Co-op Management Unit II

Part A. Who Makes What Co-op Decisions?

Co-op Management  pursuing co-op goals with the resources available  decision making Good mgmt  SUCCESS Poor mgmt  FAILURE

Co-op Decision Makers Members Directors Management Notes: 1.The size of the boxes above represent the amount of co-op decision making ‘authority’ 2.Members have the most authority and can basically do ‘anything’ they want

Co-op Decision Making Authority MEMBERS DIRECTORS MANAGEMENT DELEGATED KEPT

Member Decisions (examples)  Organize the co-op  Adopt/amend articles/bylaws  Elect/remove directors  Consolidation/merger  2/3 majority in both co-ops  ½ of active members must vote  Acquisition  2/3 majority in co-op being sold  Board can ok for buying co-op  Major business change  Give authority to board

Director Decisions (examples)  Hire/compensate/fire the manager  Customer credit policy  Patronage refund policy  Equity retirement policy  Debt acquisition  Major expenditures (e.g. acquisition)

Director Decisions (examples)  Leases and contracts  Long-run plans  Business purpose(s) of the co-op  Communicate with members  Give authority to management

‘Real World’ Board Policy Example Expenditures for Facilities, Machinery, and Equipment The President shall obtain approval from the board for purchases or leases of new or replacement facilities, machinery, or equipment exceeding $50,000. In emergencies, where replacement of an asset is needed before a general board meeting can be held, the President may obtain approval by contacting the board Chairman by phone and having the individual indicate approval. In this situation, the Chairman shall have the approval ratified at the next board meeting and included in the minutes of the meeting.

 Board policies go to the manager as instructions from, figuratively, one person. This prevents the manager from having to respond to more than one set of instructions.

Manager Decisions (examples)  Hire/compensate/fire employees  Maintain the co-op’s fixed assets  Inventory  Product prices  Day-to-day merchandising  Customer/patron dealings  Vendor dealings  Communicate with board (e.g. thoughts about long-run, status of co-op, etc.)

Things that the manager assists the board with or prepares for the consideration (examples): A. Board meetings B. Financial statements and plans C. Member and public relations programs D. Operating policies such as: 1. Credit 2. Sales 3. Delivery 4. Storage 5. Employee benefit 6. Equity retirement

Co-op Decisions MADE JOINTLY MADE BY BOARD MADE BY MANAGER STRATEGIC OPERATIONAL

“OPERATIONAL” Versus “STRATEGIC” Decisions ASPECT Mgmt Focus = OPERATIONAL Board Focus = STRATEGIC Frequency of ChangeFrequentSeldom Time SpanShort Run (up to 1 year) Long Run (1-20 years) Effect on Resources LittleExtensive Impact on general direction of co-op NoneSubstantial Degree of RiskSmallLarge Degree of Reversibility HighlyDifficult OrientationEmployeeCustomer/Investor

Management ‘FUNCTIONS’ in Co-ops 1. Planning  =deciding future direction and goals  Board:their call  Mgmt:provide lots of assistance to board and developing plans to achieve desired goals 2. Organizing  =deciding organizational structure, units, departments, etc.  Board:don’t decide, but may critique  Mgmt:their call

Management ‘FUNCTIONS’ in Co-ops 3.Directing =communicating goals, providing motivation Board:do so mainly with fellow members Mgmt:do so with fellow employees 4.Staffing =hire, train, develop, evaluate, compensate employees Board:do so with manager only Mgmt:do so with all other employees

Management ‘FUNCTIONS’ in Co-ops 5.Controlling =monitoring performance Board:focus on strategic results Mgmt:focus on operational results

Co-op Decisions ‘Mushroom Board’ Bd JtMgr

Avoiding Conflicts Between Boards and Managers 1. Boards should focus on strategic planning; let managers manage 2. Communication is important 3. Proper Evaluation/Compensation

Management Selection/Compensation 1. Start with job description 2. Include strategic objectives and plans 3. Add job performance standards 4. Be competitive on salary

‘Real World’ Example of Board Decision (Hiring a Manager)  The Heart of Iowa board had 60 different alternatives to choose from when they hired a new manager. They hired a consultant to narrow this number down to seven. The board then had to ultimately choose one of these seven to be the new manager. The board considered the following criteria for making this decision:  Experience  Leadership qualities  Communication skills  Education  Character and integrity  Personal goals of the candidate  References  Interviewing ability  How well the candidates goals matched the co-ops

Pricing Concepts in Co-ops 1. EQUAL PRICING = The same price for all patrons based on the average cost of serving ALL patrons. 2. DIFFERENTIAL PRICING = Different prices for different patrons based on costs of serving INDIVIDUAL patrons and demand differences. May be marketplace induced. 3. EQUITABLE PRICING = Establishing prices based on some notion of fairness or the ‘right’ thing to do.

Co-op Pricing Options:  Max net income of co-op  Min eventual net P to members  Min initial P to members  Max patronage refund to members  Max dollar sales of co-op Summary point: co-ops typically have more pricing options to consider than other types of businesses.

Differential Pricing (Pros) 1. More consistent with service at cost (i.e. members who are less costly to serve pay less) equal margin pricing. 2. May be needed to keep large volume customers (keeping large customers benefits small customers). 3. More likely to motivate members to change the scale of their business.

Differential Pricing (Cons) 1. Small farmers feel discriminated against. 2. Inconsistent with notion of farmers joining together to capitalize on and share in economies of size (spirit of cooperation). 3. Requires extra record keeping. 4. Equal pricing more consistent with equal voting right policy of most co-ops. 5. May result in one group of members subsidizing another if NOT based on accurate cost records.

Advantages of ‘Favorable’ Pricing (pricing at cost) 1. Enhances price competition in the market. 2. Encourages patronage. 3. Produces immediate benefits for patrons.

Advantages of ‘Market’ Pricing 1. Avoids price wars with competitors 2. Generates equity capital 3. Enhances image of management 4. Prevents benefits for free-loading nonmembers 5. Provides margin for error in covering costs