Why Do Cooperatives Have Boards of Directors?

By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

When a small new cooperative is formed, members often do not perceive a need for a board of directors. Since “member-controlled” is a fundamental cooperative principle, it seems logical for the members to be involved in the decision making. That raises the question as to why cooperatives, as well as investor-owned corporations, establish a board of directors.

There are three accepted rationales for the board of directors.

  1. The first rationale: it allows for more efficient decision making. It would be difficult and expensive to inform a large membership group about the issues facing the cooperative and facilitate timely decisions.
  2. The second rationale: it protects member groups from each other. Many decisions in a cooperative, such as the decision to fund cash patronage or to retire equity, have different impacts on different groups of members. When a cooperative is faced with the decision to convert a location to seasonal operation, for example, it is an obvious advantage for the team making the decision to consider the impact on all groups of members.
  3. The final rationale: the board is designed to take a long-term view of the firm. Individual members of the cooperative have specific time horizons. Older members might not be interested in investing in infrastructure that pays off after their anticipated usage of the cooperative. The board, at least in theory, is the entity that is thinking about positioning the cooperative for the next generation.

These rationales can help you explain the importance of the board of directors to your membership. They can also guide your board operations and development. The rationale for more efficient decision making is enhanced by improving the board’s internal operations. The rationale to avoid conflict between member groups is enhanced by good member communication, both in listening to key constituencies and in explaining the rationale for key decisions. The rationale for maintaining a long-term view is enhanced by effective strategic planning sessions.

Now if I can just discover the rationale for the existence of winter!

 

Benefits of User-Owned Firms

By Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University

 

What are the benefits of user-owned firms? Agricultural cooperatives are obviously one type of user-owned firm, but a wide variety of other businesses, including worker cooperatives, consumer cooperatives, utility cooperatives, mutual insurance agencies, credit unions and cooperatively organized banks, also operate under the user-owned business model. A number of researchers have tried to compare user-owned and investor-owned firms across all business sectors. The results suggest that user-owned firms have several advantages.

Cooperatives and other user-owned firms benefit their user-owners through access to infrastructure and services, cash patronage, stock patronage as it is redeemed and the ability to have input into how the organization operates. Those are the benefits that you need to communicate to your cooperative members to help them understand that your cooperative matters.

User-owned firms have another level of benefits that impact the general marketplace and economy. Those are the benefits that we need to communicate when we tell the general public that the cooperative business form matters.

The benefits of cooperative businesses to the general public involve market conduct, alignment and risk taking. User-owned firms help to keep the marketplace competitive. They prevent or offset the power of monopolies and cartels; they also help force other firms to set fair prices. The ultimate effect is fair prices for consumers. Managers and board members of user-owned firms are aligned with the interests of owners and customers. They are not driven by the need for short-term profits and bonuses. They drive the firm like they own it, not like they stole it!

This leads to a third area of comparative advantage. User-owned firms are less likely to take unreasonable risks. We saw this during the recent banking crisis when cooperative banks and credit unions demonstrated that they were much less risky relative to investor-owned banks. User-owned firms tend to be stable, avoiding hostile takeovers, leveraged buyouts and job outsourcing.

User-owned firms have advantages to the general public because they keep markets honest, provide stability and stay focused on the long-term goals of their customers. Those are the points we need to work into our general discussion of cooperatives.