Cooperative Information Report 1, Section 8
Revised January 1995
Reviewed and approved for reprinting July 1997
Contents
RESOURCES TO MANAGE
People
Capital
Facilities
MANAGEMENT TOOLS
Accounting System
Control
Reports
Security
and Safety
Evaluation
and Training
Incentive
Programs
Communications
Budgets
Strategic
Planning
ELEMENTS AND DIVISION OF RESPONSIBILITY
Members
Board of
Directors
Hired
Management
MANAGING LOCAL OPERATIONS
Marketing
Supply
CHALLENGES: MANAGEMENT OR LEADERSHIP
Cooperative Management Management has greatly improved as
cooperatives have become larger, more diversified, and integrated to match similar
advances in the marketplace and on the farm.
In the early years, local cooperative managers
not only supervised operations but also maintained accounting records, waited on
customers, and swept floors. Boards of directors knew little about off-farm businesses.
Many cooperatives failed because of inept operating management and poor monitoring by the
board.
Specific examples included overextension of
credit and unsound collection practices, poor technique in grain marketing, inadequate
attention to keeping products in condition, overexpansion of facilities, underfinancing,
overadvances to growers in pooling operations, dominance of the hired manager, and board
interference in management of operations.
Both surviving and new cooperatives learned
important lessons from these experiences.
As regional cooperatives developed and became
stronger, they began providing more assistance to local boards and managers through
general field representatives. This included helping recruit and train managers and
assistants. Later, several provided financing and direct management service to the weaker
locals, and auditing and analysis service to all member locals.
With the advent of The National Cooperative
Bank (CoBank) and other Banks for Cooperatives, valuable management and financial counsel
became available to cooperative borrowers. In many cases, this perhaps is more valuable
than the funds loaned to them.
In the past, local cooperatives often viewed
their bookkeepers or office managers as potential replacements for general managers. Now,
many employ assistant managers and department heads who have had prior business and sales
experience.
Regional cooperatives employ university
graduates with training in business administration, agribusiness, or sales management and
place them in management trainee programs before moving them to managerial positions.
Some regional cooperatives provide management
training for local managers, using their own staffs or management consulting firms as
trainers. Most regionals send key employees to management schools or seminars.
Some State cooperative councils and cooperative
centers offer basic director, management, and employee training to local cooperatives. In
their training, they often use case studies and roleplays based on local problems.
Personnel from regionals sometimes assist in conducting the program.
Cooperatives have increased in size and
diversity of products and services, and have departmentalized their operations. Larger
regionals have numerous subsidiaries. This stimulates more training for secondary level
managers. Training is provided by personnel or formal training departments of regional
cooperatives, who often contract with outside providers or universities.
Most farmer-directors have become more
business-minded as their own farm operations grew. They give more attention to their
cooperative's management. They employ managers with more training and expect them to
improve their knowledge and skills. Also, a growing number of directors seek to become
more proficient in directing the affairs of their cooperatives.
Public concern about food safety, pollution
control, health and the environment, monopoly, and related issues focuses attention on the
competence, integrity, and behavior of cooperative directors. As a result, cooperatives
are becoming more aware of the need to indemnify directors who are subject to increased
legal exposure.
The growing impact of world markets, even on
the individual family operation, is changing the management perspective from the local
cooperative level. The local is being viewed less and less as an independent entity and
more and more as part of a system.
Therefore, planning and strategy are evaluated
in terms of the local's relationship to neighboring cooperatives, other areas,
agribusinesses, the regional cooperatives in which it has ownership, to the markets into
which members' products flow, and to the ultimate use of those products.
Management combines ideas, processes,
materials, facilities, and people to effectively provide needed services to member-owners,
Management is the decisionmaking element of the cooperative. Broadly speaking, its role
entails formulating and executing operating policies, providing good service, maintaining
financial soundness, and implementing operating efficiencies to successfully meet its
objects.
A successful cooperative is viable in an
economic or business sense and maintains or improves its cooperative character or
features. A cooperative may succeed as a business, but gradually lose its cooperative
character regarding member control, serving the needs of members, and distributing net
margins. Likewise, it may succeed for a while as a cooperative, but fail as a sound
business institution.
Managing a cooperative is challenging and
difficult. It involves not only managing resources and business operations, as in other
businesses, but also dealing with problems stemming from the cooperative's distinctive
characteristics. Because the cooperative's members are both owners and patrons, special
relationships and problems arise concerning member and board of director roles and
responsibilities.
Seemingly conflicting answers to questions
arise. What's different in managing a cooperative from any other type of business? The
answers can range from "all the difference in the world" to "none at
all." A former regional cooperative chief executive officer offered this answer:
"Decisionmaking techniques are identical, but the cooperative's objectives are
different; therefore, the manager's conclusions will be different."
Cooperative principles and objectives present a
distinctly different managerial premise. That premise is revealed in more detail through
the following perspectives an executive must acquire to be a good cooperative manager:
1. Adjusting decisionmaking to a business
where the customers are also the owners. In a supply purchasing cooperative, the
manager of an investor-owned firm (IOF) may discover that many of the successful
techniques associated with developing a salable and satisfactory product (for the
customer) and achieving maximum return on capital (for the owner) no longer apply.
A cooperative manager has to adjust priorities
and objectives to the realization that what's best for the customer (also the owner)
really is best for the cooperative. This realization may explain why some low- or
no-margin services continue to be provided and why certain unrelated and perhaps
high-margin activities are not considered in a cooperative.
The manager of a marketing cooperative must
understand why the cooperative often is obligated to take all of the members' products and
attempt to find a market for them. The manager is not at liberty to pick and choose among
such product suppliers and cut off marketings when inventories build up. And certainly to
allow the member-producer to dictate the terms on which the cooperative business should
receive the product would be a situation foreign to noncooperative managers.
2. Dealing with complex issues of equitable
treatment of owner-patrons, the manager of an IOF will discover that distributing the net
earnings of a cooperative is much more complicated than declaring a dividend on capital
stock. The standard cooperative practice of distributing net earning on the basis of
individual member volume, such as units marketed or quantity of supplies purchased, also
will be new should he/she become a cooperative manager.
For larger cooperatives that handle many
products and involve value-added activities, the issue of equitable treatment of
member-owners can be complex.
Another concept new to an IOF manager now
heading a cooperative is the requirement that member-owners share equitably in financing
the cooperative, and that management communicates that responsibility to them and develops
financing programs they'll accept.
3. Working in a service-oriented
organization is a spotlighted atmosphere. The manager of a typical cooperative will
find that members formed it to provide a needed marketing or purchasing service or both.
Hence, every time they use the cooperative they evaluate the service performed by its
employees. Often, members may wish to express their views directly to the manager or to
get management advice about supplies to use or when to market their products.
Therefore, a cooperative manager may feel that
he/she is operating in an enclosed environment, compared with the manager of an IOF whose
only interface with most stockholders occurs at annual meetings when they want an
accounting of why there were changes in the market value of their stock or in the
dividends declared on it.
Even in the day-to-day routine of a large
cooperative, the new cooperative manager may encounter a different working environment. A
senior manager of a regional cooperative once observed, "A major change I had to face
was what I call working under a spotlight.
" Soon after joining the cooperative, I
found that the half-million farmers who owned our member cooperatives wanted to know what
I was doing. Their interest was genuine. Thousands toured the cooperative each year and
some wished to meet the executives and professionals. They were important to us and not
just ordinary visitors. Rather, they were managers of local cooperatives that owned the
regional, or farmers who owned the locals."
He concluded, "an executive or
professional joining a cooperative must adapt himself to the publicity surrounding his
work."
4. Cooperatives have unique management
implications of business ownership and control. Managers perform under the influence
of various motivational factors - pay, power, prestige, and a place in history. Not all
are fully transferable from an investor-oriented business to a member-user oriented
cooperative.
An example concerns the ownership and control
of the business. An investor-oriented business executive or manager looking for a company
to "gain control of' either by outstanding performance, political maneuver, or
eventual ownership will be surprised if the company is a cooperative. A cooperative
manager can never acquire "ownership rights," and must become resolved to always
being an employee.
Further, the manager will discover it necessary
to deliberately involve a majority of the member-owners, not just a few principal
stockholders, in major decisions affecting cooperative policy and its business objectives.
The prospective cooperative manager, therefore, needs to carefully assess whether his/her
management style and personal performance motives and ambitions are compatible with the
constraints of a cooperative owned and democratically controlled by member-users.
Like any other business, three major types of resources must be managed in a cooperative-people, capital, and facilities.
The most important resource in a cooperative
is people. The success of all phases of the business depends on competent personnel
working together smoothly and efficiently. In a 1994 study conducted by Janice Dresbach,
Ohio State University, cooperative mangers said training was highly important in the areas
of improving customer relations, educating members about the cooperative way of doing
business, working effectively with a board of directors, identifying member needs.
In an earlier study, managers cited the ability
to deal effectively with people was the qualification most important to the success of the
best manager they had ever known. Ability to size up a situation and act accordingly was
ranked next in importance. Qualifications considered least important were ability to keep
pressure on until the job is done and technical knowledge of supplies handled.
Personnel management thus is a critical phase
of business management. It begins with the selection of personnel, followed by training
and evaluation. Much depends on personnel supervisors who must plan the work, delegate
responsibilities and authority, analyze jobs, and set performance standards, as well as
train workers, review performance, set up grievance procedures, and provide leadership.
And proper compensation, including fringe benefits and incentives, is important in
personnel management.
Management should also motivate and reward
employees. This coaching function involves seeking suggestions from staff, creating an
environment where employees can be innovative, establishing goals, inspiring and
recognizing good performance, and developing teamwork and an esprit de corps among
employees.
In a cooperative, management also must strongly
emphasize member relations because ownership, control, and patronage all are member
functions. This involves adequate two-way communication and information from management to
members and from members to management. Continuous efforts are also needed to obtain new
members to maintain the organization and an adequate volume of products or services.
Maintaining or improving good member-patron
relations involves providing good, honest service and helpful information about the
cooperative and the products it handles. It means keeping members informed about policies,
operating practices, and financial requirements; and pointing out their responsibilities
for making the cooperative successful.
Management of a cooperative, as in other
businesses, also must be concerned with public relations. If there is to be public
understanding and acceptance of the cooperative, the public must have information on its
objectives, accomplishments and benefits, and limitations.
Financial management, a key to operating
cooperatives, involves managing assets such as cash, accounts receivable, inventories,
fixed assets, and investments in other organizations. It includes managing liabilities,
such as accounts payable and current notes payable, and obtaining favorable long-term
financing. Sufficient member or equity capital and a sound financial position must be
maintained that will be acceptable to creditors, suppliers, or buyers of cooperative
products. This requires periodic analysis of the cooperative's financial position, its
operating efficiency, and proposals for expansion.
Financial management involves: (1) considering
funds available and source for additional capital; (2) allocating funds among assets to be
financed; and (3) ensuring that all aspects of financing are dealt with in a manner
consistent with sound business practices and cooperative principles.
Building and equipment can represent a large proportion of a cooperative's assets. Therefore, important management considerations include scheduled maintenance; rearrangement, remodeling, and replacement to improve operating efficiency; daily operating cost records; preventive maintenance programs for rolling stock such as delivery trucks; grounds maintenance and pest control; adequate insurance; disposal of unproductive assets; and observance of safety, health, and other environmental regulations.
Overall, management embodies four functions - planning, organizing, motivating, and
controlling.
Planning determines where the organization is
going and how it will get there. It sets organizational objectives and goals, forecasts
the environment in which objectives must be accomplished, and determines the approach by
which objectives and goals are to be accomplished. Planning is used to determine a policy
and the procedures for putting it into effect.
Planning usually considers several
alternatives. Each should be judged on the basis of its economic or competitive effect and
accompanying problems. Also, it must be consistent with cooperative principles and the
association's objectives. Planning helps a manager shape the future of the organization
rather than being caught in an endless trap of reacting only to current crises or
problems.
Organizing is concerned with determining the
specific activities needed to accomplish the planned objectives and goals; grouping the
activities into a logical pattern, framework, or structure; assigning the activities to
specific positions and people; and providing means for coordinating the efforts of
individuals and groups. Organizing is a bridge connecting the planned objectives to
specific projects for accomplishing these objectives.
Motivating concerns the people side of the
organization. Cooperatives are people-driven organizations, from the standpoint of both
employees and members. Managers must have leadership skills and be effective
communicators. The manager's ability to influence members through leadership will help
determine the extent to which both individuals and the entire organization accomplish
their goals.
A manager spends up to 95 percent of the time
communicating. Good communication is essential to coordinating the organization's human
and physical elements into an efficient and effective working unit.
In controlling, management monitors the
progress of planned activities, If progress is lagging, necessary adjustments are made.
Controlling is the checkup part of a manager's job.
Management uses a number of tools to carry out its functions-accounting system, control reports, security and safety, training and evaluation, incentive programs, communications, and strategic planning.
A complete and accurate accounting system is
vital for effective management. It must produce several financial statements needed in
planning and controlling, such as: (1) monthly and annual balance sheets and operating
statements; (2) functional or enterprise accounts pertaining to departments or specific
lines of business; and (3) special accounts such as patronage records, accounts receivable
aging, member equity, and patron financing.
An independent auditor periodically verifies
the accuracy of the cooperative's business records. This is especially useful to directors
in performing their controlling and planning functions. It helps the board determine the
extent to which the manager has followed financial policies, and evaluate how the
cooperative is accomplishing its basic objectives. The external audit is primarily a board
tool.
Larger cooperatives also use internal audit
reports. The internal auditor's primary duty is to monitor the cooperative's accounting
policy. The auditor checks the cost of prescribed procedures, including their effect on
patrons and personnel, and suggests ways to prevent errors. Usually, the auditor reports
to the chief accounting officer, but sometimes to the general manager or even to the board
of directors. Internal audits are primarily manager tools.
Credit and inventory analysis include a monthly aging of accounts and notes receivable; selected financial and operating ratios;and a monthly accounting of selected inventories, including shrinkage reports.
To protect the cooperative, the board is
responsible for adequately insuring employees and assets. Employees handling funds should
be bonded. Facilities need to be appraised and arranged internally and fenced to minimize
pilferage.
The board should adopt programs to protect the
health and safety of employees and patrons and measures to comply with environmental
protection standards.
Management will be evaluated even if the
process is not formally planned. Member-owners continually evaluate their hired management
in terms of how well the cooperative is serving members. Regardless of cooperative size,
supervisory personnel are evaluated on the basis of how they perform day-to-day.
In addition, business leaders, who know about
or deal with the cooperative, indirectly evaluate its management. While this type of
evaluation may have a direct impact on the cooperative, the process usually doesn't
clearly identify weaknesses so they can be corrected.
Larger cooperatives use professional management
consulting firms to assess whether the cooperative's management structure is efficient,
locate weaknesses and strengths, and suggest what types of management training are needed.
A cooperative of any size can lay a fundamental
basis for evaluating its management. The essential requirement is to develop an evaluation
plan and then follow it (figure 1).
Present and prospective supervisors can be
encouraged to improve their management abilities by using a wide range of training
resources. Cooperatives often send many of their top management staffers to commercial
seminars on management or to specialized educational seminars such as the Graduate
Institute of Cooperative Leadership sponsored by the University of Missouri-Columbia.
Other resources are land-grant universities, banks of the Farm Credit System, regional
cooperatives, and the Federal extension service. State cooperative councils, in
conjunction with land-grant universities and cooperatives, also offer a variety of
workshops and seminars.
Management Appraisal Report
Management's traditional scope concerns land (facilities and
equipment), people, and capital. This is accomplished by using the management functions of
planning, organizing, motivating, and controlling.
Therefore, this appraisal report (figure 1)
considers those general areas (motivating is appraised in the people section). Specific
items will be addressed under each of the major areas. Specific areas will be rated first
and then an overall rating given for that area. The rating of each major area will be
justified with written comments.
Figure 1- Management Appraisal Report
Key question to ask: Rating: Circle F, G or C. These ratings are used
in evaluating the various sections of this report:
F: Fair: Performance usually meets standards but improvement is possible and
desirable.
G: Good: Performance meets and sometimes exceeds standards. Contributions are
consistent and reliable.
C: Commendable: Performance often exceeds standards or expectations.
Considerable initiative has been exhibited.
1. Land (facilities and equipment)
A. Specific Indicators:
1. Adequacy of facilities and equipment. How well does the general manager analyze equipment and facility needs and make appropriate recornmendations? F G C
2. Is the physical plant well repaired and maintained-quality of elevators, fertilizer plants, and other buildings and equipment? F G C
3. Do facilities and equipment appear clean and attractive? F G C
B. Rate the manager's overall performance in managing and equipment. F G C
C. Comments:
II. Labor (including employees, board, and patrons)
A. Specific Indicators - Employees:
1. Do cooperative employees appear to enjoy their work? F G C
2. Are employees given performance appraisals regularly? Are they provided training and development opportunities? F G C
3. Does the cooperative have sufficient backup in key positions? Can the cooperative operate effectively when the manager is absent? F G C
4. How well does the manager resolve conflicts among employees and between employees and patrons? F G C
B. Rate the manager's overall performance in handling employees. F G C
C. Comments:
D. Specific Indicators - Board:
1. Does the board receive quality information on a timely basis so it can make informed decisions? F G C
2. Does the general manager provide leadership and direction to the board? F G C
3. Does the manager make good, timely decisions? Are the decisions made within the sphere of management? F G C
4. Does the manager create an atmosphere of trust that makes the board comfortable with management decisions? F G C
E. Rate the manager's overall performance in relating with the board. F G C
F. Comments:
G. Specific Indicators - Patrons/Public:
1. Does the manager project a positive image to the patrons? Is he/she respected in the community? F G C
2. Does the manager effectively communicate to members about cooperative activities? F G C
3. Does the manager respond promptly and effectively to resolving patron concerns or complaints? F G C
4. Do the manager and staff strive toward prompt and courteous service to patrons? F G C
5. Does the manager have a good working relationship with the cooperative's lender? F G C
6. Does the manager have a good working relationship with the cooperative's regional cooperative(s)? F G C
7. Does the manager participate in community affairs in an effort to promote the cooperative? F G C
H. Rate the manager's overall performance in dealing with patrons and the general public. F G C
I. Comments:
III.. Capital (financial affairs)
A. Profitability Ratios: Standard Actual
1. Local Return on Sales _______ F G C
2. Local Return on Local Assets _______ F G C
B. Liquidity Ratios: _________ F G C
1. Interest Coverage Ratio _____ F G C
2. Current Ratio _______ F G C
3. Working Capital to Sales _______ F G C
4. Days' Sales in Accounts Receivable _______ F G C
5. Debt Service Ratio _______ F G C
C. Efficiency Ratios:
1. Firm Productivity Ratio ______ F G C
2. Labor Income Ratio _____ F G C
D. Solvency Ratios:
1. Local Leverage Ratio _____ F G C
2. Term Debt to Fixed Assets _____ F G C
3. Ownership Ratio _______ F G C
E. Rate the overall financial management of the cooperative including financial strength, earnings performance, and financial improvement. F G C
F. Comments:
IV. Planning
A. Specific Indicators:
1. How well does the manager provide vision and foresight to the board? F G C
2. How effectively does the general manager include the board and the staff in the planning process? F G C
3. How well are the plans implemented and the results evaluated? F G C
4. How accurate and adequate is the budget process? F G C
B. Rate the overall performance of the manager in the planning process. F G C
C. Comments:
V. Organizing
A. Specific Indicators:
1. Does the manager have and effectively use an organization chart outlining chain of command and reporting relationships? F G C
2. Does the manager have in place current job descriptions for each position in the company? F G C
3. Does the manager appear to delegate effectively to department heads or key employees? F G C
B. Rate the overall performance of the manager in effectively organizing the cooperative.
C. Comments:
VI. Controlling
A. Specific Indicators:
1. Are monthly financial statements accurate and timely? F G C
2. Are year-end statements reasonably close to information provided in monthly financial statements? F G C
3. Are additions to fixed assets within the parameters of board policies? F G C
4. Is the board's credit policy implemented and administered appropriately? F G C
5. Are short-term loans used effectively to minimize interest expense? F G C
6. Are relevant policies and procedures in place to minimize problems? F G C
B. Rate the overall performance of the manager in establishing and administering an adequate control system.
C. Comments:
VII. Summary
1. What are the manager's strengths and in
what ways does he/she contribute best to the success of the cooperative?
F G C
2. What are the most significant weaknesses that need to be corrected? F G C
3. What does the board expect the manager to do during the next 12 months? F G C
4. Based on this evaluation, the board rates the general manager's overall performance:[ ] Fair [ ] Good [ ] Commendable
This appraisal of my performance has been reviewed with me by the chair of the board. I accept this appraisal of my performance for the past 12 months and will strive to improve upon those areas as noted.
Manager __________________________________________Date______________________
Chair,_____________________________________________Date_______________________
Board of Director
In addition to job descriptions and salary ranges, managers in an increasing number of cooperatives use incentive payment plans to encourage productivity. Also, many use certificates of merit or special activities to recognize superior employee performance.
Managers communicate with employees,
members, and the public in a variety of ways-membership and employee publications, annual
reports, member and employee meetings, and reports by educational and Government agencies.
One regional cooperative has used satellite
transmission for conducting its annual meeting simultaneously at multiple sites. Distance
learning, CD-ROM computer media, computer simulation and self-contained units with video
tapes, facilitator guides and workbooks are being used in educational programs for
directors, managers, and employees.
Budgets are valuable tools in planning and
controlling the cooperative. Hired management usually prepares three types of
budgets-operating, cash, and capital.
Operating budgets are completed each year. The
first step is to project revenue sources, an estimate of the sales or income volume in
physical units and their values. Next, prepare estimates of variable and fixed costs based
on the income projections. Last, calculate net earnings. To obtain maximum benefit of the
budget, operating management should compare the actual income and expense against the
monthly projections. Where actual results are worse than the projections, corrective
actions should be taken.
Cash budgets estimate the flow of funds for a fiscal year. If completed
on a monthly basis, they help plan borrowing or investing of operating capital, the
ability to take advantage of discounts, and serve as a financial control. Cash budgets are
important for seasonal businesses.
Capital budgets have a longer planning span,
usually 5 years. These budgets might include the cooperatives needs for more land,
buildings, equipment, services and operating capital. An integral part of this budget are
feasibility studies on projected asset purchases and to consider alternative investments
that could produce greater returns and still satisfy the mission of the association.
Finally, identify the source of funds for capital projects. Sources to consider could be
equity capital, borrowed funds, or retained net earnings.
These three types of budgets quantify the
financial resources needed to satisfy the capital requirement of the overall strategic
business plan.
Strategic planning is a formal and
systematic process. It is long-term and different than short-term or annual budgeting. Its
primary purpose is to determine the current position of the cooperative and chart its
future direction. The planning horizon is usually 3 to 10 years.
Strategic planning is objective oriented and
focuses on specific measurable actions. It is based on available and factual information
and assumptions regarding the future. It clarifies relationships, promotes understanding
of established objectives, and assigns specific responsibilities, tasks, and time
schedules. It includes orderly review of progress.
Strategic planning uses the cooperative's
strengths to put it in the best possible position while change is occurring. It also
devises steps to minimize the cooperative's weaknesses, or even better, devises steps that
turn weaknesses into strengths.
Strategic planning helps obtain the confidence
of lenders and investors. It evaluates alternative actions. In short, strategic planning
makes a cooperative proactive instead of reactive.
ELEMENTS AND DIVISION OF RESPONSIBILITY
Management of the cooperative is a team effort that combines three elements-members, elected directors, and hired management. Often, management is construed to be only the full-time general manager, or chief executive officer, and department heads. This is understandable because this is their full-time responsibility. Members and directors look to them for information and guidance. Obviously then, the responsibilities of these three elements should be clearly understood and followed.
Articles of incorporation spell out member's
specific powers. Members also have moral and legal responsibilities in relationship to
these powers. Members are involved in the broad management aspects of a cooperative
because they are both its owners and patrons. They live close to it and exercise more
control than the stockholders of other corporations.
Powers of the membership are: (1) adopt and
amend articles of incorporation, bylaws and agreements; (2) if necessary, select and
recall a board of directors; (3) examine annual reports; and (4) study major issues and
cast informed votes. Examples of issues include: (a) adoption of long-range strategic
plans, (b) major expansion in facilities, (c) changes in capital structure, (d) adoption
of a marketing contract, (e) addition of a major type of supply or service, (f) sale of
major assets and, (5) dissolve or merge the association.
Members are responsible for: (1) providing the
necessary capital, (2) patronizing the cooperative to the fullest possible extent, (3)
paying the cost of operations, (4) assuming the business risk, (5) controlling the
cooperative through its elected board of directors, and (6) keeping informed about the
cooperative.
Directors represent members within the
framework of an official board of directors. All corporate powers of thecooperative, other
than those specifically conferred upon members, are vested in itsdirectors. These powers
and responsibilities are outlined in the bylaws.
Three major responsibilities are to set
policies, employ a general manager to carry them out, and then evaluate the manager's
performance.
Ten more specific management responsibilities
of the board are: (1) functioning as trustees for the members in safeguarding assets in
their cooperative; (2) determining the mission of the cooperative and setting objectives
and general policies; (3) defining and adopting long-range strategic plans; (4) employing
a competent manager; (5) preserving the cooperative character of the organization; (6)
requiring accounts and records; (7) appointing an outside auditor; (8) controlling the
total operation; (9) distributing corporate net earnings or savings; and (10) redeeming
equities in an expedient manner.
In the past, directors often were farmers who
have been members for many years and made maximum use of the association. Today,
progressive cooperatives are electing a more balanced representation of the membership.
Both younger and older members provide direction for both current operations and meeting
their future needs.
The member elected to become a cooperative
director probably wonders, how much of my time will this job require? And perhaps present
directors wonder if they're spending too little or too much time fulfilling their
cooperative responsibilities. Past studies revealed that 37 percent spent 2 weeks or less;
52 percent spent between 2 weeks and a month; and 11 percent spent more than 1 month per
year.
Sixty-eight percent of the cooperatives
compensate their directors for attending meetings. The frequency of meetings ranged from
two or three per year to monthly.
The board of directors, in turn, delegates
much of its overall management responsibility-the daily operations-to a full-time manager
or chief executive officer. The manager, in turn, is empowered to employ and discharge key
employees such as department heads, who together with the manager comprise the hired top
management staff or team.
Characteristics of a successful manager are
difficult to identify. Individual managers have different characteristics and skill
levels. One board could determine that an individual manager was not performing to
expectation, while the same manager could perform successfully in another cooperative. The
challenge is to match the individual's characteristics, personality, and skills with the
job.
Generally, the ability to work with people -
employees, directors, and members-is exceedingly important. This includes ability to hire,
train, supervise, and motivate competent employees and to delegate responsibility. A
second trait is business knowledge. A third is the ability to keep the cooperative meeting
the needs of members and following sound cooperative principles.
A past study found that a positive self-concept
and knowledge of economics and products usually resulted in improved performance of
managers and increased net earnings of their cooperatives. Education, training, and
knowledge of the business were reasonably good predictors of managerial performance, but
only knowledge and management experience were good predictors of economic success of the
cooperative. The study also indicated some indirect relationships or correlations. For
instance, managers with the most education tended to acquire more training and thus gain
more knowledge. This eventually boosted the cooperative's net earnings.
Common management responsibilities are: (1)
manage or direct daily business activities; (2) set goals and develop short-term strategic
plans including budgets and cash flow statement as requested by the board; (3) employ,
appraise, and terminate employees as necessary; (4) organize and coordinate internal
activities and subordinates; (5) control daily operations; (6) maintain an accurate
bookkeeping system; (7) prepare and present accurate financial and operational reports;
and (8) attend all board meetings.
Often, questions arise about the division of
responsibilities between the board of directors and hired management. Sometimes they
overlap and an exact division cannot be made. Consider these factors: (1) long-term
decisions are the responsibility of the board and operational decisions are those of
management; (2) idea decisions are usually handled by the board and action decisions by
management; (3) trustee decisions involving policy are the responsibility of the board
while trustee actions are handled by management; (4) broad primary control activities fall
to the board while secondary controls pertaining to short-run operations are the
responsibility of management; (5) employment of the manager is the responsibility of the
board; but (6) employment, supervision, and evaluation of cooperative employees is the
responsibility of hired management.
The use of policy and procedure manuals and job
descriptions along with frank discussion of problems when they arise help maintain an
understanding of the division of responsibility.
Management of the local cooperative is
perhaps the most difficult and demanding on the total personality and ability of the
manager.
Local managers, in most cases, cannot disappear
into their offices to make business decisions while skilled supervisors "run the
shop." The local manager may have supervisors, and good ones, but usually the manager
must do much of his/her thinking in the middle of daily operations. The manager is highly
visible to member-owner-customers and may be faced with time-consuming and varied
decisionmaking situations.
Marketing farm products involves local
assembling, packing, semi-processing, processing, storing, selling, merchandising, and
transporting the commodity.
Many farm products are perishable. Cooperatives
sell them either in an unprocessed (fresh or whole) or processed form. Cooperatives also
market them in two basic ways-buy-and-sell or pooling.
These are some typical basic business decisions
that characterize the daily operations of a marketing cooperative. Where large businesses,
including cooperatives, may have economic and business analysts to assist the manager, the
smaller local associations must rely largely on the knowledge, experience, and judgement
of the individual manager. Among decisions the manager faces are:
1. Providing assembling or trucking
services and rates. Decisions must be made regarding the level of service from farm
to market and rates to be charged. Should the cooperative own or lease trucks or contract
for hauling?
2. Pricing or paying for products,
including handling or pooling expenses and sales proceeds. In buy and sell
operations, cooperatives determine how daily paying prices will be set and what the gross
margin per unit of product should be. Also, discounts and premiums for quality
considerations are part of the activity.
In pooling operations, policies regarding cash
advances to growers at time of delivery are important. There may be no advance, an initial
small advance with succeeding advances or progress payments, an advance based on a fixed
percent of the market price, or the advance may reflect the current market price. Also
important is the length of the pool - daily, weekly, or seasonal. Will a pool be
established for each product or a group of similar products, and for each grade or quality
of the product?
Some fruit and vegetable cooperatives operate
under State or Federal volume regulation programs that permit the diversion of produce to
secondary use. In such cases, policies need to be established as to who will take the loss
or gain arising from a byproducts pool-the individual whose products were diverted or all
members of the cooperative.
3. Using marketing contracts or membership
agreements. These stipulate the responsibilities of members and of the cooperative
and penalties for lack of compliance. They provide for commitment by members, thus aiding
management in dealing with customers for the products and projection of operating capital.
4. Establishing patron storage or
warehousing policies and rate. Considerations include policies for accepting products
if storage space is limited, handling costs, storage pool charges and accounting, and
keeping the product, such as grain, in condition by proper aeration, drying, and frequent
inspection.
5. Managing inventories. Careful
attention to inventory levels, commodity values, and physical condition is necessary to
minimize risks of and shrink or loss of inventory.
6. Merchandising and selling the product.
Merchandising involves commingling like products to attain desired grades or quality.
Cooperatives owning the product, such as grain, may use strategy based on the commodity
futures and options markets to sell inventory. Wool marketing pools, for example, may use
sealed bids or private negotiations, and they can sell wool by forward contract or on a
spot basis. Terms of sale may include selling wool on a free-onboard (fob) basis-buyer
taking all wool offered, requiring an escrow deposit from buyer, or listing specified
discounts. Ownership in and use of cooperative sales and bargaining agencies is a major
aspect in selling products.
7. Establishing the credit rating of
buyers. Firm credit terms or escrow policies in dealing with them are needed.
8. Providing current information to
producers. Cooperatives can be of real service by providing research findings on
production and handling practices that will develop products that meet the quality demands
of buyers and consumers.
9. Determining market potential.
Management needs annual estimates on expected trends in agriculture and business activity
in the trade area.
Handling farm supplies involves several
levels or operations. These include purchasing or producing ingredients, manufacturing,
wholesaling, retailing, and transporting at each of these levels.
Local cooperatives are best characterized as
retailing operations. However, some of them have feed manufacturing facilities, bulk
petroleum plants, fertilizer blending plants, seed processing operations, and offer
transportation services.
The local manager's job may be easier if the
cooperative is affiliated with regional cooperative suppliers who offer a wide range of
products. Ms means the local manager deals with fewer people for more supplies. Regional
cooperatives are oriented to the needs of the locals and lift some of the burden from the
local manager for comparing supplies for quality, price, uniformity, and performance and
serves as an assured source of supply.
A local manager has to substitute expertise and
experience for the larger organization's team of specialists in making decisions connected
with daily operations. Typical areas requiring decisions are:
1. Purchasing supplies and ingredients. The
manager with board approval determines the types and qualities of supplies and equipment
to handle.
Managers determine the quantity, when to buy,
and factors like warehouse space, volume discounts, seasonal needs, and the price trends.
Ingredients purchases include those for feed milling or soil amendments.
The wholesale sources of supply involve
decisions by the manager. Many local cooperatives are members of regional
wholesaling-manufacturing cooperatives and buy their needs through them if their pricing
structure is competitive. Some belong to several regional supply cooperatives. Most
cooperatives buy, warehouse, and resell supplies, while others own franchises or
dealerships.
2. Warehousing and managing inventories.
Warehousing, handling materials, and controlling stock are important in retail operations.
Inventories may be carried at plants, wholesale warehouses or terminals, and at retail
warehouses, stores, and bulk storage facilities.
Decisions must be made as to the frequency of
taking a physical count of inventories and whether to use a perpetual or periodic system.
Managers need to know how frequently the inventory turns to determine if inventory capital
is being used effectively. Personal computers and user-friendly software packages have
helped to reduce labor costs of these management practices.
3. Pricing supplies. Cooperatives
usually price their supplies "at the market" for items of comparable quality.
But sometimes other pricing practices are necessary when price wars occur, or other firms
have lower prices and fewer services.
Decisions must also be made about using
quantity or volume discounts, cash discounts or credit carrying charges, and discounts for
early booking or delivery of supplies and the rates to offer on each. Discounts, services
and delivery charges, and booking programs must be communicated to all patrons and applied
fairly.
4. Establishing distribution methods.
This area involves the selling, merchandising, and delivering of supplies. Bulk feed and
petroleum products are generally delivered by the cooperative with the product and
delivery costs figured into price. Some provide allowances for patrons who want to do the
hauling. Wholesale firms may set separate prices for products purchased at their plant or
warehouse and another if delivered. The local cooperative may haul its supplies or
contract for transportation service.
Cooperatives generally use common merchandising
methods such as displays, newspaper, television, or radio advertising, newsletters,
flyers, or sales campaigns and contests. Providing technical services and field support
augments the sales effort.
5. Controlling credit. Management of
supply cooperatives continually faces the problem of controlling credit extension on
accounts receivable. Specific policies adopted and followed by the board are the first
prerequisite. Use of cash discounts, service charges, and seasonal financing must be
determined. Knowledge of the costs of extending credit and sound business practices for
controlling it are essential.
6. Providing custom and technical services.
Demand for custom and technical services increase as farm labor become costlier and
production technology becomes more advanced. Conservation and environmental issues demand
increased technological advice. Management with board approval must decide what services
to offer and whether they should become self-supporting or be subsidized by product
margins.
7. Providing information to patrons.
Cooperatives can be of real service by providing facts to farmers on the right kind and
amount of supplies to use that will give them greatest yields, gains, or satisfaction.
Some cooperatives offer recordkeeping, accounting, and hedging or optional markets to
their patrons.
8. Determining the market potential.
Management needs annual estimates on potential volumes for various supplies, and trends in
agriculture and business may affect this potential in the trade area.
Managing regional cooperatives involves the
same principles and problems as managing local operations, but on a much larger scale. It
requires more delegation of responsibility and authority and the use of more staff
personnel.
Regional operations often include vertically
integrated services such as processing farm products and wholesaling and manufacturing
farm production supplies.
There are three types of cooperative regionals:
large-scale centralized associations deal directly with farmer-members; federated
associations deal with member local cooperatives; and combinations of direct-farmer
membership and affiliated local cooperatives.
Some of the more distinctive functions of
managing regional cooperative marketing/supply operations are:
1. Establishing line and staff departments.
As cooperatives merge and increase in size, complexity, and number of locations,
departmentalization of line operations and staff becomes necessary. Delegation of
responsibility and authority is required to attain specialization and control of services
and efficient performance. Staff assistance often available includes personnel, legal,
long-term strategic planning, engineering, and economic research. Several associations
have formed wholly or majority-owned subsidiaries, and joint ventures with others to
perform certain types of commodity or service-related operations.
2. Developing "team" management.
When departments are established, their heads or managers usually participate in the
overall management process. They may serve in the management council of the chief
executive officer who receives their counsel in making final decisions. This system
replaces the more autocratic management in small cooperatives.
3. Working with relatively large boards
that meet quarterly. Regional cooperative managers present more information dealing
with policies and major problems and less with details than is customary in small
cooperatives. Also, many items are handled by an executive committee of the board, which
meets more frequently than the full board. Some regionals appoint nonmembers or
nonproducers as "outside" board members. Bankers, lawyers, professors, and
consumers, although not eligible to vote, often are appointed to these positions.
4. Managing a group of employees, many of
them located in outlying districts or plants. This is accomplished using a network of
supervisors in various departments, sections, or units. Assistance is available from the
personnel department in recruiting, training, and evaluating employees and in developing
compensation programs, including incentive systems. Management in regional cooperatives,
especially those in processing, manufacturing, warehousing, and transportation, may
involve working with labor unions on employee compensation, benefits, and working
conditions.
5. Communications with a large number of
members over wide geographic areas. Member relations become more difficult as
cooperatives become larger. User-owners cannot talk directly with the general manager or
department heads. Many may not live near the director serving their district. Farmers must
rely mainly on a local supervisor, field representative, and employees who deliver
supplies or pickup products. Newsletters, magazines, and area meetings are used to
complement communications with members. Local cooperatives affiliated with regionals that
serve several States have less frequent contact with regional top management and must rely
more on field representatives and telephone contact.
6. Establishing fair operating policies
among branch outlets. Outlying divisions of regional cooperatives may encounter
different types of competition, operating costs, and realize varying degrees of success.
These situations may pose problems of pricing, patronage refunds, compensation for local
managers, or possible subsidization of location losses. Some of these problems involve
both operating management and boards of directors.
7. Determining whether and when to expand
services into adjoining territories. Officials of regional cooperatives occasionally
have to make expansion decisions. Such factors as member interest or demand, types of
services, transportation costs, market potential, and competition must be considered. If
more than one area can be served, priorities must be set.
8. Deciding when to integrate operations on
a vertical basis or participate in joint ventures. This usually means decisions on
whether to manufacture a production input such as feed and fertilizer or to process a farm
product such as fruit. If the cooperative operates over a wide geographic area, the
problem of location priority may arise because the association cannot build or acquire all
plants needed at one time. In addition to economic soundness or feasibility of such
proposals, the availability of capital may be a deciding factor.
9. Deciding whether to market or process
supplies and products alone or jointly with others. As cooperatives see the need to
integrate operations forward in marketing farm products or backward in purchasing
supplies, they should decide whether to do this alone or in cooperation with others.
Often, lack of funds or incompatibility of management personnel and operating policies may
delay these moves.
10. Exploring opportunities and challenges
presented by an increasingly "global" economy. As multilateral trade
agreements such as the General Agreement on Tariffs and Trade (GATT) and North American
Free Trade Agreement (NAFTA) ease national border restrictions to create both larger
markets but greater competition, cooperatives like other types of firms must plan
strategically either to take advantage of new marketing opportunities or to protect
once-stable domestic or foreign markets.
Cooperatives can use a wide array of creative
mechanisms and structures which complement core business and can put them on a more
competitive footing without necessarily sacrificing their unique mission and structures.
Subsidiaries, coventures, or other joint agreements -with other cooperatives or
noncooperative firms can be used successfully to gain access to additional resources and
markets. Marketing cooperatives may grow horizontally-to supplement their core-commodity
base, broaden product lines, lengthen marketing seasons, tap new markets through the
addition of foreign growers as members or through procurement of limited volumes of
nonmember products.
Both marketing and supply cooperatives can
craft nonprice strategies involving market segmentation, niche marketing, and product
differentiation to remain competitive. Supply cooperatives may find foreign producers a
ready outlet for farm inputs, and liberalized trading and investment climates could
facilitate development of new supply or raw material sources.
11. Meeting requirements of Government
agencies. Cooperatives, especially those operating on an interstate basis, are
subject to increasing Government scrutiny. Laws and regulatory requirements, for example,
apply to competitive behavior and pricing practices, income taxes, sale of securities,
environmental problems, and occupational health and safety protection. Additional
attention and expenditures are necessary to comply with these requirements.
12. Exhibiting leadership and obtaining
public approval. Farmers look to large, centralized cooperatives and local
cooperatives look to their federated associations for leadership in numerous ways. For
example, they want the larger cooperative to plan for the future, research and develop new
markets for foods, conduct research on farm inputs, explore the feasibility of new
services or supplies, and provide information on production and marketing. They expect the
regional cooperative to take the lead in opposing proposed adverse legislation and
regulations.
The general public gets a favorable image of cooperatives if, through
its efforts, the marketing system becomes more efficient with the resulting economic
benefits shared by consumers as well as with farmers. In addition, democratic control of
cooperatives also conveys a favorable image to the general public.
Regional cooperatives, by their performance and
leadership, are expected to serve agriculture and consumers in a manner that will warrant
a considerable degree of public approval.
CHALLENGES: MANAGEMENT OR LEADERSHIP
An earlier Rural Development
Administration/Cooperative Services (RDA/CS) publication summarized its discussion of
cooperative management by first looking back at management lessons learned from successes
and failures over a 100-year period and then looking forward to the challenges and
opportunities ahead.
"In looking ahead, cooperative management
is faced with increased emphasis on mergers and consolidations, problems of greater size
and complexity of cooperatives, a need to develop new transportation techniques, and
greater understanding and appreciation of the importance of rural areas development to
cooperative progress."
Recent events have borne out those projections.
Significant mergers, acquisitions, and consolidations have taken place. Increases in
assets and business volume through the ensuing decades attest to cooperatives' growth.
Greater functional diversification as well as both horizontal and vertical integration,
including joint ventures with other firms, typifies the greater complexity of cooperative
operations.
Since the mid 1980s, cooperatives have not
developed significantly new transportation techniques. On the other hand, cooperatives
have increasingly adapted scientific methods in determining site locations to minimize
processing and distribution costs as well as the warehousing of production supplies.
Cooperatives also are being recognized as a coordinating mechanism for grappling with the
research and economic development problems in rural America.
Directors are viewing problem solving in terms
of long-term solutions and "thinking big" about financial requirements, forward
contracting, and other binding commitments.
In the 1970s, for instance, directors
considered such questions as: Shall we move away from a bargaining posture toward
acquiring and operating facilities (brick and mortar)? Directors of cooperatives in the
sugar beet and milk marketing industries said yes.
Brick and mortar expansion by grain-handling
cooperatives in the late 1970s and early 1980s was followed by a period of accelerated
mergers and acquisitions and downsizing during the recession of the 1980s. This activity
was most visible at the regional level, but also widespread among local grain handling
cooperatives.
Adjustments were accomplished by accelerated
value-added involvement by the grain cooperative sector to increase overall margins,
revenue, and market share. These trends, except for value-added, abated in the early
1990s.
A growing concern about directors' legal
responsibilities confirms the adage that serving as a director is not simply an honor and
reward for being a "good person." Nevertheless, real or imagined legal
constraints are not deterring directors' considerations of practical solutions to
cooperatives' economic problems.
With farmers becoming highly specialized and
capitalized, and their cooperatives reflecting a greater market orientation, the demand
for sharpened executive leadership skills becomes imperative. This trait harkens back to
the very roots of the cooperative form of organization.
In a conceptual sense, about 2 million food and
fiber farm production units (1990) produce for home, domestic, and foreign consumption.
Flowing into each of these units are production supplies that the farm manager-operator
combines with environmental and economic resources to produce a usable product. Flowing
out from these farms and into the market stream are a multitude of food and fiber products
to serve a hungry nation and growing export market.
The individual producer-marketer asks these
logical questions:
1. How can I improve the quality and reduce the
cost of sup plies I manage in my farm operation?
2. How can I increase the returns from the
products entering the marketing stream from my farm?
By following this general line of questioning,
the individual farm manager decides to join with other farm operators to organize,
finance, operate, and control a cooperative that provides production supplies and meets
marketing requirements.
But having created this organization that sits
astride the conduits that carry production supplies to, and marketable products from
farms, it soon becomes apparent that the farmers' jointly owned cooperative has a life of
its own.
Its pulse rate, once governed by the needs of
its farmer-owners, becomes influenced by a pacemaker variously called
"competition" or "consumer needs." This perception of a change in
basic objectives is called "market orientation."
In a figurative sense, therefore, the
organization's management antennae rotate 180 degrees from a production orientation to one
quite sensitive to the needs and requirements of the marketplace.
Cooperative management must influence
membership to adapt and change its production habits to conform with the market's needs.
This evolution of cooperative function and
orientation places a further requirement on cooperative management: The burden of
leadership. The calls to leadership are evidenced by signals flashed from different
sources. For example, signals from government carry a warning: Are cooperatives becoming
too big or anti-competitive? Will cooperatives adversely affect prices to consumers?
Signals come from large financial centers: Are
cooperatives the stabilizing force in agriculture that provides an opportunity to broaden
our loan portfolios in the agricultural industry we once perceived as too risky?
The world of international commerce beckons to
cooperatives: You have a comparative advantage in certain agricultural commodities. Are
you going to do the exporting job? In 1928, E. G. Nourse, prominent economist and
cooperative promoter, hoisted a flag saying "... you cannot throw the whole job on a
mere marketing association. It must eventually become a cooperative organization of
agriculture, not merely cooperative marketing."
So the challenge to cooperative management in
coming decades is not just to improve managerial skills. Rather, it is to accept a
leadership role in allocating resources so the whole economic process-from assembling
production inputs to the ultimate marketing process-can be operated in the common interest
of cooperatives' members and the public.
This concept does not imply that cooperatives
control production. In a very pragmatic sense, "only the eyes of the farmer can
fatten his cattle." Further, legal issues aside, quite obviously, cooperatives cannot
control environmental disasters or seasonal factors. Cooperatives can correct the
inefficiencies of the marketplace and seek opportunities for expanding purchasing and
marketing simply because of the inherent advantage a unified member-based organization
provides.
Thus, leadership should pursue avenues of
commerce that can most effectively take advantage of volume, grade, size, uniformity, and
quality factors that cooperatives bring to the marketplace.
Directions of such leadership are clear.
Cooperative leaders must push into economic activities in which farmers' long-run costs
have been high, returns are relatively low, and service requirements unmet. For example,
cooperatives' impact on prices of livestock and grain is practically nil.
Ultimately, cooperative leadership will decide
the basic question: Shall we do the job (of bargaining, processing, formulating,
manufacturing, transporting, sorting, or selling direct to consumers) or let others assume
the market development task?
Cooperative leadership will not succeed through
evangelistic appeals to social consciousness, or by demagoguery that pits one economic
group against another. Rather, it will be through intelligent use of the tools of economic
planning. The leader must become prepared for such a role by accumulating skill in
managing assets, corporate growth, research, executive development, outside industry
relationships, and, most critically, people.
The past decades were eras of intensified
management development through intracooperative training programs; management workshops
sponsored by the National Institute on Cooperation; and by special management seminars at
the land-grant universities with the cooperation of the USDA/Rural Business-Cooperative
Service.
The trend to develop topnotch cooperative
management will continue at all levels. Out of this training have and will come managers
increasingly adept in understanding how producers, bankers, suppliers, and customers will
respond to different policies and actions of the cooperative.
But the future belongs to those cooperative
managers who translate knowledge, experience, and understanding into action. It belongs to
those who evolve from skilled managers into astute leaders.