University of Wisconsin Center for Cooperatives
Rural Cooperatives, May/June 1996, pg. 4-7
Published by the Rural Business and Cooperative Development Service
A Matter of Trust
Sound Co-op Business Ethics Can Enhance Member Loyalty
Paul Lasley and C. Phillip Baumel
Editor's Note: Lasley is a sociology professor at Iowa State University
and Baumel is a Charles F. Curtiss Distinguished Professor in Agriculture
and an economics professor at Iowa State University. This article summarizes
sections of a more in-depth report, "Strengthening Ethics Within Agricultural
Cooperatives," by Lasley, Baumel, Ronald Deiter, and Pat Hipple, funded
by and available soon from USDA Rural Development's Rural Business-Cooperative
Service. The authors wish to acknowledge the invaluable assistance provided
by Thomas Gray, rural sociologist, USDA Rural Development/Rural Business-Cooperative
Emergence of Ethical Issues For Agricultural Cooperatives
Many cooperatives can trace their roots to the farm protests of the late 19th century, when farmers began to recognize the abuses of economic power by agribusiness, especially grain companies and railroads. The emergence of cooperatives and the cooperative movement can be viewed as a response to farmers' perceptions that they were not being treated fairly by the private sector. The history of farm cooperatives suggests that adopting and practicing a higher code of ethics were major attractions of cooperatives as an alternative form of business.
Cooperatives were generally organized on a community basis where social relations, such as kinship and friendship, provided a basis of trust. Early cooperative leaders recognized that they needed to sharply differentiate themselves from traditional private sector businesses. A key ingredient to achieving cooperation was establishing rapport and building trust with and among producers. Organizers of cooperative efforts were often opinion leaders who were respected and who had rapport with local farmers. The early organizing efforts stressed the importance of farmer control, honesty, integrity and high ethical standards. This attention to honest business practices and treating all patrons fairly attracted many new members.
Table 1 - Farmers' perception of changing ethics over the past 10 years. How have the ethical standards changed among the following?
Trust and commitment to ethical business practices provide the basis for cooperation and are essential for people to join together and work for mutual goals. Without trust, people do not communicate and cooperation is unlikely. People must know each other and, more importantly, must trust each other to work together effectively Where ethical behavior is the norm, people are more likely to trust each other, which results in increased levels of communication and understanding. Ethical conduct fosters higher levels of two-way communication between the manager, board members and patrons. Open and honest communication contributes to building mutual understanding of a cooperative's goals and mission which, in turn, leads to higher commitment to cooperative action.
Trust is not something that just happens. It is the result of conscious decisions and efforts to improve human relationships. Building trust among any group is a long-term and time-consuming effort. The paradigm guiding cooperative development is shown in Figure 1.
Establishing and maintaining membership loyalty has remained a major issue for many cooperatives. While membership patronage and participation are central to building strong and successful cooperatives, our research is based upon the premise that membership loyalty should be viewed as a product of sound business ethics which, in turn, creates a climate of trust within cooperatives. Membership loyalty and participation are expected to be low where trust does not exist or where ethical standards have not been established or enforced.
Figure 1- Ethical Conduct as a Unique Feature of Cooperatives
Often, distinctions among cooperatives and between cooperatives and non-cooperatives are unclear to members. This leads to the generally accepted observation that cooperatives have not been fully successful in making themselves unique and distinct from other forms of business organizations. This report suggests that cooperatives must demonstrate their unique roles by emphasizing ethical conduct. We maintain that attention to business ethics should play a major role in differentiating farmer cooperatives from other types of business organizations.
In the future, ethics will become more important in strengthening cooperatives. Membership loyalty will continue to be important for cooperatives if they are to retain their members and maintain market share in an increasingly competitive environment. As increased levels of coordination are developed through formal contracts or vertical integration in agriculture, cooperatives must highlight their commitment to higher ethical standards. Emphasizing ethical standards and behavior will enhance membership loyalty and increase patronage.
Have Ethical Standards Changed?
Many who hold a stake in agricultural cooperatives feel overwhelmed by ethical dilemmas and are ill-prepared to resolve them. Cooperatives are obviously not alone in their confusion. Small businesses, large corporations, social institutions and governmental agencies are struggling to create ethical environments and restore fairness, confidence and trust. In considering ethical standards in cooperatives, it is important to place this discussion into the larger discussion of ethics throughout a changed agricultural economy and rural society. In "Is There a Moral Obligation to Save the Family Farm?" (University of Iowa Press, 1987) Michael Boehlje observes, "There appears to be changing standards in rural communities compared to earlier years. The 'your word is your bond' attitude is no longer standard. Rural people are not necessarily becoming blatantly dishonest, but they are more willing to accept the gray area between right and wrong and accept less than pure business decisions." It appears that interest in cooperative ethical standards is but a part of the larger set of issues that are being raised about how rural people relate to each other and the level of trust that exists among rural institutions and their clients." To better understand what farmers believe about ethical standards within the agricultural economy and in rural communities, several questions were included in a statewide survey of 2,390 randomly selected Iowa farmers. Findings from the 1993 Iowa Farm and Rural Life Poll provide evidence that producers are concerned about the erosion of ethics. Key findings from this survey are:
Table 1 shows the responses from the mail survey that provides convincing evidence that producers perceive an erosion in ethics. Among the nine subgroups included in the survey, cooperatives ranked sixth in terms of the proportion of respondents who felt ethical standards had declined. Over three times as many people thought ethics had declined in cooperatives as opposed to improved.
In addition to the statewide questionnaire, three focus group meetings with cooperative managers and directors were held in the fall of 1993 to discuss ethical issues in cooperatives. The focus groups identified the following ethical issues and problems facing cooperative managers and directors that we categorized into four major sets:
1. Shirking responsibilities - Some boards of directors have become too lax and trusting of the manager or have abrogated their responsibilities by failing to keep informed about important cooperative affairs. The focus groups indicated that both managers and directors sometimes shirk their responsibilities by allowing unfavorable or unethical events to progress too far before taking action to correct them.
2. Business dealings with relatives, friends or management in private business was a second major source of unethical activities. Concerns here included: giving preference to friends and relatives of the manager or directors for job vacancies; granting special favors or price advantages to friends or relatives of directors; or granting favorable treatment to large producers.
3. Sales incentives including gifts, bonuses, and giveaways for shifting purchases or sales to a competing firm. Private suppliers and companies frequently offer trips to vacation areas if managers will shift the cooperative's purchases to the offering companies. One manager reported a salesman laid a $20,000 check made out to the manager on the corner of his desk and said, "We would like your chemical business." Often, jackets, televisions, VCRs and other merchandise are awarded by suppliers if cooperatives meet or exceed certain sales goals. These so-called prizes create ethical problems not only in purchase decisions but also in deciding who will receive the awards.
4. The fourth area of unethical business practices identified by the focus groups were pricing decisions. The existence of secret bids where some farmers receive higher prices than those posted was deemed unethical by some, although not by all focus group members. Pricing sales below variable cost or buying grain at a margin less than variable handling costs raises important ethical issues. In effect, the cooperatives engaging in these practices are simply transferring equity from all members to one or a few members. This was referred to as "buying the market."
In addition, the focus groups revealed an entire set of illegal business practices that further erodes member trust in cooperatives. Several examples of stealing, collusion, fraud, defaulting on contracts and adulteration of grain were provided.
The focus group discussions consistently revealed perceptions that ethical standards among cooperatives have declined. They suggested that as many as one-third to one-half of cooperative managers periodically engage in some form of unethical behavior. Moreover, they reported that a substantial proportion of directors and members also engage in unethical behavior within the cooperative.
Why Ethical Issues Have Emerged
Through the focus group interviews we were able to discern six major themes that managers and directors believe have contributed to declining ethical standards.
1. There is extreme pressure on managers to obtain higher savings with lower prices. One manager in a focus group expressed his frustration by noting that any manager can make a profit if he does not have a conscience.
2. In some cases, managers run the cooperative like a private business because the boards have relinquished their roles. Without effective board participation, it is easy for the manager to become lax, let ethics slide, and submit to pressure from individual members, customers and sales people.
3. With the complexity and increased size of cooperatives and the proliferation of rules and regulations, the job of managing a cooperative is becoming increasingly complex. Yet, those most qualified to serve on the board of directors are often reluctant to serve. Many members believe that there is little incentive to serve or to take the director's role seriously. The $25$35 honorarium per board meeting frequently results in the board members earning less than minimum wage.
4. The changing structure of agriculture means that fewer farmers have greater economic power over cooperative managers and directors. Losing a customer is very difficult to accept as the number of farms declines, the size of farms increases and gross margins decline. Individual members often ask for a special deal but they don't want anyone else to get the same deal. Some focus group members believe that cooperative contracting with producers results in the cooperative competing with individual producers.
5. There was some belief that young farmers lack an understanding and appreciation of the role of their own cooperative. Some commented that younger college-educated farmers display some of the most unethical behavior. If true, perhaps young farmers with heavy debt loads, along with less loyalty and wanting to be successful quickly, contributes to cutting corners and unethical behavior.
6. Reduced profitability along with weather-related
disasters (floods and droughts), have placed many farmers in precarious
financial positions, with some on the edge of bankruptcy. This may contribute
to declining ethics. Some believe that ethics would improve if farm profits
What Cooperatives Can Do to Strengthen Cooperative Ethics
Building trust among members and between members and their cooperative lies at the heart of maintaining strong agricultural cooperatives. To achieve this goal, more attention is needed on how to make ethical decisions and how to incorporate ethical dimensions into the everyday operations of cooperatives. While much attention has been given to the economic or financial side of cooperatives, there is little information on how to raise ethical standards among cooperatives.
It is an old maxim that people want to do business with organizations they can trust. Given the immobility of assets and the increasing size of the trade areas that farmers can buy and sell into, it is in agriculture's best interest to have strong, viable, ethical cooperatives. Likewise, the declining numbers of farmers also suggests that it is in a cooperative's long-run interest to attract and maintain ethical members. A higher code of business ethics fits within the general discussion of non-price competition. In addition to emphasis upon price, service and quality, cooperatives may be able to strengthen their relative positions by placing emphasis upon doing the right things. That does not mean that doing things right is not important. But doing the right thing will increasingly be judged by members as more important. Doing things right by maximizing profits for the cooperative with little or no attention to unanticipated consequences for members may not serve to build long-term loyalty to the cooperative.
Futurists suggest that social responsibility and
ethics will become more important considerations for consumers and that
these issues will increasingly impinge upon business decisions. Cooperatives
may be able to get ahead of the curve by implementing codes of ethics in
their organizations that set them apart from their competitors. We have
included examples of codes of ethics that others have developed, as a starting
point, to address these issues.