Developing Strategy in a Cooperative

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

Establishing the strategic direction for a cooperative is a key role of the board of directors. A board that is not actively engaged in strategic planning is abdicating one of its key responsibilities.

While the board is responsible for strategic direction, the role of the CEO and the interaction between the board and CEO during the planning process is seldom discussed. The CEO has an in-depth understanding of both the performance of the cooperative and emerging issues in the business environment. For this reason, the CEO is often in the best position to propose strategic alternatives. The strategy can then be developed (or rejected) through an interactive dialogue with the board of directors. This goes back to the old adage “the manager proposes and the board disposes.” In other cases, the board proposes strategy and the CEO leads an interactive discussion as to whether the cooperative has the financial and human resources to implement the strategy.

In an aligned cooperative, the board should develop the strategic plan and be the strategic advisor to the CEO on a continual basis. The CEO is charged with implementing the strategic plan. That plan is being rolled out in a constantly changing environment. In challenging years, the CEO discusses the short-term issues facing the firm, and the board shifts their advice toward those choices. In more favorable times, the CEO cautiously alerts the board about the possibility of above average cash flow, and the board shifts advice toward infrastructure re-investment decisions. Strategy is a board function but strategy development and implementation is a team effort.

 

Depreciating Fixed Assets

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

Fixed assets are a necessary evil for agricultural cooperatives. Along with fixed assets comes the topic of depreciation.

Depreciation can be thought of in at least three ways. The layman’s concept of depreciation is the decline in market value with use or obsolescence. We all expect a truck to depreciate when we drive if off the lot. While that’s a great example to explain depreciation to teenagers, it doesn’t help us much in agribusiness where the current market value of a grain facility is difficult to determine. The accounting concept of depreciation is the process of allocating the appropriate portion of an asset’s cost to the periods during which the asset generates revenue. The tax concept of depreciation is the process of deducting the cost of an asset over the time period allowed by the IRS.

In most cooperatives, depreciation methods are driven by tax rules. Accelerated depreciation (taking the most rapid depreciation that IRS will allow) increases depreciation expense and thereby reduces net income and patronage distributions while increasing cash flow. This “conservative” approach also impacts the balance sheet. For example, under textbook accounting depreciation, a steel grain bin would have some value for up to 25 years. In practice most cooperatives would depreciate it over 10 years based on IRS class life tables or take more rapid bonus depreciation if it available. The grain bin becomes fully depreciated and has no value reflected on the balance sheet for more than half of its actual useful life.

Depreciation practices are just one reason why financial statements prepared on a book basis will differ from those prepared on a tax basis. Cooperatives should continue to use available strategies to reduce taxable income. However, as your board and your banker strategize over the strength of your balance sheet, it might be useful to consider how it would look if the fixed asset values were more in line with their actual remaining life. That path takes you into some other interesting differences between tax and book values.

 

Worker Cooperatives

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

Worker cooperatives, or employee-owned cooperatives, are relatively rare in the United States, making up around 1 percent of all cooperatives. This form of cooperative is more common in Europe and Canada. In the United States, most worker cooperatives are located in urban areas and operate in retail operations.

To become a member, the employee/owner must make an initial investment, which is sometime financed through payroll deduction. In some cases, the investment is substantial. Isthmus Engineering, a worker cooperative in Madison, Wisconsin, requires a $10,000 investment, which must be financed by the member.

Profits are allocated on the basis of patronage, which may be calculated as hours worked, earnings or a combination. Governance is usually on a one-member, one-vote basis. Small worker cooperatives typically operate with all of the employee/members serving as a board of directors. Larger firms have a board and management structure similar to that of agricultural cooperatives. Some worker cooperatives do not allow the CEO to be a member because they believe that management is a separate role.

Worker cooperatives are formed as start-up businesses and as conversion of existing firms. Some firms have converted to a worker cooperative when they were unable to acquire traditional financing. Another common rationale for conversion is when a long-time owner/manager decides to retire and transition away from the business.

Data on employee well being at worker cooperatives relative to other comparable firms is scarce. The evidence seems to suggest that employee/members enjoy higher job satisfaction and job security, and perceive more access to training and development. On the other hand, they face additional risks because their earnings are linked to the cooperative’s profitability.

Employee-owned cooperatives are another interesting example of the cooperative model and could be a vehicle for business development in rural areas.