University of Wisconsin Center for Cooperatives

Excelling in Co-op Goverance

By Will Hughes
University of Wisconsin Center for Cooperatives
December 1999

First of all, Boards of Directors are responsible for cooperative governance. It is their responsibility to direct the CEO, to guide the strategic direction of the cooperative, develop policies consistent with that direction, and to oversee implementation to see that strategic direction is followed. And, the Board needs to communicate with members and the public. These board responsibilities are not new. Today, however, the job is tougher and more complex.

A look outside our US cooperative domain will discover a great deal of focus in the corporate world and in the European cooperative world on governance. In corporations, today’s larger shareholders are more active, and they are calling for tighter accountability and demanding more results from Boards. In Europe, the conversions of cooperatives to public or quasi-public corporations, puts higher demands on cooperative boards to fulfill their responsibilities. Here, business demands on cooperatives are at least as great as for corporations, probably greater, and cooperative board accountability and performance should also be no less demanding. Cooperatives as democratic organizations, directed by largely by volunteer boards, are especially challenged to meet demands of business and serving members.

Sorting through the piles of new literature on governance is a chore. Put succinctly, we have adapted a working definition of governance from a piece on "Defining Corporate Governance."* The definition is "Through cooperative governance, the Board focuses its key purpose: to ensure the cooperative’s prosperity by collectively directing its affairs and meeting the legitimate interests of member-owners and other interested parties. It must account to its member-owners for its record in this regard." This definition includes other interested parties to lay the claim that cooperatives, like any other business, is responsible primarily to its owners, but not to owners alone. Cooperatives are responsible as well to the community, the environment and other aspects of the public. We offer this definition as a framework to think about governance and its importance in the cooperative organizational form.

In practice, the business of governance is changing. More and more cooperatives are putting cooperative assets into joint ventures and alliances and changing the elements of control that the cooperative then has in those new business arrangements. Cooperatives are growing in scope and size to achieve critical business mass while being challenged to ensure member involvement, communication and commitment. Dairy Farmers of America captures this challenge with its theme " to be big in the market and small in the country, but capturing it in practice takes a huge effort and commitment.

New capital structures and mechanisms alter the control dynamics over which cooperatives can be governed. Faced with the need for increased capital in order to pursue business opportunity, and sometimes business survival, and with limits on the amounts of increased equity capital from members, cooperatives have had to look to new sources of outside capital. This is a "catch 22" issue for cooperatives and no black and white answer exists as to whether cooperatives can categorically include or exclude sourcing outside capital. While outside capital pushes the cooperative in an aggressive business direction, it can definitely dilute members’ control over the cooperative, and perhaps lessen the "value" that cooperatives will have for future generations. This result occurs because outside investors or joint venture partners focus more on financial returns of the business and less on meeting the needs of members- a conflict difficult to overcome.

John Tyrell, Director General of the Irish Cooperative Organization Society, shared the experience of the Irish dairy cooperatives forming plc subsidiaries. Its been nearly 10 years since the six cooperatives have formed plcs. No others have stepped forward because they consider that too many questions remain about whether the other cooperatives have made the right choices. While current members significantly increased share wealth commensurate with market value of the cooperative, the question is how then next generation of members will control the cooperative and benefit from it. Another speaker, suggested that you "can’t have your cake and eat it too" in having both wealth generated by outside capital and pure cooperative control.

Mike Cook, Robert Partridge Distinguished Chair of Cooperative Leadership, outlines several trends of Boards in the top 1000 investor-owned firms in the US. These include: smaller boards, fewer inside directors, growing predominance of outside directors, increased use of board retirement plans, emerging international representation, fewer board meetings, more committee activity, and increasing stock ownership.

Each cooperative has to think carefully about today’s realities and ask how a board can meet its responsibilities (or even provide a competitive advantage as Agway shared in Kansas City), given increased organizational complexity and the changing business environment. Boards can improve their governance system and improve business at the same time.

An efficient and effective governance structure will consider returns on management time, return on board time, organizational stability and leadership. It will also ensure that the Board is continually improving by how Board candidates are chosen, through Board training and development, by use of outside directors, by Board evaluation and selecting/deselecting. Sophisticated but direct communication with members about the cooperative’s direction as well as the cooperative's value to members will be required.

Complexity in business is not going away. Board members need to define the strategic direction for the cooperative, determine the success factors in their sectors, and ensure resources are provided and performance is monitored. That means governance will become more and more important, and Boards will be held more accountable for their decisions and actions.

So in the new millennium, your cooperative -- through governance structure and systems -- should be determining how to:

-make decision-making in your cooperative quicker and more flexible

-help Board members be more familiar with the competitive environment in which the cooperative operates,

-decrease the size of the Board, spend less time in Board meetings (and probably more time outside Board meetings developing knowledge and building relationships),

-increase the diversity of knowledge, skills and backgrounds of Board members,

-compensate Board members commensurate with their responsibility (and maybe tie compensation to performance), and

-communicate with members in new ways to secure their commitment to and involvement in the cooperative.

Cooperatives face challenges in governance that other business forms don’t face because of their user-owner nature. Both systems can learn from each other. By increasing the focus on improving governance now, you will better deal with complex strategic change for the betterment of current and future members.

*Mark Watson, in Defining Cooperative Governance.

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