SUBMISSION ON THE CO-OPERATIVES BILL TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY

 

AGRICULTURAL BUSINESS CHAMBER

"The Government will … place more emphasis on the development of a co-operative movement to combine the financial, labour and other resources among the masses of the people, rebuild our communities and engage the people in their own development through sustainable economic activity."

Thabo Mbeki, State President, 25 June 1999

 

"Indien de behoorlijke coöperatie in dit land wordt gevestigd, dan ben ik zeker dat de toestanden der boeren verbeteren moeten."

"If proper co-operation becomes established in the country, then I am sure that the position of farmers must improve."

"Nadat een persoon lid is geworden van een coöperatiewe vereeniging moet hy er al zijn aandacht aan wyden, en er even goed voor zorgen als voor zijn schapen en zijn ander eigendom."

"After a person has become a member of a co-operative, he must devote all his attention to it in the same way as he takes good care of his sheep and his other property."

Genl Louis Botha, Prime Minister, September 1908

 

 

I. Introduction

Recognising the important role all South Africans have in addressing the challenges posed by the legacy of apartheid, and

Recognizing the importance of cooperatives in job creation, mobilizing resources, generating investment and their contribution to the economy, and

Recognizing that cooperatives in their various forms promote the fullest participation in the economic and social development of all people, and

Recognizing that globalization has created new and different pressures, problems, challenges and opportunities for cooperatives, and that stronger forms of human solidarity at national and international levels are required to facilitate a more equitable distribution of the benefits of globalization, and

Recalling the presidential imperatives, namely:

Recalling the vision identified by the NEDLAC constituents for promoting rising levels of growth, investment, job creation and people-centred development:

Recalling the agreement by constituents in the GDS that co-operatives provide an important vehicle to:

Create and develop income-generating activities and sustainable, decent employment

    1. Develop human resource capacities
    2. Increase savings and investment
    3. Improve social and economic well-being
    4. Establish and expand a viable and dynamic distinctive sector of the economy, which includes co-operatives, that responds to the social and economic needs of the community, and

 

The Agricultural Business Chamber would like to make the following submission to the Portfolio Committee on Trade and Industry.

II. The comparative advantage of cooperatives

The co-operatives business form presents advantages over other business forms in terms of their macro-economic, social and societal importance and also structural and operational advantages over other business entities. In this section we will review these advantages commencing with the macro-economic, social and societal importance.

Co-operatives are Community Enterprises

Co-operatives Promote Democracy

Co-operatives Build Open Markets

Co-operatives Raise Human Dignity

Co-operatives are Systems through which Communities can Develop Themselves

The comparative advantage of genuine cooperatives is their high sustainable development performance. Genuine cooperatives create economic security, render social justice, contribute to maintaining the ecological balance and they are pillars of a stable political system, hence they cover the four aspects of sustainable development, thus putting into effect the overall policy objective mentioned earlier.

Cooperatives create economic security mainly through economic stability. Their economic stability (indicated by a low number of bankruptcies), is the result of a number of features, among which

Cooperatives render social justice through, among other means

Cooperatives contribute to maintaining the ecological balance by, among other characteristics

Cooperatives are pillars of a stable political system because of

(H. Hagen, 2004)

Five areas where co-operatives may have a competitive advantage over private sector firms:

A values-based approach to new business development – where co-operative values and principles are used to design and develop innovative new products and services and establish new niche markets. Better consumer orientation and product design can be achieved by using the co-operative values of democracy, equality, equity and solidarity to determine the choice, nature and design of their products and services.

Public interest activities – where the product or service is purchased by local or central government agencies on behalf of the public. The contracts awarded under the Extended Public Works Program (EPWP) are an important co-operative development policy. Government should use this opportunity to engage communities in creating infrastructure for these communities.

High trust products and services – where a high degree of trust is required between the stakeholders in the enterprise, particularly between its customers, employees and investors. The profit motive of private sector firms can undermine their customers’ and their employees’ trust in them. This provides co-operatives with a competitive advantage. A survey of the customers of co-operatives found that they had remarkably high levels of trust in these businesses because there were no external shareholders expecting profits to be maximised for their private gain. This high level of trust in co-operatives was not just based on their different ownership structures, but was also because of their broader co-operative principles.

Higher productivity – where the value-added or output per employee is higher because all the stakeholders have a shared interest in the success of the co-operative. The ability to achieve higher productivity could be a very important competitive advantage for co-operatives. In theory, co-operatives should be more productive than private sector firms because productivity is in the interests of all stakeholders, unlike profitability, which only serves the interests of investors.

Mission-oriented businesses – the pursuit of profit is secondary to the social purpose or mission of the co-operative. Mission-oriented businesses are passionate about their products and services. Profitability is important because it enables the business to achieve its mission, but it is not the mission itself. Instead, the motivation of mission-oriented firms comes from three interrelated sources. First, the business owners might be motivated by a desire to make a difference, to make the world a better place, informed by an ethical stance. Secondly, the owners may experience a need to satisfy their creative urges and want to be the best practitioners in their profession. Thirdly, some owners create businesses so that they can pursue a personal interest or belief, in the company of others.

 

III. Co-operatives as business entities

The modern thinking about co-operatives is characterised by a creative tension between viewing a co-operative as a social entity and as a business entity. The logical compromise is to view co-operatives as a social organisation that operates in the business environment. This has several very important implications. Co-operatives exist to:

Governments are usually tempted to view co-operatives as a solution to social challenges. This approach would relegate co-operatives to another institution of government. Co-operatives should be seen as an economic mechanism through which people empower themselves to gain access to the mainstream economy. The co-operative is therefore an organic part of the existing system of the exchange economy and not a bounded socio-economic ingredient design to replace the system. A co-operative is an economic institution, which, within the existing system of free competition, aims to correct wholly or partly natural imperfections of the distribution of wealth. Another mistake is to see co-operatives as a step backwards away from specialisation where a co-operative constitute a social system in which labour, land and capital would co-operate in self supporting colonies. This isolatory and atomistic approach would cause co-operatives to be sidelined in the mainstream economy.

 

IV. Proportional Member Control

The proposed Co-operative Act provides for democratic member control by virtue of one member one vote. It takes its motivation from the following International Co-operative Alliance principle or viewpoint:

"Democratic Member Control

Co-operatives are democratic organisations controlled by their members who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to their members. In primary co-operatives members have equal voting rights (one member one vote) and co-operatives at other levels are also organised in a democratic manner."

Democratic member control based on proportionality is made impossible in terms of the proposed Act. We would like to request an amendment of the proposed Act to provide for proportional member control based on the following reasons:

The ICA published the seven co-operative principles in 1995 after consultation with their membership. These principles are seen as ‘common denominators’ in co-operatives and the ICA suggests that these principles should be used as guidelines for the development of co-operative legislation. Johann Brazda and Robert Schediwy writes in their article "Preconditions for Successful Co-operative Ventures in the Light of Historical Evidence" that there is no single "ideal state" for a cooperative, such as one of "perfect democracy" or "economic well-being". Empirical evidence seems to suggest that there are typical stages of cooperative development that follow a kind of "inner logic". There are conditions for successful "foundation waves" of co-operatives (or "co-operative revolutions") as well as for successful "normal co-operative development". The co-operative principles should be seen as guidelines and not as rules. Legislation should therefore take the current and future realities of co-operatives into account to create a framework in which co-operatives can thrive.

It is clear that other countries do not follow the ICA principles to the letter. Recent research in the European Union showed that the strict one member/one vote is valid only in Belgium, France, Greece, Ireland and Luxemburg. The others allow either by law or by statute plural voting rights: up to 5 in Italy. Some countries allow proportional voting rights only to legal persons, and up to maximum of a third of all the votes (Spain, Italy, and Great Britain). In all countries, however, except Sweden that does not give any criteria, plural voting rights are not linked to the number of shares, but rather on the amount of transactions with the co-operative.

It is important to remember that the democratic process is not an end in itself, but rather the means to ensuring that the co-operative continues to serve the best interests of its members and is responsive to their needs. Above all else, this means that the democratic framework must ensure that the organisation remains in the control of its members. "Democracy" entails much more than simply casting a vote when it is time for elections to committees and the board. "Hands-on" democracy should include the opportunity to participate in a two-way communications process, with members expressing views on how the business ought to be run for their own benefit and being kept informed about what is happening within their business.

Haagen Henry (international co-operatives expert in ICA, Review of International Co-operation, Vol. 94 No. 2/2001) states that: "The basic rule for primary cooperatives is ‘one member - one vote’. This also applies to members being legal persons. Exceptionally, plural voting rights may be granted through the bylaws/statutes. The volume of transactions with the co-operative or other criteria might be used when allocating these rights. In no case, however, may plural voting rights be granted on the basis of the amount of capital invested by a member. The plural voting rights may not be exercised when taking decisions on important matters, as specified by the law. In no case must one single member be in a position to take decisions by virtue of the number of voting rights the member is holding or representing."

"In secondary and higher level co-operative organisations, a system of plural voting rights may be applied without the above mentioned restrictions. The law must regulate the criteria for granting voting rights to delegates, i.e. members elected by regional or sectional assemblies to the assembly of delegates."

"The participation of non-member investors in the general assembly, should they have voting rights at all, must be regulated in a way as to ensure that they cannot outweigh regular members. It must, however, be emphasised that voting by non-members constitutes a severe deviation from co-operative principles."

From the above it is clear that the principle of proportional member control is accepted in several countries’ legislation. However, it is clear that member control can never be based on number of shares or capital invested in the co-operative. The principle of proportional member control is therefore not a fundamental deviation from co-operative principles and should be allowed in terms of the South African legislation.

Co-operatives experience a capitalisation problem in general. This capitalisation problem is caused by the limited investment in the co-operative by members due to their limited economic capacity and the fact that a co-operative cannot allow investment in the co-operative for return on capital. Co-operatives can therefore not accept outside investors and members have no incentive to otherwise invest capital in the co-operative because they are not rewarded for these investments. The problem is exacerbated where there is a substantial disparity in member sizes. The members who actively make use of the co-operative’s services have no incentive to stay part of the co-operative. The solution provided in the previous Acts was to provide for proportional member control. This implies that larger members have greater control over the affairs of the co-operative. The benefit to the larger members is that they can exercise greater control over the value offering of the co-operative and hence are more motivated to participate in the co-operative.

Accepting that a co-operative is a form of business driven by economic motives there can be little doubt regarding participation (voice) based on economic interests. The point of view that proportionality is acceptable in secondary co-operatives carries the implication that secondary co-operatives may have both smaller and larger members, accepting the risk that inequities in voting powers may occur. Primary co-operatives are apparently excluded. The size of the member, being it a primary or secondary co-operative, depends on the level of his support of the co-operative. The Pareto principle (80/20) also applies to co-operatives, with around 80% of business being generated by 20% of members. The higher the level of support of the individual member, the bigger the contribution to profits and therefore to capital (reserves and deferred bonus fund). In terms of both existing and proposed legislation a member’s claim to free reserves would be based on business turnover. It logically follows that members with a bigger economic interest in a co-operative would insist on having a bigger say in the matters of that co-operative.

The principle of one member one vote could contribute to a "hostile takeover" situation. Co-operative membership is not limited to natural persons, extending to and including legal entities. In an environment of voluntary and unlimited membership there could be no objection to multiple memberships of individuals, as long as the relevant membership fees are paid. Smaller co-operatives would, as a result, be especially more vulnerable to takeovers by members joining with that purpose in view.

It follows logically that Proportional Member Control could lead to domination of the smaller members by the larger members, which is against co-operative principles of democracy. This danger has to be weighed against the benefits to the smaller members. Globalisation is changing the competitive landscape across the economy. Large multi-national firms are competing with local co-operatives. The local co-operative needs to operate at a substantial scale to be able to compete with these multinational companies. A Co-operatives Act that alienates larger members from co-operatives will weaken co-operatives and leave them powerless in the face of strong international competition. The smaller members further benefit from the participation of larger members in terms of the scale of the activities of the co-operative. A larger scale implies stronger bargaining position for the totality of the members in the co-operative.

However, even though small members benefit from the participation of larger members in the co-operative, protection measures need to be provided in the legislation. We propose (in line with Hagen Henry’s suggestions) that the Proportional Member Control be limited to 5 votes per member. In line with democracy and self-determination the members of a co-operative should decide for themselves and determine the voting system in the constitution of the co-operative.

In conclusion:

 

Edgar Parnell’s Prayer for Co-operatives

God save Co-operatives:

Keep them from –

The Academics who wish to pull them apart to see how they work;

The Professionals who believe that nothing can be achieved by ordinary men and women;

The Advisers who never tire of finding new problems but never have time to solve any;

The Managers who want a Co-operative to work for them rather than them to work for it;

The Politicians who seek to use the Co-operatives as their stepping stone to power;

The Governments that will bury them in bureaucracy;

The Peddlers of Dogma who try to make them fit their view of the world and will not accept Co-operatives as economic enterprises;

The Investors who would take them over and cash in their assets;

Help them to deliver benefits working in the interests of their members without transgressing the rights of those outwith the Co-operative.

Compiled and presented by:

Tobias Doyer (PhD)

CEO Agricultural Business Chamber

Tel 012 322 7181

Fax 012 320 0787

tobias@agbiz.co.za