The value of sitting on a cooperative board

Sunday, 01 September 2019

Lucinda Schmidt

    As cooperative businesses undergo a resurgence, directors need to be alert to the differences in the unique governance model of a democratically controlled organisation.

    When Robyn Kaczmarek was looking for a better way to care for people in their homes, she realised that a worker-owned cooperative was far and away the best model. Successful examples in the US and Britain inspired her to establish The Co-operative Life in 2013, linking disability and aged care support workers with customers in the New England region of northern New South Wales.

    “No-one seemed to know much about cooperatives, back then,” she says, noting it took three years to get the project off the ground. Five years on, and The Co-operative Life has 80 staff looking after 130 customers and is expanding in Sydney and Adelaide. Current turnover is about $3m, which generates a small surplus that is distributed to the co-op’s 35 members annually.

    Kaczmarek was a trailblazer in realising that the centuries-old co-op model of shared ownership could work for social services; now others are joining in. Along with the more traditional agriculture and credit union models (and there are still plenty of them around), the new co-ops are springing up in areas such as renewable energy, taxi networks and digital sharing platforms. Globally, more than 1.2 billion people are members of close to three million cooperatives.

    “Absolutely there’s a co-op resurgence,” says Melina Morrison MAICD, CEO of the Business Council of Co-operatives and Mutuals (BCCM), Australia’s peak body representing more than 2000 member-owned firms, including superannuation funds, motoring organisations, banks and agribusinesses. “Membership is growing across the world and we’re seeing startups responding to new areas of market failure. It’s the ninja economy — hiding in plain sight.”

    She argues there is more to come after recent legislative changes that lay the foundations for federally registered mutuals to unlock capital without putting their mutual status at risk. “Its a sleeping giant of access to capital,” says Morrison. “It basically puts them on a level playing field with listed corporations... they now have the option to go after investment capital.”

    What are the reasons behind this global resurgence? American journalist Nathan Schneider points the finger squarely at the 2008 global financial crisis. In his recent book, Everything for Everyone: The radical tradition that is shaping the next economy, he argues capitalism is no longer serving ordinary people, prompting a search for a democratic alternative to “the robber baron economy” of shareholder profits trumping all else. The answer, Schneider believes, is cooperatives — jointly-owned and democratically controlled — to advance the economic, social and cultural interests of members and the community.

    If that sounds radical, consider the comments by outgoing NAB chairman Ken Henry at the banking Royal Commission in November 2018, on shareholder primacy and the corporate social licence to operate. “The capitalist model is that businesses have no responsibility other than to maximise profits to shareholders,” he said. “In my view, the public tolerance of that model of accountability has been pretty well eroded to zero.”

    Commissioner Hayne expressed a similar view, saying: “In the longer term, the interests of all stakeholders associated with the entity converge… pursuit of the best interests of a financial services entity is a more complicated task than choosing between the interests of shareholders and of customers.”

    art on grain silos

    Governance challenges

    For directors, there’s no doubt that the cooperative model presents some unique challenges. While directors’ duties are very similar to those for corporations, co-op members tend to participate in governance much more directly than typical shareholders and expect a bigger say.

    Tom Nockolds, secretary of Sydney-based clean energy investment group Pingala Co-operative, says this means directors must be very attuned to members’ wishes. “Our main governance issue is to make sure we are keeping our ear to the ground on what members want,” he says. “How do we hear 150 voices, not annually, but on a continuous basis? This is critical to our success and will become more challenging as we grow.”

    Pingala, like many co-ops, sprang from dissatisfaction with the way a particular market was working. In this case, 20 people in Sydney came together as a “citizen-led energy movement” to invest in solar energy projects. The co-op pays to install solar panels for local businesses, then leases the panels to the business on a hire-purchase model over 10 years.

    The first project, in late 2016, was the Young Henrys brewery in Newtown, in Sydney’s Inner West. In October, work began on Pingala’s second project, the 4 Pines Brewing Company in Sydney’s Northern Beaches. Next is a project to put solar panels on the roof of the Sydney Buddhist Centre in Newtown. Each project is primarily funded by employees and the local community, who become members of the cooperative and earn a return of five to eight per cent. “We create new energy business models to place the consumer as the primary beneficiary, not shareholders,” says Nockolds. “Our product is finance for clean energy and through the financing we create a strong link to the local community.”

    With members now numbering about 150, Nockolds says Pingala’s five founding directors stay in touch by email and social media, often using videos to communicate. The AGM, for example, is publicly available on YouTube, under an approach Nockolds describes as “extreme transparency”.

    This focus on listening to members is exactly the same for Australia’s biggest cooperative by turnover, and one of its oldest. Co-operative Bulk Handling (CBH) has annual revenue of $3b–$4b and 4200 members, all grain growers in Western Australia who use CBH to transport and store 90 per cent of the state’s annual grain harvest. It was formed during the 1933 Depression in response to crippling grain-handling costs.

    Membership matters

    “You just cannot take your eyes off the relationship you have with the members,” says CBH director Trent Bartlett FAICD. “They have to be strongly aligned to a shared sense of purpose as to why they should belong.”

    The way members value the organisation will change over time, he says — and directors must keep track of shifts. For example, about seven years ago, CBH introduced patronage rebates for growers in boom years, to offset costs in future years. It also spends about $1.5m each year on regional community investment, such as leadership development programs and sponsoring “black dog” caravans at country football games to raise awareness of depression in the bush.

    Bartlett says it’s not just about listening; directors must also be proactive in educating members about the value the cooperative offers. In 2016, for example, when commodities giant GrainCorp launched a bid to buy CBH and list it on the stock exchange, Bartlett says directors travelled all over WA holding town hall meetings to make sure all members, including “some grumpy growers”, understood CBH’s value as a co-op.

    Unlike typical corporate boards defending a takeover bid, CBH directors couldn’t concentrate their efforts on a handful of large shareholders. “It’s one person, one vote, regardless of how much grain you supply to CBH,” says Bartlett. “You can supply 400 tonnes or 400,000 tonnes, you still get one vote. For a true co-op, this is a key governance principle.”

    Helping the CBH board to keep its finger on the pulse is an advisory council of about 15 growers, representing geographic areas. The board itself consists of nine grower directors, elected by members, and three independent directors who are usually professional company directors with a particular skill needed, such as infrastructure or finance expertise.

    Melina Morrison says this advisory council approach is more common as cooperatives grow and move beyond their founder directors. “The business grows in scale and complexity, but there is the same governance structure of one member, one vote and directors elected directly from the membership,” she says. “The match of skills required and directors elected from the member community can be a challenge.” The answer can be to appoint some independent directors, as long as the member directors are the majority. “You have to have the skills at the board table to run a complex organisation, but also stay true to the cooperative ethos,” she says, adding that an alternative approach is to ensure that management and external consultants have the skills to advise the board.

    The Co-operative Life is moving into this next phase of governance. In 2017, it changed its constitution to add the possibility of two independent directors, in addition to five employee directors. Gradually, the five founder directors will be replaced by other members, and Kaczmarek says 2019 will see a clearer division between the board and management as the co-op restructures into regional self-managed units overseen by an umbrella company for back-office functions.

    Another change is member education. Previously, any staff member could become a member after six months’ work; now they must also complete online modules on worker cooperatives, employee-owned businesses, financial training, participatory decision making and communication. “We want to attract informed members, so the cooperative is for the benefit of members who really put in,” says Kaczmarek.

    Modifying the model

    While The Co-operative Life is a successful example of a typical co-op model applied to a new area — human services — Canadian-based cooperative Stocksy shows how platform technology can create an entirely different type of online co-op, where members are scattered around the world.

    Founded in 2012, Stocksy has 1000 photographer members in 63 countries (including Australia) who supply stock images for use by others for a licence fee. Members are paid 50–75 per cent of the fees plus a patronage return in years where there is a surplus, rather than the standard 15–45 per cent. Margaret Vincent, Stocksy’s VP of governance and legal, says the co-op’s seven member directors work hard to ensure every member has a voice — using a portal, monthly reports on sales and royalties and an open forum for member discussion. Any member can submit an idea for board discussion and any change that affects members’ earnings must be voted on by the members.

    young henrys founder

    “Truly listening to the ideas and concerns of members is incredibly necessary for a true cooperative environment,” she says. “It takes some practice and education to really understand what it means to be a co-owner.”

    Greg Patmore, emeritus professor of business and labour history at the University of Sydney, agrees cooperative directors must have their fingers on the pulse, but says there’s a limit. “You can go too far with the democracy idea,” he warns, noting one large US co-op set up a committee to oversee all its committees.

    Patmore has studied cooperatives since 2004 and is two years into a project charting the development of cooperatives in Australia since 1820. Data on the 993 organisations he’s mapped so far show that the average lifespan is 25 years and that co-ops tend to develop in waves, responding to market failures such as price inflation after WWI.

    As to whether we are at the start of another wave, Patmore says there seems to be an upturn. “The Royal Commission into the banking sector has focused attention on issues arising after some institutions have demutualised,” he says, noting the 1990s trend for some large financial organisations to corporatise, including National Mutual, Colonial Mutual and AMP.

    Their main reason to do so was to improve access to capital markets. Until recently, access to capital for growth has been the major drawback of the cooperative model. Traditionally, the sector has had to rely on retained earnings, rather than issuing securities to raise capital. Borrowing has also been problematic, due to a lack of understanding of the sector by investors, regulators and the public.

    Following a 2016 Senate report and the 2017 Independent Facilitator Review Report on Reforms for Cooperatives, Mutuals and Member-owned Firms by Greg Hammond OAM, the Treasury Laws Amendment (Mutual Reforms) Act 2019 was passed by federal parliament in April 2019 to allow capital raising using a structure similar to preference shares. Under these landmark reforms, mutuals have officially been recognised in the Corporations Act, and will have greater access to capital-raising mechanisms.

    “It’s a game changer that will unshackle the sector,” says Morrison. “People are looking for businesses that genuinely and effectively combine economic efficiency and social purpose. The Royal Commission showed that when trust is broken, customers will vote with their wallets and turn to a trusted alternative.”

    She adds the new legislation will help mutuals grow, but will also require them to toe the line on governance requirements. “We can get more fuel in the tank to go further and faster with this. The sector will have to be on this governance journey so we’re match-fit for this new funding environment.”

    The AICD and the Business Council of Co-operatives and Mutuals are offering the first Foundations of Directorship course specifically for CME directors. 4-6 September.

    Mutual recognition

    Notable co-ops include Rabobank (Netherlands) and Fonterra (NZ), but cooperative arrangements stretch back hundreds of years.

    One of the earliest was the Shore Porters Society, set up in 1498 to care for sick or injured workers in Aberdeen, Scotland. The application of cooperative principles to business organisation began primarily in 19th-century Britain and France as a response to the industrial revolution. In Australia, cooperatives and mutuals have tended to develop in waves in response to socioeconomic issues.

    1840s Friendly societies were the first in the colonial era, pre-dating the welfare system. Australian Unity is one of Australia’s oldest operating mutuals. Westfund began with Vale of Clwydd Lodge miners in NSW Blue Mountains putting pennies aside to help worker families.

    1880s–1890s Farmers organised themselves to cut out the middleman, get their produce into markets in a more affordable way and to bulk buy. The dairy co-op Norco was founded in Byron Bay, NSW, in 1895.

    1900s With the advent of the automobile, turn-of-the-century motoring clubs such as the Royal Automobile Club started as road advocacy groups. RACWA and RACQ were both founded in 1905, and NRMA in 1920.

    1933 The Great Depression spawned the WA grain growers to establish Co-operative Bulk Handling (CBH) when the price of grain was less than the cost of the bag it came in. CBH is now Australia’s biggest mutual, 100 per cent-owned by 4200-plus wheat farmers, with revenue of $4b.

    1950s–1970s Credit unions and peer-to-peer funding models for housing became popular.

    1985–2000 Changes in legislation gave rise to a wave of demutualisation of life insurers — Colonial Mutual, AMP, National Mutual, St George Building Society — and the Australian Stock Exchange in 1998. The RBA estimated a total net worth of $21b, controlling assets of $180b.

    1990s The arrival of compulsory super sparked the rise of for-member profit industry — including First State Super and Australian Super.

    2010 Demutualisation of many health insurers, including NIB, MBF and Manchester Unity. Workers in care and service industries form worker co-ops, including The Co-operative Life.

    2019 Treasury Laws Amendment (Mutual Reforms) Act 2019 introduces a legal definition for mutual entities and It has created new “mutual capital instruments” to help existing CMEs grow and innovate.

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