Ask the right questions
Members should probe reasons for co-op conversions, other major changes.
By James Baarda, Agricultural
Economist
Randall Torgerson,Deputy
Administrator
USDA Rural Business-Cooperative
Service
ember involvement is a
hallmark of cooperatives.
Members create,
finance and patronize
the cooperative. They
decide major changes in the cooperative,
such as a merger or its dissolution.
But the most common means by which
members control the business occurs
when they elect directors, who are usually
members themselves.
Recent events in the formation of
cooperatives with non-traditional
characteristics and the subsequent
change or failure of those organizations
have reminded us all that
another one of a member’s most fundamental
duties in a cooperative is to
ask the right questions.
Two situations require members to
pay particularly close attention. Members
have a vested interest in the
arrangement when a cooperative considers
an association with another organization
or business that may have significant
impacts on the character of the
cooperative. This may occur when the
cooperative is being formed, or may
occur later. An example is when a cooperative
hires advisors and promoters to
finance and establish a turn-key plant.
Members also have a direct interest
in cooperative decisions when the
board is considering actions to convert
the cooperative to another kind of
business or organizational structure.
This situation may occur when a cooperative
proposes to convert to a noncooperative
corporation or one or
more limited liability companies
(LLCs). In both instances, member
inquiries and requests for information
are legitimate, necessary and healthy
for the cooperative if done in the
right way for the right reasons.
We have seen instances recently in
which new-generation cooperatives
(NGC) decide to convert to a noncooperative
corporation. NGC members
should ask a series of questions
about why the cooperative failed to
meet its objectives as a cooperative and
why the conversion is a solution to the
problem. Members will want to know
exactly what led to conversion considerations.
Was the cooperative consistently
operating at a loss? Was the
cooperative unable to make further
investments because of a lack of capital
sources from its members? Is additional
capital required to increase the members’
benefit as producers of product
used by the cooperative?
Members and good analysis
Members need to look carefully at
the source of the problem. It is critical
that members determine if the form of
the cooperative organization itself had
an inherent weakness. Or was poor
performance or limited potential the
result of inadequate business planning
or poor management?
Members should look objectively at
themselves, too. Did member behavior
undermine the cooperative? Refusal to
deliver, or promises to deliver that
couldn’t be met, may have made efficient
cooperative operation impossible.
Members may have shown signs of
their own unrealistic expectations and
lack of commitment to cooperation.
Members may also have established
in the new business a philosophy not
compatible with a cooperative. If members
expected to make money on their
investment in the organization rather
than through product delivery and
patronage returns, the stage is set for
cooperative failure. Perhaps market
projections were overly optimistic, or
maybe the market is simply not there
any more, in which case no profitable
enterprise could flourish. In any case,
members should understand the issues.
Objective assessment begins with the
right questions.
Once members understand what
happened and why, they can look forward.
The critical question for the
future: What can be done to preserve
the cooperative? Just contemplating
conversion to a non-cooperative corporation
or LLC shows that someone
believes that a cooperative cannot survive
and provide the services and
income expected of the cooperative.
This is a very serious position to take
and members should question that conclusion
vigorously. The cooperative
may have been poorly conceived and
corrections in structure or operations
may be the solution, not abandonment
of the cooperative.
Was the organization created with
true cooperative principles? Were
cooperative principles ignored or
stretched to the breaking point? Was
the organization formed for the sole
benefit of farmer-users and was the
benefit to accrue to farmers on a cooperative
basis? Members will need to
assess who will benefit from conversion
to a non-cooperative business and what
is driving the conversion idea. In a retrospective
analysis, members may find
that the problem was simple, but also
fundamental. Then the task is to correct
the problem.
The final set of questions that members
should ask is to explore the impact
of conversion from a cooperative to
non-cooperative organization. From a
purely business perspective, if the
cooperative wouldn’t work, why would
a non-cooperative corporation or an
LLC fare any better? Members will
have a difficult time finding built-in
deficiencies in a cooperative that can be
overcome by converting to a noncooperative
corporation or LLC. If
such disadvantages do exist, comparisons
between a cooperative and a noncooperative
corporation or LLC may
show that conversion is still not justified.
Detriments to farmers and the
community from loss of the cooperative
may still far outweigh any advantages
perceived for conversion.
Members should also consider that
if the cooperative disappears, they may
only then appreciate its true value. But
at that point, creation of a new cooperative
will force them to endure added
costs and face other obstacles. They
should be cautious of management that
constantly presses the cooperative to
engage in outside business unrelated to
the core member business. Growth for
the sake of growth, rather than to
increase the cooperative’s ability to
serve farmers, is also a cautionary signpost.
A subtle, but unwarranted,
change in the cooperative’s character
may occur in a progressive manner.
Cooperative principles count
Cooperative members and their
boards of directors have the mechanism
to preserve the cooperative. The
best in fact, the only questions to
guide members in conversion issues are
those that get to the core co-op principles
that guarantee that benefits of the
enterprise belong to the farmers and
that control rests in farmers’ hands.
When members abandon a cooperative
for a non-cooperative organization,
what do they lose?
Members measure losses by reference
to cooperative principles. The
user-owner principle states that those
who own and finance the cooperative
are those who use it. A non-cooperative
corporation can, of course, be
owned by farmers, but conversion to a
non-cooperative will most certainly
require former members to share the
ownership, control and benefits with
non-members. Indeed, the arguments
for conversion may be primarily based
on accessibility to outside capital. That
capital has a cost to members, and they
need to appreciate what that cost is.
The user-control principle states
that those who control the cooperative
are those who use it. Farmer-member
control is lost, or is at least fundamentally
changed, when a co-op converts to
another form of business. Investors
not the users-control a non-cooperative
business, and typically the more the
investment the greater the power of
control. Farmers may, of course, maintain
their investment in the new organization.
But farmers will be nothing
more than shareholders in a business
the control of which is (technically)
shared by many, but in reality often
winds up in the hands of a few.
The user-benefits principle establishes
that the cooperative’s sole purpose
is to provide and distribute benefits
to its users on the basis of their use.
That ends with conversion. Members
are well advised to seriously consider
the implications of such a change. The
original purpose of the cooperative was
to garner income by participation in
downstream processing and marketing.
The implications of conversion for
members are actually two fold. After conversion,
benefits in the form of corporate
profits will clearly go to investors,
not to farmers as cooperative patrons.
Only if the farmers have invested in the
corporation will they receive a portion of
the profits, and then only to the extent of
their share of the investment.
Members should carefully consider
another significant change in the
objectives of the organization. A corporation
is generally obligated to maximize
shareholder value, and this
depends on the profitability of the
business. A business that purchases
from farmers and markets a product
will maximize its profit by, among other
things, paying the least amount for
the product that will provide the supply
needed. Thus, the corporation’s motivation
will not only be to distribute
maximum profits to shareholders, but
to minimize outlays to farmers.
Farmer-members are part of a community
and support their community
however they can. Indeed, a goal of
many new-generation cooperatives is to
benefit the community with added business
and employment. Because a cooperative
returns its benefits to farmermembers,
all the income is returned to
the community at a “working” level and
is recycled in the community.
When a cooperative is converted to a
non-cooperative, the profits are distributed
to shareholders who may or may
not be part of the community. Indeed,
shareholder interests may be linked primarily
to distant money centers. Even if
the shareholders are from the community,
the return received on their investment
may not be put to work in the community
as it would if received by farmers.
Other changes require
similar questions
A cooperative may make every effort
to maintain its character and achieve
some of the benefits perceived for noncooperatives
by establishing ancillary,
non-cooperative, organizations. Entities
may be established to handle nonmember
business, involve non-producer
investors, expand operations beyond
those related to member business, or
for a number of other reasons. There is
nothing inherently objectionable about
cooperatives making such business
arrangements for the benefit of the
cooperative and its members. The
cooperative will run into trouble, however,
when the arrangements are used
to circumvent the cooperative’s principles
or to benefit someone other than
the farmer-members.
Business dealings may also become
so complex and intrusive in the cooperative’s
affairs that members and management
lose sight of the cooperative’s
prime objectives. Members should pose
many of the questions mentioned
above to be sure the ultimate result is
beneficial to members as producers.
Are the costs worth it?
Another practice among some new
cooperatives should prompt members to
ask hard questions. NGCs are formed to
add value to the farmer’s product and
capture the benefits of that value. In most
cases, the NGC will need processing
facilities and will operate the processing
and marketing system. At the same time,
that activity may well be beyond both the
expertise and initial financial capabilities
of the farmers as a group.
If so, it is necessary to look outside
of the confines of a traditional local
cooperative. The danger is that the
expertise and up-front capital is purchased
at an unacceptable cost to the
cooperative.
The issue is far deeper than monetary
outlay. Members should ask what
the arrangement will do to the cooperative,
and on what principles the cooperative
will operate.
The clearest example of such a problem
is where providers of a turn key
plant act essentially as promoters of an
NGC and retain interests in its operations
beyond a simple construction and
sale of the plant. A company, or group
of companies, may, for example, agree
to build the plant on the condition that
they retain a management role and
share in the earnings, thus taking a share
both of the benefits and the control that
should be reserved for members. Clearly,
members’ questions are not limited to
short-term return on investment.
Rather, members should explore longterm
implications and carefully address
all the issues presented by the cooperative
principles mentioned earlier.
Time and place for
members’ questions
This article has presented the type of
detailed, important questions members
should ask. But members must also recognize
that there is a time and place for
their questions. Unbridled and inappropriate
inquiries can be detrimental to a
cooperative and undermine the established
(and legally mandated) role of
the directors and management. Members
should be guided by the familiar
mantra of: “When? Why? Where?
What? How? and Who?”
When members ask questions
depends on circumstances, but in general
the earlier the better. This is
especially important when cooperatives
are being formed and making the
initial decisions about control, investment,
financing and distribution of
benefits. The time for questions may
be mandated, such as when a major
change in the cooperative requires
direct member approval.
Members should be sensitive about
why they are asking the questions. If
they ask for personal benefit rather
than for the benefit of the cooperative
as a whole, or if they are asking not to
gain legitimate information but to
advocate a personal position, they are
not benefitting the interests of the
cooperative and fellow members.
We have discussed as some length
what members should ask, which will
depend on the circumstances. Members
should realize that some information in
a cooperative may be confidential.
The propriety of members’ questions
will also depend on how questions
are asked. If they are confrontational,
publicized, or accusatorial, they
will not achieve their only legitimate
purpose: to obtain useful information
to respond to cooperative challenges.
Who should members ask? A cooperative’s
board of directors is assigned,
by law, responsibility to establish the
cooperative’s policies. Members must
not undermine the board of directors,
either directly or by planting doubts
and dissension among members. When
members have questions, the board has
most likely already considered the
issue. The best practice is to inquire of
the board of directors first. If the board
perceives a deficiency in communication
generally, it may establish procedures
for handling questions in the
management system.
To re-emphasize: members should
clearly understand that the board of
directors they selected establishes the
cooperative’s policy as representatives
of members.
The positive approach
In today’s economy, cooperatives
cannot be static or slow to act. Change
is in the air, and cooperatives need a
positive, dynamic and creative approach
to the markets in which they operate.
The type of inquiry suggested in this
article is in no way intended to restrict
creative, rapid, significant or effective
response to the needs of the marketplace.
To the contrary, this type of
questioning is positive, not negative; it
is forward looking, not reactionary. But
these questions are vitally important.
Perhaps change even significant
change in the cooperative is due. It
may be time for a new look at structure,
operating methods, bylaws or
policies. Perhaps a substantial response
to dynamic market forces is indeed
required.
The central focus of members’ interest
in the future of their cooperative
the basis for questions discussed here is
to preserve the value, and values, of their
cooperative so it can benefit its members
as producers of agricultural products in
the manner mandated by fundamental
principles of cooperation.
