Could better governance have saved co-operatives in the past?

'Co-operatives, owned by their members rather than by shareholders, have a relatively good track record in governance, but there have been some notable failures as well'

The co-operative movement has seen high profile casualties in recent years, most notably the crisis which brought down the UK’s Co-operative Bank.

In his study for Co-operatives UK, The Governance of Large Co-operative Businesses, Prof Johnston Birchall stresses that governance failures happen in all business models – and highlights a “malaise” in “the whole edifice of corporate governance in shareholder-owned companies”.

On the other hand, he says, “Co-operatives, owned by their members rather than by shareholders, have a relatively good track record in governance, but there have been some notable failures as well.”

When it comes to producer co-ops, Prof Birchall says there have not been many governance failures – but he gives the example of the Saskatchewan Wheat Pool, a successful Canadian wheat exporter, which ran into trouble in the 1990s.

“In the 1990s, it needed to modernise while facing a demand from retiring farmers to redeem their equity. In search of new capital, in 1996 it issued non-voting shares to outside investors. However, the board did not have the expertise to manage these changes and the result was a transfer of power to its managers.”

The new managers made losses through some poor business decisions – but the board was too trusting of the chief executive and there was a “growing gap between the information possessed by the management and by the board”.

“Eventually,” writes Prof Birchall, “the board was restructured from 12 members down to eight, with four independent expert members brought in, but it was too late: in 2005 it converted to an investor-owned company.”

Another co-op, Dairy Farmers of Britain, had 1,800 farmer members, responsible for 10% of UK milk production. But Prof Birchall says “a strategy of growth through vertical integration” saw it enter a costly deal in 2004 to buy a dairy company from the Co-op Group and supply the Group with milk at a loss.

“It did not have the financial resources or experience to make the strategy work, and when it lost the contract in 2009, it went into receivership, at a considerable loss to its farmer members,” adds Prof Birchall. “A parliamentary report commented that the governance of the co-operative was partly to blame. It would have benefited from having executive directors on the board, from giving the farmer directors proper training, and from having a more transparent transfer of information between the board and the members.”

He also cites a string of failures in European consumer co-ops in the 1980s and 1990s, under the pressure of supermarket competition. They were not helped by “a combination of mediocre management and oligarchic local boards of directors, both caught in a downward spiral of poor performance and lack of member involvement.

“At the back of the whole dismal story was the fatal loss of the economic connection they had previously had with their members – the dividend on purchases. When, under falling profits and pressure to cut costs, they gave up this device, there was nothing to distinguish members from customers in general, and so the link between members, boards and managers in the governance structure was fatally broken.”

Mervyn Wilson, former principal of the Co-operative College, says that a string of governance failures in the past, with some high-profile UK scandals in the early 1990s, prompted a move for better training of governors.

Mervyn Wilson

“There’s whole raft of situations where governance failures lead to recognition of a need for improvement lead to training about codes,” he says.

“To me, the lack of director training in terms of accountability training and the use of ‘external business expertise’ led them to fail in their responsibility to hold executives to account.”

Like Prof Birchall, he sees governance as particularly difficult in large, complex organisations and warns that sometimes “process replaces competence”.

Worse, he says, the lessons of past governance failures are not learnt.

“There’s a systematic refusal to learn from experience in the co-op movement.

“In order to move on, there’s almost a line drawn under those failings – what’s most remarkable is that people engaged in serial failings are given new
roles as part of a deal for a quiet life.”

But it is worth noting that better governance alone may not always be enough. A recent casualty for the co-op movement has been Australian dairy giant Murray Goulburn, which was forced to cut milk prices after being exposed to volatile markets. It is now being taken to court by regulators and has been sold to Canadian dairy firm Saputo.

Anthony Taylor of Australia’s Business Council of Co-operatives and Mutuals says the MG case “was more complex than governance – there were arguably poor management decisions, and the broader economic environment was a factor that exposed this.”

Murray Goulburn’s Rochester plant

Mr Taylor says the crucial thing is for co-ops “to remain focused on their members to succeed … whether we are talking about how you approach governance or management or anything else to maintain a strong co-op over time.”

He says this is the starting point the BCCM has taken when it develops Governance Principles for co-operatives and mutuals, adding that BCCM’s original blueprint stressed the need for the co-operative and mutual sector to develop the highest standards of governance. To that end, the BCCM has been holding two chairs’ forums per year for the past three years.

These have been working on the first set of Co-operative and Mutual Enterprise Governance Principles for the Australian co-op and mutual sector.

“We are getting close to publishing the first version, for voluntary adoption by the sector in the next couple months, after a final round of consultation,” adds Mr Taylor. “A couple of BCCM members have already indicated they are ready to start reporting against the governance principles when they are released.

“We will then continue to develop the governance principles iteratively with our members over time.

“Alongside the self-help aspect of having a set of governance principles for the sector, we hope it will kickstart a dialogue with key stakeholders outside the sector, such as governance training bodies, about what fit-for-purpose governance practices and governance training looks like for the co-operative and mutual enterprise sector, distinct from both the for-profit and not-for-profit sectors.”

Murray Goulburn’s woes deepened when it cut milk prices for its farmers, prompting many to leave the organisation.

By contrast, Greg McNamara, chairman of Australian dairy co-op Norco, says co-op values which put farmers first are vital to good governance.

“If you don’t take the co-operative ethos where farmers are the most important part of the business, you are weeded out – you don’t survive,” he told the agricultural Outlook 2018 conference in March.

“We have to stay true to our core values,” he said. “Our relationships with all our stakeholders is the key to future success, building a proposition that sets our business apart from its competitors… We look for business partners who will build on this value proposition.”

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