In this week’s Principle 6 newsletter, Mike Mercer unpacks nine actionable steps board directors can take to demonstrate loyalty to their member-owners.
“As co-op directors, they intuitively know that their representation of and allegiance to members is a higher calling than would be the case in a for-profit firm,” Mercer writes.
Read the full newsletter below, then consider how cooperatives across sectors can unite around their commitment to members. NCBA CLUSA is on a mission to document Principle 6 collaborations across the country so we can identify trends, document best practices and share this knowledge with you—our fellow cooperators!
Principle 6 Newsletter – Duty to Co-op, Allegiance to Members
October 12, 2022
Members of the cooperative who serve as directors have the important function of overseeing the management of the cooperative. A director has to act in the best interests of the cooperative.
In addition, the special characteristics of a cooperative business require that the directors be sensitive to the needs of the members and make sure the members are educated so that they can exercise their rights. – Kathryn Sedo, “Duties and Responsibilities of Cooperative Board Members,” 2012
The board obviously has the responsibility of making decisions that are in the long-run interest of the cooperative. In that process they have the responsibility to convey member concerns to the board and manager. – Phil Kenkel, ‘The Cooperative Board of Directors,” Cooperatives CoP, 8-21-19
A cooperative faces a dilemma in representing the views of its membership. If operating properly, the cooperative reflects the views of a majority of members. A member who is in the minority has three options: bow to majority rule, solicit support for the minority view, or leave the co-op. – Michael Cook, “Member Control of Cooperatives,” University of Missouri Extension
Most of the readers here hang out in the C-suite. Professed cooperators. Financial KPI pursuers in the day job. Responsible for charting a course through choppy competitive waters toward relevancy and sustainability. The cooperative structure softens short-term ROI pressures by eliminating market analysts and disinterested shareholders. The cooperative values and principles provide a foundation for constructive/collaborative culture within the organization. And, to the enlightened, identifying as a cooperative can lead to lucrative competitive differentiation. Grow the co-op. Hit the KPIs. Job well done!
But what about the members? The ones who own the place.
They have the right to elect the boards to which the professionals are accountable. In the purity of cooperative theory, members would take an active, democratic role in providing guidance for resource utilization in “their” co-op. But, with time and scale, members drift away from activist governance, moving in the direction of service beneficiaries. Eventually, their only real activism is the exercise of choice—the freedom to leave.
In fact, most co-op directors are recruited by the existing board, with plentiful advice from the CEO’s office. Once ensconced at the board table, directors quickly learn that their duty, their legal obligation, is to the firm and its perpetuation. They are warned about undue influence from individuals or factions. They learn that their duty is to the majority—in decision making and in constituency. After fiduciary indoctrination, they wonder what allegiance they owe the owners. As co-op directors, they intuitively know that their representation of and allegiance to members is a higher calling than would be the case in a for-profit firm.
So, how can/should co-op officials exhibit allegiance to the member-owners? Consider a few possibilities…
Improve Access to Service
Healthy food to unserved areas. Electrification (now broadband) to rural areas. Affordable housing for the asset poor. Virtually all co-ops were started to provide or improve access to service. The contemporary challenge is for long established co-ops where traditional service activities have been commoditized by for-profit suppliers or disrupted by technological innovation. For directors, questions at the board table should include how the co-op can improve access to service… and for whom.
Deliver Immediate (and Tangible) Value
Value is rarely an absolute measurement. It is appropriately expressed in relation to service alternatives. The obvious comparison is around price. Purchasing co-ops were formed to obtain lower prices for members. Walmart, Home Depot and now Amazon are among those that diminish the advantages. Credit unions have long made consumer credit available at the best prices. But fintech and other online providers have substantially cut into the advantage. Relative co-op advantages in convenience and service helpfulness have been threatened as well. The quest to produce immediate/tangible value has resulted in a race to scale through growth and consolidation at co-ops. The only option is voluntary collaboration in back office, supply chains, distribution and product brand support.
Enable Informed Decision-Making
At the most basic level, co-ops have an obligation to avoid deceptive advertising. To reach the threshold of cooperative decency, directors should assure that helpful education accompanies promotional messaging. Going beyond that to unbiased well-being-of-the-member advice separates the co-op from the for-profit competition in a meaningful way. In a time where online search and social networks are displacing institutional familiarity in the hierarchy of trust, becoming perceived as a reliable source of unbiased advice could be savvy competitive strategy. And the right thing for members.
Assure Future Sustainability
“The firm must do well to do good.” The financial KPIs are important for building strong, sustainable co-ops. Attention to the well-being of the firm is good for members, especially those who will arrive in future generations. And it is the most fundamental element of fiduciary duty. But, in a co-op, the well-being of the firm must be balanced with the well-being of those being served.
In Italy, there are tax incentives for allocating portions of profits to “indivisible reserves.” These reserves can never be removed from the cooperative system, even in a liquidation. This is a collective form of cooperative sustainability.
Provide Equitable Distribution of Profit
At many co-ops, the view is that fairness and sustainability are best achieved if prices and margins are set consistent with (not significantly better than) general market conditions. If the co-op can operate more efficiently than others, profits will be produced. Then, the fair thing is to equitably distribute “excess” profits to members. Fairness usually means in proportion to usage of the co-op’s services. Patronage refunds.
Operate with Transparency
One approach for elevating allegiance to members is to embrace transparent practices. Publishing periodic financial statements is only a small part. Candidly, publicly traded firms are required to publish substantially more financial disclosures than most co-ops provide. More important is to explain the “why” behind service features and operational practices. One large credit union sets up advisory boards made up of local members for each of its branches. They are intimately familiar with the policies and procedures that affect members on a daily basis. They routinely discuss the “why,” not just the “what.”
People want to feel like they belong. Cooperatives are structured to embrace inclusivity. But co-ops often evolve from exclusive groups. And, along the path, they occasionally congeal their activities around homogeneous majorities. Their leadership, elected folks and professionals, take on the likeness and perspectives of these exclusive groups and constituent majorities. Co-ops should own the commercial reputation for inclusivity. That reputation could emerge at the community level, strengthening into regional and national notoriety. It would have to start in the boardroom as a deliberate expression of member allegiance.
American democracy is having an identity crisis. Americans want to be a part of democratic institutions, but the concentrations of power in big government and big business leave them cynical toward democracy as a sustainable ideology. Cooperatives could stand out as the standard for commercial democracy at an opportune time. Former Polish President Lech Walesa followed the collapse of communist rule in his country with a worldwide search for ways to inject democracy into the lives of people at the local level. Credit unions were one of the practical ways to do that. U.S. co-ops could project the virtues of democracy in creative and visible ways at the local level for the benefit of members.
Contribute to Economic Civility
Members form and utilize co-ops as an alternative to extractive free-market capitalism and instead of relying on government subsidization. Some argue that most workers, consumers and business owners don’t care about the emergence of some kind of alternative system. These agnostic souls certainly don’t expect their co-op to be leading the charge to build a civil economy option, the argument goes. True, for more than a few. But increasingly, the folks that are being left out and left behind are raising their voices in search of alternatives. A viral movement could be in the making. It seems to be happening in Europe. Co-ops there could benefit from the opportunity. A U.S. co-op board member could legitimately assert that the emergence of a civil economy composed of member-centric firms could be a beneficial thing… for the co-op and the members.
Co-op directors have a duty to the well-being of their co-op. No question. But they also have an allegiance to the members that own the co-op. These two “obligations” are not mutually independent. In fact, they are intricately interdependent. How they come together in practice is the central responsibility facing co-op boards and their hired leaders. It’s more complicated than a few bucks less for the product or service.