accommodating two worlds in one organisation: changing board models in agricultural cooperatives

MANAGERIAL AND DECISION ECONOMICS

Manage. Decis. Econ. 34: 204–217 (2013)

Published online 17 December 2012 in Wiley Online Library

Accommodating Two Worlds in OneOrganisation: Changing Board Models in

Agricultural CooperativesJos Bijmana,*, George Hendrikseb and Aswin van Oijenc

aManagement Studies Group, Wageningen University, Wageningen, The NetherlandsbRotterdam School of Management Erasmus University, Rotterdam, The Netherlands

cTilburg University, Tilburg, The Netherlands

(wileyonlinelibrary.com) DOI: 10.1002/mde.2584

*CorrespondenGroup, HollaE-mail: jos.b

Copyright ©

While most economic organisation literature on cooperatives has focused on changes inincome rights, we study changes in the allocation of decision rights between board of directors(representing members) and managers. The traditional role of the board is to direct theactivities of the managers. However, professional management increasingly makes moststrategic decisions, pushing the board into a supervisory role. We present two groups offindings on changing board–management relationships. We identify three corporategovernance models: traditional, management and corporation. And we present an empiricalillustration showing a relationship between the choice of board model, and product portfolioand performance. Copyright © 2012 John Wiley & Sons, Ltd.

1. INTRODUCTION

The allocation of decision right between the board ofdirectors (BoD) and the professional management isone of the classic issues in the debate on corporategovernance of cooperatives (Cornforth, 2004). Overthe last decade, directors of agricultural cooperativeshave increasingly questioned the appropriateness oftheir corporate governance structure. This debate hasbeen fuelled by three developments. One is the moregeneral trend among businesses to strengthen theiraccountability and transparency towards shareholdersand other stakeholders. Responding to cases of fraudamong stock-listed companies (such as Enron andWorldCom in the USA, and Parmalat and Ahold inEurope), regulatory agencies have developed new

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2012 John Wiley & Sons, Ltd.

corporate governance rules, and business associationshave introduced stricter codes of conduct. This devel-opment has also encouraged directors of cooperativesto start discussing good corporate governance.

The second development that triggered the debateon cooperative governance was the changes in theagrifood markets and the necessary responses fromcooperatives (Bijman and Hendrikse, 2003). Over thelast decades, the market for agrifood products hasbecome more competitive as a result of reduced marketprotection in the countries of the EU as well as intransition countries. Cooperatives are no longersheltered from competitive pressures and respond withnew strategies for growth, diversification and innova-tion (Kyriakopoulos et al., 2004; Harte and O’Connell,2007). Here, the discussion has been focussed onwhether traditional governance structures enablestrategic reorientation, in particular whether traditionaldecision-making structures allow the cooperative tobecome more market oriented. As a cooperative is a

CHANGING BOARD MODELS IN AGRICULTURAL COOPERATIVES 205

user-oriented organisation (Barton, 1989), the ques-tion has been raised whether a shift in corporategovernance structure is a prerequisite for the organi-sation to become truly customer oriented (Beverlandand Lindgreen, 2007).

One of the main topics in this academic debate on therelationship between governance structure and strategyfocussed on the difficulty for agricultural cooperativesto find additional equity capital needed for the newgrowth strategies. Because of the so-called vaguelydefined property rights (Cook, 1995) and the resultingnegative effect on member incentives to invest in thecooperative, cooperatives are assumed to encounterdifficulties in attracting more equity capital from theirmembers. As a solution, cooperatives have developedinnovative ownership structures, including invitingnon-members to invest in the cooperative or its subsidi-aries (Nilsson, 1999; Chaddad and Cook, 2004).

The third development that promoted a discussionamong cooperative scholars and practitioners aboutgood cooperative governance relates to the impact ofgrowth strategies on the effectiveness of board controlover the management. According to agency theory(Jensen and Meckling, 1976), one of the main functionsof the board (as principal) is to make sure that the man-agement (as agent) takes decisions that are in the interestof the owners of the company. Insufficient monitoringand control provides room for decisions by managersthat are not in the interest of the owners or, in the caseof a cooperative, not in the interest of the members.Bijman (2005) has shown that the combination of highcomplexity in the cooperative firmwith a heterogeneousmembership leads to paralysis in the board and thus to ade facto shift of decision-making power from the boardto the managers. However, where agency theory startsfrom the premise of conflicting interests and seekssolutions in designing mechanisms that align interests,stewardship theory (Muth and Donaldson, 1998)emphasises the shared interests between board andmanagement in promoting organisational performance.Thus, from a practical point of view, the discussion isnot just about organising effective control but alsoin obtaining a good balance between control on theone hand and empowerment of the managers on theother hand.

Boards of cooperatives may respond to the need forstrategic reorientation by delegating more decisionrights to the managers, either within existing gover-nance structures or within formally changed governancestructures (Hendrikse, 2005; Kalogeras et al., 2007).These new structures entail a transfer of decision rightsfrom the board to the professional management.

Copyright © 2012 John Wiley & Sons, Ltd.

Accommodating the world of farmers and the world ofprofessional managers in one corporate governancestructure is the challenging task of the BoD.

Our paper has been motivated both by practical andtheoretical considerations. First, although severalauthors have discussed potential changes in cooperativegovernance structure, few studies provide empiricalevidence. We present and discuss shifts in corporategovernance in Dutch agricultural cooperatives. Second,by investigating the causes and effects of the changes incooperative governance, we seek to develop a typologyof board structures. Such a typology could be used bycooperative directors that pursue, in the light ofenhanced competitive pressure, a new balance betweencontrol and support. Third, as cooperatives are organisa-tions with an economic objective, a change ingovernance structure is expected to eventually lead toimproved performance. Our paper presents empiricalresults regarding the relationship between board model,and product portfolio and performance of agriculturalcooperatives.

The fourth motivation of our paper results fromorganisational change literature, which suggests thata change in formal structure may be needed in orderto obtain a necessary change in organisational culture(Zenger et al., 2002; Lazzarini et al., 2004). This issuemay be particularly relevant for cooperatives thatare changing from a producer-oriented to a customer-oriented strategy. Cook (1994, p. 46) claims that theinherent features of cooperatives ‘lay the groundworkfor a conservative, defensive, operation-orientedcorporate culture, one that is almost anti-offensive’.However, he does realise that some cooperatives havebeen able to overcome this limitation and ‘have beenaggressively innovative and expansion oriented’. Oneway to account for these differences in performanceis to consider differences in structure. Strengtheningof customer orientation has been claimed to beessential for the success of marketing cooperatives(Bijman, 2010).

We contribute to the literature on cooperativegovernance in at least three ways. First, we provideempirical evidence of recent changes in corporategovernance structures of agricultural cooperatives.Such an overview has not been published before.Second, we provide a typology of board models. Thistypology can be used to explore changes in coopera-tive governance in other parts of the world. Third,we contribute to the literature on ownership structureof agricultural cooperatives. Where other authors havemainly focussed on changes in residual income rights,we focus on changes in decision rights.

Manage. Decis. Econ. 34: 204–217 (2013)DOI: 10.1002/mde

J. BIJMAN ET AL.206

The paper is structured as follows. In Section 2, wepresent the key characteristics of the governance ofcooperatives and compare this with the governanceof investor-owned firms (IOFs). In Section 3, wepresent the results of a qualitative study on new corpo-rate governance models in Dutch agricultural coopera-tives. In Section 4, we formulate propositions regardingthe relationship between board model,1 and productdiversification and performance. In Section 5, wepresent the results of a quantitative investigation ofcooperative corporate governance models, diversifica-tion and performance of cooperatives. Section 6concludes with several observations and discussion.

2. CORPORATE GOVERNANCEIN COOPERATIVES

The formal governance of a cooperative reflects itsmain purpose, that is, serving member interests. Tradi-tionally, the BoD of the cooperative, democraticallychosen by and from the membership, has been themain body governing the activities and investmentsof the cooperative firm. In small cooperatives, theBoD also carries out the operational management.However, as the cooperative grows in scale and scope,professionals are hired to manage the cooperative.2 Asa result, cooperatives apply the classical division oflabour (Fama and Jensen, 1983) between decisioncontrol (i.e. ratification and monitoring) and decisionmanagement (such as initiation and implementation).The BoD takes care of decision control, whereasprofessional managers are responsible for decisionmanagement.

Unlike the classical stock-listed firm, where theboard represents owners who are mainly investors,the board of an agricultural cooperative consists ofand represents farmers who are entrepreneurs them-selves. The members have their own farming businessand evaluate the strategies of the cooperative from theperspective of their individual farming interests. Themanagers are entrepreneurs who seek the developmentof the cooperative firm, follow personal careerambitions that include non-cooperative positions, havetheir own peer group and compare the performanceof ‘their’ firm with non-cooperative competitors. Itis a key task of the BoD to accommodate thesetwo worlds.

We define a governance structure as an organisa-tional design that incorporates systems of decisionmaking, operational control and incentives (Yin andZajac, 2004). In other words, the governance structure


of an organisation defines who is in control, whoseinterests are represented and who receives benefitsfrom the organisation. A standard way of defining agovernance structure is to distinguish decision rightsand income rights (Hansmann, 1996). Decision rightsspecify who may take decisions on the strategies andpolicies of the organisation, as well as on the use ofassets and thereby on the employment of peopleworking with these assets. Decision rights include theallocation of authority (delegation and centralisation),decision control (ratification and monitoring), decisionmanagement (initiation and implementation), taskdesign, conflict resolution and choosing enforcementmechanisms. Income rights are rights to the (monetary)benefits and costs resulting from the activities of theorganisation. Income rights are reflected in the composi-tion of cost and payment schemes, thereby creating theincentive system. Examples of income rights incooperatives are direct and indirect benefits of patron-age, cost and benefit allocation schemes such as poolingarrangements, and the compensation package of themembers of the management team.

The corporate governance structure of cooperativesis often compared with that of IOFs (Hendrikse andVeerman, 1997; Hendrikse, 2007). The classical per-spective evaluating different corporate governancestructures is that of principal–agent theory (Shleiferand Vishny, 1997; Tirole, 2001). Because of a separa-tion of ownership and control, an agency relationshipexists between the principal (investor, owner andoutsider) and the agent (manager, entrepreneur andinsider). The agency relationship is characterised byasymmetric information and potential conflicting inter-ests, which may then lead to the problems of adverseselection and moral hazard. The corporate governancestructure should reduce these problems.

Although the agency situation in cooperativesseems similar to the one in IOFs, with the BoD as prin-cipal and the professional manager as agent, there aresome fundamental differences. First, members have adouble set of income rights in the cooperative: asusers, they benefit from patronising the cooperative,and as owners, they provide equity capital and receivea return on investment. Traditionally, the latter hasbeen subordinated to the former, but with the need ofsome cooperatives to obtain additional equity capitalfor strengthening its market orientation, the financialrelationship between member and cooperative hasbeen reinforced (Chaddad and Cook, 2004).

Second, members formally participate in thedecision-making process of the cooperative. As theBoD consists of members and is elected by the General



Assembly (GA) of members, the latter have moreinfluence on company strategy than investors in anIOF (Hendrikse, 1998).

Third, where owners of an IOF usually haveuniform interests, namely to obtain high return oninvestment, members of a cooperative may be heteroge-neous in their interests. Heterogeneity among (board)members may have serious impact on the efficacy ofthe cooperative, as it leads to mistrust and deadlocksin decision making (Hansmann, 1996).

Fourth, cooperatives lack external mechanisms fordisciplining the management (Staatz, 1987; Trechteret al., 1997). Unlike stock-listed companies that arescrutinised by the financial media (on behalf of currentand potential shareholders), there is no external finan-cial assessment of the performance of the cooperative(and therefore of its management). This implies thatthe task of performance evaluation mainly lies withthe members and their representatives in the BoD.

Agency theory captures prominently the advantagesof delegating decision making by having a principalassigning a task, or multiple tasks, to an agent.However, this delegation is not without problems. Thekey issue is asymmetric information between principaland agent, in our case between BoD and professionalmanagement. Although the board may have formalauthority, the real authority lies with the managementbecause of its superior knowledge of both the firm andthe competitive environment. When the board does nothold real authority, delegating formal authority maybring economic benefits. Aghion and Tirole (1997)suggested that ‘the delegation of formal authority to asubordinate will both facilitate the agent’s participationin the organization and foster his incentives to acquirerelevant information about the corresponding activities’.However, delegation involves a costly loss of control forthe principal. As a result of this trade-off, formalauthority will not be delegated for all decisions. Aghionand Tirole (1997) found that formal authority is morelikely to be delegated for decisions that are sufficientlyinnovative that the principal has not accumulatedsubstantial prior expertise or competencies.

3. CORPORATE GOVERNANCE MODELS INDUTCH AGRICULTURAL COOPERATIVES

The Netherlands has about 215 agricultural coopera-tives, most of them very small or dormant. Some 40are members of the Netherlands Cooperative Councilfor Agriculture and Horticulture, representing morethan 90% of the 140 000 farmer members and the


€32bn turnover of the 215 cooperatives. Of these 40cooperatives, we were able to collect data for the top33 (in size). In our sample, the differences in sizeand membership are substantial. In 2006, the largestcooperative had a turnover of €4.6bn, whereas thesmallest had a turnover of only €34m (Table 1);membership ranges from 60 to 27 470.

Data on the corporate governance models of Dutchagricultural cooperatives have been collected byseveral means following to a stepwise approach. Instep 1, general information on changes in cooperativecorporate governance has been collected throughliterature study. In step 2, the findings from literaturehave been discussed in personal interviews with sixDutch experts on cooperatives.3 Together steps 1 and2 resulted in an overview of the main shifts in corporategovernance among Dutch agricultural cooperatives andin the development of a typology of board models. Instep 3, semi-structured interviews have been held withthe chairman of the BoD of eight different cooperativesas well as with managers of six different Dutch agricul-tural cooperatives. The objective of these interviewswas to obtain personal experiences with particular(changes in) forms of cooperative corporate gover-nance. All interviews were held in 2006. In step 4,company documents and websites have been studiedto find out what corporate governance model the 33largest agricultural cooperatives in the Netherlandsapplied in 2006 (Table 1). Finally, in step 5, the resultsof this 2006 survey were used for a more quantitativeanalysis of the performance effects (refer to Section 6for more details on this step).

In this section, we present our typology of boardmodels. We start with a description of the traditionalboard model. We then follow with a discussion ofthe main changes in cooperative governance that wehave found among Dutch agricultural cooperativesover the last two decades. Finally, we present thetwo non-traditional board models that can be foundin Dutch practice.

3.1. The Traditional Model

The traditional corporate governance model amongDutch agricultural cooperatives has existed for morethan a century, ever since enactment of the first lawon cooperatives in 1876. Under Dutch cooperativelaw, a cooperative is both an association and a firm.More specifically, in Dutch law, a cooperative isdefined as a firm that performs economic functionsto the benefit of the members and that has the legalstatus of an association (Galle, 2010). All requirements


Table 1. Board Models of the 33 Largest Agricultural Cooperatives in the Netherlands (2006)

Name Main productTurnover 2006,

EuroTraditionalmodel

Managementmodel

Corporationmodel

1 Friesland Foods Dairy 4675 0 0 12 Campina Dairy 3624 0 0 13 FloraHolland Flowers 2136 1 0 04 Aalsmeer Flowers 1756 1 0 05 Cosun Sugar 1469 1 0 06 The Greenery Vegetables 1448 0 0 17 Cehave

LandbouwbelangFeed 664 0 1 0

8 AVEBE Potato starch 634 0 1 09 Agrifirm Feed 576 0 0 110 Cebeco Group Poultry 556 1 0 011 DOC Kaas Dairy 358 0 1 012 CNB Flower bulbs 327 1 0 013 FresQ Vegetables 317 1 0 014 FromFarmers Feed 313 0 1 015 Fruitmasters Fruit 265 1 0 016 ZON Vegetables 237 0 0 117 CZAV Inputs for arable farming 214 0 1 018 Agrico Seed potatoes 200 0 1 019 CNC Mushrooms 186 0 1 020 VDT Vegetables 155 1 0 021 Rijnvallei Feed 150 0 0 122 Horticoop Inputs for horticulture 144 1 0 023 CONO Dairy 133 1 0 024 CR Delta Cattle breeding 125 0 0 125 Boerenbond Deurne Inputs 116 1 0 026 BGB Vegetables 99 1 0 027 Pigture Group Pig breeding 85 0 0 128 Rouveen Dairy 65 1 0 029 Nedato Potato 63 0 0 130 Boerenbond

YsselsteynFeed/inputs 59 1 0 0

31 VON Flowers 57 0 0 132 Arkervaart-Twente Feed 44 1 0 033 AB Limburg Employment 34 0 1 0

Total 15 8 10

J. BIJMAN ET AL.208

as to the governance of associations also apply to coop-eratives. All associations have two governing bodies: aGA and a BoD. A third governing body, the SupervisoryCommittee (SC), is not compulsory for associations butcommon among cooperatives, and it is even legallyrequired for large cooperatives.4 Although traditionallythe executive function was carried out by the Directorsthemselves (and still is in small cooperatives), mostcooperatives in the Netherlands nowadays have one ormore professional managers who are actually managingthe daily operations of the cooperative. Thus,most coop-eratives have a fourth governing body, the professionalboard of management. Let us briefly describe the tasksand responsibilities of these four governing bodies asthey prevail in Dutch agricultural cooperatives.

The GA consists of all members of the cooperative.Within the GA, each member has at least one vote, butmost cooperatives apply some kind of proportional


voting rights (Van der Sangen, 2010). Voting in theGA is used to make decisions on the appointment ofthe members of the BoD, on the selection of themembers of the SC and on major issues such as termi-nating the cooperative, mergers of the cooperative andchanging of the by-laws. The GA also has the right to(dis)approve the annual financial report. The controlfunction of the GA is mainly carried out ex post.

The BoD is the main decision-making body; itinitiates, develops and decides upon the strategies andpolicies of the cooperative. The BoD, as the fiduciaryagent of the members, has the formal authority and legalresponsibility to act in the best interests of the members.According to Dutch association law, the BoD canconsist of one person, but it is more common to haveseveral directors. Traditionally, the BoD consists ofmembers of the cooperative, but it is allowed, underassociation law, that the BoD partially or fully consists


Board of Directors Supervisory Committee

Management

General Assembly

Appointment and Control

Election and Appointment

Control

Appointment

Figure 1. The traditional model of cooperative corporategovernance.


of persons that are not members of the cooperative. Themembers of the BoD are elected and appointed by theGA, and the BoD has to report back to the GA.The BoD appoints the professional managers of thecooperative. An important function of the BoD iscontrol of the management. Even in the situation wherethe cooperative has a professional management board,the BoD continues to be, according to the law, the maingoverning body. Decisions of the BoD are takencollectively, and responsibilities and liabilities are bornecollectively.

The SC is responsible for controlling the activitiesand decisions of the BoD. This control function isperformed ex ante. As there is no legal obligation forassociations and small cooperatives to have an SC,the exact tasks and responsibilities of the SC are deter-mined in the by-laws of the individual cooperatives.The SC is appointed by the GA. Traditionally, theSC consists of members of the cooperative. Since1989, when changes in corporation law were intro-duced, cooperatives that have more than €16m equitycapital, that have a compulsory employee council andthat have more than 100 employees are legallyrequired, just like IOFs that have these size character-istics, to have a Board of Commissioners (BoC) assupervisory body (Galle, 2010). The legal responsibilityof the BoC is to look after not only the interests of onegroup of stakeholders (such as the members) but alsothe interests of the company as a whole. Specific BoDdecisions require ex ante approval by the BoC, and theemployee council has the right to (dis)approve newmembers of the BoC.

Traditionally, the role of the professional managershas been just to carry out what the BoD had decided.However, as cooperatives have grown in size andcomplexity, the management has taken over some ofthe decision-making functions of the BoD. Using theterminology of Fama and Jensen (1983), largecooperatives now have a separation of decisionmanagement and decision control. Thus, while theBoD continues to be responsible for decision control(i.e. ratification and monitoring), the professionalmanagement has acquired the responsibility for deci-sion management (i.e. initiation and implementation).The professional managers (such as CEO and CFO)are appointed by the BoD, often after consultationwith the SC.

The combination of these traditional elementsof composition and function of the governing bodiesof the cooperative leads to our first model ofcooperative corporate governance, the traditionalmodel (Figure 1).


3.2. Changes in Cooperative Governance

Over the last 20 years, there have been significantchanges in the corporate governance of agriculturalcooperatives in the Netherlands. These changes havebeen described mainly by legal scholars (Galle, 1993;Galle and Van der Sangen, 1999; Van der Sangen, 2001;Galle, 2010). Most of these changes affect the role ofthe BoD, particularly the relationship between theBoD and the management. Also, the role of the SChas been altered. The following organisational changeshave been identified. First, all of the large cooperativesnow have introduced a legal separation between thecooperative association and the cooperative firm. Assetsare placed in the cooperative firm, which has obtainedthe legal form of Besloten Vennootschap (similar toLtd in the UK) or Naamloze Vennootschap (similar toPlc. in the UK). This change implies that the dualstructure of the cooperative – being both an associationand the firm – has been formalised by the legal separa-tion. Important reasons for cooperatives to introducethis legal separation are the reduction of the liabilitiesfor the cooperative and the granting of more autonomyto the professional managers (Van der Sangen, 2001).

The second change relates to the composition of theBoD. Should the BoD consist of only members of thecooperative, or can outside experts join the BoD?Outside experts may bring along special knowledge,for instance, about finance or marketing, which thefarmers in the board may not have. Moreover, outsideexperts may themselves have experience in leading alarge company, thus bringing additional managementexpertise into the BoD. An issue often discussedwithin cooperatives is whether the manager(s) shouldbe part of the BoD (which is allowed under Dutchassociation law). If the answer is yes, the board wouldresemble the one-tier board model of corporate firmsthat can be found in many countries but is notcommon in the Netherlands. The most extreme optionis that the BoD consists of only professional managers,


General Assembly / Member Council

Supervisory Committee / BoC

Board of Directors =

Management

Figure 2. The management model of cooperative corporategovernance.

J. BIJMAN ET AL.210

which implies that there are no longer farmer membersparticipating in the BoD. In our sample, 12 of 33 hadoutside experts in their BoD; 8 of these 12 have aBoD consisting of only professional managers (nomembers of the cooperative).

The third change relates to the main function of theBoD. Although traditionally the BoD is the maindecision-making body of the cooperative, with themanagement mainly for executing the decisions takenby the BoD, nowadays, most of the expertise and thusthe real authority lies with the professional manage-ment. The function of the BoD may shift towards amore supervisory role.

Changes in the role and structure of the BoD oftenalso lead to changes in the function and compositionof the SC (Dortmond, 1999). Thus, the fourth changein corporate governance structure of the cooperativedeals with the main function of the SC. Whencooperatives have reached a particular size, the SCbecomes a BoC, with the legal task of controlling themanagement of the cooperative firm. However, inthese large cooperatives, the BoD itself has shiftedtowards a supervisory role. The result is a situationof double control of the management, both by theBoD and by the BoC. Several cooperatives havesolved this issue of double supervision by makingthe BoD and the BoC consisting of the same persons(a so-called personal union). In these cases, themembers of the BoD of the cooperative association arealso the members of the BoC of the cooperative firm.

The fifth change relates to the composition of theBoC/SC. Similar to the changes in composition of theBoD, a cooperative can also decide to have both mem-bers and outside experts in the SC. Van Dijk (2006)found that 26 of the 40 largest cooperatives had outsideexperts in the BoC/SC. Most of these experts (28%)had themselves experience as manager of a large com-pany; 18% had experience as financial manager. Otherfields of expertise were human resource management,marketing, retail, academia and politics. Incorporationof external experts in the BoD and the BoC/SC hasbeen considered as a trend towards more professional-ism in the governance of the cooperative.

The sixth change relates to the implementation of aMember Council (MC). Such council has taken overmost of the legal obligations of the GA. The MCconsists of members of the cooperative and is appointedby the GA. In large cooperatives, members are usuallyorganised in geographical districts. The chairman ofthe district board, who is elected by all members of thedistrict, becomes a member of the MC. Reasons forestablishing an MC are the need felt by the BoD to


bridge the gap between BoD and the membership andto have a group of committed members from whichfuture board members can be selected. Although thismay not imply a change in the relationship betweenboard and management – the key issue of corporategovernance – it may affect the influence and therebythe commitment of individual members.

All of these changes among Dutch agriculturalcooperatives have led to the rise of two new cooperativegovernance models (or board models): the managementmodel and the corporation model. Of the 33 coopera-tives, 15 still adhere to the traditional model, 8 applythe management model, and 10 have chosen to applythe corporation model. We will now describe thefeatures of these new models, particularly thosecharacteristics that distinguish them from the traditionalmodel.

3.3. The Management Model

Figure 2 presents the management model of cooperativecorporate governance. The main characteristic of thismodel is that the management board (consisting ofprofessional managers) is also the BoD of the coopera-tive. This model implies that the BoD no longer consistsof members of the cooperative. In the professionalliterature as well as in the interviews with directorsand managers, at least three advantages of this modelhave been frequently mentioned: there is no longer aproblem of double supervision (by both the BoD andthe SC) over the management; the BoD has becomeprofessional and is fully devoted to directing the firm;and the management board has obtained more auton-omy, which provides an opportunity for strengtheningmanagerial entrepreneurship in the cooperative firm.The disadvantages mentioned were the lack of astructure for ex ante evaluation of managementdecisions on member interests, the lack of a clear



distinction between the responsibilities of the BoD andthe management and a lack of member influence onthe decisions of directors/managers.5

3.4. The Corporation Model

Figure 3 presents the corporation model of cooperativecorporate governance. This model can only be appliedby cooperatives that have a legal separation betweenthe cooperative association and the cooperative firm,where the association is the full owner of the firm.The main characteristic of the corporation model isthat the directors of the association are also membersof the SC/BoC of the firm (i.e. there is a personalunion between these two governing bodies). Often,the BoD consists of only members of the cooperative,whereas the SC/BoC also consists of a number of out-side experts. This model implies that there is not aseparate supervisory committee at the level of theassociation.

The following advantages of this model werementioned in the interviews with board members andmanagers: no double supervision of the management,more autonomy for the management, one body thatattends to the interests of members and firm, and anSC that directly controls the management of the firm.One disadvantage mentioned is that, although thepersonal union between BoD and BoC combinesseveral responsibilities and therefore has to find acompromise between various interests, in practice,the members of these boards may clearly favour oneinterest from the other (e.g. they may favour firminterests over member interests). Another disadvantage

Management

Board of Directors =

Supervisory Committee / BoC

General Assembly / Member Council

Figure 3. The corporation model of cooperative corporategovernance.


is the absence of a supervisory committee at theassociation level. This problem can be partly solved byestablishing an MC, which then can perform thefunction of controlling the BoD/BoC.

4. PROPOSITIONS ON THE IMPACT OFCORPORATE GOVERNANCE MODEL

Having identified the different cooperative governancemodels, we are interested in studying the impact ofthese different models on the product diversificationand the performance of the cooperative. For this task,we have formulated three propositions.

The first proposition presents a benchmark. Corpo-rate governance structure may not matter at all. Forexample, LeVay (1983, p. 5) states ‘(. . .) whateverthe formal basis of association, cooperatives maybehave no differently from other types of enterprise’.A motivation is provided by the relational contractingline of reasoning (Baker et al., 1999; Hendrikse,2007). If the involved parties agree on a certain courseof action in an informal, self-enforcing way, then theformal aspect of the relationship does not affect thedistribution of bargaining power. The incentive toinvest in particular projects is assumed to be identicalunder every governance structure. This argumentresults in proposition 0:

P0Board model has no effect on product portfolio orperformance.

The next two propositions specify the impact of thecorporate governance model on product portfolio andperformance. We have identified three theoreticalperspectives that relate to the aforementioned descrip-tion of board models. We distinguish a legal perspec-tive, an agency/managerial power perspective and anagenda setting perspective.

Cooperatives embody various objectives because ofmember heterogeneity (Hansmann, 1996; Hart andMoore, 1996). For example, older members who haveinvested in their cooperative during many years ofmembership measure good performance by the amountof patronage refunds not retained, whereas youngmembers may be interested in having the cooperativefirm build strong market positions.6 The idea is thatdiversification in the cooperative firm can createconflicts of interest between different classes of mem-bers because somemembers benefit from diversificationand others do not (or are even harmed by it). Anappropriate legal structure can reduce the losses from


J. BIJMAN ET AL.212

diversification that some members would otherwisebear and therefore facilitate diversification in newdirections. Another aspect of the legal separationbetween the association of members and the cooperativefirm is that it provides a commitment of the membersnot to interfere too much with the daily decisions ofthe management. Finally, it may also facilitate thedistribution of rents over the various classes of members.

When companies become large and diversified, goodtop managers may be difficult to find. Those that havethe capabilities to run a complex company can negotiatelow interference from the BoD (Adams et al., 2010).Giving managers more autonomy is in line withstandard economic organisation theory’s prediction thatdecision rights should be allocated to those actorsthat have the knowledge to make those decisions (e.g.Aghion and Tirole, 1997). Having such autonomy isan important element of the intrinsic rewards that topmanagers prefer as incentive for their effort. Thus, wemay expect that when cooperatives become larger, moreinternational and more diversified, the main function ofthe board will shift from directing to supervising. Forthe corporation model of cooperative corporategovernance, this means that real authority resides withthe managers, whereas formal authority stays with themembers (Baker et al., 1999). In other words, membershave delegated decision rights to the managers.

Managers have different objective functions, but itis expected that there will be increased attention andsensitivity to final product markets because of theconcern of managers for their reputation in the marketfor managers (Bebchuk and Fried, 2003). Managersmay even prefer to diversify into activities for personalmotives, such as a reduction of employment risk, thatreduce the value of the firm (Montgomery, 1982).Notice that the diversification choices of managersare most likely to be different from those of members.Members have, as owners of the cooperative, a stakein the future profitability of the cooperative, but theyare also interested in obtaining a better price for theproducts they deliver to the cooperative firm. If theyhave to choose between an investment in expandingan existing plant, thereby increasing economies ofscale, and an investment in a new venture, they mostlikely favour the first option.

One way to distinguish the three board models iswith respect to the identity of the party having autonomyover the strategies and policies of the cooperative firm.More decision-making rights are transferred fromthe BoD to the management when moving from thetraditional model, to the corporation model and to themanagement model. We expect that a shift in decision


rights has implications for diversification because theparty determining the agenda of decisions determinesto a large extent the outcome of the decision process(McKelvey, 1976). The aforementioned arguments leadto proposition 1:

P1aCooperatives with a traditional board model are leastdiversified in their product portfolio.

P1bCooperatives with a management board model aremost diversified in their product portfolio.

Our final proposition concerns the influence of theboard on the financial performance of the firm.Enterprises perform well financially when they areinternally coherent; that is, various organisationalattributes of the enterprise are aligned (Holmström andMilgrom, 1994). One of these attributes is the boardmodel. Recall that an IOF is designed to bring theenterprise to maximum profits, whereas a cooperativeis committed to the interests of the members as usersof the cooperative firm’s services. Applying this logicto the three board models, it is expected that thetraditional board model has the best financialperformance because of its strong focus on members.The corporation model is expected to have the worstfinancial performance because it tries to serve bothmember (as supplier) interests and customer interests.Because the organisational structure required for thetwo tasks is different, it is expected that a firm pursuingboth supplier and customer interests will experiencetensions. We summarise this argument in proposition 2:

P2aCooperatives with a traditional board model have thebest financial performance.

P2bCooperatives with a corporation board model have theworst financial performance.

5. EMPIRICAL ILLUSTRATION

In this section, we provide a practical illustration ofour propositions. We first describe the companies thatwe investigated and the information source that weused. Next, we explain the information that wegathered on each company. Finally, we show the mainfindings of our investigation.



5.1. Companies and Data Collection

In Section 3, we explained how we identified thegovernance models of the largest agricultural coopera-tives in the Netherlands. We were able to obtain mostof the required information for 33 cooperatives: 15had a traditional model, 8 had a management modeland the remaining 10 had a corporation model. As infor-mation source, we used REACH, which is an electronicdatabase with financial information on over 1.7 millionDutch companies.7 All information refers to 2006.

5.2. Information on the Companies

We used two types of information, one involving prod-uct diversification and the other financial performance.

To approach product diversification, we appliedunweighted product-count measures. Unweightedproduct-count measures are reliable and easy to com-pute, and they have low information requirements(Montgomery, 1982). Weighted measures are morerefined, but the breakdown of sales that is necessary tocalculate the weights was not available for most of thecooperatives in our sample. Besides, Lubatkin et al.(1993) find a strong correspondence between product-count measures and Rumelt’s (1974) categorical mea-sures, which supports the validity of product-countmeasures.

To be more precise, we applied a variant of theentropy measure of diversification, with the salesweights set at one for each activity. One advantageof the entropy measure is that firms that are notdiversified receive the score zero, which facilitatesthe interpretation. Another, more important advantageis that the entropy measure can be broken down intoan unrelated component and a related component(Palepu, 1985). Accordingly, we made a distinctionbetween total diversification, unrelated diversificationand related diversification. Total diversification refersto the number of different four-digit industry codes

Table 2. Means of the Board Models

N Traditional model

Total diversification 15 0.60Unrelated diversification 15 0.40Related diversification 15 0.20Return on total assets 9 23.98Return on equity 9 47.42Asset growth 15 2.00Sales growth 12 �0.78Employee growth 11 �6.75

N varies for the traditional and the management model because not all


of a company. Unrelated diversification is associatedwith the number of different two-digit industry codesof a company. Related diversification involves four-digit industry codes with identical first two digits butdifferent final two digits (e.g. Palepu, 1985).

For financial performance, we adopted accounting-based measures. Market-based measures, such as themarket-to-book ratio and Tobin’s q, are not availablefor cooperatives. Also, accounting-based measureshave a close connection to the decision variablescontrolled by managers. Our measures can be dividedinto two categories: return and growth. In the firstcategory, we included return on total assets and returnon equity. Return on equity may be a more relevantperformance measure for the owners of cooperativesthan return on total assets, but it is also influenced toa larger extent by the capital structure of the companythan return on total assets (Hill et al., 1992). The sec-ond category contains asset growth and sales growth.Although not directly related to financial performance,we also added growth of the number of employees.

5.3. Findings

Table 2 shows the mean values for each board model.The number of observations varies for the traditionalmodel and for the corporation model because not allinformation was available for each cooperative inthese cases.

In line with propositions 1a and 1b, on average,cooperatives with a traditional board model seem leastdiversified, whereas cooperatives with a managementboard model seem most diversified. These findingsare most prominent for total diversification and relateddiversification. For unrelated diversification, thedifferences are smaller (between the traditional modeland the other two models) or even absent (between themanagement model and the corporation model).Figure 4 illustrates these results.

N Management model N Corporation model

8 1.12 10 0.908 0.50 10 0.508 0.62 9 0.408 4.47 9 4.438 8.32 10 11.638 �1.75 10 2.618 2.28 9 9.068 �6.88 9 �2.35

information was available for these cases.


Figure 4. Diversification averages of the board models.

J. BIJMAN ET AL.214

Regarding financial returns, cooperatives with atraditional model clearly outperform all other typesof companies. Compared with cooperatives that havea management model, cooperatives with a corporationmodel only have a marginally lower average return ontotal assets and a fairly higher return on equity. This isillustrated in Figure 5. The averages are in line withproposition 2a, which predicted superior financialperformance for the traditional board model, but are incontrast with proposition 2b, which predicted the lowestfinancial performance for the corporation board model,

Proposition 2b is also not empirically illustrated bythe average growth measures. In contrast with theproposition, cooperatives with a corporation modelhave the highest asset, sales and employee growth.Furthermore, in contradiction with proposition 2a,sales growth of the cooperatives with a traditionalmodel is actually the lowest of all models, althoughasset and employee growth are somewhat higher thanthose for cooperatives with a management model.Figure 6 graphically illustrates these findings.

Figure 5. Return average


6. CONCLUSIONS

Cooperatives are hybrid organisational structures inmany ways. Recent economic organisation literatureon cooperatives has focused on changes in ownershipstructure and thereby in income rights. This articlelooked explicitly at changes in the allocation of decisionrights, particularly between the different governingbodies of the cooperative. We asked three questions:(1) what are the changes in cooperative governance?(2) can we develop a typology of corporate governancemodels? and (3) what impact do changes in corporategovernance structure have on the performance anddiversification of the cooperative?

We found that over the last 20 years in agriculturalcooperatives in the Netherlands, a division of labourhas appeared between the BoD taking responsibilityfor decision control (ratification and monitoring) andthe professional management being responsible fordecision management (initiation and implementation).This division of labour has been institutionalised

s of the board models.


Figure 6. Growth averages of the board models.


in new board models. Besides the traditional model,which has been around for more than 100 years, wehave found two new corporate governance models:the management model and the corporation model.In the management model, the management of thecooperative firm also forms the BoD of the cooperativeassociation. In this model, there is no longer adistinction between decision making on and executingof the strategies and policies of the cooperative. TheBoD has been professionalised, and the supervisorycommittee supervises association and firm at the sametime. In the corporation model, the BoD of the coopera-tive association has become the supervisory committeeof the cooperative firm. A legal separation betweenassociation and firm has been established, turning thecooperative association into a 100% shareholder of thecooperative firm. This structure provides the manage-ment with relatively most autonomy.

Cooperatives have shifted to another corporategovernance model because of changes in the competi-tive environment. In order to develop appropriatestrategic and tactic responses to competitive pressures,cooperatives felt the need to strengthen the autonomyof the management, to reduce member influence onoperational decisions, to find new sources of equitycapital and to professionalise the supervisory bodies.In other words, strategic re-orientation towards morecustomer focus, diversification and innovation hasbeen accompanied by changes in the decision-makingstructure.

Although we have assumed that cooperatives haveadjusted their governance structure to be better equippedfor changes in the competitive environment, the


debate on the causality between structure and strategyis not fully settled (Galan and Sanchez-Bueno, 2009).Another issue that we have not touched upon in thispaper is the power relationship between BoD andmanagement. In the literature on corporate governancein non-cooperative firms, some authors claim thatboards are endogenously determined institutions(Adams et al., 2010). Although BoD in cooperative isstill different than boards in non-cooperative firms, theshift in cooperative corporate governance towards moreIOF-like models would justify further research into thisdirection.

The illustration of the propositions with data fromthe largest Dutch agricultural cooperatives suggeststhat we need to reject proposition 0. In other words,there seems to be an association between board modelon the one hand and product portfolio and financialperformance on the other hand. Our empirical resultssupport the propositions 1a and 1b. Cooperatives withtraditional board models are least diversified in theirproduct portfolio, whereas cooperatives with amanagement model are most diversified. The assumedrelationship between financial performance and boardmodel is only partially supported in our analysis.Traditional models do not necessarily perform betterand corporation models do not overall perform worsethan other models.

Although we include almost the total population ofthe large agricultural cooperatives in the Netherlands,the amount of observations is actually too smallfor meaningful statistical analysis. Thus, we cannotgeneralise our findings to agricultural cooperativesoutside of the Netherlands. Still, we think we have


J. BIJMAN ET AL.216

provided useful insights in the development of corpo-rate governance models and their implications. Futureresearch, preferably with a larger sample, should pro-vide definite answers and the assumed associations.

Acknowledgements

The authors like to thank Christiaan van der Linden for collectingparts of the data, and Li Feng and Claudio Machado for theirvaluable comments.

NOTES

1. The terms ‘board model’ and ‘corporate governancemodel’ are used as synonyms.

2. This process of replacing board management by profes-sional management as the cooperative grows does nottake place in countries where the board has the statutoryobligation to manage the cooperative.

3. Two law professors with special expertise on cooperativelegislation; one economics professor specialised infinancing cooperatives; one consultant who often advicescooperatives in restructuring processes and one formerchairman of a large feed cooperative; and one researcheron international comparisons among cooperatives.

4. All around the world, cooperative governance structuresconsist of a General Assembly and a Board of Directors,and most cooperatives also have some kind of SupervisoryCommittee (Henrij, 2005).

5. In the management model, the SC/BoC has less authoritythan the BoD has in the traditional model.

6. In Dutch cooperative, there is no periodic return ofequity. Traditionally, all equity was jointly owned. Overthe last decades, most cooperatives have started to individ-ualise a small part of the equity capital. This individual partis returned upon termination of membership.

7. REACH is published by Bureau Van Dijk (http://www.bvdinfo.com).

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accommodating two worlds in one organisation: changing board models in agricultural cooperatives

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