MAY 2018

The rise of digital, market volatility and financial crises mean choppy waters for business – which
makes governance is more vital than ever for co-ops. Co-op News looks at some of the key issues
Could better governance
have saved fallen co-ops?
GOVERNANCE
BY MILES HADFIELD
p Good governance
could be key to
keeping a successful
business alive
The co-operative movement has seen high profile
casualties in recent years, most notably the crisis
which brought down the UK’s Co-operative Bank.
In his study for Co-operatives UK, The Governance
of Large Co-operative Businesses, Prof Johnston
Birchall stresses that governance failures happen
in all business models – and highlights a "malaise”
in “the whole edifice of corporate governance in
shareholder-owned companies”.
On the other hand, he says, “Co-operatives, owned
by their members rather than by shareholders, have
a relatively good track record in governance, but
there have been some notable failures as well.”
When it comes to producer co-ops, Prof Birchall
says there have not been many governance failures –
but he gives the example of the Saskatchewan Wheat
Pool, a successful Canadian wheat exporter, which
ran into trouble in the 1990s.
“In the 1990s, it needed to modernise while facing
a demand from retiring farmers to redeem their
equity. In search of new capital, in 1996 it issued
non-voting shares to outside investors. However,
the board did not have the expertise to manage
these changes and the result was a transfer of power
to its managers.”
The new managers made losses through some
poor business decisions – but the board was too
trusting of the chief executive and there was a
“growing gap between the information possessed by
the management and by the board”.
“Eventually,” writes Prof Birchall, “the board was
restructured from 12 members down to eight, with
four independent expert members brought in, but
it was too late: in 2005 it converted to an investorowned
company.”
Another co-op, Dairy Farmers of Britain had
1,800 farmer members, responsible for 10% of UK
milk production. But Prof Birchall says “a strategy
of growth through vertical integration” saw it
enter a costly deal in 2004 to buy a dairy company
from the Co-op Group and supply the Group with
milk at a loss.
“It did not have the financial resources or
experience to make the strategy work, and when it
lost the contract in 2009, it went into receivership,
at a considerable loss to its farmer members,” adds
Prof Birchall. “A parliamentary report commented
that the governance of the co-operative was partly
to blame. It would have benefited from having
executive directors on the board, from giving the
farmer directors proper training, and from having a
more transparent transfer of information between
the board and the members.”
He also cites a string of failures in European
consumer co-ops in the 1980s and 1990s, under the
pressure of supermarket competition. They were not
helped by “a combination of mediocre management
and oligarchic local boards of directors, both
caught in a downward spiral of poor performance
and lack of member involvement.
“At the back of the whole dismal story was the
fatal loss of the economic connection they had
previously had with their members – the dividend on
purchases. When, under falling profits and pressure
34 | MAY 2018