Unity and the Vote

If you want to purchase the right to one vote within Fonterra, you can do so for $4520.  Purchasing rights within Fonterra will now be easier in the future thanks to TAF.  Without knowing it, the acceptance of TAF has also enhanced the role of markets within the cooperative to allocate all things, including those things we traditionally placed non-market values on.  But importantly, we didn’t arrive at this state through a deliberate choice. To unify the cooperative, we must now look at how we arrived here and whether this is in our long-term best interests.
To investigate how this happened, consider this:
Should votes within Fonterra be subject to market share, tradeable and therefore viewed as private property, or rather seen as a civic responsibility to the cooperative, and therefore an obligation of membership?  
This is actually a question about the appropriateness of markets without limits within the cooperative.  But why should we worry that we are moving towards a cooperative in which everything is up for sale?  For two reasons: one is about inequality, the other is about corruption.
Consider inequality: Larger farmers who have more money invested in the cooperative should have a greater say because they have more to loose.
 This sounds like a strong market based argument, but implicit in this comment is that smaller farmers are less able to make appropriate decisions for the good of the cooperative because supply size is the best measure of democratic competency.  Of course rational thought says that this argument is flawed, but for the last 10 years, this argument has prevailed largely unchallenged.  For ten years, those with more means have mattered more.
The second reason, corruption, is about the corrosive nature of markets.  Markets change the way we view the things being exchanged.  When we decide that certain things should be tradable, we decide, at least implicitly, that it is appropriate to treat them as commodities, as instruments of profits and use. This means that if you have the ability to influence the outcome of a vote, you would be more inclined to vote towards an outcome that is to your personal advantage. Conversely, if you had no more ability to influence the result than any other member you would be more inclined to vote towards the collective good, believing that everyone else would do the same too.  
Markets should have limits within the cooperative.  Markets promote inequality and corrupt the non-market values of the things they allocate.  They change member attitudes towards the value of the cooperative, towards other members, and towards working together for the collective good.
Encouraging markets into all areas of our cooperative will not promote unity.  A 66% majority of a market-based vote might be the easy way to claim unity, but we all know that to truly have cohesion within the cooperative requires brave leadership.  Leaders who can step back from heady market values and rediscover the truly priceless non-market values that can unit us and drive dairying sustainably into the future.

TAF and critical thinking

The basis for my concern for the TAF proposal is that the governance of Fonterra appears to lack critical thinking and therefore rational judgement. I would never dispute the absolute importance of ensuring any governance decision meets robust economic scrutiny, but higher reasoning suggests that it should never be the primary motive for decisions. When governance decisions of a cooperative are made to meet economic desires or market preferences firstly, they are without a reasoned and rational judgement basis, and as a result are at the mercy of circumstance rather than being free and unburdened to shape the cooperative’s destiny. Continuous flip-flopping of policy and the protracted capital structure debate are examples how leadership have tied the cooperative to the arbitrary nature of their markets, both internal and external. This is in contrast to a rational judgement position that would allow the governors to unlock the full potential of the cooperative for its members.
Without policy arrived at from a rational judgement basis, the cooperative will lack a unified and clear vision of the future for members.  Members become confused and frustrated with continually changing policy and this generates mistrust of the leaders and their motives, and at times, outrage for decisions that appear dictatorial.  It has been argued many times that these outbursts of anger are emotive reactions to policy members do not, or have not taken the time to fully understand.  But in dismissing this anger, the governors fail to recognise that anger, and especially outrage, are the specific reactions people have to injustices imposed upon them. People are rational beings capable of reason and therefore should be treated justly and with respect.  You can only be ensured that you consistently and deliberately treat people justly if you act with rational judgement in dealings with them.
Governance that is founded on rational judgement is stronger than arbitrary decisions. It is stronger and more enduring because in addition to being able to promote economic sustainability it offers direction to strategy, galvanises membership and enhances the collective recourse value of Fonterra. It also sends a clear message to the government and the wider community that the organisation stands for something of value, and that value is worth protecting.  How individual Boards judge what is right and just is for each board to determine, but through judgement and rational reason rather than arbitrary reaction, governance decisions must be made.
To illustrate my point, I will use environmental sustainability as an example.  It was identified that the approach to environmental sustainability by Fonterra and it farmers’ is becoming increasingly important to markets, both here and overseas.  In response Fonterra has launched a concerted environmental sustainability program throughout its sites and began to introduce a number of punitive measures to try to fast-track farmers into improving their environmental compliance performance and meet customer expectations.  The result was general outrage from the membership base and this was scaled back to the introduction of urgent, but somewhat ad hoc, on-farm environmental support programs such as every farm every day. The decision to undertake these measures was driven entirely by economic need.  The decision to undertake operations sustainably should have been from a rational moral judgement first. Fonterra should choose to participate in environmental sustainability because the governors have engaged with members to understand their positions on the issue, then stripped these arguments back and rationally evaluated them.  From this evaluation they would then drawn a reasoned judgement about the environment having an intrinsic value that is worth protecting for Fonterra, its farmers and the community it serves. Therefore working to improve environmental sustainability becomes the right thing to do for the cooperative and its members.
It could be argued that regardless of the approach, the result still remains the same; environmental sustainably.  But this is only true in the short term.  Once the whims of the market move in another direction, so too will the policy and the commitment that comes with it. The fundamental difference between the two approaches is that a decision based primarily on economics uses environmental sustainability as a means to an end.  Governance based on rational judgement would view environmental sustainability as an end in itself. When the leadership always follows a rational judgement position, it sends a consistent message to members, and the wider community, that Fonterra wants to make a meaningful difference for reasons beyond “it makes good commercial sense.”  People want to interact with an organisation that treats them and the things they value justly.  This behaviour creates a powerful competitive advantage; but this should not be the motive in itself.
The practice of reacting primarily to economic stimuli and market pressures for making governance decisions is why I still hold grave concerns for the TAF proposal.
The most enduring reasons that have been presented to me as the driving purposes for the TAF proposal is to remove redemption risk and free up capital to pursue economic options as part of the strategic plan.  What has not been made clear is the how the capital structure plan is intended to support and protect the collective resource value of Fonterra.  Although some issues surrounding this have been addressed in-part by the proposal, their handling is somewhat clumsy and critically impinges on the justice of such a proposal.   On the face of it, it appears that this proposal presents a capital structure that uses members’ rights and the collective resource value of Fonterra to galvanise the economic flexibility of the company, rather than to galvanise member rights and preserve the collective resource value as the end in itself.  Below I present my reasoning on how I arrived at this position.
(It is important to note that I am not supporting the current system as an alternative as this too is heavily flawed and fails the critical thinking test.)
My first clue to the reasoning of TAF comes from when I question how free the TAF market will be. In a regular investor market a potential investor is free to choose, when, how often, and to what levels they participate. This means investors are free to participate with the market as they choose, creating a free market.  In contrast, farmer members are coerced in their participation by the compliance aspect of membership into the cooperative.  The primary motivation for participating in the TAF market by cooperative members is not investment, rather access to the cooperative, investment is secondary. This means that to participate with the cooperative to supply milk, farmers are required to participate with the market. This policy works on the assumption that because all members of Fonterra are farmers, they are also equally capable as investors.  This position is morally contingent in so much as their success in this market is contingent on their natural talents and abilities or their opportunities to acquire satisfactory trading skills. Farmers are choosing to be farmers but are being coerced into being investment traders.  As farmers are also bound in the level they can participate due to the membership compliance requirements I feel that there is also a material level of coercion in their freedom to interact with the market, which is in addition to their desire to even engage. This inequity in access to the market between farmers and investors could expose the cooperative to free-riding on the capital value and the distributable profit.
The second clue to the reasoning comes from member access.  Under the current constitution, members wishing to access the cooperative are free to transact directly with the cooperative.  Under the TAF proposal, farmers wishing to join or increase membership in the cooperative can only do so on the condition that they compete for membership through the market.   Making supply conditional, transfers members’ rights from a collective constitutional arrangement to an individual contractual agreement. It could be argued that this is now a condition of supply and anyone wishing to supply the cooperative must adhere to the rule of supply. This reasoning is flawed as it implies that producing milk constitutes consent to participate in the market because farmers must engage with the market if they receive services.  It moves consent from explicit to tacit. Tacit consent to compete in the market in this case means that the agreement may not be wholly voluntary, due to the superior bargaining position of Fonterra created by the perishable nature of milk.  It moves membership from a position of freedom to one of condition.
The third clue to the reasoning is how membership entitlements are protected.  Take as an example two farmers.  Farmer A meets the share standard to supply based on their three-year rolling average.  This farmer chooses to place 10% of their shares into the fund.  In effect has laid out total capital for 100% of supply minus the 10% that he has re-couped by placing shares into the fund.  Farmer B also meets the share standard to supply based on his three-year rolling average.  This farmer has a bumper year producing 10% above this three-year average, a one-off year, and now has in effect invested capital for 100% of supply minus 10%. Each farmer is supplying 10% more than the shareholding they have money invested in the cooperative for.  Both qualify for full membership by meeting the three-year rolling average share standard, but only one, farmer A, will be entitled to the just deserts of this membership (full milk price and full voting rights).  If farmer B wishes to also receive the just deserts, he is forced to engage with the market in addition to meeting the share standard for membership.  This creates an inequity in membership entitlements that is not equally reflected in membership obligations.  This action appears to put the need for liquidity in the market ahead of membership rights.
The forth clue to the reasoning is the milk pricing mechanism.  In investor owned companies, producers of raw products are contracted to supply a pre-determined volume of goods for a particular price.  If the processor experiences unforseen increases in the cost of producing their product that they are unable to pass on the their customers, the shortfall for this amount would be met by investors through reduced distributable profit, not by the supplier of the raw materials that are contracted at a fixed price.  This is in contrast to Fonterra where this shortfall would not come from distributable profit, rather the milk price as this fits with the milk pricing formula.  The important thing to note with dairy cooperatives is that the farm-gate milk price is set after the company knows what it has achieved from the market, not before as is the case with other types of contractual supply. This means that the success or failure of NZ milk supply must be born entirely by the suppliers, as the owners of the milk, because the profit from the value-add portion of the business must be distributed as dividend and not subsidise the performance of NZ milk.  This model works well in times of market largess because an economic based policy dictates milk price will be the focus.  This becomes an issue when the market shifts and greater economic rewards can be found for value-add, or more worryingly, off-shore supply (distributable profit); as apposed to enhancing and following the collective purpose. This puts Fonterra’s economic growth needs ahead of the collective purpose.
My overall assessment of the TAF proposal is that Management have produced a clever option that does exactly what was asked of it. Unfortunately I have serious concerns about what was asked. It appears that the Board has failed to match the proposal to the collective purpose of the cooperative resulting in a miss-match of synergies. The four objections I presented are just off the top of my head, and I know others would be found if critical thinking was applied to the whole proposal in any great detail.   The mere existence of these objections says that no reasoned judgement has been applied. The only judgement appears to have been whether it met the financial objectives for restructuring set by management. There is no rational judgement as to rights, responsibilities, entitlements, desirable virtues, just deserts, honours, loyalties and collective purpose that TAF should encourage, protect and enhance.  The proposal is about securing Fonterra’s financial future alone.  This proposal appears to use the inter-generational collective resource value and members’ rights to achieve this end, rather than the protection of this value and these rights being the end in itself.

What is the Government doing with DIRA?

The Government has failed the people of New Zealand with their DIRA review.  This legislation is not about taxing those with surplus incomes and re-distributing it as a civic good, rather its better viewed for what it is; the Government sanctioned enforced re-distribution of assets from a group of NZ citizens to foreign owned companies. 

1.       Compensation does not reflect free market exchange

a.       Ability of private processors to drive down the milk price.

b.      Increased value of the raw milk for on-demand uptake.

c.       Inability for individual farmers to refuse consent to participate in the scheme if they feel compensation is inadequate.

2.       There is no civic duty aspect

a.       The purpose of the original DIRA regulations is not being met.

b.      Obligations do not reflect entitlements for participating in the scheme.

1.       Collective consent is tainted.

a.       Farmers could not have known how they would feel about corporate free-riders on the cooperative.

b.      The honour of NZ farmers as world leaders in the cooperative model is under threat.

The Raw Milk Regulations works on the premise of taking some milk from the larger processor and re-distributing it to some smaller processors who are less able to source the milk therefore enhancing the utility of the dairy industry as a whole within New Zealand.  This theory works on the assumption that the environment is of a larger processor dominating the NZ milk supply where smaller processors are trying to emerge to add competition at the farm-gate price and choices for farmers around who to supply.  This reasoning is flawed because it misunderstands the cooperative model.  The cooperative is actually individual farmers processing their own milk through a collective resource system, and are doing it in an organised way, creating the Fonterra organisation. This means that all farmers using Fonterra are in-fact still the legal owners of the milk and must bear the responsibilities and receive the rewards that ownership of the milk bestows.  The justness of this proposal critically hinges on whether compensation to farmers for their milk reflects a genuine free-market exchange, is any civic duty met and how untainted is original consent given by farmers to participate in DIRA.

Firstly I will explore the compensation to the NZ farmers for their raw milk (products of their time and labour) that is removed from them, and whether the farmers’ compensation reflects what would be achievable in a free market exchange. To investigate this we look at the farm-gate milk price.  It is important to note that the farm-gate milk price for a cooperative is set after the company knows what it has achieved from the market, not before which would be the case if this was a type of contractual supply to a company independent of the individual farmer’s business. This means that the success or failure of NZ milk supply must be born entirely by the suppliers, as owners of the product. Due to the mismatch in size between the domestic market and the domestic milk supply, the majority of the value for the milk produced in NZ comes from exporting it.  By farmers organising themselves into a way which, for the most part, creates a single point of sale from NZ enhances the profitability of the saleable product, and therefore the reward each farmer is able to achieve for their milk.  The emergence of private export processors, supported by the DIRA regulations, has seen this position as a single point of sale for NZ dairy products weakened.  This action has a negative effect on the farm-gate milk price, because as discussed before, the milk price is set after it is known what the market will pay, not before.  Farmers are now not able to maximise their income from the cross-boarder sale of milk due to increased competition coming from NZ and the decreased collective volumes available to sell. This means that private processors subsidized by DIRA can weaken the farm-gate price, the very price that determines the justness of the confiscated raw milk from individual farmers.  The farm-gate milk price now becomes inadequate to reason a fair exchange due to the superior ability of private processors to influence the market ahead of individual farmers.

The ability of private processors to choose when they take raw milk intrinsically increases the value of this raw milk to them, as it allows them to maximise their processing capacity for longer, maximising their profitability.  This further value added to the raw milk by the regulations is not reflected in the basic milk price alone; meaning the milk-price alone is not adequate compensation.  It is critical to ensure the compensation is fair as individual farmers do not actually have the freedom to refuse participation in the scheme if they do not feel compensation is just. 

The second aspect to this claim is whether the NZ public are benefiting from the redistribution of the raw milk and any civic responsibility is being met.  Part of the purpose for the DIRA regulations was to ensure that the NZ public would have adequate competition in the supermarket to keep dairy products affordable.  The success of this aspect cannot be accurately measured because despite the high level of uptake from new and established private processors, the majority of the milk is being exported rather than finding its way to the domestic market.  The reason for this is that the entitlements processors receive for accessing the Raw Milk scheme are not met with any obligations around promoting domestic competition, or to the NZ dairy industry as a whole.  The ability to receive entitlements without obligation is a gaping injustice in the scheme and one that encourages free-riding on the collective resource value of Fonterra to maximise profits for overseas investors.

The third aspect to this claim is how this lack of obligations and the consequential free-riding on the farmers’ collective resource system of Fonterra, taints the original collective consent the Fonterra farmers gave when the scheme was set up.  Farmers collectively entered into consent for the scheme to enable the formation of Fonterra, but would have been unable to know at the time that the scheme would not produce the originally consulted on outcomes and expose the cooperative to the free-riding on capital by private processors, and critically, how they would feel about this.  There is also the question of honorific value in forcibly removing the fruits of farmers’ time and labour.  Farmers have worked for a number of generations to increase the strength of the cooperative model and are proud of their position in New Zealand and on the world stage as an example of the power of the cooperative model.  The DIRA scheme undermines this honour and sends a message to the NZ public that the government does not value individual producers of export products working collectively to take on larger and better geographically positioned countries successfully.

This scheme amounts to nothing more than a re-distribution of income and wealth away from NZ farmers to overseas based investors.  It empowers private processors to free-ride on the cooperative model for their own ends.  This behaviour does not support or enhance the purpose of the original legislation and does not add to the civic good.  The lack of obligations attached to the entitlements seriously erodes the fairness of the scheme.  Tainted consent and the derogation of fair compensation coupled with the lack of freedom for individual farmers to refuse participation in the scheme makes the scheme unjust to those it was intended to protect; the NZ farmer and the NZ public.

As minimum measures to protect the NZ farmer and the NZ public we believe that the following actions are the least the government can take to ensure a basic level of justice is restored.

• ·         Limit the number of years a private processor can access the scheme.
• ·         Remove virtual processors.
• ·         Failure to uptake one month should constitute withdrawing from the scheme for that season.
• ·         Introduce some form of obligation to the NZ domestic market for those that access the scheme, at least while they are in the scheme.  

Controlling the Cooperative

The key difference between a cooperative and an investor-owned company is that a cooperative is a business owned and operated by its members for their mutual benefit.  An investor-owned company’s only owner focus is financial. 

Because a cooperative is operated for the mutual benefit of its members by its members, member control beyond the levels usually accepted in an investor-owned company is imperative to achieving successful outcomes for members, both financial and in services.  Control by cooperative members is important because in cooperatives, purpose includes how the cooperative interacts with its members’ businesses and this can vary and change over time. By contrast in investor-owned companies, purpose is always clear, to make money through shares and dividends.

The types of controls members have over the decision making of cooperatives are:

1. Redemption of membership – Ultimate form of control, very dissatisfied, Rarely used.
2. Voting rights at AGM – Official level of control. Used annually, more frequently with concern.
3. Engagement with the co-operative – co-operative level of control and is directive or interactive only. Used regularly/daily.  Used in a variety of mediums. NB: Increases in reciprocal engagement decreases the dependence on other forms of control by improving outcomes for members.

Redemption of membership (ownership) – Exercised Anytime

1. Remove capital and cease trading with the co-op. 

• Personal risk to own business as trading security reduced.
• Galvanises remaining members to direct the board

Voting rights at AGM: - Exercised Annually

1. Election of Board members
2. Changes to constitution – changes are to the parameters of the business (not on how the business is run)
3. Passing the annual report
4. Appointment of Auditor
5. Winding up the organisation

Engagement with co-op: - Varied and ongoing

1. Directive remits at AGM/SGM
2. Speaking rights at AGM/SGM
3. Access to co-op communications and publications
4. Access to Directors
5. Access to member representatives
6. Invitation to member update meetings
7. Access to member only areas on co-op website
8. Participation in focus groups or local forums
9. Clear complaints procedures on operational or governance issues
10. Information-sharing networks
11. Member/management working parties
12. Cooperative training and education
13. Advocacy
14. Other forms of formal and informal communication through-out the co-op

Improving member participation is the key to a successful, member controlled, member focused cooperative.  It all starts with the constitution. Having a constitution that clearly defines the parameters of how the cooperative operates, how membership is defined and the rights and responsibilities of members is important in setting the framework for a successful cooperative. 

Unlike investor-owned businesses, reciprocal engagement with members is a key component to the success of co-operatives.  Having a Board that works to develop strong member engagement directly with members will strengthen outcomes for members.  There needs to be a clear pathway from the Board to the members and back again.  The use of external PR firms in communicating with members is extremely damaging to this process and actively destroys value for members.

Member control of a co-operative is vastly different from owner control in an investor-owned business.  It needs to be protected through the constitution and actively encouraged by a member-focused Board.  Lack of co-operatively focused professional development training by the Board, the use of outside PR firms to communicate with members, an overly complicated constitution that does not focus on the important issues, and no clear lines of open communication are all warning signs of poor co-operative health.  The use of reciprocal engagement methods that promote strong lines of formal and in-formal communication by the Board and member representatives is one of the key ways of helping members exercise control over their co-operative. Strong member control creates strong outcomes for the co-operative. 

Does the treatment of the Organic suppliers herald the introduction of Farmgate Pricing?

My concerns about the Fonterra decision to axe Organic milk from New Zealand are not so much the decision, but rather the way it was handled, and that this behaviour could this be an ominous preface on how Fonterra could treat other farmers under less cooperatively focused capital structures in the future.

Telling Organic farmers twenty minutes before the national media that their world was about to change can never be argued was genuine consultation.  It was nothing short of tyranny.  Organic farmers are still shareholders, they still have put the same capital in as every other supplier.  This does not bode well for the future of some regional supply groups that may be less profitable to pick-up and process than other regions. 

If Fonterra decides at some time in the future, that it was no longer economical to pick up from a certain region, what will stop them dis-incentivising them from producing.  The Chairman, Henry van der Hayden, has never made any secret of his desire to introduce farm-gate pricing.  He knows this can never happen under the traditional co-operative model, so has spent the entire time at the helm of the Board, trying to actively change the capital structure.  To this end, you will note that every capital structure option put forward has involved a trading platform of some kind.  If you don’t take the thinking that a form of share trading is the best model to transition Fonterra in to an investor owned company, you will concede that any form of share trading will all but remove redemption from the control mechanisms members have over their Board.  By doing this, the Board will be free to treat different groups of farmers as they chose, because although shareholders will still be free to leave, any mass exudes will not be felt on their balance sheet like it has in the past.  Farm-gate pricing will always be in the best financial interests of Fonterra, but not the best interest of all the members.  

The Success and failure of cooperatives

The modern cooperative movement began in Rochdale, England at the end of 1844 as a way for workers to help themselves out of poverty and provide a future for their communities. Since that time, cooperatives have spread throughout the world and continue to promote sustainable economic and social growth. Globally, co-ops have more than 800 million members. They employ in addition 100 million people across more than 130 countries. The estimated economic contribution of the top 300 co-ops globally in 2006 was almost 1 trillion $US. To put this in perspective, this is about equivalent to GDP of the world’s 9th largest economy, Canada.

The top co-ops are some of the most successful large organisations globally, and provide their members with a level of economic and social support they would be unlikely to receive without them. Although cooperatives can be big business players, cooperatives also exist at the other end of the economic scale, acting as the financial lifeline for many third world people struggling to make a living. Regardless of their size, cooperatives play an important part in the world’s economies and support many people. The number of people who are benefitting from cooperatives is significant enough for the United Nations to assert in 1995 that, “Cooperatives contribute directly to improve the standards of living of half the world’s population.”

Cooperative structures vary in size and complexity, but here in New Zealand they are essentially formed by a group of smaller businesses or sole traders who identify a common need they have when operating in a larger market. Private businesses will sometimes come about to meet this same need, usually when an individual identifies this need as an opportunity to make money from others, or when the business community involved is not willing to participate cooperatively. As co-ops are formed to serve members’ needs, cooperatives have to be owned entirely by their members because any profit a cooperative makes is distributed back to its members and their communities, instead of going to outside investors who often have little or no connection to the community the co-op serves.

Regardless of the size or complexity of the cooperative, voting and the election of directors is usually conducted on the basis of one member one vote. This is because it is believed that all members play an important role in the overall success of the business, and therefore are entitled to an equal say. When a single member holds a larger financial investment in the co-op they should engage and communicate actively with the co-op to ensure their needs are addressed; not look to control the co-op with a dominating voting right.

Unlike shares in private business, the value of the membership share is usually fixed. In addition, these shares need to be withdrawable as membership to the cooperative should be voluntary. A successful cooperative should value the importance of membership and be continually responding to members’ desires to become involved in their business. The complexity of some cooperative structures comes about from a need to balance members’ rights to withdraw form the co-op and redeem their membership while providing the cooperative with some longer term capital to offer some financial stability.

As cooperatives are groups of people working together for their collective good, it is important that a strong and clearly defined set of values binds them together in a unified direction. How these values are implemented is up to individual cooperatives, but their existence should be at the bedrock of the organisation and underpin any activity of the cooperative.

The core cooperative values are:
Self-help: working together for a mutual benefit.
Self-responsibility: acting responsibly and playing a full part.
Democracy: where members control the organisation.
Equality: where members have equal rights, and according to their contribution have equal benefits.
Equity: treating people justly and fairly.
Solidarity: supporting each other and other cooperatives.

Cooperatives also hold a strong set of ethical values which should extend through the membership to it employee, suppliers, customers and the wider community. They are:
Honesty
Openness
Social responsibility
Caring for others

Strong cooperative and ethical values have lead to a set of cooperative principles that all cooperatives should hold. These principles flow from the values, the primary motivation of co-ops, and their unique operating structures. Following these values and principles should drive the way cooperatives approach business and if applied properly will promote the health of the cooperative, as well as offering guidance and direction for the cooperative members and its governors.

The seven principles of cooperatives are:
à 1st Principle: Voluntary and open membership
à 2nd Principle: Democratic member control
à 3rd Principle: Member economic participation
à 4th Principle: Autonomy and independence
à 5th Principle: Education, training and information
à 6th Principle: Cooperation among cooperatives
à 7th Principle: Concern for community

These cooperative principles are not only important in guiding the development and growth of cooperatives, they are also important in assessing the soundness of a cooperative and its chances of success. In 1999 Sir Graham Melmoth, the former Chief Executive of the UK Co-operative Group stated that, “Most failed Cooperative Societies over the last twenty years failed not only commercially but democratically as well.” His comments come about because democracy, the second principle, is seen as pivotal to the effectiveness of a cooperative and is the key indicator for assessing cooperative health. Ways of a measuring the vibrancy of the cooperative’s democracy are the voter turn-out, the number of contested elections, the average term length of directors, and how current directors support succession planning and emergent leadership. Are all members able to participate equitably and fairly, and how effectively are the values and principles of the co-op communicated to members, employees, customers and the wider community?

Cooperatives should have a strong value system and set of principles, a complex mission and operating structure, unique governance structures, and a requirement for different leadership skills from traditional private businesses. These unique qualities of a cooperative are there to serve its members and, if harnessed properly, provide a distinct competitive advantage.

Successful cooperatives are those that truly embrace their cooperative difference. They work towards meeting their cooperative and ethical values and strongly adhere to the cooperative principles. By doing this they effectively work for their members, through their members. Successful cooperatives see the importance of a strong and active membership and engage in activities that promote and enhance this. Cooperatives that fail do so because they lose sight of what it is that brings them together. They are unable to clearly see their cooperative competitive advantage and as a result start to act like a clumsy private company. What makes a cooperative fail is simply a failure to be a cooperative.

Effective Cooperative governance

When a member of a cooperative is newly elected to the board, they are taking on a demanding role which will require them to foster and enhance the relationship between the members of the cooperative who own the business and elect the Board that govern the business, and the management who manage the business for its owner members.

To manage this role and be an effective cooperative governor, individual board members have to uphold four duties as part of a code of conduct for directors. They are to undertake:
* a duty to obey the law
* a duty of good faith
* a duty to take care, and
* a duty to maintain the cooperative status of the organisation.

A duty to obey the law means that directors undertake to comply with or ensure the statutory requirements of the various Acts of Parliament imposed on them as directors, and on the business are met.

A duty of good faith is an undertaking to protect the interest of members by working in a manner that is truthful and honest at all times. Good faith ensures confidentiality when individual directors have no legal authority to disclose things that are not already in the public domain. It means always acting in the best interest of the cooperative and not using their position for personal advancement. A duty a good faith also includes working to avoid conflicts of interests and, if they arise, any material conflict of interest should be declared to the board and the members of the co-op.

A duty to take care simply means that each director should give the task their best. This includes reading board papers before meetings, attending meetings, taking advice from the executives and independent advisors, at the same time asking questions of them and challenging them, as well as undertaking ongoing relevant training.

Every board member in addition is responsible for maintaining the cooperative status of the organisation. This includes continuing to provide the goods and/or services that the cooperative was established to provide for its members, and ensuring that the business remains committed to cooperative values and principles.

To achieve a well-constructed cooperative board, the required skills of potential candidates should be clearly articulated to the members of the co-op so that appropriate members come forward for election. Elected board members are not expected to be experts, but rather to actively use and develop the expertise they have.

In following the directors’ code of conduct, board members should also undertake professional development training. It is not sufficient to rely solely on current knowledge and experience if they wish to carry out their responsibilities effectively in a continually changing environment.

Regardless of the skills required on a board, candidates for election to the board of a co-op should always come from its membership. An effectively governed cooperative will identify and articulate the skills required of potential candidates to ensure the right balance of skills and experience sit around the board table. That these governors are elected from the membership base is important as it means the membership is at the centre of a cooperative’s governance and ensures that cooperative principles and values will continually underpin governance.

When a governance board works to uphold cooperative values and principles they should use them to support the development of a strategic framework. This should be a cyclical process that involves setting a vision and strategy for the business. The implementation of the strategy and vision should have clear targets that are clearly communicated to both management and the members.

An effective board monitors the implementation of this plan, gathering feedback and reviewing it. It will learn from the feedback and adjust their vision and strategy to ensure their members’ interests are maintained. This process forms the bedrock of effective cooperative governance.

An effective cooperative board comes from its membership. They will develop a robust strategic framework that grows the cooperative for the mutual benefit of all its members who collectively own the business. They will work to uphold the cooperative values and principles, ensuring the competitive advantage of being a cooperative is maximised and assets remain robust and in trust for future generations.