Governance of the member-cooperative relationship: a case from Brazil

Recent events in the agri-food sector increased the demand for quality attributes, from healthy and safe products to sustainable agricultural practices (Grunert, 2005). Particularly challenging is the connectedness of transactions between farmers, traders, processors, retailers and final customers in order to comply with quality requirements, which implies a need for value chain coordination. Combined with increased consumer demand for variety and convenience, these changes in sector have led to stronger sequential interdependencies, in which the output of one part is the input for another part. The increasing connectedness between transactions demands more vertical coordination. A major challenge for the agricultural cooperative is to combine horizontal coordination among the members with vertical coordination in the value chain (Bijman 2009; Hanf, 2009). Since they are member-oriented, agricultural cooperatives traditionally buy the farm products of its members regardless of its quality. Increasingly, however, cooperatives need to guarantee product quality towards their customers, and thus assure that members supply products of the right quality. The objective of this thesis is to disentangle the governance mechanisms that can be used by the cooperative to strengthen the member-cooperative relationship, and to assess the impact of the different governance mechanisms on the coordination of members’ adjustments to higher quality levels. The attempt to organize the participating farmers and firms along the food value chain generates transactional risks and coordination costs in the relationship between agricultural cooperative and farmer-member. This leads to the first research question of this thesis. R.Q. (1): What are the mechanisms for governing the member-cooperative relationship, and how do they affect transactional risks and coordination costs? This thesis (Chapter 2) poses that four governance mechanisms - market, hierarchy, community and democracy affect coordination costs and transactional risks through their effect on member commitment and cognitive heterogeneity. It is important that members of an agricultural cooperative are committed to customer orientation; otherwise the involved transactional risks would make vertical coordination more costly. It is necessary to disentangle two types of commitment: to collective action and to customer orientation. Member commitment to collective action prevents side selling, in particular, and free-riding behaviour in general. This leads to the second research question of this thesis. R.Q. (2): How do the four governance mechanisms - market, hierarchy, community and democracy - affect both types of commitment? One of the conclusions stemming from this thesis was that, on the one hand, a cooperative may assure members’ compliance in a less costly way if market incentives related to quality, productivity and effort are strengthened, as well as (hierarchy) input control and on-farm monitoring, since these mechanisms are positively related to commitment to customer orientation. On the other hand, democracy and community mechanisms do have an important role in enhancing commitment to collective action which is a sine qua non condition for the viability of the cooperative (Chapter 3). A large multi-product cooperative in which different activities of the cooperative cater to different groups of members, as the case that was chosen as the empirical basis of this thesis, may face problems related to membership heterogeneity (Hansmann, 1996; Fulton and Giannakas, 2001). The basic assumption in most of the literature on the impact of member heterogeneity on the process and outcomes of decision-making is that farmers pursue individual or subgroup interests when participating in the decision-making of the cooperative. If members primarily pursue individual economic interests, there might be a relationship between the economic reasons for becoming a member (and maintaining membership) and the motivation to participate in the governance of the cooperative. This leads to the third research question of this thesis. R.Q. (3): How do economic motivations for association affect members’ participation in the governance of a cooperative? The conclusion of this thesis, regarding this research question, was that besides the role of social mechanisms in enhancing commitment to collective action, there seems to be a role of social mechanisms in enhancing members’ control of their cooperative. Members who participate in boards or committees are not actuated to participate by the same economic motivations that drive their association to the cooperative. Cooperative ideology, in turn, appears to be an important motivation for them to actively participate (Chapter 4). The ability of cooperatives to adapt to a rapidly changing environment characterized by technological change and industrialization of agriculture has been questioned Fulton (1995). The organizational structure of the cooperative is said to have negative implications for its quality management (Mérel et al., 2009). On the one hand, cooperatives may be mimicking Investor-Owned Firms (IOFs) in applying more hierarchical mechanisms which enable them to define and effectively apply quality norms for their supply, control the quality of delivered products and monitor members’ production processes. On the other hand, cooperatives have unique organizational characteristics that could provide them with competitive advantage, such as the tight relationship between members and cooperative, which may enable less costly coordination of the transaction (Sykuta and Cook, 2001). This leads to the fourth and last research question of this thesis. R.Q. (4): What are the differences in quality performance between a cooperative and an IOF, and can these differences be explained by relationship characteristics? In the Brazilian broiler industry, suppliers delivering to a cooperative are performing better in terms of quality than suppliers delivering to an IOF. Cooperative and IOF have the same incentive and control mechanisms for production efficiency and high-quality chicken meat. The cooperative’s advantage over the IOF in terms of suppliers’ quality performance could be influenced by the characteristics of the supplier-buyer relationship. This thesis shows (Chapter 5) that there are some important differences regarding relationship characteristics that could account for this higher performance. Dependence on current buyer, which is higher for cooperative members, uncertainty regarding buyer’s behavior, which is lower for cooperative members, and market risk reduction by the buyer, which is higher for cooperative members, can help explain the higher rate of compliance to the “feet callus” quality standard. These three features of the supplier-cooperative relationship are likely to prevent suppliers from shirking behavior and to induce commitment. Moreover, cooperative suppliers receive more technical support from their buyer for adapting to new quality requirements than IOF suppliers do; this is likely to positively affect farmers’ competence in complying with quality standards. The main methodological approach of this thesis is quantitative. Qualitative data were collected through semi-structured interviews with professional managers of the industrial division, directors and farmers in order to guide the design of the questionnaire. The data that is analyzed in this thesis were collected by using a survey questionnaire applied among 148 farmers, all members of the same multi-product cooperative in Brazil, and 42 broiler suppliers of two major buyers in the same region. This thesis makes several theoretical contributions, which can be listed as follows: (1) Member commitment in agricultural cooperatives can be disentangled conceptually and empirically into two types. Commitment to collective action is related to Fulton’s (1995) definition: the willingness to patronize a cooperative even when the cooperative’s price or service is not as good as that provided by an IOF. It is an attitude that precedes loyal behaviour; it is the making of a sacrifice or an effort in the name of the relationship and the success of the organization. Commitment to customer orientation, in turn, is the willingness to give up a part of the autonomy at the farm level for the sake of the cooperative’s compliance with the requirements from downstream customers. It is a positive attitude of members towards the re-orientation of the cooperative and is related to Borgen’s (2001) view on commitment. (2) Membership heterogeneity might not be a source of inefficiency in decision-making if the organizational goal is precisely to satisfy diverse members’ interests, and if members who occupy representative and managing functions are genuinely seeking to further organizational goals rather than to follow private motives. Most conceptualizations of decision-making problems and influence costs derive from organizational economics, where agency theory has been quite influential. The findings of this thesis (Chapter 4) suggest that assumptions from agency theory, which are often adopted by cooperative studies, could better be treated as an empirical matter. (3) This thesis presents a different perspective on the comparative advantage of the cooperative in producing food products with higher quality attributes. The literature on the implications of the cooperative structure for quality management (Mérel et al., 2009) emphasizes that cooperatives often fail to adequately reward the highest quality producers, often causing the problem of “adverse selection”. However, despite starting with larger heterogeneity in terms of producers’ capacity to produce high-quality products, cooperatives may achieve high quality products through superior coordination and adaptation support. The findings of this thesis are in line with other empirical studies outside the domain of cooperatives that found that quality performance may be influenced by relationship characteristics, through their effect on transaction costs (Lu et al., 2009; Coronado et al., 2010). (4) Overall, the main scientific contribution of this thesis is the use of the ‘chemistry of organizations’ framework proposed by Grandori and Furnari (2008) in seeking a better understanding of the governance of cooperatives. By adopting that framework the thesis addressed in an integrated way the role of social capital (Ostrom, 1999) and community governance (Bowles and Gintis, 2002; Hayami, 2009) in facilitating collective action, and the role of relational contracts (Poppo and Zenger, 2002; Lazzarini, Miller and Zenger, 2004) in assuring commitment from parties in a transaction. Furthermore, with that framework, the thesis addressed the cognitive role of governance mechanisms, such as knowledge exchange (Conner and Prahalad, 1996; Grant, 1996) and competence enhancing (Nooteboom, 2004). The implications of this thesis for management and policy are listed in the three following groups: (1) Rewarding farmers appropriately and controlling and monitoring delivery and production processes are important for enhancing commitment both to collective action and to customer orientation. Giving “voice” and building a social community for members and their families are important to prevent members’ free-riding and selling “outside”. It is advised to combine at least the following governance mechanisms: hierarchy control, market incentives, community involvement and democratic voice. Finally, communication is an important tool for enhancing farmers’ commitment to customer orientation. (2) Cooperatives can participate in high-quality value chains and be as efficient and effective as other organizational arrangements in the agri-food sector. More importantly, cooperatives might even have an advantage in the production and marketing of goods with credence attributes, such as animal welfare, organic and fair trade. Therefore, policies aiming to promote sustainable food production may target cooperatives, as this organisational form is more effective in lowering the risks associated with farmer’ opportunistic behavior. (3) Member participation, commitment, satisfaction with leadership and with the cooperative’s strategy are examples of what could be additional performance criteria besides reported profits, which taken alone could be misleading. Because the cooperative’s objectives are beyond the economic viability of the collective enterprise, (Birchall and Ketilson, 2009), the intangible social assets should be assessed in order to evaluate the performance of the cooperative, and thereby to compare cooperatives with investor-owned firms and among cooperatives themselves.