What Makes Governance in Co-operatives Different?

Paul Thompson

boardroom governance

All firms are co-operatives? That can’t be right…

When I first started studying co-operatives as a graduate student, the first article I read was a piece provocatively titled “All firms are cooperatives – and so are governments.” Its author, Yale law professor Henry Hansmann, claimed exactly what you would expect from the title: that investor-owned businesses were no different in their structure than co-operatives.

He writes:

In fact, nearly all privately owned firms are cooperatives. This includes, in particular, the conventional investor-owned firm – the business corporation, or joint stock company – that we are accustomed to labelling ‘capitalist.’ Such firms are simply a subset of producer cooperatives that we might call ‘capital cooperatives.’ They are owned collectively by the persons who supply capital to the organization, with an individual owner’s share in both profits and voting rights determined by the amount of capital they have contributed (2014, p. 2).

Capital Co-operative? Excuse me? If Amazon and Walmart are co-operatives, then why did I spend my tuition on a course about co-operatives? I could have just taken a class on corporations… It took me most of the following semester to realize that Hansmann glosses over some small details that make a world of difference.

So what are those details and why do they matter? Well, there are a lot of those details. At least a semester’s worth; even enough for a lifetime of research and publication. Maybe more. But let’s begin with the details tied to the most vital organ of an organization’s anatomy: governance.

Hansmann isn’t entirely wrong about the similarities between co-ops and investor-owned businesses. The governance structure of any enterprise – co-operative or otherwise – will have the same fundamental structure comprised of three essential parts:

  • An owner or owners. In most corporations, the owners will be the shareholders. In most co-operatives, the owners are the members.
  • A group that makes decisions on behalf of the owners by representing their interests. In most organizations, this is a board of directors or a board of governors.
  • A manager who runs the organization according to the instructions of the board. This is usually a chief executive officer or general manager.

No matter how large or small an organization, it will always have these three governance roles. In some organizations, the same person can occupy multiple roles. However, all three will exist in any kind of enterprise, from small mom-and-pop stores to large multinational corporations.

Co-ops aren’t just organizations. They are a movement with a history.

So if a co-operative has the same parts as an investor-owned company, how is its governance different, and why is it worth studying this difference? Let’s look at two critical differences between co-operative and corporate governance.

  1. Democratic member control. Democratic member control is one of the seven principles included in the ICA’s statement on the co-operative identity. This means that co-op members ultimately make decisions about the organization through their voting, often at an annual general meeting. Stockholders of a corporation will also make decisions through voting. The difference is how votes are allocated.

In a stock corporation, votes are allocated based on the amount invested – anyone who has invested more than half of the total capital in the corporation can effectively out-vote all the other investors. Most co-operatives, on the other hand, are run on the principle of “one-member, one-vote.” This means voting power is based on your involvement as a member, not the amount of money you have invested. This seemingly subtle governance detail will mean a fundamentally different way of controlling the business and making decisions.

  1. Self-help and self-responsibility. These two values are the first listed among the six co-operative values in the statement on the co-operative identity. They have been present from the earliest beginnings of the co-op movement. Co-ops are about more than creating wealth for investors. They are about people solving problems for themselves, providing themselves with services such as electricity, or buying affordable or otherwise unattainable products, or creating secure employment. Co-ops aim to meet the economic, social, and cultural needs of a community.

Because co-ops are about self-help, they sometimes lack certain kinds of expertise. A board of directors made up of members from a small rural community will make decisions differently than a corporate board made up of highly compensated business experts. Because co-op boardrooms are filled by member-owners, they have to take special care in how they make decisions, and how they navigate their relationship with management, who will often have more expertise in running a business.

Some larger co-operatives, particularly in finance and retail, are starting to seek out expert directors, creating boards that look more like those of investor-owned firms. This is a controversial practice. Many co-op members are asking how their organization can balance the expertise needed to succeed in highly competitive markets with the longstanding “do it ourselves” mentality of the co-op movement and the desire to remain connected to the broad sweep of owners.

We discuss these issues in depth in our free online course “Governance in Co-operatives,” running from January 21st-March 4th on the Canvas network. This course will look at the principles of co-operative governance through the lens of in-depth case studies of real-world co-operatives. These case studies will focus on co-ops that have grappled with governance challenges that are unique to the co-operative structure.

By examining how these co-ops have succeeded or failed, we hope to show how – contrary to Henry Hanssman’s argument – co-operatives are a fundamentally different kind of organization that requires a fundamentally different approach to governance.

To sign up for Governance in Co-operatives, click here

For more information about the course, email governance.course@usask.ca 

Boardroom image credit 

Paul Thompson, Knowledge Mobilization Officer, Centre for the Study of Co-operatives, University of Saskatchewan