Análisis descriptivo

The second economic subconcept of Supplier-Shareholder-Needs/Benefits induced from the evidence, Risk-Reduction, is defined here as:

supplier-shareholders’ need to reduce the risk of being taken advantage of in their economic transactions due to their vulnerability in their dependence on the performance of the milk processing company, the need for a daily market due to the perishability of their produce, and having very specific assets that are very fixed in nature.

Supplier-Shareholder-Needs/Benefits for Risk-Reduction is raised in 100% of the co-operative cases studied and by 67% of respondents (refer to Appendix F-2 for evidence and Table 7-2 for summaries). Included in this subconcept are issues raised by respondents around risks related to the dependence of supplier-shareholders on the performance of the co-operative, the perishability of milk, the need for a market, the lack of diversification of assets, and the need for a competitive yardstick²⁷. Supplier-shareholders have an expectation that the board has a role to ensure that their risks are reduced by their relationship with the operative. The board has a role to ensure that the co-operative company continues to collect, process and market all supplier-shareholders’ milk at a competitive price over a long period of time. As such, an understanding of Risk-Reduction is important to the understanding of Board Roles.

Supplier-shareholders are very dependent on the performance of the co-operative and much of their (and their families’) well-being is tied up with the co-operative, hence creating an even more substantive personal risk to the supplier-shareholders. This has implications for the Composition of the board

27 Concept developed by Nourse (1922) ensuring that a fair farm gate price is being paid for produce. This concept has been explored in Chapter 2, the agricultural co-operative context.

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and their Strategic-Involvement and Control roles, as is explained in this rather long but enlightening quotation from a supplier-shareholder director:

If you look at a farmer all his income generally speaking is derived from the farm, that income is generated by the co-operative company, he generally lives on the farm so his house is on the farm, he lives in the community so all his schooling, friends, relationships, business associations such as lawyers and accountants tend to be pretty closely aligned with the local community … the farmer-shareholder is very, very close association with the company. Dependent on the company for their livelihood, dependent on the company in terms of where they live and for example, if things went wrong not only would they lose their income but they potentially also lose the place in which they live.

So the interest of the shareholder are totally aligned with the performance of the company and therefore its most important, in my opinion, that the farmers have representatives as directors on the board of directors to ensure that the company’s strategies and policies are very closely aligned with the interests of the farmer-shareholders (A2, supplier-shareholder director)

Supplier-shareholders’ dependence on the co-operative is accentuated by their own personal lack of diversification:

They [supplier-shareholders]actually have invested in this co-operative for their interests as a farmer which probably represents 90 percent of their wealth anyway (D4, managing director)

For a dairy farmer his whole livelihood depends on his company. So he’s got this vast amount of money tied up in his farm and he’s got all this money tied up in the company through shareholding and through his entitlement to supply, it just creates a different way of thinking (A4, CEO)

As supplier-shareholders produce a highly perishable product, in quantities that may vary from day-to-day and year-to-year (as noted under Exogenous-Issues), they require a market for that produce each day:

Obviously securing their milk off take, I mean they are not dispensable to us so whatever they produce we will process and will pay a commercial price (D2, supplier-shareholder director)

As all cases export dairy products and there is a requirement to manufacture that perishable product into a shelf-stable product and to market it. The co-operative must have sufficient infrastructure to process and market all the milk supplied, therefore:

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What’s [a supplier-shareholder director] say? ‘don't spill a drop of milk’ [laughter] (C3, appointed director)

The board is accountable to the farmers for security of milk off take, for providing an ongoing viable option for them to grow if they want to grow (D1, appointed chair)

This supplier-shareholder expectation has physical capacity allocation implications. That is, resources may need to be allocated to milk processing infrastructure even if doing so does not appear to be economically sound for the co-operative as a whole. This managing director explains:

The issue of putting money into facilities to process milk where there is no margin or very little margin, but very, very important to the dairy farming community because they just need this constant growth (D4, managing director)

It is felt the co-operative not only needs to provide a market for tomorrow’s milk but also a market for milk produced by future generations, requiring a sustainable business:

[We have] got to have a business here that is sustainable in the future, in its own right (E2, supplier-shareholder director)

I think a co-operative is, in particular a farming co-operative, has to take a far longer term view on its initiatives, on its investments (A2, supplier-shareholder director)

Apart from having a few sacred cows like this co-operative needs to be sustainable for generations (C2, supplier-shareholder director)

In the New Zealand and Australian dairy industry there are a limited number of

‘buyers’ of milk and a large number of small ‘suppliers²⁸’ (co-operative memberships ranged from 120 to 12,000 supplier-shareholders). This suggests a Supplier-Shareholder-Needs/Benefit for countervailing market power,²⁹ which is achieved through collective action. With this difference in market power between supplier-shareholders and buyers (especially when combined with the perishability of milk), there is a risk of supplier-shareholders being taken advantage of by the buyer. As this appointed director muses:

I don't know what it was, and presumably it was in England or Ireland somewhere, but they thought about a means for getting their produce

28 Predominately family farms.

29 Discussed in Chapter 2.

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aggregated, processed, and finding a market for it, without being screwed by those nasty bastards down the city of London or Queen Street, Auckland or wherever it was (C3, appointed director)

This risk is reduced by collectively owning and controlling (through the board of directors) the processor and marketer of that milk, that is the co-operative:

The co-operative will say bugger it, we might have to trade off some economic efficiency in doing things really well and being best in class, but at least we’ll own the bastard and no one gets control of it and exploits us (C3, appointed director)

Milk producers also need a competitive yardstick (Nourse, 1922) against which to set the milk price. Otherwise milk producers risk being paid less than fair value:

It’s the 70% of milk that’s in this country that is controlled by co-operatives that have driven the price. It wasn’t the Nestlés or the Krafts. And I used to work for Nestlé. I used to set their milk pricing policy (E4, managing director)

It is in the best interests of Australia for there to be a strong operative because there is no doubt about it, that basically the co-operative sets the milk price (F3, appointed director)

The co-operatives also reduce supplier-shareholders’ risks by pooling benefits across products, time and markets and hence reducing variation in supplier-shareholders’ income.

Demand for Risk-Reduction thus has an effect on the roles undertaken by the governing board. Risk-Reduction needs may constrain a board’s strategies:

I believe that [case B] made a decision to go independently ... it did so for the sake of the [region], development of the [region] and the benefits it could bring to its own farmer-suppliers. To start hiving off into other activities outside, despite all the temptations that are put in front of you, you have to be very, very thoughtful about why you would want to do that (B3, appointed director)

and/or affect their Control Role (section 8.4) as these chairs acknowledge:

I believe that we actually bank the farmers. Equity is part of our drive and if we in any shape or form try to run the company with low equity we would then put a lot of pressure ... on farmers ... we couldn’t expect farmers to take the risks they do with the weather and the market prices where they have to take the price they get. I believe that we would slow

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down the growth of what we were trying to do within the region (B1, supplier-shareholder chair)

The reason for being there [the board] is to protect the shareholders’

interests and their investment (B1, supplier-shareholder chair)

The evidence presented here suggests Risk-Reduction is a subconcept of Supplier-Shareholder-Needs/Benefits and is useful for the understanding of co-operative Board Roles.