GUEST EDITORS
SAMULI SKURNIK AND VESA VIHRIÄLÄ
Role of Cooperative Entrepreneurship in
the Modern Market Environment:
Introduction and Summary
I
n modern societies the bulk of all economic
types of benefits from the firm than maximum
activity - production of goods and services
value to their usually small investment.
and their distribution is carried out by firms that
More importantly, these alternatives to
combine the efforts of many people. In a text-
investor owned firms (lOF's) are not just mar-
book the firm is typically understood to be
ginal phenomena. In many countries and in
owned by investors i.e. the suppliers of capital,
many branches they are major if not dominant
whose only objective is to maximise the value
players. In the European Union there are well
of their investment.
over 30,000 farmer cooperatives with some 1 2
However, not all firms are of this type.
million memberships with very considerable
There are also non-profit organisations and
market shares in mostpart of the major agricul-
many types of cooperatives ranging from agri-
tural products. The turnover of the top 30 agri-
cultural cooperatives, cooperative banks and
cultural cooperatives in the EU is over Euro 50
mutual insurance companies to partnerships
billion. In the United States the total number of
and franchises organised on cooperative basis.
all cooperatives is over 47,000 with over 1 2 0
In these firms the owners - to the extent there
million members. This represents 40 percent of
are owners - seek also or even primarily other
the U.S. population. For instance US farmer
1 SAMULI SKURNIK, LicEcon
CEO of Pellervo Confederation of Finnish Cooperatives, P.O.Box 77, FIN-00101 Helsinki, Finland,
Phone (358)-9-47675501 • e-mail: [email protected]
VESA VIHRIÄLÄ, PhD(Econ)
Managing Director of Pellervo Economic Research Institute, Eerikinkatu 28 A, FIN-00180 Helsinki, Finland,
Phone (358)-9-34888400 • e-mail: [email protected]
375
cooperatives produce and/or handle more than
the alternatives an intriguing subject: something
thirty percent of the commodities, products pro-
can perhaps be learned by examining different
duced and processed, and inputs purchased in
organisational forms.
the agri-food chain - equivalent to more than
Second, deregulation, globalisation, rap-
USD 100 billion annually. Furthermore, 6 of the
idly advancing development and application of
1 0 largest insurance companies of the world are
information technology are changing the cor-
mutuals.
porate environment in a pervasive way. Com-
Finland is one of the most cooperative
petition intensifies leading to major restructur-
countries in the world with almost 60 percent
ings in many branches. Firms are recurrently
of the population being members in one or sev-
merged and broken into pieces in the quest for
eral cooperatives. In Finland cooperative banks
increased efficiency and investor value. In this
account for 33 percent the banking market, co-
process the capital market has come to play a
operative retailers 39 percent and mutual insur-
major role: purchase and sale of shares or a
ance companies 40 percent of their respective
threat of such are instrumental in pulling
markets. 96 per cent of dairy products and 69
through the restructuring. This has naturally
per cent of meat products are produced and
raised the question, how organisations that do
marketed by cooperatives. In the forest indus-
not have shares to be priced and sold in the
try one of the three big Finnish forest industry
market, and thus cannot share the market in-
companies the majority is owned by forest own-
formation, can cope with such pressures to
ers with a 33-percent market share in timber
change.
purchased from private forests.
These alternative forms of firm organisa-
This special issue of the Finnish Journal
of Business Economics examines the role of co-
tions have received relatively little attention in
operative enterprises in the modern market
economic research until recently. Two devel-
economy from several angles. The articles pub-
opments, however, have started to change this
lished here are based on the presentations de-
situation of benign neglect. First, in the past two
livered at an international cooperative seminar
decades economic research has become in-
in Helsinki, June 1 1 , 1999. The seminar was
creasingly interested in issues that usually go
organised by Pellervo Confederation of Finnish
under the name economics of organisation and
Cooperatives and Pellervo Economic Research
more specifically corporate governance. In a
Institute in collaboration with the Helsinki
broad sense corporate governance covers the
School of Economics and Business Administra-
mechanisms - internal and external to the firm
tion and the Finnish Economic Association to
- through which the firm's operations are con-
commemorate the 100 th anniversary of Peller-
trolled by the owners. The analysis of govern-
vo Confederation, the central organisation of
ance structures has made the differences that
the Finnish cooperative movement.1
exist between investor owned companies and
An academic seminar on cooperative en-
376
1 The organising committee of the seminar included the following persons: Mr Samuli Skurnik, CEO of Pellervo Confederation of Finnish Cooperatives (chairman); Professor Seppo Honkapohja, Univ. of Helsinki; Professor Eero Kasanen,
Rector of the Helsinki School of Economics and Business Administration and editor of the Finnish Journal of Business
Economics; Dr Jaakko Kiander, Research Director, The Governement Institute of Economic Research and editor of the
terprises was considered by the organisers the
group of persons who transact with the firm or
most appropriate way of celebrating the anni-
"patrons" in Hansmann's terminology. Patrons
versary. The idea of cooperative enterprises was
and thus potential owners include those who
namely brought to Finland at the turn of the
provide different inputs to the production proc-
century by an academic, Dr Hannes Gebhard,
ess - employees, suppliers of raw materials and,
who pursued studies in cooperative thinking in
of course, suppliers of capital - but also pur-
various European countries in the late 1890's
chasers of the firm's products. From this point
on an award given by the Finnish Economic
of view the conventional investor-owned busi-
Association. He wrote about his findings in a
ness corporation is according to Hansmann
book entitled "'Maanviljelijäin yhteistoiminnas-
nothing more than a special type of producer
ta ulkomailla" (The cooperation of farmers
cooperative - namely, a lenders' cooperative,
abroad), published in Finnish early 1899. Both
or capital cooperative.
Dr Gebhard and his book played a central role
The relative advantages of different pa-
in the Finnish cooperative movement for dec-
trons as owners depend on the costs that are
ades to come.
associated with ownership on the one hand and
The seminar examined cooperative enter-
with market transactions of the patrons on the
prises from three different perspectives. First, the
other hand. The costs of ownership include
fundamental reasons for the cooperative as an
costs of monitoring, collective decision making
organisational form. Second, the emergence of
and risk bearing. Market transactions in turn in-
cooperation from historical perspective in dif-
volve costs of market power, "lock-in" or ex
ferent industries. Finally, the prospects of co-
post market power, and costs of asymmetric in-
operative enterprises in the rapidly changing
formation. Investor ownership is an optimal so-
environment.
lution only to the extent to which it performs
better relative to other ownership arrangements.
Cooperative Firms as a Way
Organising Economic Activity:
A Theoretical Perspective
In the first paper Professor Henry Hansmann
Agricultural cooperatives for instance
have in many countries emerged in response to
the market power of the firms that have either
sold inputs to farmers or bought their products.
Through ownership of dairies and slaughter-
from Yale University has as his point of depar-
houses or seed distributors farmers have been
ture the fact that investor ownership has noth-
able to eliminate the market power that could
ing special to it that would make it in all cir-
otherwise either reduce their revenues or in-
cumstances the most natural or efficient organ-
crease their costs.
isational form. Ownership - i.e. the formal right
Empirical evidence suggests according to
to control the firm and appropriate the residual
Hansmann that sufficient homogeneity of inter-
earnings - can, in principle, be assigned to any
est among any potential class of patrons is a
377
Finnish Economic Journal; Mr Lauri Kontro, Director, Pellervo Confederation of Finnish Cooperatives; Dr Jukka Pekkarinen, Managing Director, the Labour Institute of Economic Research and Chairman of the Finnish Economic Association; Dr Vesa Vihriälä, Managing Director, Pellervo Economic Research Institute. The seminar recieved generous support from the Finnish Cultural Foundation and Yrjö Jahnsson Foundation.
major determinant of the costs of collective de-
the emergence of information technology. Cap-
cision making. Employees and raw material pro-
ital markets in turn are better placed to make
viders - say milk producers - may often have
such moves for several reasons. First, markets
rather different interests among themselves. In
have naturally a broader knowledge base. Sec-
contrast, investors have relatively homogenous
ond, the decisions of the market are not delayed
preferences - their interest lies singularly in the
or biased by the influence activities that often
maximisation of the value of their investment.
plague firms' internal decision making. Third,
Hansmann argues that this rather than supply
markets are naturally directed towards the fu-
of capital is likely to be the major reason for
ture and are unbiased in evaluating future op-
the dominance of investor owned firms in mod-
portunities, and finally markets are better at ex-
ern economies.
perimenting because of portfolio thinking.
Professor Bengt Holmström from the Mas-
sachusetts Institute of Technology shares with
market, the greatest challenge to cooperative
Hansmann the view that the costs of collective
firms is to find alternative ways to undertake a
decision making play a central role in determin-
fundamental change. The main difficulty of the
ing who are efficient owners. He notes that a
cooperative to cope with this challenge is that
stakeholder can affect a firm's decisions either
change most probably increases tensions
by exit or by having a direct say, "voice". Voice
among the members, as it upsets established
should be given to the group of patrons who
ways of behaviour and may make preferences
can most effectively make use of it and who
to diverge. To overcome these difficulties may
cannot be cheaply protected by exit. Holm-
require substantial adjustments in the coopera-
ström also agrees that homogeneity of interests
tive structures. Holmström, however, notes that
is a crucial facilitating factor of an effective use
cooperative constitutions can take - and have
of voice. Maintaining a sufficient alignment of
already taken as the other articles published in
owner interests is a reason for cooperatives to
this volume show - many shapes and this is
constrain their activities to narrow lines of busi-
likely to help the adjustment process.
ness. This may also be a serious handicap,
should circumstances require something else.
Sufficient homogeneity of member interests, whose importance is emphasised by both
Holmström continues by discussing in
Hansmann and Holmström may be achieved in
length the reasons for the recent restructuring
many ways. It may sometimes be quite natural-
wave and, in particular, the crucial role the cap-
ly based on - even short-term - economic ben-
ital market has taken in it. Although most funds
efits. But, it is more probable when there is a
are still allocated internally in corporations, the
strong commitment to the cooperative idea on
impact of the capital market has become much
the part of the members.
more significant.
378
Given these advantages of the capital
Member commitment and its role is ana-
Holmström argues that this is so because
lysed in the third article by Professor Murray
in current circumstances moving capital "long
Fulton from the University of Saskatchewan.
distances", from - say - the metal industry to
Even though for instance a purchasers´ cooper-
telecommunication, has become more impor-
ative can, in principle, eliminate the market fail-
tant than in the past owing to deregulation and
ure of monopoly pricing of some product, such
a cooperative may not emerge or it may not sur-
today much better than earlier when coopera-
vive unless there is sufficient purchasers' com-
tive principles and early practice were formu-
mitment to the cooperative idea.
lated - appear to have influenced the formation
An incumbent monopolist can often un-
dercut the cooperative's prices for a while in
order to force the cooperative out of business
and evolution of cooperatives in different environments.
Dr Antti Kuusterä, docent at the Univer-
and restore monopoly prices. To avoid this the
sity of Helsinki, currently in process of writing
members of the cooperative have to be suffi-
the centenary history of Finnish cooperative
ciently committed to using cooperative services
banking movement, provides an economic his-
despite short-term benefits from doing business
torian's analysis of the factors that led to the for-
elsewhere. Similarly, a successful operation of
mation and growth of cooperative banks in Fin-
cooperatives requires sufficient participation of
land. The general ideological factor noted
the members in the exercise of control over the
above was in the Finnish case supplemented by
management. Without commitment free rider
another, clearly political motivation, national-
problems could make this participation inade-
ism. Cooperatives controlled by a large number
quate.
of Finns were seen as a roundabout way of
Commitment is a concept that links the
strengthening the Finnish nation in the small
more narrow economic arguments for the ex-
Grand Duchy of the Russian empire, when Fin-
istence of cooperatives to broader sociological
land's autonomy was threatened by increased
and political explanations of cooperative enter-
repression at the turn of the century.
prises. The establishment of cooperatives late
Yet, in the case of cooperative banks
last century was, at least in part, motivated by
Kuusterä emphasises the important role of the
ideological viewpoints: the existing capitalistic
economy. Although savings banks and commer-
economic order was considered not only eco-
cial banks had existed for decades and money
nomically deficient from the point of view of
was widely used as a means of exchange in the
some people but also "unfair". Organising eco-
vast rural areas, where the majority of the pop-
nomic activity on the basis of cooperative prin-
ulation was still living, capital formation and
ciples was seen by the proponents of the coop-
with that, economic progress was clearly held
erative idea morally superior to the capitalistic
back by poor access to credit. This was ham-
firm. This sort of ideology created a strong ba-
pered by the small scale of individual credit
sis for commitment to the cooperatives.
needs and a risky environment to the lenders:
potential lenders in towns knew very little of the
borrowers in the countryside and did not con-
Emergence and Evolution of
Cooperative Enterprises:
Interpreting History
sider it worthwhile to invest in information gath-
The second session of the seminar considered
metric information.
several examples of cooperative enterprising in
ering or monitoring activities. Financial intermediation was plagued by problems of asymThe cooperative bank - formed along the
order to examine in what ways different theo-
lines of the German rural credit movement
retical arguments about cooperatives - known
spearheaded by Friedrich Raiffeisen - provid-
379
ed a solution to the problem. In the coopera-
ther a cooperative society ("New Generation
tives the members knew each other, and thus
Cooperative") or public limited company (Pic
the board of directors of the cooperative banks
cooperative). This model is designed for a fo-
knew exactly the economic backgrounds of
cus strategy. The number and market strength
their borrowers and could also in enforcement
of both external-investor cooperatives and
rely on the social control of the village peo-
member-investor cooperatives can, according
ple. Yet, although handling fundamental infor-
to Nilsson, be expected to increase - especial-
mation problems was important for the emer-
ly the former group.
gence of credit cooperatives, they probably
Professor Cert van Dijk from Wageningen
had not grown very fast had they had to rely
Agricultural University and Nijenrode Univer-
on internally accumulated funds only. This is
sity - Netherlands Business School studies the
where the state provided an important contri-
evolution of business structures and marketing
bution. The state lent early on substantial
policies in EU farmer cooperatives. He consid-
amounts of money to the central organisation
ers a co-operative as a two-layer entrepreneur-
- Okobank - of the Finnish cooperative banks.
ial system in which the cooperative firm (c.f.)
Thus an economic rationale was supported by
is owned, used and controlled by member firms
a nationalistic ideology and government inter-
(m.f.), and where the c.f. maximises member
vention.
value or customer value. A key question is, who
Professor Jerker Nilsson from the Swed-
380
has the entrepreneurial lead in the cooperative
ish University of Agricultural Science studies in
system. In his paper van Dijk is mapping out
his paper how the emergence of the coopera-
the four broad strategies that European farmer
tive organisational models can be seen as re-
cooperatives have chosen in answering the stra-
flections of the business environments. In Nils-
tegic and financial challenges of the modern
son's taxonomy the tree main models are: the
market environment. One has been to change
traditional cooperative model, the external-in-
into an i.o.f. structure. The second has been to
vestor cooperative model and the member-in-
maintain the legal form of the cooperative at the
vestor cooperative model. The first model large-
level of the parent company (c.f., dealing with
ly implies collective ownership and governance
the transactions towards the members), but ac-
and is excellent when it comes to collection and
cepting non-members equity in subsidiaries
primary processing of agricultural commodities.
(s.f.) and in some cases having the subsidiaries
In more advanced and more capital intensive
stock listed. In most cases the entrepreneurial
businesses the models implying individual own-
lead has in these cases been shifted so that
ership by external investors and members are
while the c.f. takes on a part of organising tasks,
better. Especially in the case of outside inves-
essentially the s.f. is taking care of the entre-
tors both the amount of capital and the degree
preneurial lead. The third possibility has been
of commercial thinking increases making the
the differentiating model chosen, for instance,
differentiation strategy possible. In member-in-
by the North-American New Generation Coop-
vestor cooperatives the members invest in trad-
eratives, in which the value of the shares has
able shares that are proportional to their deliv-
been directly linked to the added value for the
eries to the cooperatives. The legal form is ei-
raw material produced by the m.f.'s. The fourth
model has been merging the cooperative firms
cross-border.
In the last paper of this section Professor
How will Cooperatives Cope
with the Challenge of Today
and Tomorrow?
Risto Tainio from the Helsinki School of Economics and Business Administration deals with
The third and last session of the seminar dis-
the strategic change in the evolution of coop-
cussed in more practical terms the current chal-
eratives in an environment characterized by a
lenges faced by cooperatives and how some
transition from nationally oriented, production-
successful cooperatives have met them.
driven industrial era to a global, investment-
The first paper by Mr Olle Hakelius Chair-
driven financial era, where the most significant
man of the Board of SLR and Cerealia as well
change has been the restructuring of the own-
as President of Cogeca and Vice-chairman of
ership of the companies. According to Tainio
LRF discusses the challenges faced by tradition-
Finnish cooperatives have been typical exam-
al producers' cooperatives in the rapidly chang-
ples of companies with strong CEOs and rela-
ing agricultural policy environment. He argues
tively passive owners, while modern coopera-
that as agricultural policy loses importance as
tives would need both active and competent
the main factor affecting the income to the farm-
management as well as active and competent
ers, the need for cooperatives will increase. To
owners with governance structures which ena-
meet the rapid changes cooperatives have to be
ble an active involvement of both these core
creative in finding solutions in the following
groups, when necessary.
areas:
Thus one of the first challenges of Finnish cooperatives seems to be to design their governance structures in a way that serves the new
demands of active owners, potential or real, by
rethinking the necessity of supervisory boards
and by redesigning the role and the composition of the boards of directors. The renewing of
the roles and composition of the board of directors can help to keep the destinies of co-operatives in their own hands. As the new boards
cannot ignore the new global reality, the simple imitation of the corporations in the leading
countries may also make cooperative compa-
• The decision-making processes have to be
speeded up and made more transparent
• The farmer-owners as well as the people
employed in their cooperatives have to become more market oriented
• Motivation for the owners of the cooperatives
to invest in the market has to be created to
be able to raise risk capital for market investments
• The relevant markets have to be identified
and cooperative solutions created across national borders to exploit those markets to the
benefit of the farmer-owners.
nies vulnerable. The challenge for cooperative
boards is to create wider options and special
Mr Jorma Vaajoki, president and CEO of Met-
solutions for new kinds of value creation in the
future.
sä-Serla Plc, describes the evolution and rapid
restructuring of Metsäliitto, the forest owner's
cooperative in Finland, and discusses how the
strategic needs of Finnish forest owners have
been served. Metsäliitto has been transformed
381
in a relatively short time from its original role
382
of collective experience of the cooperative or-
in handling the export of logs to a diversified,
ganisation, the Rabobank employees try to find
yet focused, group with operations in Europe
solutions the customer feels are appropriate. In
and a wide range of forest industry products
doing this, the Rabobank organisation is regard-
marketed worldwide. The structure of Metsä-
ed as a network whose core is formed by the
liitto Group has been streamlined during the
affiliated banks.
90s so that for the moment the companies in
The third case is developed by Professor
Metsäliitto Group are amongst the major play-
Michael L. Cook and Dr Constantine Iliopou-
ers in the specific branches it has chosen to be
los of the Graduate Institute of Cooperative
active in not only in Europe, but in part even
Leadership and Agribusiness Research Institute
on a global scale. As the forest industry is con-
at the University of Missouri, Columbia, Mis-
tinuing to consolidate rapidly and the main
souri, USA. The authors describe the emergence
challenge of Metsäliitto is to maintain its posi-
of a new form of cooperative organization - the
tion in the industry and to be one of the survi-
new generation cooperative. Since 1990 in the
vors that come through this stormy consolida-
northern part of the United States, several hun-
tion process. In this process one key issue of
dred new agricultural cooperatives with more
Metsäliitto as a cooperative is to get the best
than 2 billion dollars (US) in assets have been
use, as a source of competitive advantage, of
incorporated.
its capacity of being a major European forest
The authors argue that operating ineffi-
industry company owned and controlled by the
ciencies caused by vaguely defined property
forest owners.
rights in traditional cooperatives created an eco-
The second case of Rabobank is intro-
nomic environment in the United States where-
duced by Mr Henk Vlessert, corporate strategist
by agricultural producers commenced the
of Rabobank Nederland. He discusses how to
search for alternative collective action solu-
strike a balance in strategy and corporate gov-
tions. The paper continues by presenting the re-
ernance in a cooperative organisation that com-
sults of recent theoretical and empirical re-
prises a large variety of different units: local
search suggesting that several forms of collec-
cooperative banks in the Netherlands, a central
tive action and particularly the new generation
organisation including Rabobank International
cooperative ameliorate a number of the prop-
and subsidiaries for special financial services,
erty rights problems of traditional cooperatives.
both national and international. Rabobank-the
Particularly important are the concepts of de-
only bank globally with the highest financial
fined membership, transferable and appreciable
ratings - is providing a broad range of financial
delivery rights or equity shares, and well-de-
services in the Netherlands and specialised fi-
fined member contracts.
nancial services for food & agriculture, health-
The paper concludes with a detailed de-
care and financial institutions globally. Ra-
scription of the Dakota Growers Pasta Case - a
bobank defines as its objective the provision of
US new generation cooperative that adapts
customer value. Rabobank aims at realising this
many of the clarification of property rights
through a distinctive orientation toward custom-
measures discussed in the theoretical and em-
ers. Based on their expertise and the 100 years
pirical literature. The case demonstrates the
ability of individual producers to design rela-
erative form of enterprise, in particular the prob-
tively efficient cooperative organizations by im-
lems of heterogeneous member interests and
proving the clarity of cooperative residual con-
inability to change.
trol and residual claim rights.
The cases discussed not only show that
theoretical arguments really help understand
Concluding remarks
the evolution of cooperatives, but they also provide examples of the different paths coopera-
A popular belief has been that cooperation is
tive enterprises have already taken to meet the
long on practice but short on theory. In light of
often tough challenges of the modern market
the articles published in this volume, this per-
environment. In this regard the North American
ception appears rather inaccurate. Recent de-
new generation cooperatives are particularly
velopments in the theory of economic organi-
interesting, as there cooperative theory seems
sations have brought about many important in-
to directly guide practical organisational solu-
sights, which make it understandable that "what
tions - even if the Upper Midwestern U.S
works in practice can work also in principle".
farmers surely were not aware of this interest-
At the same time, theoretical work has high-
ing fact.
lighted the potential weak points of the coop-
383