Overview of Corporate Governance Issues for Co-operatives - IFC

Many studies draw primarily on US examples but some do consider evidence fromco-operatives based in different sectors (e.g., agricultural, consumers, housing).Hansmann, for example, contends that the costs of sustaining forms of economicdemocracy become too high where there is a lack of homogeneity and conflictinginterests among the owner members. This is reflected in the relative rarity of memberownedbusinesses within the private sector. Where member-owned enterprises aresmaller and have more homogenous membership, they can and do survive asevidenced by the presence of co-operatives in agricultural marketing, rural utilities andhousing (Hansmann 1996).This study is based on case studies derived solely from the USA and does not includethe large consumer, worker and agricultural co-operatives that can be found in Europe.Dow, however, does consider European case studies and identifies a range of factorsthat contribute to the relative rarity of member owned businesses. He emphasises theimportance of exploring the historical context and the ways in which legal institutionsand codes have ensured the dominance of investor-owned firms and restricted thedevelopment of other models. Co-operatives need a supportive policy framework to besustainable. This support has been enjoyed by Legacoop in Italy where an enablinglegislative and financial framework has helped to create a large and vibrant co-operativesector. He comments that the “Lega experience also refutes the idea that such firmssuffer from deep organizational flaws that predispose them to failure” (Dow 2003:75).Cuevas and Fischer identify the principal source of failure for CFIs as deriving frommember/owner conflict with management. The growth of a co-operative inevitablyexpands (or dilutes) ownership and managers become subject to weaker controls. Thisresults in rent-seeking behaviour and wasteful expenses. This tendency is reinforced bythe fact that co-operatives have frequently faced weak external competition throughsubsidised financing from government which has also enabled inefficient managers tosurvive (Cuevas and Fischer 2006).The development of managerial dominance within co-operatives has been a strongtheme within the literature on non-financial co-operatives as well. An influential modelhas linked co-operatives to a process of democratic degeneration. Meister, for example,identified four stages in the internal transformation of democratic organisations intomanager-led enterprises. This relates to the growth in size and complexity of theenterprise which enables management to take advantage of growing member apathyand distance from the original core co-operative values (Meister 1984).Another recent study has proposed a model of five management and governance roleswithin co-operatives. It also links the tendency for the diminishing role of membership ingovernance to the expansion of the co-operative and a growing domination ofcommercial values fostered by a professional management distanced from co-operativevalues (Malo and Vezina 2004).Page 12