Should co-operative demutualise?

What are the issues for a co-operative to consider whether or not it should demutualise?

The demutualization of a co-operative is ultimately determined by the members of a co-operative. However, it is the board and management who can critically influence this determination.

The conversion of co-operatives to investor ownership in Australia has been board and management led. This is ironic as the board of a co-operative is elected by the members and has a responsibility to protect co-operative values and principles.

The process of these conversions has invariably ignored or given lip-service to the impact of conversion on consumers, producers, workers and their communities. There has been either no or minimal consideration of the elimination of member control and how this significantly reduces the ability of members to control the terms under which they will buy goods and services.

Co-operatives have external and internal conversion challenges. It is whether and how co-operatives foster and facilitate member loyalty and involvement that critically determines the impact of the conversion challenges. It requires a board, a management and a membership who have an ongoing commitment to co-operative values and principles. A USA study on Strengthening Cooperative Business Structures: Lessons Learned From Demutualization & Cooperative Conversions (E.G. Nadeau and Rod Nilsestuen, 2004) has concluded that a co-operative’s level of commitment to its members and its community, and member awareness of, and trust in, the co-op varies inversely with the likelihood of conversion:

• Members who are aware of their ownership role and are pleased with the services they receive are more loyal to their co-operative.
• Similarly, co-ops that place high priority on service to their communities are less likely to be the target of conversion efforts by outside entities.

In identifying whether or not a co-operative should demutualise, there are key issues about the co-operative practice of a co-operative that should inform this assessment:

Common Values and Principles
Do the members share the co-operative values and principles?

Are these shared with the board and management?

Are the co-operative values and principles the basis for business decision-making processes and decisions?

How important is the co-operative to the members’ economic activity?

What is the level of economic participation by members?

What is the level of political participation by members?

Is the co-operative a member of its State Federation?

Co-operative Education

Are members, directors and workers provided with ongoing co-operative education opportunities?

Does this co-operative education:

- Provide an understanding of co-operative values and principles?

- Develop the skills of members to maintain and increase their active membership?

- Link the common needs of the members with the role of the co-operative?

- Provide a practical understanding of co-operative values and principles in practice?

Member Involvement

Is there a sufficient number of member meetings and are these well-attended by members?

Does the board consult members on the business and strategic directions?

Is this consultation sufficiently informative for and understood by members of the strategic issues and choices including the competitive environment?

How meaningful are the co-operative’s active membership provisions?

Co-operative Governance

Does management and the board work towards understanding and satisfying member expectations?

Does management and the board understand and accept the co-operative structure?

Is the culture of the business based on co-operative values and principles?

Are management and the board accountable and transparent to members about the relationship between business decisions and co-operative values and principles?

Does management and board understand and accept their primary responsibility to members?

The answers to these questions should significantly influence a demutualisation decision. These are the core issues that should determine a demutualisation.

If members do not attend member meetings, then, the co-operative has a problem with member involvement. If a co-operative is under-capitalized and members are unwilling to commit additional capital, then, the economic commitment of members to the co-operative is proportionately weakened.

If a co-operative’s active membership provisions are not based on a primary activity, then, the economic relationship of members to the co-operative is tenuous. An annual membership fee could be evidence of a strong relationship if a magazine or newspaper is a primary activity but its significance dramatically decreases if it is not a primary activity.

If members secure a benefit from using the services of the co-operative, then, this is a practical expression of the economic relationship based on membership of the co-operative. If the same benefit is available to non-members, then, the value of membership is perceived to be and is actually diminished.

The core demutualisation issues are not necessarily recognized, however, as core issues. Instead the common arguments that are advanced for demutualisation are as follows:

• Raising capital for growth and diversification
• Increasing and maximizing the return to shareholders
• Introducing market incentives and disciplines
• Increasing the market value of the business
• Provide greater liquidity of member shares
• Increasing business efficiency and decision-making

This can be seen in the arguments that were made for the demutualization of two agricultural co-operatives in the Australian state of Victoria – the Warrnambool Cheese and Butter Factory and Pivot. Both have converted into investor-owned companies and are listed on the Australian Stock Exchange.

In the notice for the general meeting and the Explanatory Memorandum the Warrnambool Cheese and Butter Factory board provided these arguments for listing on the Australian Stock Exchange:

• Listing will give Shareholders who wish to sell their Shares the benefit of an open and transparent market on which to realise the true market value of their Shares.

• Listing will give others an opportunity to acquire Shares.

• Listing will give the Company greater access to capital markets to fund further growth and development if and when required. This should enable the Company to access more readily opportunities that arise under current rationalisation conditions prevailing in the dairy industry.

The Independent Expert Report prepared for Pivot noted that with the merger there will be a loss of co-operative principles and control but that inter alia:

• Whilst Pivot has been conducting its affairs partly on co-operative principles, it has ceased to pay its members rebates, preferring instead to be competitive in the marketplace and make dividend distributions from available profits.

• Whilst Pivot Investor Shareholders do not have the right to vote, in nearly all other respects they rank equally with Pivot Ordinary Shareholders.

• Pivot's current capital structure may constrain the company's ability to raise additional equity capital in order to be competitive and to fund expansion.

• Pivot, as an unlisted company conducting its affairs partially on co-operative principles, makes it difficult for shareholders to realise the portfolio value of their Pivot shares in a liquid market.

What is common to these arguments is that they do not reflect and reinforce co-operative values and principles. They are intellectually dishonest for they criticize a co-operative for what it is not and expect it to emulate investor-owned businesses when they are an alternative to investor-owned businesses. While the market can provide incentives and disciplines, this is not the point for co-operatives. An investor owned company has an obligation to maximize the return to its investors for this is why they are shareholders – not because they want to use the services or products of a company. In contrast, the primary purpose of a co-operative is service to its member shareholders – the shareholders who own, use and benefit from the co-operative.

It is important to understand what contributes to demutualisation in Australia - a list of these factors. The Australian situation also needs to be compared with the situation of many large co-operatives in Europe - co-operatives that have resisted demutualisation.

ACCORD has reported on the results of the first Australian Social Attitudes Survey managed by the ACSPRI Centre for Social Research in the Research School of Social Sciences at the Australian National University. According to ACCORD when asked if they agreed or disagreed that changing ownership from members to shareholders in organisations such as AMP and NRMA, 49% said it had been a mistake and only 19% said it had not been a mistake.

Nonetheless, there are real capitalization issues for co-operatives and measures are needed to stimulate community and member investment in co-ops and other member-owned organizations. Consideration needs to be given to tax treatment of member-owned businesses and ways of retaining member control while providing flexibility for capital access. An example of this is Capital Credit Units. Legislation has been drafted to enable each State to include CCU’s as part of the fundraising options available to co-operatives. The legislation already exists in the New South Wales Co-operatives Act, subject to some minor amendments required to make it consistent with the draft legislation prepared on behalf of the Co-operatives National Working Party.

David Griffiths
Last updated: 10-Apr-2005 4:40 PM