TABLA DE ENFERMEDADES DE TRABAJO

As elaborated previously, one of the distinctive features of the co-operative is the promotion of, and adherence to, a set of principles. Principles play a central role in co-operative culture and help to define their nature and role in society by distinguishing them from other forms of business, especially investor-ownedfirms (IOFs) (Barton [1989]).

No modern farmer co-operative follows all the Rochdale principles, but many of the fun- damental principles and essential characteristics of these original principles persist. Enduring principles include: (1) democratic ownership and control by users; (2) limited returns on capital; (3) return of benefits or margins to users on the basis of use; and (4) the obligation of user-owner financing to ensure that farmers can indeed exert jurisdiction over those aspects of their life they wish to control (Fairbairn [1994] and USDA [1995]). This list of obligatory principles makes up the minimum features necessary to be considered a co-operative (Fairbairn [1994]). These principles reflect the presence of a community of members interested in the idea that as a group they can work collectively to address their common challenges (Uphoff [1993] and MacPherson [1972]).

For the purpose of this thesis, a farmer co-operative is defined as a form of economic orga- nization with the following characteristics (Staatz [1987b] and Cotterill [1987]):

• Equity investment should be contributed by each member and there is a strict limitation on the proportion of one member’s contribution, including institutional members. For example, no member can own more than 5 percent of the shares in the co-operative.

• The formal governance of the business by the stockholders is structured “democratically” in the sense that:

– Voting rights are not proportional to equity investment. The limitation to “voting one’s equity” may be in the form of a one-member, one-vote rule. Voting may be proportional to patronage or stock ownership if it is also subject to some limit, such as restricting any member from having more than five percent of total votes.

Chapter 7. Analysis of the Company + Households Model – There are strict limitations on the number of non-members who may serve on the board of directors, and farmer (user) board members should make up the majority. – A general meeting, where all members are invited, must be the top decision-making

body. There is a strict limit that prohibits general meetings from being replaced by meetings of representatives.

• The benefits a member receives from committing capital to a co-operative is tied largely to patronage. There are three reasons for this:

– Each patron member is eligible to receive patronage payments and to vote.

– The business pays a strictly limited dividend on equity capital invested in the orga- nization.

– Net margins are distributed among stockholders in proportion to their patronage with the business rather than in proportion to their equity ownership in the organization.

As the right column of Table 7.1 indicates, the C+H model does not follow the key co- operative principles or characteristics. Most of the equity contributed to the C+H co-operatives comes from the owners of agro-processing companies and small producers are either not willing or not allowed to make an investment. The vast majority of small producers are treated as peripheral members that receive marginal benefits, or none at all because the distribution of surplus is based on shares of contribution capital, rather than patronage. Furthermore, small producer members cannot elect people to the board of directors and cannot hold the co-operative accountable.

The preceding analysis suggests C+H co-operatives are not real co-operatives. They are not owned and controlled by small producer members, and the benefits do not directly accrue to them. Instead, C+H co-operatives are monopolized by a small number of investors and their allies for their own ends.

Of course, whether any given organization is a co-operative or not is not a legalistic, black- and-white question. Rather, the co-operative is defined by its strategy, its purpose, the control structure it holds, and its connections to a defined community of people (Fairbairn [2004]). An

Table 7.1: Co-operative Principles compared to Company+Households Co-operatives in China. Co-operative Principles C+H Co-operatives

Equity is contributed by each member. Lim- its to each member’s contribution to prevent capital domination

Some members are not allowed to make an eq- uity investment. Company members can con- tribute more than 50 and up to 100 percent of the equity. Domination of capital by a small number of investors

Each patron member has voting rights. One- member-one-vote or voting is proportional to patronage

Some members don’t have voting rights. Each member of management can have as much as 20 percent of the voting rights

Voting rights are not proportional to equity investment

Voting rights are proportional to equity invest- ment

Strict limits on the number of non-members that serve on the BOD

Company management and government offi- cials occupy most of the BOD seats

Net margin is distributed in proportion to pa- tronage

40 percent or more of the net margin is dis- tributed in proportion to equity investment. There are strict limitations on how a general

meeting can be replaced by a representative meeting

Representative meetings are often the top de- cision making body instead of a general meet- ing

Co-operatives grow through horizontal coor- dination and vertical integration

Co-operatives grow through vertical coordi- nation

Co-operatives control their own marketing fa- cilities

Leading enterprises control and own market- ing facilities

Management and control of production rests with individual farmer

Management and control of production rests with a small number of investors

analysis of the structure of co-operative principles is not sufficient to understand the economic nature and other key aspects of these organizations. One must also know something about their organizational behaviour; their objectives, ownership and control structure; and how to interpret the acts of different agents in these organizations. This analysis will be carried out in the following section.

Chapter 7. Analysis of the Company + Households Model 7.1.2 Property Rights to Ownership and Control of Resources in C+H Co-operatives To analyze, understand, and predict the emergence and development of C+H co-operatives, it is critical to have an in-depth understanding of who owns and controls these organizations, who benefits from them, and whether these structures differ from IOFs.

An economic organization is viewed by agency theorists as a nexus of contracts among various participants who provide the organization with inputs including labour, managerial talent, and capital, and who purchase its outputs. Each participant, or “agent,” seeks to maximize his or her own welfare. Agency theorists stress the importance of two types of contracts within economic organizations. The first contract specifies the nature of the residual claims in the organization, while the second defines the allocation of the decision making process among agents (Vitaliano [1983]). Understanding these two contracts, and how they apply to co-operatives, is crucial to determining the degree of member control and the goals that co-operative is set up to achieve.

The residual claimants are agents who receive a share of the difference between the orga- nization’s gross revenue and the payments promised under fixed claim contracts. The decision process of an organization can be divided into two general categories – decision management and decision control (Fama and Jensen [1983]). Decision management includes the right to initiate and implement approved decisions, while decision control includes the right to ratify or make the decision that is to be implemented, the right to measure performance, and the right to set the reward for decision makers (Condon [1987]).

Using this framework, Condon [1987] summarizes the key difference between a co-operative and an IOF:

“In an IOF, control over how resources are used and the rights to residuals ultimately rest in the hands of the owners of common stock in the organization. Decision control is based on the share of capital invested, and decisions are presumed to be judged on the merits of the returns generated by that capital. In a co-operative, the basic property rights governing ownership and control are structured so that decision control and the rights to residuals rest solely in the hands of those who patronize the firm as members …. Ancillary to this restructuring of rights is the

fact that co-operative firm control is generally based on one-member, one-vote terms and not by the share of capital invested” (Condon [1987], p. 24-25).

Since co-operative members receive benefits in proportion to their use of the co-operative, members have little incentive to invest money in the enterprise. A common way of addressing this problem is to have members provide capital in proportion to their use of the co-operative. This can be done up-front (i.e., when the members first join), as is the case in the New Generation Co- operatives, or as the members go along by having the members contribute capital in proportion to their patronage. Such practices help solve the problem of the under-financing of farmer co- operatives.

In China, one of the reasons that more western-style co-operatives are not present is that Chinese farmers typically have little ability to contribute capital, which in turn would provide them with control. Farmers’ ability to contribute capital is largely a result of the small size of Chinese farms and the resulting lack of capital to invest. The lack of a well-functioning credit market or set of credit policies that would allow farmers to obtain loans to finance their co-operative shares is also a factor in the lack of capital contribution.

According to Gourevitch and Shinn [2005], ownership in a firm can be divided into two models: a diffuse shareholder model and a concentrated blockholder model. In the diffuse share- holder model, a diffuse set of shareholders owns the firm. In this model, managers are supervised by a shareholder-elected board of directors that holds the managers accountable to the investors. The board members hold relatively small portions of the total stock, but their vote is required on major decisions, and they are supposed to discipline and reward the managers. In contrast, the blockholder model tightly links ownership and control. Managers are supervised by a concen- trated group of blockholders. In the blockholder approach large shareholder blocks are either held by big businesses like firms, controlled through a family or ethnic network, or controlled by public authorities through a variety of instruments. The board of directors is made up of representatives from these various blockholders.

Within each of these models, the role of management can vary. In some instances, man- agement holds effective control – as is the case in the so-called managerial firms (Monsen and Downs [1965]). In other instances, the investors (or in some cases the workers) are able to exer-

Chapter 7. Analysis of the Company + Households Model cise control (Gourevitch and Shinn [2005]). Different models of corporate governance provide different minority shareholder protections, low shareholder protection will lead to concentration of ownership (Gourevitch and Shinn [2005]).

With the aid of previously explained theories including property rights, governance structures, dominant institutional structures of power and authority, and firm-ownership and control (residual claimant and decision control), it is possible to analyze how C+H co-operatives fundamentally differ from those of the West. By examining the economic nature and governance structure of Chinese co-operatives we can interpret the relationships among investors, patron members, and management.

Table 7.2: A Structural Comparison of IOF, Company+Households Co-operatives and Co- operatives.

Structure of organiza- tion

IOF Co-operatives C+H Co-operatives

Governance structure Shareholding or block- holding

Shareholding Blockholding

Capital contributors Investors Patron members Mostly investors Residual claimants

(risk bearers)

Investors Patron members Investors Control Investors or manage-

ment hired by them

Patron members or management hired by them

Investors or manage- ment hired by them

As Table 7.2 illustrates, in an IOF, the governance structure is either shareholding or block- holding. Owner-investors contribute the capital and are the residual claimants. The profits are distributed in proportion to the amount of capital contributed by each owner-investor. The de- cision control and management of the companies officially rests in the hands of the owners, via the board of directors. However, in practice the managers may hold effective control of the organization.

In co-operatives, the governance structure is diffused shareholding. The co-operative is owned by its members, who provide the capital investment and are the residual claimants of the organi- zation. The control of the co-operative officially rests in the hand of a member-elected BOD that

is accountable to the membership. However, as with IOFs, the managers may effectively control the organization in some instances.

The governance structure of the C+H co-operatives is blockholding. The ownership of these organizations is concentrated in profit-oriented businesses and/or rent-seeking government of- ficials. Indeed, it is common for a small number of favoured investors or organized coalitions of investors to own these co-operatives. Control of these organizations may rest with managers. However, given the power that the major blockholders can typically exert, managers may have little effective power to control the organization. The C+H co-operatives are also marked by ef- forts to restrict and limit competition. Co-operative laws are not enforced, or if they are enforced their interpretation has altered their meaning substantially. There is little protection provided to minority shareholders, and their are no rules on accountability for the corporate board (or the rules are not enforced).

In the C+H co-operative, patron members produce an intermediate output and pay a nominal membership fee. Patron members are not eligible to receive returns on equity capital. In the cases where patron members can receive a return, based on their use of co-operative services, from the operation surplus, the investor decides how much to allocate based on the incentives for members to deliver better quality inputs. In other words, the residual claimant is the investor. The above comparative study of the structure of IOFs, co-operatives, and C+H co-operatives indicates that the C+H co-operative is, in everything but name, a private-owned firm. It features the concentrated blockholding ownership of an IOF rather than co-operative ownership, use, and democratic control by patron members. As a consequence, the investor is the residual claimant and the holder of control. The investors and/or their allies are the agents responsible for making the decisions that determine how resources will be used, and these parties assume most of the risks associated with those decisions.

The examples of C+H co-operatives provided in the last chapter suggest that the board is not elected by the members and that producers cannot hold the board accountable, in part because no information is provided by the board through disclosure, auditing, and oversight. Investors or organized associations of investors assume almost all of the management positions in the co-operative. Further, the owner of the company usually assumes the position of director of the

Chapter 7. Analysis of the Company + Households Model co-operative and director of the BOD. Other BOD members come from the same company or are favoured local elites with business or political ties to the company. Consequently, decision control rests in the hands of the investor(s) and they assume most of the risks associated with the decisions.