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Unique Expectations of Co-operative Boards: Taking on the Challenges of the Democratic Enterprise

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Co-operative enterprises continue to evolve and adapt in synch with various political crises seen across the globe. Take for example the banking crisis of 2008. Financial co-operatives were seen as a viable antidote to the excesses of the investor-owned financial institutions. But the economic crisis was so deep that it revealed a number of governance challenges embedded in robust co- operative sectors in Spain and the U.K. Using the lens of the institutional logics perspective, we address the common and unique expectations of co-operative vs. investor owned corporate boards of directors. Building on prior governance literature, we discuss tensions created between various perspectives and identify and succinctly describe three common expectations including teaming, vigilance and strategic behaviors. Then, we take a deeper look at the unique co-operative expectation of being advocates for democracy and the challenges this poses including being played for suckers, tyranny of the majority (and minority), democratic despotism and pragmatism. We close with an exploration of co- operative democracy in practice and highlight resulting questions of interest to researchers and practitioners.
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28 Interna!onal Journal of Coopera!ve Management • Volume 7 • Number 1 • August 2014
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Unique Expecta!ons of Coopera!ve Boards: taking on
the challenges of the democra!c enterprise
Arthur Sherwood and Keith Taylor
Abstract
The expectations for governing boards of co-
operative enterprises continue to evolve and adapt
in synch with various political crises seen across
the globe. Take for example the banking crisis of
2008. Financial co-operatives were seen as a
viable antidote to the excesses of the investor-
owned financial institutions. But the economic
crisis was so deep that it revealed a number of
governance challenges embedded in robust co-
operative sectors in Spain and the U.K.
Using the lens of the institutional logics perspective,
we address the common and unique expectations of
co-operative vs. investor owned corporate boards of
directors. Building on prior governance literature, we
discuss tensions created between various perspectives
and identify and succinctly describe three common
expectations including teaming, vigilance and
strategic behaviors. Then, we take a deeper look at
the unique co-operative expectation of being
advocates for democracy and the challenges this
poses including being played for suckers, tyranny of
the majority (and minority), democratic despotism
and pragmatism. We close with an exploration of co-
operative democracy in practice and highlight
resulting questions of interest to researchers and
practitioners.
Keywords
Co-operative Boards, Co-operative Democracy,
Co-operative Governance
Introduc!on
The world has experienced serious economic,
social and political disruptions in the last decade.
The ICA’s Blueprint for a Co-operative decade
states,
“in the second half of 2012, following five
years of financial turbulence the more
developed economies of the world remain
in a state of crisis from which there is still
no apparent exit, and the developing
economies are being impeded in their
pursuit of the Millennium Development
Goals. In many nations, governments are
in retreat, cutting their social and public
spending, leaving citizens even more
vulnerable to economic turmoil. In others,
inequality continues to increase as
economic power is shifting dramatically
with consequential social impacts.” (ICA,
2013, p2)
The authors go on to say,
“In the midst of this uncertainty and
suffering, co-operatives can provide some
hope and clarity of direction for citizens
around the world. Uniquely amongst
models of enterprise, co-operatives bring
economic resources under democratic
control. The co-operative model is a
commercially efficient and effective way of
doing business that takes account of a
wider range of human needs, of time
horizons and of values in decision
making.” (ibid)
In this “co-operative decade“ the stated aim is to
bring co-ops to the forefront as the acknowledged
leader in economic, social and environmental
sustainability, the institutional model preferred by
people, growing faster than other forms of
economic enterprise.
But, can democratically owned businesses actually
make these differences? Are the elected governors
just window dressing on what is really just another
conventional business? These questions then beg a
Around half of the 60 boards have independent
appointed experts on them, and we can expect more
to follow. Most boards achieve some balance
between representativeness and expertise by
controlling the appointment of new board members
through nomination committees. This can become
undemocratic, particularly when they neglect
member voice and make sure only their
recommended candidates get elected. It is better to
open up elections of representatives to competition
while ensuring expertise through appointing extra
independent board members.
What should be the place of management? Most
co-operatives have an executive board or committee
of top managers that relates to a separate board of
directors, but among the 60 co-operatives there are
some interesting permutations. Having a large
assembly of representatives enables some co-
operatives to have a smaller, mixed board of
directors and managers that seems to work well. It
is all about the effective distribution of different
types of authority.
Conclusion
Using this simple framework, the Myners plus
report summarizes the situation in relation to the
Co-operative Group. The existing structure has a
large element of representation, but not much
member voice and hardly any expertise. The
Myners proposal would amplify the expertise and
the direct voice of members, but arguably at the
expense of representation. In the view of this author,
the Myners plus suggestions would enable the
Group better to balance the three elements and so
produce a new governance structure that will help it
to recover from its current malaise.
Notes
1Also published in the volume of the 2nd
International Co-operative Summit, Quebec 2014
References
Books
Birchall, J (1994) Co-op: the People’s Business.
Manchester: Manchester University Press
---(2005) ‘Business ethics and the Co-operative
Bank’ in Tsuzuki, C (ed) The Emergence of
Global Citizenship: Utopian Ideas, Co-operative
Movements and the Third Sector, Tokyo: Robert
Owen Association of Japan
Wilson, J, Webster, A, and Vorberg-Rugh, R
(2013) Building Co-operation: a business history
of the Co-operative Group, 1863-2013, Oxford:
Oxford University Press
Journals
Birchall, J and Simmons, R (2004a) ‘The
involvement of members in the governance of
large-scale co-operative and mutual businesses: a
formative evaluation of the Co-operative Group,
Review of Social Economy, 12.4, Dec, 465-486
----- (2004b) ‘What motivates members to
participate in co-operative and mutual businesses:
a theoretical model and some findings’, Annals of
Public and Co-operative Economics’, 75.3, 465-
495
Miscellaneous
Barber, H, Birchall, J and Mayo, E (2014) Myners
Plus: How to make a success of governance
proposals developed by the Myners Review for
The Co-operative Group, Manchester: Co-
operatives UK
Birchall, J. (2013) Good governance in minority
investor-owned co-operatives: a review of
international practice Manchester: Co-operatives
UK
---(2014) The Governance of Large Co-operative
Businesses, Manchester: Co-operatives UK
Co-operative Group (2014) statistics from
website www.co-operative.coop
Euricse (2013) World Co-operative Monitor
2013, Trento University, Italy
Kelly, C (2014) Failings in Management and
Governance: Report of the independent review
into the events leading to the Co-operative Bank’s
capital shortfall, Manchester: Co-operative
Group
Myners, P (2014) Report of the Independent
Governance Review, Manchester: Co-operative
Group
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third: can democratically owned and controlled
businesses really simultaneously deliver on the
promise of enterprise performance and a robust and
thriving democracy when the practice of democracy
poses so many challenges, and faces persistent
pressure and tension from the tradition of return on
capital as the dominant priority in market-based
enterprises?
Boards of co-operative organizations have a variety
of expectations placed upon them that are unique to
the co-op model. Cornforth identifies the tension
between the management, board, and their
democratic obligations to member-owners (2004);
Spear, Cornforth and Aiken, (2009)point out the
unique skills needed for competent governance;
Birchall (2014) distinguishes the necessary
governance differentials and adjustments needed
between co-operatives of differing scales.
The logic of the institution will guide analysis about
which of these tensions are in effect and how they
should be managed. Our first contribution builds on
this evolving discussion of tensions and challenges
through a lens new to the literature on co-operative
governance. We take a look at boards from an
institutional logics perspective (Thornton, Ocasio
and Lounsbury, 2012) in order to identify
potentially paradoxical behavioral expectations
held of these agents. We also draw from the broader
governance literature to identify overlapping
behavioral expectations of investor-owned
corporation (IOC) and co-operative-owned
corporation (COC) governors including teaming,
vigilance, strategy and being advocates for
democracy. We argue that the institutional logics of
both IOC and COC indicate the first three are
common expectations (although likely to have
different flavors of implementation) while being
advocates for democracy is unique to co-operatives.
These four expectations become the pillars that lead
to a board’s success, but the tensions created by the
resulting paradoxes must be managed.Identifying the
logics and related behavioral expectations is
important as it takes our understanding one step closer
to helping co-operative practitioners address the
challenges and tensions arising from them.
Our second contribution is to address the challenges
of democracy and the dangers the democratically
controlled enterprise faces. Spear (2004) highlights
that much of what a co-operative was designed to do
have the potential to degenerate into what is
essentially a managerially entrenched and powerfully
controlled enterprise due to limited controls either
from the market or the ownership. He states:
“This weakness in turn weakens the original
market advantage of such enterprises in trust
and collective goods, by reducing trust and
reducing the incentives and controls for good
performance. In the worst case the result is
sleepy managers, cozy board relations and
poorly performing social enterprises that eat
into its asset base, often accumulated over
generations, until it is taken over or fails, as
markets become more competitive.” (Spear,
2004, p.49)
This is a concerning insight. The implication is that
there is an expectation for boards to be effective in
their democratic control, and if they are not, the results
can be catastrophic. There is a point at which co-
operatives may move toward isomorphic tendencies,
standardizing into what looks like an IOC which in
turn conceptualizes members instrumentally as mere
consumers, producers or laborers, with governance
becoming dominated by financial – not democratic-
concerns (Malo and Vezina, 2004). This then leads to
the downward spiral of diminishing market
advantages (Spear 2004).
We wil l dig de ep e r in t o th e p ot entia l vul n er ab il ities
of democracies drawing from the work of Vincent
Ostrom (1997). We will then argue that boards are
critical to providing the countervailing measures
called for by Spear (2004) including opportunities for
protecting, perpetuating and practicing democracy.
Review of three seminal coopera!ve
governance papers
Past research has examined governance challenges
and tensions from a variety of perspectives and
approaches. While we do not provide an exhaustive
review of this literature below, the three pieces we
highlight lay a foundation for understanding the
challenges and tensions co-operative boards face.
Cornforth (2004) reviewed a variety of theoretical
perspectives that highlighted this tension including
agency, stewardship, democratic, stakeholder,
resource dependency and managerial hegemony
theories. The author argued that a paradox perspective
was needed in order to deal with these tensions, as
using just one theoretical lens was too one-
dimensional. In other words, we do not look at one
facet, but a number of facets when identifying the
various challenges facing a co-operative. The tensions
identified included the question of who governs
(representative vs. expert boards), the question of
board roles (conformance vs. performance) and the
question of relationships with management
(controlling vs. supporting).
Spear, Cornforth and Aiken (2009) studied social
enterprises in the UK identifying a variety of
common challenges including: recruiting board
members with the right skills and expertise, choosing
appropriate legal and governance structures,
managing the diversity of external stakeholder
interests, managing membership, the power of
boards to control management, managing the
interdependencies between board and management
and balancing social and financial goals. These
challenges reveal multiple tensions including
balancing stakeholder interests, organizational
outcome expectations and how to be both supportive
and controlling of management.
Finally, Birchall (2014) recently presented findings
in a report for Co-operatives UK examining the
governance of large consumer co-operatives. Two
challenges noted by the author include ensuring
expertise on the board and managing the cost of a
participatory model of governance. He goes on to
indicate that successful governance is all about
effective distribution of various forms of authority.
Again, it becomes apparent that these challenges
create tensions. How can co-operatives develop the
expertise to make decisions on behalf of their
members and invest in a participatory model while
keeping the financial and non-financial costs from
going off the rails? How to have distributed authority
that does not undermine successful board-
management relations yet allows for appropriate
control on behalf of members? Birchall states:
“In designing governance structures, we
struggle to give some weight to each of four
different types of authority: voice,
representation, expertise and management.
We h a ve to li s t en to th e v o i ce of th e m e mb e r s,
to find an effective way of representing them,
to find the expert help they need, and to find
ways of encouraging and controlling
managers. Only when all four types of
authority are present can a co-operative be
governed effectively” ( Birchall, 2014 p22)
Clearly getting these tensions balanced is a challenge
to co-operative boards.
The challenges of being a coopera!ve
enterprise
But why are these challenges? Why do these
tensions exist at all? We argue that the tensions arise
from two arenas: 1) the institutional logic of the co-
operative enterprise and 2) the nature of the agency
relationship. Approaching this from the institutional
logics perspective allows us to explore behavioral
expectations that develop for directors as agents in
order to follow the logic of the organizational type.
The democratic governance expectation is
particularly interesting because of unique
importance placed upon it by co-operatives
(democratic governance is a mandatory feature).
This characteristic, while challenging, can also be
the source of market advantage. Birchall (2012)
discusses the comparative advantages of member-
owned organizations derived from ownership,
control and benefits. The set of ‘comparative
advantages’ is directly derived from the nature of the
member-owned business. In order to avoid
degeneration of this co-operative advantage (due to
the dangers noted earlier by Spear 2004), it is critical
for boards to meet their behavioral expectations
related to democracy.
We wi ll g o de ep er i nt o the d em oc ra cy
expectations and bring in the perspectives of noted
political scientist, Vincent Ostrom. Linking to
Ostrom’s work (Ostrom, 1997) allows us to further
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understand the vulnerabilities of democratic
representation and voice and the expectations that
may arise for boards in order to counteract and/or
avoid these vulnerabilities. We’ve structured our
contribution into three components. First, we will
frame the expectations of governing boards as
agents informed by institutional logics. Although we
look at both IOC and COC directors through a
narrow - agency - lens, we seek to make the case
that ideal type co-operative and investor owned
corporations have different institutional logics that
lead to particular expectations of board directors.
Second, we will identify the common expectations
of co-operatively-owned and investor-owned
corporations and briefly describe each including
teaming, vigilance and strategic behaviors. Third,
we take a deeper look at the unique expectations of
co-operative boards to act as advocates of
democracy, noting the special challenges this
expectation poses to directors in structuring
democracy as an asset rather than a liability.
We will u se c o-op era tive ly ow ne d co rp or atio ns
(COC) and investor owned corporations (IOC) for
our discussion. When formed as a corporation, the
two different ownership types typically will have
boards of directors, separate legal existence, limited
liability for owners and continuity of existence (i.e.
existence that continues regardless of specific
owners). The key point of departure lies in the breadth
of stakeholder needs, with COC’s typically having a
more diverse set than IOC’s (Spear et al, 2009). It is
commonly understood that the primary interest of
IOC shareholders is the maximization of wealth,
whereas the primary interests of COC member-
owners are diverse and subject to a one-member,
one-vote democratic process. This understanding
allows us to focus on the resulting overlapping and
contrasting agent expectations stemming from their
institutional logics.
Agency in the Ins!tu!onal Logics of
Coopera!ve vs. Investor
Owned Corpora!ons
Boards sit at an interesting place in the set of
agency relationships of both COCs and IOCs that
link to many of the aforementioned tensions. They
are delegated an enormous amount of authority
from owners while at the same time delegating
nearly all this authority to management, often
through a general manager such as a CEO.
Making this even more interesting (and
challenging) is that the number of owners is often
high resulting in the inability to directly hear or
represent all voices equally. Board directors are
tasked to process the numerous voices and transmit
interpretations of those desires within a complex
organizational structure, while controlling for a
dynamic market environment.
This raises interesting questions about what
might be the appropriate base assumptions of
boards regarding their work expectations, and what
the situations might be that influence or determine
them. What might determine the base assumptions
for COCs and IOCs and how might this impact
directors’ perceptions?
One perspective that is useful in exploring these
questions is that of institutional logics.
The institutional logics perspective is a:
“Meta theoretical framework for analyzing
the interrelationships among institutions,
individuals, and organizations in social
systems” (Thornton et al, 2012, p2)
More specifically, institutional logic is defined as:
“the socially constructed, historical
patterns of cultural symbols and material
practices, including assumptions, values,
and beliefs, by which individuals and
organizations provide meaning to their
daily activity, organize time and space, and
reproduce their lives and
experiences”(ibid).
Theory related to agency often assumes bounded
rationality (e.g. Eisenhardt, 1989). Because
agent-actors can’t know everything, they must rely
on something to make decisions and act on behalf
of their principals. Institutional logics can fulfill at
least some of this role, ultimately impacting the
perception of behavioral expectations placed upon
agents through an understanding of key components
in the above definition: historical patterns, cultural
symbols, material practices, assumptions, values and
beliefs of their organization. These expectations, laid
upon and perceived by the governors will ultimately
impact the governance systems/models employed
by them. Furthermore, the logical orientation of an
institution may impact the types of agents –and their
concurrent motivations - which seek to participate
in the governance systems of the firm.
If we assume that the specific logic of the
institution influences actual and perceived
expectations, we can assume that it both constrains
and enables the actors in their level of agency, or
ability to act. Agency is defined as an actor’s ability
to have some effect on the social world---such as
altering the rules, relational ties or distribution of
resources (Scott, 2008).Institutional logic argues
that “agency, and the knowledge that makes agency
possible, will vary by institutional order” and that
“each institutional order has its own sense of
rationality” (Thornton et al., 2012:pg. 4 and pg. 7).
Thus, from an institutional logics perspective, we
can anticipate that expectations placed upon and
perceived by boards of differing institutional orders
will also vary (as in this case, the logical
differentiation between a COC and IOC).
Both COCs and IOCs must be profitable
businesses in order to sustain themselves. They both
have owners that invest equity, boards that act as
agents of the owners and an enterprise. Thus, each
has business, owners, and capital as part of their
logic. At this point we can start to detect the departure
of the two business models. Ownership in IOCs may
be divided unevenly, with one shareholder able to
hold multiple shares. The amount of shares
determines the portion of the profit each owner may
receive in dividends and the number of votes they
have in electing the board of directors. This in turn
leads to a widely held understanding that the primary
value upon which the corporation should focus is
maximization of shareholder wealth. IOCs are
shareholder wealth building mechanisms and this is
central to their institutional logic.
In contrast, ownership in COCs is evenly
distributed with each owner having a single share.
Each owner has one vote in the election of the
board of directors. Rather than profits being
distributed based on how many shares an owner
has, it is distributed based upon patronage, or the
value of economic transactions with the COC.
This difference arose as a consequence of COCs
being formed to meet the needs of their owners
(Malo and Vezina, 2004; the scope of these needs
may very well be wealth related but can start or
evolve to be quite broad and diversified) and on the
basis of democratic control by owners of the
business. The widely held understanding is that
COC’s place primary value on meeting shareholder
needs. COCs are needs meeting mechanisms and
this is central to their institutional logic.
Maximizing shareholder wealth vs. satisfying
owner needs as primary values likely impacts the
institutional logics of IOCs and COCs, and in turn,
the expectations held of directors’ behavior for
each rests on set of values that is quite different.
Particularly interesting is the broader scope that
COCs have in owner needs beyond creating
monetary wealth for owners-members.
Many COCs around the world have embraced a set
of broadly held values that are guided bya universal
set of “Co-operative Principles.” (ICA 1995). These
principles and values are identified in Table 1.
Table 1:
CO-OPERATIVE PRINCIPLES AND VALUES
Seven Co-operative Principles Co-operative Values
1. Voluntary and Open Membership*
2. Democratic Member Control
3. Member Economic Participation
4. Autonomy and Independence
5. Education, Training and Information
6. Cooperation among Co-operatives
7. Concern for Community
*Membership assumes ownership in co-operatives, but it has a
wider scope in democratic voice and patronage benefits.
Self Help
• Self-responsibility
• Democracy
• Equality
• Equity
• Solidarity
• Honesty
• Openness
Social Responsibility
Caring for others
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It is interesting to note that only one of these
addresses economic participation, and that the only
one specifically articulated in both principles and
values is that of democracy. The principles and
values that sit aside economics should broaden the
scope of the logic of this institutional type well
beyond that of the IOC.
From this point forward, we assume that there are
certain overlapping and distinguishing aspects of
institutional logics that will lead to overlapping
differentiated behavioral expectations held of, and
perceived by, boards of directors.
Review of the literature on Directors’
Behavioral Expecta!ons
Multiple scholars, both from the traditional
corporate and the co-operative arenas have identified
contrasting perspectives on the role of boards (e.g.
Cornforth, 2002; Finkelstein, Hambrick and
Cannella, 2009). From this, the question arises as to
what an agent is to do for the owners of the business
and the impact they can ultimately have on the
organization. Finkelstein et al (2007) indicate the
key question to be “How do boards affect
organizational choices, strategies and performance?”
(229). This implies that directors are affecting those
choices through their governing behaviors derived
from their personal filters (mental models) of what
they should do as governors.
McGinnis defines governance as:
“the process by which the repertoire of
rules, norms, and strategies that guide
behavior within a given realm of policy
interactions are formed, applied, interpreted
and reformed” (McGinnis, 2012, pg. 6).
While there may be multiple levels of governance
including that of operations in an institution, our
focus here is that of the board of directors and their
expected behaviors in the process defined by
McGinnis.
COCs and IOCs have elected boards with certain
common expectations of their governance duties as
they act out their agency role. But as discussed in
the previous section, there is a difference in who has
the elector power and in the institutional logic each
starts with, which then begins to separate and
distinguish COCs from IOCs.
Figure 1 below illustrates a model of four board
behavioral expectations that find their roots in the
paradoxical theoretical perspectives. Each of the
component expectations are labeled as behaviors.
Because board governance is at least in part an act
of agency, there are expectations that boards “do”
something on behalf of those electing them to their
positions.
The core expectation components of the
framework are teaming, vigilance, strategic, and
advocates for democracy behaviors. Democracy
behaviors are in grey as these are considered to be
the unique set of expectations of COC vs. IOC and
may very well sit at the heart of the co-operative
enterprise’s comparative advantage. The next three
sections define and describe each behavioral
expectation component. We will treat teaming,
vigilance and strategic behaviors succinctly and
delve deeper into the unique challenges of being
advocates for democracy for co-op boards.
Expectations of Board Teaming Behaviors
A team is “a specific type of group composed of
members who are interdependent, who share
common goals, and who must coordinate their
activities to accomplish these goals” (Kogler Hill,
2013, p287). According to Finkelstein et al (2009)
almost all theoretical framings related to boards
identify two such common goals or roles that they
work toward fulfilling on behalf of their owners.
First, boards of directors have the common purpose
Figure 1: Components of Board Governance Expectations
of playing a role of linking the organization to its
external environment. Second, they play an internal
role related to control and administration. Each of
the subsequent components of board governance
expectations (vigilance, strategic, democracy) relate
to one or both of these roles.
This of course can create tensions for boards as
they try to understand if each director is a
representative (e.g. democratic perspective) or to
control vs. collaborate with management (e.g.
agency vs. stewardship theory).The logic of either
corporation type will establish that boards are
expected to come together to accomplish a set of
internal and external common purposes, although
what this looks like and the degree to which the
group is cohesive will surely vary.
Expectations of Vigilance Behaviors
Vig ilance appears to have s trong support as an
expectation and the greatest overlap in expectations
between co-operative and other forms of business.
Vig ilance behaviors can be considered acts of
intentionally paying close and continuous attention
to avoid risk.
Vig ilan ce behavi ors are obs ervable as boar ds pl ay
their internally focused “role in administration and
internal control, putatively (and legally) responsible
for setting policy and monitoring management”
(Finkelstein et al., 2009: p228) thus having a role
focused on conformance (Cornforth, 2004).
Fama and Jensen (1983) point out that boards
play the role of ratifying and monitoring top
management decisions and that they are central in
ensuring that shareholder best interests are served
by management actions. The authors point out that
this is the case for various types of organizations
from corporations to financial mutual to not-for
profits, akin to fiduciary responsibility (Joyal and
Swansen 2011).
The key insight from the above is that board
vigilance behaviors are expected from all types of
board governed organizations. Not only are they
expected by virtue of their logics, they are legally
mandated to do so. Of course, which behaviors and
how well these are carried out will vary from
organization to organization resulting more or less
effectiveness and more or less impact on an
organization’s ultimate performance as it relates to
meeting shareholder/stakeholder/owner interests.
Perhaps the words of Fama and Jensen (1983)
summarize this well:
“Such boards always have the power to
hire, fire, and compensate the top-level
decision manager’s and to ratify and
monitor important decisions.”(Fama and
Jensen, 1983, p 311).
Being highly vigilant can create tensions with
both teaming and being part of the strategic process.
Asking the difficult questions can place strains on
the group (both in the board and with management)
as well as be seen as obstructive to moving forward
with strategy.
Expectations of Strategic Behaviors
Strategic behaviors are those acts that are part of the
strategic process of the organization. Stewardship
theory indicates that the board’s role is to help
improve performance and add value and support to
management (Cornforth, 2004; Donaldson, 1990).
Thus far, agency theorists have focused most of their
attention on the monitoring role of boards and less on
strategy and its formulation (Finkelstein et al., 2007).
While this may be the case, there has been growing
pressure over time toward a higher level of board
expectations, from the implementation of Sarbanes-
Oxley act in the US to director liability issues, to
directors wanting to play a primary role in advising
and evaluating (Lorsch and Maclver, 1989). Yet, the
literature also indicates that there are powerful norms
not to question management, and penalties for boards
and directors that do so (Westphal and Khanna, 2003).
Tens io ns ar e crea te d as b oa rds wo rk to det er mi ne
how to balance strategic behaviors with those of
vigilance (support vs. control). And it becomes even
more challenging for directors of co-operatives as
Strategic
Behaviors
ADVOCATES FOR
DEMOCRACY
BEHAVIORS
Teaming
Behaviors
Vigilance
Behaviors
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they have unique expectations placed upon them
relating to democratic control.
Expectations for Advocates for
Democratic Behaviors
To thi s p oint, w e h ave b riefly o vervi ewed t hree
behavioral expectations that are common to both
COCs and IOCs. While each of these has inherent
tensions between and within, behavioral expectations
of board agents by principals are that they are to be
fulfilled to the degree that it is consistent with their
understanding of the institutional logic, as well as
their own self interest (to paraphrase Tocqueville,
“rightly understood”).
The expectation of acting as democracy advocates
is the point of COC distinction. The reasoning for
this is quite simple; IOCs are not designed to be
democracies and COCs hold democracy as core to
their institutional logic and design. Co-operatives as
democracies have long been the subject of scholarly
attention (for example see Bernstein, 1976;
Cornforth, 1995) with recent attention brought to
how their unique nature brings comparative
advantage to the enterprise (Birchall, 2012).
A lo ng stan din g qu estion is, what does it me an to
be a co-operative democracy and how would impact
upon owner expectations of the board? Isn’t it
basically about holding an election with each
member-owner getting a vote, and check, democracy
work is complete? To further address these questions,
we turn to the writing of democracy scholar, Vincent
Ostrom. Our intention from here forward it to use his
thinking to go deeper into the challenges of
democracy in general, and in co-operatives in
particular, with the implications for boards as they
fulfill yet another expectation, and act as advocates
for democracy. This in turn helps take the
countervailing steps called for by Spear (2004) and
protects what may be the comparative advantage
of COCs.
In addressing the reasons for crises of democracies
around the world, Ostrom (1997) considers:
“Perhaps the answer is to be found in the
superficial way we think about citizenship in
our democratic societies. How people
conduct themselves as they directly relate to
one another in the ordinary exigencies of life
is much more fundamental to a democratic
way of life than the principle of ‘one person,
one vote, majority rule. Person-to-person,
citizen-to-citizen relationships are what life
in democratic societies is all about.
Democratic ways of life turn on self-
organizing and self-governing capabilities
rather than presuming that something called
‘the Government’ governs”.
(Ostrom, 1997, p3).
This is worth considering for the society of the
co-operative as well. If being a democracy means
more than “just one person, one vote, majority
rules”, then what are the implications of this to the
institutional logic of the COC and the subsequent
perceived expectations member-owners should
have of elected boards?
Starting with the words of Ostrom, we can draw
some parallels to COCs. The members make up the
citizens of the COC democracy. They elect the board
of directors. The board of directors is the elected part
of the governing structure and the management is
typically the appointed part of the governing
structure. But from Ostrom’s perspective, this is not
what makes a democracy go beyond superficiality.
The citizens retain governing power through this
election and appointment approach having self-
organized and developing, maintaining and utilizing
self-governing capabilities. The citizen owners
delegate authority and power, but do not abdicate
authority and power to their agents.
In a robust and resilient COC democracy,
member-owners have the capabilities for and are
engaged in self-governance through participating in
the processes of reflection and choice. Certainly they
use agents to act on their behalf, but again the use
of agents is an act of delegation to help the system
work. Delegates are themselves members of the co-
operative. In order to make good decisions on behalf
of the majority of member-owners, having
member-owners participate in the process of
reflection that leads to choices appears critical.
Ostrom states that:
“democratic societies are necessarily
placed at risk when people conceive of their
relationships as being grounded on
principles of command and control rather
than on principles of self-responsibility in
self-governing communities
of relationships” (ibid, p4).
If indeed the co-operative values and principles are
taken as guidelines by COC boards, one can begin to
see how fundamental this is to the institutional logic
of COCs: democratic member control, self-help, self-
responsibility, democracy. And to support a vibrant
democracy: education, training and information,
autonomy and independence, concern for community,
caring for others, social responsibility, openness. The
majority of the values and principles appear to be
directly or indirectly about supporting a robust,
self-governing democracy.
To have a r ob us t an d res il ie nt d em oc ra cy, Os tr om
argues that it must be about power with, rather than
power over. But this does not just spontaneously
occur nor is it free from vulnerability. Multiple types
of vulnerabilities have been identified including being
played for suckers, tyranny of the majority,
democratic despotism, and pragmatism. As
democracies, co-operatives are vulnerable to each,
and each presents a challenge to their boards.
Being Played for Suckers
Misaligned interests between principals (owners) and
agents (board directors) is a core issue concern with
agency theory (Eisenhardt, 1989).
This vulnerability is evident when after an election,
whatever voiced alignment with the public evaporates
in favor of hidden agendas and actions of winning
coalitions (Ostrom, 1997). A COC is vulnerable if
those on the board work to be elected based on one
premise, with a hidden agenda upon which they base
their actions. Owners-members can also be played
for suckers if the elected board communicates one
thing with the intention of acting in another. This
manipulation and lack of candor breaks down trust,
alienates members and disillusions them about the
COC and how it connects to their values.
Tyranny of the Majority
Tocq ue vi lle (1 83 5-40) and Ma dison (H amilt on , Jay
and Madison, 1788) both identified this as a
vulnerability via the majority vote mechanism.
Ostrom (1997) refers to this vulnerability “as a
sickness of government” where the majority decisions
benefit the majority but leave the minority needs and
interests behind. The vulnerability moves into a full
on crisis when the majority restructures the co-op in
such a manner that forces an abdication of authority,
empowering the board to act on its interests alone.
Democratic Despotism
Tocq ue vi lle ( 18 35 -40) id entif ie d this vu lnera bi li ty to
arise when things are good, and the people are
kept happy.
This leads to a sort of benevolent autocracy where,
“power is absolute, minute, regular, provident and
mild. It would be like the authority of a parent if,
like that authority, its object was to prepare men for
manhood; but it seeks, on the contrary, to keep them
in perpetual childhood: it is well content that the
people should rejoice, provided they think of
nothing but rejoicing. For their happiness such a
government willingly labors, but it chooses to be the
sole agent and the sole arbiter of that happiness; it
provides for their security, foresees and supplies
their necessities, facilitates their pleasure, manages
their principal concerns, directs their industry,
regulates the descent of property, and subdivides
their inheritances: what remains, but to spare them
all the care of thinking and all the trouble of living?”
(Ostrom, 1997,p 16).
Ostrom identifies this as a “sickness of the
people” and states:
“Democracies are in serious difficulties
when a sickness of the people creates a
dependency, a form of servitude, in which
the people no longer possess the
autonomous capabilities to modify their
constitutional arrangement and reform
their system of government in appropriate
ways” (ibid, p17).
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But can this possibly apply to COCs? Arguably,
COC businesses are especially vulnerable as there
is considerable attention paid to customer service
and member-owner needs. If needs are not met,
complaining and working to change the system are
expected. But what if people are satisfied for a
significant period of time? Why bother to know how
to actively participate in the democracy? It is not
hard to imagine member-owners saying to
themselves the board will do it and even more so,
the excellent management will take care of us.
Perhaps a member-owner does have a concern but
things are generally just fine, right?
This long term member satisfaction may in fact
lead to democratic muscle atrophy. And when a need
to engage does arise, the skills no longer exist within
the membership and even within the board and
management. This atrophy can lead to a vicious
cycle of a fear of democracy, with actors working to
stifle participation of voice, representation and
information sharing through indirect action of
ignoring member-owners to active stifling through
manipulating process (the aforementioned problem
of coerced abdication).
Pragmatism
The pragmatic paradigm originates from the
presidential administration of Woodrow Wilson
(Ostrom, 1997). Participatory mechanisms of
governance are perceived as cumbersome, and prone
to engagement of sub-optimal agents. Instead,
knowledge leaders or experts are elevated to
leadership positions, and elite-labeled amateurs are
excluded from participatory governance processes.
As globalization and business competition intensifies,
the deference to pragmatic governance threatens to
weaken democracy. Under such a system, the users
of crucial public goods are kept from informing elite
agents working on their behalf - what Aligica and
Boettke (2009) refer to as a public service paradox.
The agents then exhibit a cloistered worldview,
informed by a shallow knowledge pool of
information dissemination. Pragmatic governance
opens channels for exploitation in that it obscures
participation in reflection and choice by the public
(owners) as it may interfere with the “necessary”
business at hand and create distractions by
introducing the challenges the COC principles and
values bring (again, the delegation authority is
abdicated).Ostrom (1997) states of Wilson’s
pragmatic thinking:
“Governments could presumably govern in
democratic societies without regard for the
processes of crafting and re-crafting the
common knowledge, shared communities of
understanding, patterns of social
accountability, and mutual trust necessary for
self-governing society (ibid, p 20)”.
Wilson essentially argued that the original
intentions –institutional design and structure- and
future desired states were not of importance; rather,
the pragmatic situation of today is what matters
most. The government had grown up and those
original values were nice, but not practical. Clearly,
this is an argument that professional management of
COCs may be tempted to make and thus move
closer toward what Spear (2004) cautioned against.
They might argue democracy is hard and messy and
dealing with all those members reduces our agility
in the marketplace and our capacity to respond to
competitive pressures. And these things are likely
true; this is why pragmatic governance is such a
dangerous vulnerability of COC democracies.
Practical business needs as identified by
professional management can potentially trump all
else. The COC loses its value edge, and ultimately
its comparative advantage.
Each of these vulnerabilities is real, and
unfortunately, they are often not well understood
by members of COC democracies. Avoiding
becoming victim to these vulnerabilities implies
both defensive and proactive behaviors. Thus
boards must become the champions of democracy,
and have the consequent expectation to be
advocates for democracy.
Avoiding Vulnerabili!es, Strengthening
“Self Governing” Democracy
What might these advocacy behaviors be? Here, we
do not propose any grand scheme, but instead choose
to highlight some examples, with the intent that this
will lead into a body of research on best practices for
individuals in board governance positions.
Board governors (directors) must be explicitly
aware of their responsibilities as advocates of
democracy; at the same time, they must also build
a self-regulating system that keeps them in check
as well. Simply put, the membership body has
delegated certain responsibilities and rights to the
elected members who serve on the board of
directors; at no time should this be perceived as the
membership at large partaking in a wholesale
abdication of their fundamental constitutive rights
over the co-op.
Practice Democracy
Co-ops are common resource regimes, meaning they
are owned collectively, with major decision-making
authority being vested in the best interest of the
collective. Any democratically governed institution
requires optimal access by its members, owners, or
citizenry (optimization being quite subjective,
dependent on the habits, self-reflection, and reasoning
of the citizenry). And yet paradoxically, boundaries
and rules are of critical importance for co-operatives
to offer the degree of participation demanded by the
member-owners (some co-operatives may prefer
direct participation, whereas others desire strong
representation in a top-down management team).
Processes should be put into place that reinforce
predictable, concise, understandable avenues by
which member-owners might engage in their co-
operative. One such example is in the U.S. food co-
operative sector, in which a sizable share of the
co-operatives are implementing Carver’s highly
conceptualized Policy Governance® model; this then
allows co-ops to follow a common, structured
framework, and improve upon it. Concurrently,
co-operative directors from across the country can
share their experiences in interacting within that
framework.
From this line of thinking questions arise such as,
do various co-operative sectors (i.e. electric, food,
etc.) across ownership models (worker, consumer,
producer) adhere to specific governance practices? If
so, how did they evolve and adapt? Could
co-operatives optimize their governance through
inter co-operative linkages (cross-pollination)?
Protect Democracy
Co-operatives must guard against capture, atrophy,
and mal-intent. The practice of democracy helps to
“bake-in” democratic culture, and adherence to the
co-operative principles generates additional
incentives which drive member-owner participation
(specifically the return of patronage dividends). But
what about those co-operatives that are currently
captured by a small faction, or are under threat of
demutualization? Proper laws and regulatory
regimes can help guard co-operative democracy
against such self-serving behavior as is the case with
a New Mexico electric co-op whose management
refused to grant its member-owners access to the co-
op’s by laws, thereby creating a power differential
(one group is left with an upper-hand, having
privileged knowledge of the rule of the game of their
co-operative). But so too can mobilized co-operative
advocates guard against such behavior. Credit
unions are always under threat of demutualization,
particularly when such a process can line the pockets
of the sitting CEO. The US-based Credit Union
National Association and other member credit unions
have banded together to prevent select credit unions
from demutualization by organizing public opinion
against the demutualization effort, thereby preserving
the co-op for future members.
Interesting questions arise from this including,
what can we learn from demutualization –and
counter demutualization- drives? Perhaps such cases
may provide insight as to how co-op democracies
atrophy? How do we identify an optimal regulatory
framework that enhances co-op competitiveness and
entrepreneurship? Do “model-laws” exist which
might inform such ends?
Promote Democracy
Robert Putnam in his book Bowling Alone (2000)
documented the declining arenas for civic
participation. Fewer venues for civic engagement
and governance result in fewer individuals with self-
governing capabilities. Co-operatives are then tasked
to not only promote internal venues for participatory
democratic governance, but to do so in a challenging
market environment. Boards will need to seek to
create opportunities for participation in democracies
that simultaneously strengthen democratic skills and
lend toward market advantage. Examples may
include activities such as building community
conversations as seen in food co-operatives in
Wisconsin (Sherwood, 2014) and multi-layered
governance opportunities as seen in Affinity Credit
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Union in Saskatoon (ibid). Internal organizational
processes are demystified, and member-owners are
made to feel empowered to participate. These are
intentional, proactive steps boards can take, but
there are other avenues created through required
operations to build opportunities to participate in
the process of reflection and change in the
organization turning member feedback into an act
of democratic participation.
Questions arising include, what are the avenues
available to promote democracy? How can boards
influence the entire co-operative to build and
provide these opportunities for democratic
participation and help members take advantage of
these opportunities? What skills do members need
in order to do so effectively? What are the results
of these efforts in terms of performance and
comparative advantage?
Perpetuate Democracy
The practice of democracy is a practice of applied
education. It follows that the more democracies that
exist, the greater the likelihood that individuals will
be capable to engage in democratic
self-governance. Therefore, the proliferation of
co-ops is one strategy toward this end.
Another strategy is the continued development of
robust participatory mechanisms within the co-op in
an effort to engage as many member-owners as
possible and thus build a pool of democratic leaders
to take the co-op forward. Take for example the
North Carolina State Employee’s Credit Union
(SECU; 2014). The $30 billion co-op has a location
in every county of the state, and each location has a
member advisory council serving as the locality’s de
facto board. These board members then can access
the larger co-op structure. But of greater interest to
the topic of perpetuation, this then creates a more
engaged member-ownership and a pool of people
capable of effective democratic governance within
and outside SECU. In this manner, democratic self-
governing tendencies are perpetuated throughout the
organization and in the community.
Interesting questions arise including, do nations or
regions with higher/lower densities of co-operative
enterprises create more/fewer new co-operative
start-ups? Do they have fewer/greater instances of
demutualization? What are the mechanisms (policy,
example, training etc.) through which boards can
take action now that bolsters the likelihood that
democracy will continue into the future?
Conclusions
Clearly there are many questions ahead with
which practitioners will continue to grapple and
researchers will continue to build understanding.
Our paper has argued that co-operative boards share
some of the same tensions and challenges of
investor owned boards, but appear to have an even
greater challenge to their logic of needing to meet
diverse member needs through a democratic
enterprise.The democratic nature brings a variety
of unique vulnerabilities that must be attended to
through actions such as practice, protection,
promotion and perpetuation by governing boards.
As the Blueprint points out, the external challenges
are great. The related need is great for the research
community to continue their efforts to understand
effective governance of co-operatives in a way that
deals with the paradoxical tensions and challenges
faced by directors, as they work to live up to their
expectations framed by their institutional logics.
Notes
1This papers approaches directors in their role as
agents, although the literature on co-operative
governance highlights the importance of the
stewardship role, as directors are typically also
members of the co-operative.
2We use this term to create distinction between
the two models in order to help compare and
contrast. In reality, individual corporations vary
from this ideal type where we find co-ops having
a narrower set of stakeholder needs to address,
and IOCs focusing on more than simply
maximizing shareholder wealth.
3Interestingly, in a co-operative that holds a
diversity of values that at times appear to be in
conflict, it may be possible for the democracy to
suffer from a Tyr an ny o f th e Mino ri ty. This occurs
when a small group forces their ideology to the
forefront, attempting to bypass the democratic
process and the agents in place. This is done using
the priority the co-operative places on a related
value and then leveraging this to make their
squeaky wheel gain attention. This is worth
further exploration as, if minority indeed is able
to circumvent the processes used, the resilience
of the democracy may be questionable.
4For further details of the events around the
Socorro electric co-operative, see this article:
http://www.informedcynic.com
/SEC/sec-docs-jan-2010-dec-2010/081810-
SEC_Investigates_Financial_Irregularities.pdf
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The Rela!onship between Performance and Governance
in Agricultural Coopera!ves. A structural equa!on
modeling approach
See Yang and Fabio R. Chaddad
Abstract
Previous research in co-operative governance has
modeled the relationship between performance and
governance using econometric methods such as
two-stage least squares (2SLS) estimation and three-
stage least squares (3SLS) estimation. We use an
alternative modeling approach to co-operative
governance—structural equation modeling. Treated
in a novel way, co-operative performance is
measured as a latent variable. Our main contribution
to the literature is a robust measurement model
providing evidence that co-operative performance
is best measured by qualitative indicators in addition
to quantitative financial indicators. Our structural
equation model suggests that performance of
agricultural co-operatives is weakly associated with
governance practices.
Key Words
Agricultural Co-operatives, Board Structure,
CEO Characteristics, Econometric Performance
Measurements, Governance, Structural Equation
Modeling, Qualitative and Quantitative Measures.
Introduc!on
The field of corporate governance has become an area
of renewed scholarly interest over the past two
decades. Corporate scandals in the late 1990s and
early 2000s brought to surface the fact that firms were
not implementing effective internal mechanisms and
that external market mechanisms were not being used
properly. Legal standards were obsolete allowing firm
managers to portray opportunistic behavior without
much consequence. As a result of failed corporate
governance systems, shareholders were losing
billions of dollars. More recently, the 2008 global
financial crisis showcased failed governance systems
in many developed economies that resulted in
government bailouts of the corporate sector. A strong,
sound corporate governance system is important to
protect the interests of shareholders and the well
functioning of the global economy.
Since the birth of corporate governance research,
multiple surveys of the literature have been
published (Dennis, 2001; Hermalin and Weisbach,
2003; Shleifer and Vishny, 1997). With growing
attention to its unique organizational structure, co-
operative governance is a relatively new field of
study. The results from previous research in
investor-owned firms (IOFs) are informative to co-
operatives, but due to differences in organizational
structure and objective, those results may not be
applicable. Whereas the objective in an IOF is to
maximize shareholder value, the objective in a co-
operative tends to be broader. Co-operatives do not
have a share price. The objective of a co-operative
is to satisfy the needs of its member-owners. That
need varies depending on the function(s) of each
co-operative.
Another major difference between IOFs and co-
operatives is in board structure. The CEO typically
controls the board in an IOF. If the CEO has
alternative motives, he is in the perfect position to
exercise moral hazard behavior. In U.S. agricultural
co-operatives, the board is dominated by member-
owners elected by the membership and independent
of management, which reduces the chances of
managerial opportunism (Burress et al, 2011;
Chaddad and Iliopoulos, 2013).
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attempted to investigate the relationship between
co-operative performance and variables measuring
internal mechanisms of governance (Bond, 2009;
Burress et al, 2011; Cook and Burress, 2013).
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mechanism in the corporate elite. Administrative
Science Quarterly, 45: 366-398.
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from https://www.affinitycu.ca/YourCreditUnion/
About/GovernStruct/Pages/default.aspx
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AboutSECU/Governance.html
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... The Co-operative Values are then translated into a set of guidelines for implementation, referred to as the Co-operative Principles (see Table 2, adapted from [27]). The organizing principle of a governance system partially determines how the public is served by a firm [9] (p. ...
... The prolonged delegation of governance to a small clique may have stunted stakeholder involvement in governance and policymaking, cultivating a unitary governance structure. This could indicate that capture has occurred (tyranny of the minority) or the stakeholders have abdicated in their responsibilities to co-govern [27]. ...
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