Flying the coop

Why members leave a co-op and ways to help prevent it

By Catherine Merlo

Editor’s note: Merlo is a freelance
writer and former co-op communications
director based in Bakersfield, Calif., who
specializes in issues pertaining to cooperatives.

n August 2002, grower Greg Palla rose before the board of directors of a major regional marketing cooperative and made a startling announcement. Standing before the group during executive session, Palla announced he was resigning from the 50-member board after nearly 10 years as one of its directors.

“They were shocked,” Palla remembers. But they shouldn’t have been, says the 49-year-old, whose family had been with the farmer-owned co-op since the 1930s. Palla himself had been a member for more than 20 years.

“For months, I had been urging the co-op to reconsider its process for selecting a new chief executive officer (CEO),” he says. “It was faulty. Also, the co-op had exhibited poor performance. I felt the board did not have proper oversight on the co-op’s policy or management.”

The co-op, accustomed to annual sales of $500 million and higher, had come through a rough marketing season the year before. For the first time in decades, it had been forced to ask for a return on payment advances made to members. That had caused widespread consternation. Coincidentally, the coop’s long-time CEO was preparing to retire, and the search had begun for new management.

Palla had expressed his views about the board’s “inherent deficiency in its oversight of management.” He had recommended more emphasis on strategic planning. He had even suggested the board consider adding an outside director to offer a different perspective. He had been met with what he calls “cross looks.”

“The board was not inclined to hear my message,” says Palla. Changes weren’t made. Six months after his resignation from the board, Palla ended his connection with the association during the co-op’s annual membership sign-out period.

Lack of response prompts
co-op members to quit
Palla wasn’t alone in his departure. Three more long-time directors soon resigned from the co-op’s board and membership. Numerous members also withdrew, angry and disappointed over having to pay back the advances the co-op had overpaid on its marketing pools.

The co-op’s management troubles deepened. Nine months after hiring him, the board fired the new CEO.

The experience hasn’t soured Palla on co-ops. He remains a member of two other co-ops and serves as board chairman for one of them.

“I still believe in growers banding together to enjoy economies of scale and have ownership in their particular activity,” he says. “But what happened made me aware there are inherent concerns at co-ops.”

Today, the co-op Palla left has rebounded with a new CEO, a return of many previously departed members and successful results. But both Palla and the co-op have learned hard lessons from the experience.

Reality of member departures
The case illustrates the reality that few cooperatives publicly like to talk about: members do grow unhappy and withdraw from their cooperatives. Certainly, not all member withdrawals stem from frustration. A co-op can lose members when they die, retire or leave the business.

But co-ops also lose members for more sharp-edged reasons, such as poor performance by the association, questions about its credibility or leadership, or inadequate products and services. In an era of fewer farmers and farmer-owned co-ops, membership loss can pose serious problems for a co-op.

According to USDA’s Farmer Cooperative Statistics for 2002, U.S. farmer cooperatives number 3,140, down 89 from 2001. This includes losses from mergers, closures and conversions. Between 1993 and 2002, memberships in U.S. farmer cooperatives dropped from 4 million to 2.8

million. This decline reflects the decreasing number of farms, farmers and ranchers in the United States. But these numbers also drive home the importance of sustaining cooperative membership when the overall pie shrinks — at a time when volume matters and markets have become more competitive.

Performance first
A co-op’s performance is paramount in retaining members, says Dan Vincent, president of Pacific Coast Producers (PCP), a 176-member fruit and vegetable processing and marketing cooperative based in Lodi, Calif.

Vincent, who became PCP president in June 2004, says, “The best advice I’ve had came from our previous president: Run the co-op like a business. In today’s market, members are investing in us and expecting a decent return. If they’re not getting it, they’ll take their business somewhere else.”

Palla agrees. “A co-op can buy ads and give out hats and toys, but performance speaks much more loudly,” he says.

Problems can develop when members perceive their co-op isn’t doing as well as a competitor or the open market, or if its performance has lagged behind the industry average for three or four years.

“A co-op can lose members when there’s no real or perceived value in the co-op,” says Joe Huffine, manager of member services for Tennessee Farmers Cooperative, a federated farm supply co-op with 64 members representing 70,000 farmers.

“It’s very important to evaluate the services offered to determine if they’re being utilized or meeting current needs,” Huffine says.

Not meeting members’ needs can create indifference to the co-op, adds Huffine. Members can also drift away when they perceive the co-op is not focused on profitability or future growth and needs.

“When you’re not returning patronage, when they see little or no value or your co-op’s services are not compatible with their needs, members can become disenchanted,” Huffine says. “Then the co-op becomes like any other business and members may seek out someone else. Perceived indifference to members can create a wall of obstruction for any business, especially a cooperative.”

Co-ops that have strayed too far from their original purpose or aren’t in touch with member needs, Huffine adds, “are often the co-ops with the most problems and least loyal membership.”

Contending with competition
Co-ops also may lose members to competing businesses or even other farmer-owned organizations.

“Competition is legitimate and can be healthy for business,” Huffine says. “But it can also be a death sentence for co-ops not willing to adapt to current membership and market demands.”

He points out that many co-ops no longer have just local competitors to contend with. With the advent of national companies through attrition and consolidation, competition has widened to a national scope. Farmers and ranchers can even turn to the Internet for products and services. All that’s created an atmosphere of “survival of the fittest,” Huffine says.

Competitors looking to boost their market share can do more than offer promises of better prices, products or services. They can sabotage a co-op’s efforts, undermine its relationship with members or deliberately attempt to woo them away.

Dr. Shermain Hardesty, Extension economist for cooperatives and marketing at the University of California at Davis, has seen that happen between co-ops.

“There were two rival co-ops in California,” Hardesty says. “One co-op had been struggling, and the other said all kinds of negative things about it. This just added fuel to the fire.”

The negative campaign created more doubt in the minds of members at the struggling co-op. As a result, Hardesty says, many members left the troubled co-op, further weakening it. In time, it closed its doors for good.

The role of the board
A co-op’s board plays an important role in member retention. In fact, “the board can make or break a co-op,” Huffine says.

“A board member plays a significant role because he or she represents members,” Hardesty agrees. “It’s his or her duty to be in touch with them.”

“If board members are fulfilling their responsibilities so that a co-op achieves its performance objectives, why would a member go anywhere else?” asks Palla.

But too often, board members fail in their responsibilities.

“The majority of board members are often there for the ride,” says Palla. “Too many directors view their role more as an honor rather than performing a fiduciary responsibility representing the membership. It becomes a social club.”

That happens frequently because farming communities, where directors usually live, are small and close-knit, Palla says. Farms are so often steeped in family tradition that it can be hard to separate the family farm from the co-op.

Palla recalls hearing one long-time director emphatically state that the coop’s board had only to hire a CEO, not question his or her management decisions.

“That doesn’t sit right with me,” Palla says. “If a board member is not questioning management, he’s not fulfilling his fiduciary responsibility.”

Further, he says, “I maintain that the board needs to review its strategic plan and the performance of its CEO on an annual basis. That is the minimal fulfillment of a director’s fiduciary responsibility.”

Communications are essential
Whether it’s between directors and members, or directors and management, or management and members, communications are essential to solid member relations. Forthright and straightforward communications are the best way to earn members’ trust and support, says Palla.

“Make sure the membership understands how the co-op is attaining its level of performance,” says Palla. “If the performance is less than targeted, explain why — not with excuses, but with reasonable, plausible explanations. That’s the best way.”

The small service co-op where Palla serves as board chairman is doing a “great job” of member retention, he says, despite fewer producers as a result of retirements and consolidation of farming operations. Its success is partly due to a board that “sets aside its own personal objectives in favor of the co-op’s objective.”

The co-op also does a good job communicating its performance status to members. “The books are open to them,” Palla says. “We go through all financial statements in detail at least once a year with members.”

Whether a co-op is large or small, it needs the support of its members to survive. Member retention takes work, commitment and a willingness to adapt to the needs of your members, Huffine says.

“If you’re losing members, if you’re not getting growth or your margins are eroding, it’s time to reevaluate the benefit of your co-op to members today,” he says. “Maybe you need a third party to analyze your co-op. Problems may be invisible to us but obvious to others. It may be time to adopt a new business or marketing strategy.”

As for Palla, he remains confident of his decision to leave the co-op. “I have no regrets whatsoever,” he says, “except that I wasn’t able to be more effective in getting the board to recognize the problems I saw. The rankand- file member who’s not inside the leadership is dependent on those leaders to lead. Having seen it from the inside, I can say it’s often not adequate at all.”











Actions that help retain members

In addition to delivering a strong financial performance, co-ops can help retain their members in other ways, such as:


January/February Table of Contents