|PURPOSE||Maximize member income||Maximize returns to stockholders||Profit maximizing decisions, not always the best for the member|
|DECISION MAKING PROCESS||Democratic one member one vote||One vote/share of common stock||Members need education for decision making*|
|DIRECTOR SELECTION||From members||Inside/outside or both||Directors often need training*|
|STRUCTURE||Those who own, use, control, are the same people||Those who own, use, control may be different people||Members need education for decision making*|
|POLICY MAKING PROCEDURE||Quasi public||Often private||Members need education for decision making*|
|CONTRIBUTION TO OWNERS EQUITY AND DISTRIBUTION OF NET MARGINS||Proportional to use by current member-owners||Money available to invest and proportional return on investment||Members need to be educated to understand their responsibilities*|
In our quest to be a potent force in the market place,
we often attempt to emulate our competition and forget some of these unique
features. When we do, we risk the consequences noted by Laidlaw.
Role of the board
In our definition of a cooperative, Schaars called cooperatives businesses that were voluntarily organized. No one is forced to join a cooperative, and as a last resort a dissatisfied member can "volunteer out" or quit.
Because volunteers are so important, and because one half of the management team (the board) is composed of volunteers, and because of the differences in cooperative structure and management philosophy, we should examine more closely the unique position of a cooperative board.
Most states require that all or almost all of the directors be members of the organization. Because, as members, they are also users, owners, and controllers, and not part of the regular hired management, they don't really fit the definition of either "inside" or "outside" directors. They occupy a very unique position. The best parallel that comes to mind is the one that St. Paul used when describing the relationship of the Christian church to the world. He said that the church was "in the world but not of the world" -- meaning that while the church must physically operate and carry out many of its functions in the world, it has a non-worldly base from which it draws much of its strength. I think we can say that the board of directors of a cooperative is in the cooperative, and yet in many ways not of the cooperative. Because the board is made up of member/owners, they are a definite part of the organization. Since they are not actively involved in management, and indeed, in order to carry out their proper function cannot be part of active management, they are not really of the organization. For a board to really do its job, it must be aloof from mundane, routine management decisions and be in a position to judge the performance of the organization from a lofty and objective position.
In any corporation, the board is legally responsible for management. Most state laws, and the model corporation law, are very explicit on this point. In a cooperative corporation, because the owners/users also make up the board, their objectives are not the same as the board members of a standard, for-profit organization. Short-run profit-maximizing decisions may not be in the best long-run interest of the members. Also, the board's legal responsibility may not always be in harmony with the wants and needs of the members. For example, the members may want a patronage refund to offset high operating costs, yet if the board were to grant one they would jeopardize the financial structure of the cooperative and thereby violate their legal responsibility.
What About the Future?
A famous writer said that those who failed to learn the lessons of history are condemned to relive them. It is also true that we are a product of our past, and our past is but a prologue to the future. Many of the "problems" that we face today are a result of inadequate planning and a shortsighted outlook in years gone by.
Over and over we hear people talk about the fantastic rate of change in which we live. Yet, it was two thousand years ago that a wise Chinese philosopher remarked that the only sure thing in the world is change. We can look about us and certainly see changes occurring at an ever-increasing rate.
When the history of this country is finally written, it may show that we have lived through the zenith of our civilization. We probably reached our peak in terms of economic, political, and military power right after World War II. We have been struggling to maintain this pos1iton ever since, and unfortunately many of those struggles have not been too successful. One result is that decisions are now made in an entirely different economic and philosophical climate than existed twenty, thirty or forty years ago.
There is a law of Physics that states that things cannot expand forever. But those who were brought up just before and after World War II were ingrained with an ever-expansionist philosophy. Now we are suddenly finding that this is not to be. As one person puts it, "Everything we thought was nailed down is coming loose."
In a speech before the 1983 Director's Conference of the National Rural Electric Cooperative Association, Lester Thurow put it this way:
"The real problem, I think, if you look at the American economy, is that the world for the Americans is never going to be the same again. Those decades of what I would call effortless superiority for America are over.
If you go back to 1953, America had a per capita gross national product twice that of the next best country in the world, eight times that of the Japanese. We could simply afford to do things, make mistakes, be sloppy, and still have the world's highest standard of living. By the time you get to 1981 that isn't true. In 1981, the Organization for Economic Cooperation and Development felt the United States would have fallen to 10th. They thought we'd been passed in terms of per capita GNP by Switzerland, Sweden, West Germany, Denmark, Norway, Iceland, Belgium, and Luxembourg and were tied with the French for 10th.
We are now in a world of equal competitors. There are other countries that can afford to do anything that we in America can afford to do. Back there in the mid-1950's, we had an enormous technological lead on the rest of the world." 6
A key point in Thurow's argument is that "We are now in a world of equal competitors." Evidence of this appears almost daily in attempts to lower wages and shift production from this country to other part of the world. Agriculture is not immune. Sagging grain exports, brought on in part by increasing competition from other countries, are one example.
It's a new ball game, and the rules are changing all the time. In fact, one of the biggest problems of most management teams today is just to stay even with change.
Let me give you one example. Two years ago we had a meeting in Chicago to discuss cooperative research problems. One of the participants mentioned that he was working on the problems of allocating losses. At first glance this appears to be a minor problem until one looks at it in a little more detail. We have always been concerned with the allocation of surplus or profit, but rarely with the allocation of losses.
After returning to Madison, I looked up our state law and found that there was almost a page on how to allocate net margins or profits, but there was only one sentence on how to handle losses and that had nothing to do with allocation. If our business climate is going to chug along at about 80% speed as it has in the past few years, rather than full speed like it was during the heady years following World War II, we have to learn how to handle losses because they are going to occur. No business can operate forever and just show black ink; there is going to be an occasional dip in your long-range growth cycle.
Now let's look at some specific problems that cooperatives are going to face in the future:
1. Cooperative Principles. Will the principles of cooperation still apply? Despite the fact that some authors do not agree, I think we can answer the question with a resounding "yes". If this is not true, cooperatives will cease to exist, at least as we know them today. The principles of cooperation will continue to be important because they will express the social conscience of the members of the organization. As R.H. Towney said, "It is the principles which men accept as the basis for their social organization, which matter." If these principles are high and maintained at a high level, the organization will also operate at a high level.
That cooperatives have been used for hundreds of years, and that many different types of governments promote cooperatives, illustrate the resiliency and adaptability of the cooperative organization; no doubt it will survive the current economic situation.
2. Member Control. As organizations grow and diversity, how are we going to insure member control? One saying we have used many times is that a cooperative should "be big and seem small;" i.e., it should be big enough to compete in the market place, but small enough so that the average member can relate to the organizaiton on a personal basis. Galbraith in his book American Capitalism referred to the theory of countervailing power, whereby agricultural organizations would have to be large enough to balance the power of the firms they were competing with in the market place. I think very few economists would argue with this, for to go to the bargaining table without power really is little more than begging. Yet if cooperatives are going to continue to be controlled by their owners, i.e., members, we have to come up with some different control mechanisms. A basic question is does ownership always mean control? The answer is no.
Then we have the problem of the third level or the interregional cooperative: who controls them? Yet. farmers/members are still the owners. For example, the eventual loss from the investment in Energy Cooperative Inc. is going to be borne by the farmer members in the upper mid-west.
All of these problems will be exaggerated as membership becomes more heterogeneous. Almost all cooperatives in this country started as a homogeneous group with a single purpose. Over the years this has changed as the nature of agriculture has changed, and cooperatives have attempted to diversify as a hedge against economic downturns. One example: the long-term interests of the soybean farmer-members of Land O' Lakes are not always the same as the dairy farmer members of Land O' Lakes. The fact that Land O' Lakes started with a single purpose; i.e., to market butter from member creameries, but today also sells margarine made from soybeans, illustrates this point.
3. Balance Between Economic and Social Purposes. Businesses do exist for both business and social reasons, and we should not let ourselves become blinded with the bottom-line syndrome. That means that we should not let the only test of a cooperative's success be whether or not the bottom-line figure on the operating statement is black.
American businesses are often criticized for operating in the short run and ignoring the long run; i.e., looking for the short-range maximization of profit to pay shareholders rather than long-run gain for the corporation. A long-range outlook has been rated as a strength for businesses in other countries, and a short-range outlook as a weakness of business in the U.S. Cooperatives must be careful not to fall into the same trap.
4. Emphasize Our Differences. Cooperatives are different business organizations, but too often we have tried to operate the same as our non-cooperative competitors. Nowhere is this more apparent than in the food business. Cooperatives that have attempted to compete head-on with the multinational giants have been less than spectacularly successful. Earlier we noted that Berkeley is closing several of their stores. Recently Greenbelt Cooperative in the Washington, D.C. area announced that they were closing all of their food operations. Cooperatives are different, and we should never forget it.
5. Relations with Nonagricultural Cooperatives. In talking with reresentatives of the so-called emerging cooperatives, it is interesting to listen to their views and compare them to the history of agricultural organizations. They are going through many of the same struggles that agricultural cooperatives experienced thirty to fifty years ago. The struggles are not just economic, but in many cases involve social issues. Many of our agricultural cooperatives have not viewed nonagricultural organizations too kindly. However, with agriculture representing less than 4% of the population, and declining both in numbers and influence in all legislative bodies, agricultural cooperatives are going to need all the friends they can get. It would be much better to work with our nonagricuitural friends and help them avoid some of the mistakes we have made rather than sit by and let them solve their problems and then ask for their help when the going gets tough. Failure to work with our nonagricuitural cooperative friends is a shortsighted political view.
6. Relating to Foreign Cooperatives. As the world becomes more interrelated, events in other countries affect all of us. Consequently, there is a growing interest in cooperative-to-cooperative trade between this country, Europe, the Far East, and developing areas. Some of this is already being done.
How serious farmers are about committing products to agricultural export cooperatives will say a great deal about how important cooperatives will be in the future world trade situation. 7
7. Continual Education. There is a saying in Europe that a cooperative without an education program will last a generation and a half. No doubt we have many organizations in this country that are operating on the half-generation side, and some may even be beyond it. This question takes on greater importance when one considers what a generation is. In a student housing cooperative, it is probably two or three years, while in an agricuitural cooperative it may be twenty-five or thirty years.
In an article in Farmer Cooperat1ves, Apri1 1983, Randall E. Torgerson, administrator of the Agricultural Cooperative Service, USDA, commented on cooperative education as follows:
"A casual look at a number of cooperatives in recent years indicates that the human side has been getting insufficient attention (as compared to the business side). This educational deficiency shows up in uninformed members, misunderstandings, apathy in use and uitimately in disappointing business results. In some cases, the organization may even drift from its basic cooperative character."Thomas Jefferson said that the price of democracy is eternal vigilance. We can paraphrase this to say that the price of cooperation is eternal education. No business can exist without information and good information flow.
It is the lifeblood or lubrication that keeps the machine going. If this is important in the standard business corporation that may operate more autocratically than a cooperative, it is even more important in a democratic, voluntary organization such as a cooperative.
8. Maintaining a Favorable Public Image. As agriculture becomes a smaller minority in the population, each commodity group becomes a smaller minority within a minority. We can't afford continual bickering and a bad press as we air our dirty linen before the entire nation. We noted that we will need all the friends and allies that we can muster in the years ahead to preserve the enabling legislation that allows us to operate as cooperative businesses now. It is frequently the case that when a group of people has an unfavorable public image, it is their own fault. Cooperatives are no different, and much of the bad press that we receive can be traced right to our own doorstep. Let's look at some examples:
1. Cooperatives are often considered communistic or socialistic, yet we know that they have made their greatest gains in western countries. However, much of the early theoretical thinking about cooperatives was done by socialists. Many cooperative pioneers in England, France, and Germany were avowed socialists. Earlier we mentioned the Finnish cooperatives in the upper Midwest and the fact that they were openly socialistic and later associated with the communist party. Also, all of the eastern European countries today, and many of the developing countries that lean toward socialism, consider cooperatives a very acceptable economic development tool.9. Expanded Role of Spouses. The greatest wasted resource in any cooperative is the human resource. Too often spouses are delegated to a special spouse program and/or shuttled off on busses to go shopping. We find that many women prefer to sit in on the business sessions and find out what cooperatives are doing. This is especially true among the younger couples, who tend to operate as true partners.
So people who do consider us different and communistic and socialistic perhaps feel that they have a justification for those feelings. And we haven't always been the best spokesmen to dispel such feelings.
2. Cooperative writers and speakers often use the terms "cooperatives" and "private enterprise" in comparing cooperative and non-cooperative businesses. If we are not going to consider ourselves part of the free enterprise system, what are we? Most of us consider cooperatives the most basic type of business, but if we compare ourselves to organizations that are accepted in the free enterprise system, how can we expect to be accepted ourselves? Cooperative uniqueness arises from structure and operations, not from being freaks in a free enterprise or other economic system.
3. From the end of World War II untll the mid-1960's, many cooperatives concentrated on business growth and expansion, and neglected member education and public relations. A natural consequence was an eroding of member and public support as older members and supporters of cooperatives retired and their replacements had no firsthand knowledge of conditions before cooperatives were established.
In the past 15-20 years most cooperatives have recognized increased need for member and public education. Greater education efforts will hopefully lead to better understanding and support of cooperatives.
A question we might logically ask ourselves is what would happen if cooperatives were not there? Many times we hear members, especially the younger members, say, "Why should we trade with the co-op if the price is the same as it is anywhere else?" This is a difficult question to answer, but younger members and employees should be reminded that things were not always the way they are right now, and if cooperatives were suddenly to vanish from the picture they would have to be recreated.
A recent article in Farmland News contained some comments by Doyle Smith, general manager of Agland, Inc.. He commented on the life and death of a cooperative as follows:
"I can recall about ten years ago, a group of farmers got together and formed a small cooperative in Colorado, the purpose of forming that cooperative was the same purpose that Agland -- or most any other co-op was formed.One of the major schools of cooperative thought in this country considers them a competitive yardstick. Part of what this means is that the cooperative acts as a yardstick against which non-cooperative businesses can be compared. The example cited above was fairly common when cooperatives were first started. It should serve as a reminder that things were not always the way they are now. Anyone who expects cooperatives to always sell for the lowest price or pay the highest price will be disappointed.
They were paying extremely high prices for their fuel and other products needed in their farming operation.
The day this local cooperative opened its doors the price of LP gas dropped 14 cents a gallon.
Well, this group of farmers supported their local cooperative for several years. Then, all of a sudden, they found they could buy propane for a penny less, and in some cases two cents less, than at the co-op.
And because they no longer supported their cooperative, it liquidated a little over a year ago. Within two weeks after liquidation of this association, the price of propane went up 9 cents a gallon.
And if you recall, at that particular time the price of propane was decreasing instead of increasing."
In this world of great change and decreasing permanence, people need something they can feel a part of. A cooperative, through it's unique form of economic democracy, can offer this opportunity. As Jerry Voorhis sa1d, cooperatives are "the little people's chance in a world of bigness."8 In performing this unique function, cooperatives also offer the consumer an added layer of protection. The longer I work in this field, the more convinced I become that the best form of consumer protection, and we are all consumers, is consumer ownership. If you don't like what someone else is doing to you or for you, do it yourself.
I would encourage you to keep the faith. Cooperation represents a higher calling of mankind, and not all people respond to higher callings. Consequently, cooperatives are not for everyone. I hope that as you progress up the management chain, you never forget who the true owners of the organization are, and who you really work for. It is the members' interest that must come first, and that you always must guard.
Finally, let's return again to antiquity. The three greatest thinkers in early Greece were considered to be Socrates, Plato, and Aristotle. What we frequently don't realize is that Socrates taught Plato and Plato in turn taught Aristotle.
The story is told about Aristotle who at the age of 21 was approached by King Phillip of Macedonla and asked to teach his son Alexander, age 11. Alexander, who was destined to become Alexander the Great, was a very bright young man. One day in the middle of a mathematics lesson, as the story goes, he stopped Aristotle and asked: "How many is 1?" Aristotle could have answered that 1 was unity, it was one-half of two, it was two halves, or something else, but instead he asked for twenty-four hours to think about it. When he returned he told his young student, "One can be a very great many." Think about it: as individuals we are a great many people, and we have relatively little power alone. Through a cooperative we act as one, and one can be a very great many.
Good luck to all of you in cooperative management.
*Professor, Department of Agricultural Economics and Chairman, University Center for Cooperatives, University of Wisconsin - Extension
Presented at the Graduate Institute of Cooperative Leadership, July 23,1985
1. "Objectives of Farmer Cooperatives: by a Sociologist", Carl C. Taylor, Agricultural Cooperation, selective readings, Abrahamson and Scroggs, Editors University of Minnesota Press, 1957.
2. Marvin A. Schaars, Cooperatives. Principles and Practices, University of Wisconsin - Extension, Madison, 1978.
3. The New Harbinger, a Journal of the Cooperative Movement, Volume 5, #1, Spring 1978.
4. Fredrickson, C.T. "Cooperatives--Hard Times and Hard Realities" Land O' Lakes Annual Meeting, February 25. 1985.
5. "Cooperative Principles and Practices Redefined", Gene Ingalsbe, Director, Agricultural Cooperative Service Information and Education Staff, and Waiter Jacoby, Vice President of Programs, and David, Simpson, Education Specialist, both of the American Institute of Cooperation, Farmer Cooperatives, July, 1984.
6. Rural Electrification, May 1983
7. For further discussion of world wide interrelationships and other factors affecting cooperatives see: Naisbitt, John, Megatrends, Warner Books, 1982. Also, U.S. News and World Report, March 19, 1984.
8. Jerry Voorhis, Cooperative Enterprise, Interstate Publications, 1975