The only thing farmers seem to do better than growing vast amounts of grain seems to be selling off ownership of the industry, especially in the West. In February of this year, Parrish and Heimbecker purchased the 112,000-tonne farmer-owned Weyburn Inland Terminal. Just a month earlier, Viterra bought the 42,000-tonne Lethbridge Inland Terminal that had been co-operatively built in 2007 by more than 150 southern Alberta farm operations.
Of course, we also remember the sales of the farmer-built Prairie pools and United Grain Growers.
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People argue why these and other farmer-owned grain-handling co-operatives were sold. Reasons include being too small to compete in the global markets, overregulation of the industry, not enough regulation, the existence of the CWB, the loss of the CWB, mismanagement, the inability of co-ops to raise funds for upgrades and expansion, and ideology and politics.
However, there is one reason rarely brought forward which farmers need to think about, not only to account for what happened to these co-operatives, but to prevent the same sorts of buyouts from happening to thousands more member-owned businesses, ranging from the few remaining independent grain facilities to farm supply co-operatives, rural gas and electrical co-ops, and credit unions.
That factor is a lack of business succession planning. Why are we not planning for the succession of our co-operative businesses to the next farming generation?
One of the main reasons co-ops disappear may simply be an increasing lack of knowledge of what co-operatives are. Many farmers no longer differentiate between the corporate and co-operative business models. Failure to educate and update the co-operative directors, staff, prospective co-op members, and even current membership on the advantages and benefits of being a co-operative may be the leading cause of co-operatives transitioning to a corporate or private ownership structure.
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Dr. Greg McKee, ag economist at North Dakota State University, argues that each co-op must have an ongoing education program. “Co-ops must communicate with the membership to prevent misunderstandings,” McKee says. “They need to educate the core membership on the role of a co-op. They need to provide leadership training to the board.”
This is not to say that co-ops can ignore supply-and-demand forces, and McKee is quick to agree that co-ops must be competitive to remain in business. To retain their membership, he says, co-ops must compete with all other businesses in both price and quality of products and service.
Leadership
In their working paper “Succession Planning in Nonprofit Organizations” published by the Centre for Non-profit Strategy and Management at Baruch College, New York, researchers identified an “impending leadership deficit” for co-operatives and non-profit organizations. The authors found by survey that only 18 per cent of co-operatives have developed a formal plan for CEO transition. The paper’s summary stated: “Both types of organizations see succession planning as important, yet are doing relatively little about it.”
Quality leadership is as important to success in a co-operative as it is in any other business. According to McKee, a board must “define the characteristics desired for the CEO, aligning CEO succession with business goals and ensuring that a pool of qualified candidates exists. Selection of the CEO is the most important activity of the board of directors. Planning for CEO succession is a board responsibility and the board should not wait for the CEO to raise the issue.”
McKee also says succession planning needs to go beyond simply setting a procedure for replacing the CEO, and also must identify the skills and traits needed in a CEO as well as encourage the development of these skills in management personnel within the co-op.
McKee feels the same attention must be paid to selection of directors of the co-op. The current board needs to seek out members who have the attributes desired in a director. They must actively recruit and educate potential directors.
McKee even recommends that co-ops consider having a non-member director on the board if that person brings needed skills to the board table.
The Ontario Co-operative Association suggests adding a youth directorship to the board of a co-operative. This provides a learning opportunity not only for a young person but for the board as well. (A check is needed of provincial legislation to determine how old a person must be to be a director — usually 18.)
It is important that boards which bring in a youth director ensure the youth director has all the rights and responsibilities of any directorship, including voting privileges. A youth director should not to be a token position. However, the association says the term of appointment may differ, such as a one-year term for a youth director instead of the usual three- or four-year term for a director.
Strategies
While education and leadership are important, co-ops must also ensure they continue to meet the needs of all members. This was likely a lot easier in the past when there was likely less differentiation in farm size and in the business needs of members. The more diverse the membership, the more likely it is that the co-op will run into problems. As well, the larger the membership, the greater the risk of the co-op failing.
McKee, however, suggests a number of strategies to address this issue of member satisfaction.
First, clearly identify the goals of the members and of the co-op. Continually communicate these goals to the membership, staff and directors.
Second, identify where the business is losing membership and address the problem.
Third, stop trying for 100 per cent consensus. It is impossible to be everything to everyone all the time. Focus on the core business of the co-op.
Fourth, consider offering customized or specialized services for a subset of the membership. While this may appear to go against the basic equality principle of co-ops, McKee suggests co-ops could offer a new class of membership, or a preferred membership for the subset of membership who is looking for additional service over and above the basic service available to all members.
McKee is also emphatic on another point: “A co-op cannot simply continue with business as usual. A co-op will not succeed if it will not change with the times.”
An example of change may be using social media like Facebook, Twitter, or even a blog to communicate with the membership and prospective members (especially young people) about the co-operative and how it differs from other businesses. (The addition of a youth director may bring valuable information about social media to the board table.)
Dr. Murray Fulton, director of the Centre for the Study of Co-operatives at the University of Saskatchewan, identifies some other issues that co-ops have experienced which likely have contributed to the transition of some rural co-ops. He also identifies the succession strategies that could have been used to prevent these issues leading to loss of membership control.
According to Fulton, some co-ops fail to allocate sufficient funds to cover retained earnings which are payable when members leave a co-op. He says a co-op must set aside the funds needed to cover this cost. He also suggests a co-op may even want to consider a regular, scheduled payout of retained earnings for all members instead of waiting until members leave.
On the other hand, Fulton points out some co-operatives have not allocated enough of the profits generated by the co-op for the growth of the co-operative. While high patronage rebates benefit current membership through lower costs and services, it can be a short-sighted strategy. Instead of returning all profits as patronage dividends, Fulton wonders if perhaps some of these funds could remain as permanent capital of the co-op to be used for growth and expansion of services.
New-generation co-operatives
Fulton and McKee warn that new-generation co-ops present an even greater challenge for long-term continuation under the co-operative business model. While new-generation co-ops seemed the perfect way for a group to fund a new venture to provide a needed service in a community, this model typically requires a very significant upfront investment by the membership.
Even after a relatively short time, a successful new-generation co-op (NGC) can have increased so much in value that potential new members simply cannot afford to buy out members seeking to leave the co-op. As a result, new-generation co-ops are even more likely to transition away from membership control than a traditional co-op.
If you are a member of a new-generation co-op it is even more critical you have a strategy in place to transfer ownership to new members if you want the business to remain under membership control.
This is also the opinion of USDA economist Bruce Reynolds. In his publication, Ownership Succession Crucial for Rural America, Reynolds writes: “The challenge is that most beginning farmers, especially those with farm debt, cannot afford to buy appreciated shares in a new-generation co-op.
“In recent years, many value-added enterprises have been functioning as NGCs but have been formed as Limited Liability Companies (LLCs),” Reynolds continues. “In this way farmers have a larger market for selling shares, one that includes non-farmer investors, but ownership and control of these businesses will become increasingly unavailable to beginning farmers, or to any farmers, for that matter.
“Thus the new-generation co-operative may not become the co-operative for the next generation of farmers.”
The co-operative business model is highly successful. The 2012 House of Commons Committee report “Status of Co-operatives in Canada” points out one in three private-sector businesses fails whereas only one in five co-operative enterprises fails.
However, their downfall is business succession planning. If you are a member of a co-op, and want to see the business continue to be member controlled, succession planning is an issue your membership and directors must tackle immediately.
