Business failures underscore need for dose of preventive medicine

By Dan Campbell, editor

How should cooperatives respond to the recent bankruptcy filings by several of the nation’s largest farmerowned co-ops and the collapse of some of America’s corporate heavyweights? More effective director training programs and communications efforts geared to better educate members about how their co-ops function would help, according to panelists who tackled this thorny issue during the annual institute of the Cooperative Communicators Association (CCA) in Burlington, Vt.

“Fortune” magazine blames lack of vigilance by boards of directors for the financial and ethical lapses that have contributed to the collapse of some of America’s corporate giants, said Catherine Merlo, a communications consultant from Bakersfield, Calif. Quoting from the article, she said, “Nothing will change until directors realize ultimately that they must reform themselves. They have to go beyond the rules, ask tougher questions, be more skeptical and critical of management and never forget that their No.1 job is to watch out for shareholders, not the CEO.” The same doubtless holds true among many co-op boards, she noted.

In recent conversations with co-op representatives, Merlo was told that some are convinced that their directors “don’t have a true grasp of the nitty-gritty details” of the co-op financial statements they review. She said this strongly suggests that more time and effort be spent on director training.

The need for more effective education extends beyond co-op directors and “goes to the heart of member communications efforts,” said Pamela Karg, a Wisconsin-based co-op communications consultant. “How many of your members really understand those beautiful annual reports we put out? How many of you really understand the numbers the finance office gives you?”

As another example of the need for more basic member education, Karg said she was approached by a dairy co-op to produce an article explaining how milk is priced and how this determines the bottom line on a producer’s milk check. If something this basic to the livelihood of farmers isn’t always well understood, think how much tougher it is for producers to move from the farm to the board room, where they must deal with complex financial statements and global marketing issues.

Chuck Lay, communications director for MFA Inc., said he feels most co-ops “have access to talent” in their ranks. Farmers who are still in the business have survived this long only if they are astute businessmen, he said, adding that MFA’s board represents deep knowledge of a wide range of commodities, including hogs, soybeans, corn, beef cattle and dairy.

Lay said some co-ops struggle with “large board syndrome.” Several years ago, MFA reduced its board from 30 to 14, and most believe it was a good move. A “smaller board composed of sharp producers can make quick, intelligent decisions,” Lay said.

Lani Jordan, communications director for CHS, said an article in “The Economist” magazine also addressed the meltdown of some of the nation’s major corporations. It printed a list of recommendations for corporate boards to consider as preventive medicine. These recommendations range from the need for more aggressive audit com mittees to conducting thorough annual performance reviews for CEOs. As she worked her way down the list, Jordan put checks by all the items that CHS is already doing. She wound up checking most of the items on the list. Thus, the co-op governance structure was, in effect, being held up to corporate America as an example of the way it should be doing business.

“Yes, co-ops do sometimes end up with unqualified directors on their boards,” Jordan said. But most are selected by their fellow producers based on their business acumen and they know well that their duty is to their fellow producers, rather than being “handpicked choices of the CEO” based on their willingness to support his or her agenda.

Merlo said she is increasingly hearing that members are only concerned with the bottom line, particularly younger members. One staff member of Tri Valley Growers, a now-bankrupt and defunct California fruit processor, told her the co-op’s members always wanted the best possible price from the co-op for their crops, but also wanted the co-op to be competitive in the marketplace. A major challenge of the co-op was to balance those two divergent demands.

The response of some co-ops is to admit that they cannot guarantee they will pay the top price to producers every year, but will be competitive over the long term and provide a reliable home for their crops. “This is a constant member-education challenge,” she said.

“The bottom line is crucial, but we have to do a better job telling the rest of the story about the value of coops,” said Jim Rodenburg, communications director at AGP. He noted that AGP member meetings used to always start with the financial report, but now begin with a management report that focuses on marketing efforts. He said that in no way downplays the financial statement, but puts new emphasis on marketing as the key to the co-op’s future success.

It was noted that one farm columnist laid some of the blame on the rise in co-op bankruptcies on the nation’s farm press, which he said traditionally gives co-ops “a free ride” and is rarely critical of them for fear of being perceived as anti-farmer.

Lay disagreed, saying he has usually found the farm press to be “skeptical and even hostile toward cooperatives.” Most ag journalists, Lay continued, “have to be dragged kicking and screaming to cover a co-op event.”

Jordan said the media “generally ignores co-ops unless they file for bankruptcy.” She acknowledged efforts of those in the room who strive to get the coop story out to mainstream press, but said it is hard when the press is so geared toward covering crisis and conflict.

Patrick Duffey of USDA Rural Development said the situation can best be addressed if farm, electric and consumer co-ops continue to work together as they do under the umbrella of CCA to promote greater public understanding of cooperatives. Well-planned media events can still attract positive press coverage, he said.

It is vital to remember that these co-ops “did not get into financial trouble because they are co-ops they got into trouble because of some bad business decisions,” Jordan said. Most co-ops form as a response to failure in the marketplace, she noted. “When no longer needed for defensive purposes, co-ops must adopt an offensive business strategy to survive,” she said. In the case of CHS, the strategy is to continue to move to position itself as a producer of value-added products.

“Co-ops will survive,” Jordan said, “but this is a time of transition,” and the co-ops of tomorrow will look different than those of today. Our members are telling us we have to earn their business every day. A co-op is not a social club; you can’t count on loyalty. You must earn it through solid business performance.”

“We don’t run the board or management, but we can make suggestions about director training and help members understand how their co-op works,” Karg said, urging those present to “communicate about the difficult issues before questions arise among members.”

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