Lang, Mahlon G.

English

Research Papers in Economics

The Role ofManagement
Behavior in Agricultural
Cooperatives: Discussion
Mahlon G. Lang
Professor Cook begins by observing that relatively little research on
agricultural cooperativemanagementhasbeenconducted. Heoffers some
reasonswhyandgoesontotestclaimsbyrecentresearchersthatcoopera-
tive management is different, if not more difficult, than management of
an investor-owned firm (IOF).
CookusesMintzburg'staxonomyofmanagerialrolestocomparecooJ?er-
ative management to the management ofIOFs (Mintzburg 1971). He con-
cludes that the successful management of a cooperative requires all of
the skills used in managing an IOF and, in addition. requires:
• comfortindealingwithvagueness, complexity, andconflictsurround-
ing the objective function ofthe cooperative:
• superior human resource management skills because oflimited
access to risk capital;
• communication skills and understanding of the user/owner stake-
holder conflict inherent in cooperatives: and
• leadershipinmanaginga widerrangeofobjectivesandassociatedsub-
goals.
ProfessorCookis correct. In a givenmarket, theagriculturalcooperative
managerdoesindeedneedall, andsometimesmore, oftheskillspossessed
bythe managerofan IOF to successfullymanage a cooperative. However.
the degree of difference varies according to the type of cooperative. It
should also be considered that if cooperatives make sense at all. there
must be some aspects in which they are also easierto manage than their
investor-owned counterparts.
First. in any single cooperative, the members and their directors may
have a wide range of expectations. Some expectations are in conflict
becausethemembersarebothusersandowners. Stillothersareinconflict
becauseofdifferencesinthesituationsofindividualmembers.Asa conse-
quence, thetaskofconsensus-building(agreeingonanobjective function)
in a cooperative is substantial. In some cooperatives, this task is much
more difficult than in others.
Second, because the consensus-building task is so great, superior con-
flict resolution. communication, and leadership skills are needed. At this
Mahlon Lang. Ph.D.. is director ofthe Centerfor Cooperatives. University of
California. Davis.62 JOURNAL OF AGRICULTURAL COOPERATION 1994
point, I would restate Cook's first conclusion, that a cooperative manager
has to be "comfortable with vagueness, complexity, and conflict." I am
more inclined to say that the manager's ongoing challenge is to focus,
simplify, and reconcile thevagueness, complexity, and conflictassociated
with the management ofa user-owned business. Failure to do so puts the
cooperative at an inherent disadvantage relative to competing firms. Top
management must identify and understand the full range ofmember
expectationsandthenshowhowthosewill besatisfiedonlythroughsupe-
rior market performance.
Finally, cooperatives are not designed to attract risk (equity) capital.
Theyaredesignedtorewarduse,notinvestment.Thisfactalsoputsgreater
demandsontopmanagement, sincecooperativesmustcompetewithfirms
thatcanrewardinvestmentperse. While Dr. Cookpointsouttheresulting
needfor carefulmanagementofhumanresources, thefactthatriskcapital
is relatively scarce for cooperatives suggests to me that their managers
should also bejudiciOUS in using this resource.
Points ofAgreement
This topic is timely at the Center for Cooperatives. In the summer of
1993, I interviewed twenty directors and chiefexecutive officers (CEOs)
ofagricultural cooperatives. My aim, in an open-ended interview, was to
identify director education needs. Several directors expressed a need for
research on how to select and evaluate a cooperative CEO. Since then,
interest in this topic has been independently and spontaneously volun-
teered by directors in several different settings. In response, the Center
funded such research and will offer a conference on the subject late in
1994.
The reasons I agree with Professor Cook are shown by demonstrating
howhisanalysisofMintzburg'sworkappliestomyindependentexperience
withdirectoreducation. Cook'sclaimisconsistentwithtwosetsofconclu-
sionsIrecentlypresentedatworkshopsfordirectors ofCaliforniacoopera-
tives. Mter outlining these conclusions, I will interpret them in light of
Cook's analysis.
In a basic course for directors, the Center for Cooperatives maintains
it is harder to direct a cooperative than to direct an IOF where there is
generally a very clear relationship between market perf~imanceand the
interests ofallstockholders. Market performance thatenhances earnings
or earning potential will be reflected in yield and/or appreciation for all
stockholders. Presumably, these are the principal interests of investor-
stockholders.
In cooperatives, the linkbetween marketperformanceand membersat-
isfaction is sometimes clear, but this is not always the case. Market
requirementsina marketingcooperative(variety, quality, location,orother
rawproductcharacteristics) orin a supplycooperative (productlines and
servicelevels) thatbestserveprofitabilitygoals ofaninvestor-ownedbusi-
ness may not directly serve the immediate interests of all cooperative
members. If a truly market-driven approach is taken by a cooperative,
memberswithlessmarketableinputsorthosewhohaveunusualorother-
wise costlysupplypreferencesmaynot, bycomparisontoothermembers,Management of Cooperatives: Discussion/Lang 63
feel theirneedsarewell met. Thepressuretomatchmembers'rawproduct
supplies with market demands or to match profitable input marketing
with member demands presents a major challenge for cooperatives that
directors ofan IOF would never face.
Ifthese potential conflicts between user-owner and user-investor pres-
ent a challenge to the board. they clearly challenge the CEO. He orshe is
one ofthe first to feel torn by the need to satisfY market demands as well
as the conflicting needs ofmembers. The CEO knows that ifthe market
is not well served. all members will lose in the long run.
The CEO recognizes this challenge for the following reasons:
• A cooperative cannot "give" anything to its members that it does not
earn by competing successfully in the food system
• Cooperatives must adjust to change in the competitive environment
ifthey are to continue to provide benefits to members
• The single most important way for cooperatives to serve members is
through superior performance in a rapidly changing food system
Cooperatives increase member returns only through market or "user"
benefits that encourage member business. The efficiencies reqUired to
deliverthesebenefitsarenotcreatedbyforcing themarkettomeetproduc-
ers' demands (in a marketing cooperative) or by expecting members to
accept non-competitive performance (in a supply cooperative). They are.
instead, achieved by harmonizing the interests ofmember-owners. as
farm-product sellers or as farm-supply buyers. with the demands ofthe
market.
To harmonize the interests ofcooperative members with the market is
to define a viable market segment, show members how they can benefit
by being responsive to that market, and/ormake sure pricing. patronage
refund, cash refund, and equity redemption policies all reward individual
members for responding to market demands (marketing cooperative) or
bUying from the cooperative (supply cooperative). Harmonizing the inter-
ests of cooperative members with the demands of the market requires
every form of managerial skill mentioned by Mintzburg (1971). It also
requires that they be applied to a wider array ofinterests than would be
addressed by the CEO ofan IOF in the same industry.
When it is Most Difficult to Manage a Cooperative
In an investor-owned business there is a clear. close correspondence
between rewards to the investor owners and market performance. The
highest long-term rewards to investors will result from the highest long-
term service to consumers.
In the best cooperatives, this is also true. However the relationship
between market performance (as measured by long-term profitability of
the firm) and the interests of userowners is not naturally clearand close.
Further, thepotentialfor harmonyvariesbytypeofcooperative.Thegreat-
estpotentialfor close correspondencebetweenthe interests ofthe market
and the interests ofuser-owners is found in marketing cooperatives. The
greatest potential conflictbetween market performance and the interests
ofuser-owners is seen in consumer (supply) cooperatives.64 JOURNAL OF AGRICULTURAL COOPERATION 1994
Thepotentialfor correspondencebetweenmarketand user-ownerinter-
estsishighestina marketingcooperativebecausethegreaterthecustomer
market satisfaction, the greater the potential market reward and the
greater the potential cooperative earnings. This correspondence between
marketperformanceand user-ownerbenefitispotentiallyclearand direct.
Management's efforts to reconcileinterests ofmarketswith thoseofmem-
bers could be addressed at great length. In brief, they may appear as
memberresistance to discountand premiumprograms thatreward mem-
bers for meeting time, form, and place reqUirements imposed by the
market.
There is an inherent conflict between market and member interests in
a supply cooperative. The members are user-owners. As users, ifall else
is equal, they (like other customers) prefer low prices. As owners. they
know, or must learn to know. that the ongOing maintenance of service
capabilities and high levels of performance require investment to meet
service and other market demands. These require earnings and capital
accumulation.
Supplycooperativemanagementis therefore challenged to provide sup-
plies on highly competitive terms to all customers (member and non-
member) and, in the process. to generate earnings sufficient to maintain
operations. distribute patronage refunds. and retire equities. Even then.
members may argue that they would prefer direct benefits in the form of
lower (even sub-market) prices. sometimes forgetting that capital is
reqUired to sustain performance and retire equities. Continued earnings
are no less critical to the cooperative than to the IOF.
Stillanotherchallengefacingcooperativemanagementisthatofbalanc-
ing interests of current members against interests of retiring members.
Current members are more interested in customer service and return on
equity. Retiring members are more concernedwith the retirement oftheir
eqUity. Treatment of both sets of interests is important in terms of the
expectations they create for potential members who watch to see how
the cooperative treats its members. While the board has the ultimate
responsibility ofallocating earnings. management may spend more time
evaluating alternatives and framing the questions ultimately posed to
directors.
When a Cooperative is Easier to Manage
Clearly, cooperative managers face many challenges that managers of
IOFs do not need to address. However, the long-term success of many
cooperatives is testimony to the fact that cooperatives meet real needs in
the face ofcompetitionfrom IOFs. Howeverfrequently memberstake their
cooperatives for granted. they continue to provide equity passively and
actively for user-owned companies (cooperatives). even when investor-
owned alternatives are available.
This fact alone suggests an advantage for managers of cooperatives
relative to IOFs. If, in some circumstances. members prefertheircoopera-
tiveoverotherfirms, theyare,insomerespect.easiertomanagethanIOFs.
The source of advantage to cooperatives has to be in user value. The
significant economic difference between a cooperative and an IOF is userManagement of Cooperatives: Discussion/Lang 65
ownership. If there is an economic reason for cooperatives to survive, it
isbecausethere is somethingaboutuserownershipthatpermitscoopera-
tives to add value to or cut costs from the food system in ways that IOFs
cannot. Ifsuch sources ofuservalue cannotbe found, there is no private
economic reason for cooperatives to exist.
There is at least one public economic reason for cooperatives. This is
thelong-standingnotionthatcooperativesprovidea competitiveyardstick
to keep IOFs "honest." In this regard, it is important to remember that
cooperatives must operate efficiently to keep anyone honest. Therefore, it
remains important to identify the source ofuser value in cooperatives.
Ifuserownershipgives a cooperativea competitiveadvantage, thiseases
themanagementchallenge. Therefore, theconceptofuservalueis central.
The full meaning of the term cannot be addressed here; therefore, I list
only likely sources ofuservalue. These include identity preservation and
close coordination that add value to final food products. Critics rightly
argue that these are achievable through vertically integrated firms ofany
sort, including cooperatives. This merely shifts the debate to the perfor-
mance consequences ofcooperative and investor-owned vertical integra-
tion. Other sources ofuservalue include costsavings through riskreduc-
tion. Cooperatives that assure supplies or provide a "home" for crops
reduce risk (costs) to members and may enhance stability in the food
system.
The potential benefits ofcooperatives to members (uservalue) also vary
by commodity. Products vary in terms ofperishability, continuity ofpro-
duction, homogeneity,value-weightratios, rawproductshareofconsumer
product value, and others. A model that uses these characteristics to
predict coordination requirements may offer hypotheses regarding where
cooperativesworkbestandwhy. Forexample, such a model may indicate
thatpotentialuservalueisgreatestwhere there iscontinuous production
ofa highlyperishablecommoditythatis transformedrelativelylittlebefore
final consumption (milk) and explain why cooperative marketing is
commoninthemilksubsector.Thesame modelwould identifyotherchar-
acteristics to show why cooperatives are less likely than other forms of
coordination to be used in livestock marketing ormore often in stonefruit
marketing.
Conclusion
Cookhasaccuratelyidentifiedtheprincipalreasonfor difficultymanag-
ing agricultural cooperatives. The challenge of harmonizing inherently
conflicting member interests to be responsive to the market is unique to
user-owned (cooperative) firms. This requires more organizational, com-
munication, resource allocation, and other leadership skills than is
required ofthe managers ofIOFs in the same market.
At the same time, and for the same reasons, the degree ofdifficulty in
cooperative management varies according to the type ofcooperative. The
potential for high and clearcorrespondencebetween memberand market
interest is greater in marketing cooperatives than in supply cooperatives.
This is because there is an inherent conflict between user and owner66 JOURNAL OF AGRICULTURAL COOPERATION 1994
interestsin supplycooperatives that is not necessarilypresentinmarket-
ing cooperatives.
Finally, ifthere are economic reasons arising from user ownership for
cooperativesto exist, thereare surelycircumstancesthateasethe relative
management challenge in cooperatives. If user ownership adds to final
product value or reduces producers' costs in ways that IOFs cannot, it
reduces the management challenge in some respect.
Reference
Mintzburg, Henry. 1971. Managerial work: Analysis from observation. Management Science.
18:897-8110.

The Role of Management Behavior in Agricultural Cooperatives: Discussion

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