The Renaissance of Cooperatives in Competitive Private Sector Economies

1
The Renaissance of Cooperatives in Competitive
Private Sector Economies

• Michael L. Cook
• Graduate Institute
• of Cooperative Leadership
• University of Missouri
• USA

2
Outline

• Introduction
• Background Basics
• Reasons for Existence
• Life Cycle Dynamics
• Observations

3
Introduction

• Nomenclature?
• Cooperative
• Collective
• Patron-owned
• Patron-controlled
• Member-Owned
• Member-Controlled
• User-Owned
• User
• Mutual

4
Introduction

• Re-Emergence?
• Renaissance ?

5
Introduction

• Mini-Stories
• India
• Entitlement
• NGC
• Producer-Company Act
• Wyoming
• Patron
• Patron - Investor
• Public Policy

6
Background

• Co-operative Basics Pre-1990
• Residual Claim Rights
• Patron-Member Control
• Ownership Rights 1 Share
• Residual Control not aligned with patronage

7
Background

• Co-operative Basics Pre-1990
• Cooperative Corporate Governance
• Representation
• Member - Board Member
• Aligning Control Interests

8
Evolution

• Most modern cooperative organizational
  architecture
• and institutional frameworks
• have roots in social movements
• of the 19th century

9
Evolution

• Industrial Revolution fosters
• Markets
• Market Failure
• Reactions
• Collective Action
• Regulation

10
Evolution

• Geographic Origins
• Credit
• Germany, Switzerland
• Consumer
• U.K., Scandinavia
• Production/Processing
• Netherlands, France, Scandinavia
• Colonial Impacts

11
Evolution

• Tipping Point
• Combination of
• Market Failure 1850-1920
• Macro Uncertainty 1850-1920

12
Evolution

• Decoupling of social movement and commercial
  pragmatism
• in OECD countriesWWI

13
Evolution

• Institutionalization of commercial cooperatives
  in OECD, 1920-1940s
• Mostly grass roots-driven
• Quest for countervailing power
• Scale/Scope economies
• Reaction to negative externalities
• Defensive

14
Evolution

• Throughout OECD countries
• Agricultural cooperative, credit and financial
  cooperatives
• Complemented each other and increased in
  importance until 1980s

15
Evolution

• Before we go further,
• lets explore why cooperatives exist

16
Reasons for Existence

• Economic Reasons
• Social Reasons
• Political Reasons

17
Reasons for Existence

• Economic Reasons
• Ameliorate Market Failure
• Reduce/Pool Risk
• ? Net Chain Coordination Costs
• Scale/Scope
• Defensive
• Financial Literacy

18
Reasons for Existence

• Social Reasons
• Enhances social capital
• Community - Shared Identity
• Increase trust-particularly among strangers
• Residual distributed to local area
• Empowerment

19
Reasons for Existence

• Political Reasons
• Democratic member control
• Representative governance
• Collective Decision-Making
• Transparency
• Grass roots vs. Top-Down

20
The Life Cycle

• Introduction

21
Life Cycle of a Cooperative
Health of Cooperatives
Time
P1
P2
P3
P4
P5
Phase 1 Economic Justification Phase 2
Organization Design Phase 3 GrowthGlory
Heterogeneity Starts
Phase 4 Recognition Introspection Phase 5
Choice
22
Life Cycle of a Cooperative
Health of Cooperatives
Time
23
What causes cooperative life cycles?

• Geo-politics
• Technology
• Market Shifts
• Government Intervention

• Macro Factors
• Industry Factors
• Cost of Ownership

• Change in Supplier Structure
• Change in Demand Structure
• Substitution Threats
• Entry Threats
• Rivalry

• Agency Costs
• Risk Preferences
• Collective Decision Making

24
The Renaissance

• An Explanation

25
The Renaissance

• Since 1990 we observe
• the following dynamic

26
Ownership Rights Framework
T
Traditional
R
R
Proportional
T
Member Investor
R
R
Redeemable
T
New Generation
R
R
Restricted to Members
Equity Outside
T
T
R
OR
Equity Inside
T
T
Restricted to Investors
Liquidate
Convert
X
Bankruptcy
27
Horizontal Integration Vertical
Coordination Vertical Integration Corporate
Governance

• Efficiency / Strategic
• Reduce Collective Decision Costs (VDPR)
  Realign member patron-investor proportionality

28
Ownership Rights Framework
T
Traditional
R
R
Proportional
T
Member Investor
R
R
Redeemable
T
New Generation
R
R
Restricted to Members
Equity Outside
T
T
R
OR
Equity Inside
T
T
Restricted to Investors
Liquidate
Convert
X
Bankruptcy
29
Back to Traditional Member Investor New
Generation Cooperative Hybrid

• Efficiency / Strategic
• Investor-Patron

30
Ownership Rights Framework
T
Traditional
R
R
Proportional
T
Member Investor
R
R
Redeemable
T
New Generation
R
R
Restricted to Members
Equity Outside
T
T
R
OR
Equity Inside
T
T
Restricted to Investors
Liquidate
Convert
X
Bankruptcy
31
Traditional
R
R
T
T
Proportional
Member Investor
T
T
R
R
Redeemable
New Generation
T
T
R
R
Learn
Restricted to Members
Patrons Investors
React
Hybrid
Equity Outside
Complement
R
T
T
R
Umbrella
OR
T
T
Equity Inside
Compete
Learn
Liquidate
React
Restricted to Investors
X
X
Convert
Bankruptcy
32
Observation

• Cooperative Corporate Governance evolves from
• Member-chair-manager to a more Principal-Agent
  form

33
Observation

• Patronage-owned firms find the cooperative
  organizational form challenging once multiple
  objectives enter the vision.
• Member heterogeneity
• Organizational complexity

34
Observation

• Patronage-owned firms have been very innovative
  in tinkering to realign the user-owner fit.

35
Observation

• Dual role of patron-investor more obvious as
  market environment becomes more rivalrous.
  Increases complexity of governing.

36
Observation

• Opportunities to remain a patron owned firm are
  plentiful but demand a
• sophisticated
• communicationoriented memberoriented
• governance team

37
Observation

• Given the pace of market change, governing a
  vertically- coordinated, producer-owned entity
  will become not only more challenging and
  exciting but possibly more socially desirable.

38
Outline

• Introduction
• Background Basics
• Reasons for Existence
• Life Cycle Dynamics
• Emerging Observations

39
Thank you

• Michael L. Cook
• cookml_at_missouri.edu