Their Loyalty or Our Value Package

Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

At a recent cooperative educational program, a large producer was invited to present his perspective toward his local cooperative. He prefaced his remarks with the comment that he placed no value on cooperative stock since it was unclear when it would be redeemed and its value could be written down. His views were another spin on the familiar desire for deep discounts just above marginal costs. The producer was not interested, or perhaps had not been recruited, to serve on the board or become involved in the cooperative.

A common reaction to these types of expectations is to conclude that the producer has no loyalty to the cooperative and wants benefits without the responsibility of investing. There is validity to those claims but the issues are worth pondering. Loyalty to a cooperative is not an end in itself. It is rather a reflection of the belief (and often fact) that patronizing the cooperative on a long-term basis is in the producer’s best interest. The lack of “loyalty” of the disinterested large producer may be explained by his first statement about cooperative equity. In most situations, the prices of products, services and commodities are similar between a cooperative and its independent competitor. The cooperative value package provides three advantages: cash patronage, stock patronage and the opportunity to be involved in and influence the direction of the business. The net impact of cash patronage is reduced by the tax impacts of the qualified stock. A significant part of the cooperative value package is the fact that the member is building equity without any out-of-pocket investment. If members do not consider themselves an owner, their value package is obviously reduced.

Building loyalty in a cooperative comes down to explaining why patronage is in the member’s long-term best interest. That involves creating the best value package of price, service and investment in infrastructure and communicating the value of ownership and governance. Ownership value is diminished by long revolving periods and eliminated when cooperatives channel member returns to unallocated reserves. Rapid equity revolvement requires high profitability, which may diminish the customer-level returns. Overall, cooperative managers and boards do a great job of balancing those tradeoffs and creating an enviable value package. They often fall short in communicating the entire value package, particularly the value of ownership. Are today’s producers less loyal or do we need new ways to communicate our value?

 

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.

 

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.