading relationships with other co-operatives or private sector businesses and our staff for that matter, can be better, more transparent, and more honest, which will also enable us to maintain the real standards of quality and service. Now all that is going to give us a major competitive advantage in the marketplace.

Last, but not least, we have our Co-operative Identity. One of the things that has been presented very much over this Think Tank, has been the need to promote Co-operative Identity. And I couldnít agree more.

Because the more that people understand what the co-operative is, the more they are gong to recognize our transparency and our honesty. Our Identity gives us our crucial brand differentiation in the marketplace. Its not an optional extra but central to our commercial success and organisational purpose.

The problem is can we live up to our own identity? This is why, in the UK, I suspect, so many co-ops have not followed the Co-operative Bankís example, have not set up their ethical programs, and have not pushed the Co-op Identity. Because if you are going to push the high standard of principles and values that the Co-operative Identity Statement represents, you better have the processes, quality and standards of organization to deliver on that promise and on that image. Otherwise, you have lost credibility.

Why Co-op Reality has not always lived up to its potential?

--------------------------------------------------------------------------

And if we look at the co-operative movement, and why it has failed, I think, we can see a number of reasons. First, we have expected too much from our members. People do not join co-ops to vote and attend management meetings. They join co-ops to get services, benefits, social and economic protection, and justice. Now, many a times, we only offer, as a main means of involvement, the process of democracy or the process of attending meetings. And then we get very surprised, when people donít turn up. We donít have representative meetings.

Our democratic content is often a hollow shell. This may not have happened in your cultural context just yet. Many of you may come from small co-ops, where everybody knows everybody, and it is based on a small community.

But as soon as you start to get big, you are going to find it hard to manage and maintain your memberships, and mass involvement in that process. That, I promise you, will happen. And when it does, what you have to do is not do what the British did, which is just to carry on as if nothing had happened. What you have to do is to find other ways of engaging, mobilizing, and involving your members. Democracy is not simply turning up once a quarter and voting.

The Co-operative Bank - which has incidentally a PLC structure- has spent more time engaging its customers and finding out what its customers want, and responding to them, than nearly any of the so-called co-operative retail societies in Britain has done. So we have to look at finding new ways of engaging our members.

The second thing is that we expect too much from the ordinary lay members or volunteers, who sit on boards and are legally responsible for management decisions involving multi-millions or billions of dollars worth of business. Lay members cannot be expected to do that effectively, with the best will in the world. And that brings me to this very problematic position about management.

Co-operative management doesnít get nearly enough attention in this movement, and it hasnít done over the years. As a result we do not have an appropriate model of co-operative management. If you look at the various alternatives of models of co-operative management, that exist today, I can demonstrate quite clearly, why these models are inappropriate.

First of all there is the neutral scientist model. That model of management is really the mainstream view capital based organisations model but it is very influential in some co-operative circles. The idea is that management is not about values, or principles, because it has a market. And that market operates perfectly. It is a major clearing mechanism. All managers have to do is to follow the disciplines of the market, as good social scientist, and bingo, welfare is optimized.

But of course, we all know from the co-operative movement that that doesnít happen. If it did, we wouldnít need co-ops. The market doesnít operate like that. So that whole concept of management as being nothing more than a value-free exercise of scientific principles is just rubbish.

Then we have something thatís quite familiar to many of you. That is the model of the manager as charismatic leader, father or mother figure of the co-operative. I could name examples of those in the UK. Iím sure that you could name charismatic leaders of your own. They are great people. They have vision and drive. They get us moving and make us do things. For that I am not against them. We need more. But as managers, they have a lot of very serious deficiencies.

Firstly, they donít take advice from anybody. They very rarely ask anybody elseís opinion, which is why very often they get it very wrong. Not only that, but charismatic leaders are very, very bad at working in teams. And they are extraordinarily bad at selecting someone to take over. So charismatic leaders are not a model that we can go with.

Then we have what I think is the mainstream model of co-op management, which is the civil servant model. It says, we have the business on one side, and a social dimension on the other. Lay members run the social bit. The manager runs the day to day business bit. You the board are responsible for policy. But of course itís nonsense. Itís nonsense, first of all because this person who is managing the day to day, of course is also directing the policy. Policies are not directed by boards. They are directed by chief executives.

I was at a meeting of the International Association of Co-operative Bankers in 1995, the year that the Identity Statement was being adopted. There I addressed them and said, would anybody here admit that when they went to their board meeting, with a proposal, they genuinely didnít know what the board was going to decide, before the board had even heard the options that would be presented. There was not a single chief executive who didnít know exactly what action his board was going to take.

To me, this idea of management as a professional civil service is a cancer that breeds cynicism and division in our movement. And it breeds corruption too.

A unified board of lay directors and professional managers would I believe have a number of advantages over the civil service model. Before I set done what I believe those advantages to be, however, I want to stress that it is the management and organisational culture that is generated that I think is the really decisive element in ensuring co-operative development and success.

A unified board will help to establish a unified culture rather than a them and us culture. It will help to make managers recognise they have responsibility for managing the whole co-operative enterprise not just the "business". Managers will have the added responsibility and authority that goes with being directly accountable to the whole membership rather than the elected board.

The co-option of the chief executive and two or three of the senior management team into a majority of lay board members will not prevent the majority from dismissing the manager if necessary. In fact Boards hardly ever do this in Britain where the civil service model is particularly entrenched.

There are a number of advantages in a unified board. First the board reflects the true position. Those creating policy are now legally responsible for their decisions. This has to be healthier than the present fiction. Second the structure recognises that the social and commercial are not separate strands in co-operative organisation but closely inter-related. For co-operatives to compete effectively and to differentiate themselves in the market effectively the social and commercial need integration.

Third, without that integration co-operative democracy will remain purely a matter of institutional accountability not real involvement in business decision-making. Such involvement will only increase and encourage participation in governance and make governance more transparent it will not be a substitute for governance as I suspect some people fear. Nor will such involvement be a hindrance to management because it will be the result of effective application of the latest professional management techniques to the development of the co-operative business.

Co-operative TQM managed by Co-op managers who understand that the membership base is a commercial advantage and a management tool will enable a genuine partnership of stakeholders that will deliver the competitive quality of service our members and customers require. With structural and governance reforms there must be cultural reforms.

We need to develop a Co-operative Management capable of leading us into the next millennium. A unified Co-operative board with the right co-operative management will release the entrepreneurial drive that we need to respond to the challenges of the new global market.

Summing up

---------------

First we must recognise that modern management in the context of membership based organisations can deliver a competitive advantage to co-operatives.

Second, we must develop managers to have the values, skills and knowledge to deliver these methodologies effectively.

Third, we must, by focusing on our customers and members as whole persons, recognise the social and environmental value added we can offer.

Fourth, we must establish real stakeholder partnerships committed to serve the members and customers on the basis not of short term exploitative commercial relations but on a recognition of mutuality of need at the heart of the relationship.

Fifth, we must have the courage to re-engineer our business processes and accept mergers and acquisitions when necessary to achieve the quality standards our members need.

Sixth, we must empower our managers as well as govern them. We need a new relationship that recognises the central importance of professional management in the effective development of co-operatives by installing them as leaders on the main boards of co-operatives.

Seventh, we must emphasize our Co-operative Identity in our marketing and public relations as well as in our involvement of all our stakeholders. We must manage our relationships on the basis of it and have the courage to live up to the standards of excellence it requires of us.

Eighth, real involvement of customers and members in quality issues will encourage a greater involvement in the governance of co-operatives and a greater appreciation by the membership of what it is they are part of and why.