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Roger SPEAR*
Open University, Milton Keynes, UK
ABSTRACT**: This paper considers issues of governance in
democratic member-basedorganisations (DMOs), suchas co-operatives
and mutual societies. It examines the processes whereby members
interests are mediated through the democratic process, and the
board; and it explores some of the factors influencing the power
of managers. It goes on to argue that the system of governance in
DMOs in their institutional context runs the risks of managers
becoming powerful and entrenched in poorly performing
social economy organisations, unless countervailing measures are
1 Introduction
The paper focuses on the governance of democratic, member-
based organisations (DMOs). Essentially the paper is relevant to a
wide range of organisations that serve a membership and give that
membership democratic rights of governance, such as co-operatives,
mutual organisations, trade unions, and voluntary sector organisa-
tions where the membership is formalised and given democratic rights
of control in its constitution. (However, as Lansley (1996) argues
in those voluntary organisations which are charities the historical
development of charity law has tended to marginalise members in
relation to trustees and management). Most, but not all, DMOs accord
democratic rights to members on the basis one person one vote,
rather than on the basis of shares held. This excludes most
commercial share-based enterprises. Nonetheless, the paper draws
** Re sume en fin darticle; Zusammenfassung am Ende des Artikels;
resumen al fin del art culo.
CIRIEC 2004. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
Annals of Public and Cooperative Economics 75:1 2004 pp. 3359
on some of the approaches to corporate governance in such organi-
The current concern with organisational/corporate governance
is widespread. In the private sector the reasons for this include the
- excessive executive power which may culminate in pension
fund abuse, excessively large remuneration packages for execu-
tives, corrupt practices as well as poor decision making;
- a concern that systems that attempt to enable owners to
exert control over managers have often been ineffective and
- a concern that with increasing globalisation of corporations
and the relatively weak regulatory powers of national
governments that some effective constraints on the power of
corporate managers is required;
- an increasing concern for the environment and market fail-
ures for common property (tragedy of the commons); and so
placing greater demands on good stewardship;
A similar picture emerges in the social economy (co-operatives,
mutuals and voluntary sector). Examples of the current concerns
are most visible in the periodic reviews on Co-operative
Governance in the UK Co-operative Sector (by the Co-operative
Union now Co-operatives UK (19762001), and the recent spate
of privatisations of mutual societies which has involved conversions
to PLC status to increase commercial flexibility and gain access to
wholesale capital; this has also led to lucrative share options for
executives and share windfalls to current members where they
benefit from the accumulated capitalisation of the business over
several generations of membership. Other concerns in the social
economy are to do with degeneration of co-operatives (specifically
of their values and distinctive practices), a tendency to insularity,
and the processes or political levers for promoting change in
This paper continues by outlining some of the major theoretical
perspectives on corporate governance. Using this framework it then
examines the nature of governance in DMOs and some of its charac-
teristic weaknesses, including low levels of member participation and
managerial entrenchment. Finally, it goes onto develop prescriptions
for better governance of DMOs designed to overcome some of the
weaknesses identified.
2 Approaches to governance
This section outlines some of the main themes in the corporate
and non-profit governance literature, then goes onto locate the
approach adopted in this paper in relation to these themes.
The policy context for designing or adapting governance sys-
tems is: a recognition of the power of (often deregulated) markets in
shaping corporate action, varied institutional frameworks for corpor-
ate takeovers in different countries, government regulatory frame-
works (which are often weak). This leaves an emphasis on business
ethics, and regulatory/advisory frameworks for corporate governance
(the main features of which are concerned with the role and composi-
tion of the board, and the ways in which it can exert control). This
paper is concerned mainly with governance (and to a limited extent
regulatory frameworks).
There are several schools of thought in the literature on govern-
ance. This paper will refer to a few of the major ones relevant to its
domain of interest democratic member based organisations. The
first has its origins in the work of Berle and Means (1932) which
asserted the dominance of management and the legal fiction of share-
holder control, and the ineffectiveness of the board in checking man-
agerial power in the interests of shareholders. The second major
trend, which is used to structure the analysis in section 3 of this
paper, is principal/agency theory (this whole section draws on, but
also develops and adapts writings on principal/agency theory and
transaction cost approaches such as Ben Ner and Van Hoomissen
(1994), Jensen and Meckling (1976), Hansmann (1996) and Morse
(2000), etc). This theory is based on similar assumptions of powerful
managers, and it develops a normative approach for limiting manage-
rial power and guiding its direction. P-A theory is particularly useful
for structuring and informing an analysis of the influence of mem-
bers/owners (the principals) over the managers (agents) in DMOs. It
is concerned with economistic, rational-choice theories of how the
principal (usually determined by property rights i.e. the owner/mem-
ber) can control the agent (the manager of the enterprise) so that the
agent manages effectively in the principals interests. Principal
agency theory has been extremely influential, particularly in propos-
ing changes to governance processes; and it can be seen informing a
range of measures such as codes of practice and share option schemes
for senior managers.
Third, there are stewardship approaches (Davis et al. 1997) that
examine the role of managers in relations (of partnership) with
diverse stakeholders of the organisation. These approaches are often
normative, looking to inform good management practices, rather than
controlling them. One such approach is that of Kay and Silberston
(1995) which proposes a trustee model of governance, where manage-
ment are seen as trustees of the firms assets. As with the above
approaches, this approach has the advantage of fitting closely with
most observers views that management is by far the most powerful
actor in the governance/management process. This approach is criti-
cally examined in Section 4, particularly in relation to expanding the
view of a firms assets to include its core values and the democratic
rights of members thereby expanding the view of governance.
There are also numerous studies of factors influencing the per-
formance and effectiveness of boards, including the specification of
different roles of boards and in particular the competency of board
members (e.g. Westphal and Zajac 1995, Stone 1991, Fletcher 1992,
etc). These are not central issues for this paper.
Some recent researchers e.g. Pettigrew and McNulty (1995),
and Cornforth (1996, 2002) argue that there is relatively little
research on how governance is actually conducted and in particular
the operation of boards has been a black box for too long. Pettigrew
and McNulty (1995) develop a framework for analysing power and
influence at board level in terms of three sets of factors: context and
structure, power sources, and will and skill. This suggests that the
wider institutional, legal, and societal context shapes directors inter-
pretations of their role and conduct. A board member may draw on
various power sources to develop a credible power base relevant
expertise, derived power from internal/external power figures, posi-
tions on board committees, and influence arising from information
and networks developed within and outside the boardroom. But
clearly the will and skill of board members differ considerably in
both their ability to build and develop power sources and to make
effective use of them (using sound analysis, persuasion, persistence,
tact, charm, etc).
Finally, partly from such empirical considerations and partly
out of a concern for a need to integrate theoretically the diverse
perspectives on governance, attempts have been made to bring
together some of these approaches in a way that informs the complex-
ity faced by boards and manager. Such more integrative approaches
that bring together theoretical perspectives (e.g. Cornforth 2002,
Sundaramurthy and Lewis 2003, etc.) seem highly relevant both for
improving theoretical understanding of governance issues, but also
for assisting in normative concerns for the better design of governance
systems. With regard to this papers concern for democratic gover-
nance in social economy organisations, it seems particularly important
to address issues both of participation of members (see Birchall (2002)
for an important contribution), and how they exert influence or
control over managers, but also to consider how this relationship can
be developed through co-operative/collaborative relations.
Sundaramurthy and Lewis (2003) argue that in order to under-
stand governance performance it is necessary to develop an approach
that combines both control perspectives (e.g. P-A theory) and collab-
orative perspectives (e.g. stewardship theory). They also argue that in
the design of governance systems that an over-reliance on one of these
perspectives can lead to a self-reinforcing dynamics leading to poor
performance thus a balance is required:
Acontrol approach helps curb human limitations through vigilance
and discipline, while a collaborative approach taps individuals
aspirations via cooperation and empowerment. Yet if one approach
becomes overemphasised, perils of groupthink or distrust can fuel
reinforcing cycles. From a more integrative perspective, however,
embracing and balancing both approaches facilitates learning and
adaptation. Sundaramurthy and Lewis (2003)
This framework is used in this paper, firstly to outline the nature
of control in DMO governance, then to explore the need for a trustee
(collaborative) model of governance in order to balance out the defects of
limited member control. The paper concludes by exploring further meas-
ures required for the design of effective governance systems in DMOs.
3 Members control?
In this section the control perspective on the governance of
DMOs is explored using P-A theory and secondary data. In P-A
theory, the principal has three ownership rights:
- to control the organisation,
- to dispose of its payoff (in whatever form), and
- to transfer these two rights.
This paper is mainly concerned with the first right (control of
the organisation) but the other rights also have a bearing on the
argument. Typically the influence of the members (the principal)
is not direct, but via a board of directors representing the members
and via an annual general meeting, where directors are elected and
major issues are discussed. Thus it is convenient to split the analysis
in this section into three parts: members influence on the board,
board influence over managers, and external factors influencing
governance namely the market for corporate control, legislative/
regulatory frameworks and professionalisation processes.
3.1 Members and boards
In this section secondary data (mainly from UK consumer co-
operative sector and direct from UK co-operative societies) is used to
examine the extent of member influence over the board, an aspect of
governance which has tended to be under emphasised in governance
research. Data from consumer/user co-operatives in the UK is used,
with some comparative data from the other sectors and countries.
Five issues are addressed examining different points in the logic of
influence from user/consumer to the board:
- the proportion of users/consumers with member rights;
- member participation;
- the effects of size and age on participation, which examines
the extent to which a decline in participation can be consid-
ered a result of size or age;
- coalition formation;
- board functionality.
Proportion of users/consumers with member rights
This refers to the relationship between customers and mem-
bers. In some retail consumer co-operatives, such as in Japan, all the
customers are members, and vice-versa i.e. there is an identity
between the two. This identity principle still applies in the case of
most financial mutuals, including credit unions. However many con-
sumer co-operatives have lost this principle, so that there are some
members who are not consumers (because they have moved away,
died, etc), and there are many consumers who are not members either
because they lack the interest or the opportunity (because the
co-operative has not been promoting membership vigorously).
These conditions can be seen in Figure 1.
Where the identity principle applies it may lead to complacency
about membership issues since promoting membership becomes an
unnecessary task. Many financial mutuals, such as building societies
in the UK, hardly promoted the concept of membership, and certainly
not active participation, until the wave of demutualisations in the
nineties. The situation has improved in recent years in that sector,
and in the consumer co-operative sector for example one regional
society has written off 42%of its previously recorded members (due to
them having lost contact with the society), and now just over 50% of
their trade is with members (Co-operatives UK 2003). And there are
now new policies in place for increasing the proportion of trade with
members of consumer societies.
Where the identity principle does not apply, there are two
issues: firstly the proportion of customers who are members the
lower the percentage the less representative they are of the customer
base; and secondly the proportion of members who are not customers
assuming most of these are dead or have moved away, this may give
a false impression of scale of membership and its characteristics; there
is a minor risk of entryism people becoming members for political
reasons or to secure personal advantage.
Member participation
Recent data on UK consumer co-operatives (Davies and Donald-
son 2001) shows a range of 15% of members participating in board
elections. Most societies report less than 1% of members voting in
members meetings, but the range is still 15%for the full spectrum of
societies, and there was some evidence of size effects with larger
organisations tending to have lower participation levels (Figure 2).
Figure 1 Showing incomplete identity between members and customers
Under 1% 1%2% 2%5%
% Members attending


Figure 2 Percentage of members attending members meetings
The Oxford, Swindon and Gloucester Co-operative (OSG) is the
largest regional independent retailer in this geographical area with an
annual turnover of 296.7 million (the fifth largest UK retail co-
operative in 2002), 190,701 registered members (70,044 active, regu-
larly trading, members) and 3,603 employees. 8,665 members voted in
the Societys AGM in 2002. This voting represents 4.54% (of mem-
bers). The OSG policy over the years of promoting membership by
targeted recruitment and the introduction of a dividend card has
clearly paid off (together with postal voting).
Lincoln Co-operative Society, another large successful independ-
ent retailer has increased its membership dramatically over the last few
years, as can be seen in Table 1:
Table 1
(as at April each year) No of votes No of candidates No of members % voting
May 1998 480 8 67,574 0.73%
May 1999 564 9 100,000 0.56%
May 2000 424 6 114,281 0.37%
May 2001 1239 9 125,787 0.98%
May 2002 1132 8 136,419 0.83%
May 2003 n.a. 8 142,948
However increasing the percentage of active voting members
has been more difficult, but again considerable progress has been
made. The dramatic improvement in percentage voting in 2001 is
due to a change in the system making it easier to vote: they allowed
members to vote using their dividend card rather than share account
book. Voting is over 4 days and votes can be cast in all 66 outlets.
However there is no postal, phone or internet voting although they
are constantly looking at different methods.
The National Trust is the UKs largest membership-based char-
ity, with about 2.7 million members. In 2001, about 90,000 people
voted in the AGM (representing 3.3% of members, some 1800
attended the meeting). Members elected half the board (26 seats)
while the other half (26 seats) were appointed from kindred bodies.
A recent study of credit unions in Ireland shows an average of
2% of members attending and voting at AGMs (McKillop et al. 2002).
This applied regardless of size, but relative to co-operative retail
societies the credit unions are much smaller (with an average of
about 4100 members in 1998).
Again, looking at evidence from other countries, in one of the
most comprehensive studies of participation in co-operatives and
other associative structures in a single country, Pestoff (1991) finds
that Swedish consumer co-operatives demonstrate the lowest level of
membership activity of any of the 17 types of . . . Swedish voluntary
associations. In 1980 this ranged from 29.2% participating in AGMs
of smaller co-operatives to 7.2%participating in AGMs of citywide co-
operatives, to 5.9% in regional co-operatives, and 3.3% in (larger)
metropolitan co-operatives. The author explains this through a struc-
tural model of participation, which emphasises the options open to
members to participate in a particular organisation he found that
the greater the contact surface between an organisation and its
members (i.e. opportunities to participate), the greater their partici-
pation. (Pestoff 1991).
Size/age effects on participation
There is a common perception that with increasing size and age,
active membership and democracy will decline or degenerate. This
can be seen in Figure 3 showing voting in the elections of consumer
co-operatives in the UK in the middle of last century (from Banks and
Mears 1984).
Here the 1933 series shows declining membership democracy
(measured by percentage voting in AGM). This declines with the size
of the co-operative from 5%for large co-operatives to just over 1.5%for
small co-operatives. The second series shows the effects of age, just over
20 years later democracy has declined in all size ranges of co-operatives
(but least in the smallest co-operatives) with a range of 3.51.5%.
and less
Size (number of members)



Figure 3 Voting and size
However, more recent data from the latter half of the twentieth
century shows fluctuations in membership. Figure 4 (Co-operative
197687) shows reducing numbers of co-operative societies
(due to competition/failures and mergers), with increasing total turn-
over, and membership declining, as the number of societies goes down
and the size of societies goes up (a clear size effect).
Figure 5 (Co-operative Union 19902001) shows some very
interesting developments indicating that the process of degeneration
can be reversed thereby challenging the inevitability of the degen-
eration thesis. Despite declining numbers of societies and increasing
turnover which taken together indicate greater size of co-operatives,
membership increases, keeping pace with turnover (and inflation
effects may strengthen this trend).
Coalition formation
Non-transferable ownership shares in DMOs are usually estab-
lished on the principle of one person one vote (rather than one vote
Retail Turnover
No. Societies
No Members
Figure 4 Retail societies in the 1970s/80s
1 The Co-operative Union now operates under the name: Co-operatives UK.
Retail Co-ops in 90s
Number of
Number of
Figure 5 Retail co-ops in the 1990s
per share). Hence their ownership is widely dispersed, which prevents
a concentration of ownership, and hence inhibits transfers of owner-
ship through mergers, conversions and takeovers. Proxy votes, where
members can temporarily assign their vote to another person, might
moderate this tendency, but in practice proxy votes are overwhelm-
ingly given to the chairperson, thereby increasing the power of the
managerial elite (which usually includes the chair).
Hence, the formation of a group or coalition of shareholder
members is difficult, since coalition formation is restricted due to
the non-transferability of control rights (via shares), poor information
about such coalitions, and the practical difficulties of forming a coali-
tion and reaching agreements (particularly with size and dispersed
membership). Thus there are no voting blocks like that of institu-
tional investors in conventional shareholding companies, to exert
concentrated influence, and provide checks on managerial power or
ineffectual boards.
Board functionality
This section considers the implications of the above factors for
the effective functioning of the board. Low participation reduces the
legitimacy of (and trust in) representatives on boards. Issues of repre-
sentativeness of the 15% that do elect the board must also be raised,
since they are often dominated by people from the same social or
cultural group, having higher incomes, better education, and being
members of community elites (thereby further reducing trust and
legitimacy). Evidence for this is provided in the Co-operative Commis-
sion Report (2001) stated: our concern was that the current minority
was not necessarily representative for instance in age structure of
either the membership as a whole or of the consumer population at
large. Further evidence is provided in research conducted for the Co-
operative Group (reported in Co-operative College 2003): the research
differentiates between cradle co-operators, older more working class,
who have been brought up to believe in the co-op as a way of life vs
convert co-operators, younger, more middle class, who come to the
co-op because they empathise with its values. The study hypothesised
that the latter are more likely in future to become active members and
elected directors. Although as argued in the Co-operative Commission
Report (2001): it must be emphasised that Board members, once
elected are not delegates representing any particular constituency,
rather they serve on the Board to oversee the competitive and com-
mercial success of the Society as a whole.
In addition participation levels can be improved factors influ-
encing the level of member participation include the extent to which
membership strategies deliver benefits, involvement and participation
opportunities (see Spear 2000b); and technology has played a part for
many years: Ostergaard and Halsey (1965) reported how postal voting
made a big difference in the 1950s, while Lincoln has shown how
smart dividend cards dramatically effected voting, and it would seem
likely that the variety of channels being considered (mobile phones to
internet) can only increase voting levels.
From the perspective of board functionality (see Cornforth
2002) it may well be that many of the societies examined above can
draw on a substantial pool of active members for their boards, and
this may be satisfactory from the perspective of the level and range of
skills required to function satisfactorily as a board. Nonetheless any
claims to represent the interests (or even know the interests) of the
wider body of members and customers must be called into question
and this may affect the legitimacy of the board in the eyes of mem-
bers/customers and other stakeholders.
On the other hand the extent to which board seats are contested
will increase members real choice in voting, and will increase the
legitimacy of a board. Evidence from Irish credit unions (McKillop et al.
2002) shows some variation in the extent of contested elections by size of
society with 32.9% of the large societies having contested elections,
18.2% of medium societies, and 9.7% of small societies; (N.B. in small
societies there was a high incidence of fewer candidates thanposts (28.5%);
this size effect is encouraging for the legitimacy (and democracy) of
larger societies, but traditional practices also play a role thus for
example in UK building societies seats are frequently uncontested.
Summary: the logic of the co-operative/mutual form is that
consumers/users have membership rights, but as we have seen this
is compromised by the lack of an identity principle. In addition fre-
quently there is a very low level of participation by members through
the governance structures of annual meetings of consumer/user co-
operative and mutual societies recent data shows that most consu-
mer co-operatives only have about 15% of members voting in the
AGM. This may be due to a variety of reasons including opportunities
to participate, and the well known paradox of voting (i.e. it is not
rational for an individual to vote since in most cases one vote will
not make a difference, and the payoff is minimal), and the cost/effort
of getting information, etc to inform voting decisions. This is
compounded by difficulties associated with identifying, forming and
joining a coalition.
This leads to the conclusion that the vast majority of members
(and even more consumer/users) have no influence on the board and
consequently on management. The impact of this on board function-
ality raises issues of representativeness and legitimacy, which may be
counterbalanced to a certain degree by the extent of contested elections.
3.2 Boards and managers
In this section principal agency theory is used to structure
an examination of the extent of members influence in the board/
manager relationship. It is argued that managers are even more powerful
in member-based organisations than in commercial shareholder
The main features of the relationship between the principal and
the agent are that the agent may engage in shirking or opportunistic
behaviour unless the principal can select and control an effective
board of directors (examined in the previous section), and design a
reward structure (e.g. promotion, disciplinary action, pay linked to
share value), and gain access to relevant information though under
conditions of asymmetric information i.e. the principal can only par-
tially monitor the agents activities. A further control is exerted
through the market for corporate control i.e. take-overs, the threat of
which keeps managers more responsive to shareholders. There are
other external factors: legislation and regulatory frameworks which
protect shareholders/members interests, and professionalisation fac-
tors which will be examined in the next section. The board governance
factors will be examined in more depth under the following headings:
- reward structure (including goals and measures)
- information and monitoring
Then the external factors will be addressed in the subsequent
Reward structure (goals and measures)
In Principal/Agency theory applied to democratic member based
organisations, as we have argued earlier, the principal is the member
(who has ownership/property rights over the enterprise). Although
members own the reserves of their organisations, their shares are
not publicly tradable and are not regularly revalued; most members
will not have a direct interest in profitability, and since their primary
role is not as investors, it is likely that return on capital will not be the
most likely payoff to be given priority. Lower prices or better quality
(consumers), higher wages or better conditions (workers), etc are
likely to be more important. Indeed there may be a discord here
between conventional measures of performance (profit or growth)
which a manager might be trained to optimise, and those linked to
member stakeholders.
The board of directors of DMOs, besides having the typical goals
of giving direction to the enterprise, frequently has an official goal of
encouraging the participation of other members see for example
Co-operative Commission recommendations (2001). However as the
evidence in the previous section indicates, these goals may not be
operative or effective.
Most DMOs adopt the constraint of a limited return on share-
holding. There is also a tendency not to revalue shares in line with
inflation and business performance. Instead there may be an empha-
sis on lower prices and better products, to support the trust relation-
ship between the organisation and the members. Partly as a result of
this and the social goals of co-operatives, the goals and measures of
performance of the enterprise may well be more complex and more
numerous than conventional firms. There are also pressures from
non-voting but influential stakeholders like banks whose financial
interests (via loans) are less likely to coincide with those of member
based enterprise not seeking to maximise profit. There may be
debates and conflicts over the quality and range of services provided,
and the extent to which conventional strategies like growth (size) of
the enterprise may limit the trust relationship. This pluralism of goals
can result in a lack of strategic focus and greater transaction costs
prioritising them at board level. And an important consequence of
these factors will be greater difficulty in designing effective incentive
systems than for conventional for-profits firms (which have clear
profit/growth related goals and associated measures and incentive
structures). This may have implications in terms of a reduced level
of motivation of managers, but this needs to be balanced against
ideological commitment to the DMO, by managers sympathetic to
the members goals and the co-operative ethos.
Information and monitoring
Due to multiple goals and lack of clarity or consensus about
measures of performance, it will be more difficult for the board to
gather information and monitor performance effectively. In addition
boards may exercise insufficient monitoring and control due to little
or no financial stake in the enterprise (nor the possibility of selling
their stake in the enterprise for a good profit on leaving). Members
may adopt a more limited economistic perspective participating in
customer benefits (such as dividends) without participating in
monitoring and control.
Finally, despite information being essential for control, over
time members may slip into a trusting cosy relationships with the
organisation, its board and managers. They consequently regard
active monitoring and control as less necessary; and as a result inform-
ation may be made available to them rather than distributed; the
implication being that greater effort is required of members for
proper monitoring.
There has been frequent concern about increasing business
complexity and the possible lack of expertise of board members in
DMOs. Non-executive directors (co-opted from outside the organisa-
tion) can play an important monitoring role here but they are not
always acceptable for example they have been opposed in the UK
consumer co-operative sector (see a major report on co-operative
corporate governance, Co-op Union 1995).
3.3 External factors influencing governance
There are a number of wider institutional factors that also have
an important bearing on member influence in DMOs, and correcting
or avoiding situations of weak governance/management and poor
organisational performance.
Market for corporate control
The market for corporate control mergers and acquisitions is
regarded as an important institutional mechanism for waking up sleepy
managers and cosy board relations. The lack of institutional investors,
difficulties forming coalitions, and the dispersed influence of members,
(which is exacerbated with increasing size) thereby weakens this form
of external control. Thus mergers are generally agreed and manager-
led (though many may be forced as a last resort) rather than hostile
takeovers. The large numbers of small and medium UK building
societies (savings and loans organisations) and health insurance
friendly societies (mutuals) testifies to this tendency, in a financial
services sector which has seen major consolidations.
Legislation and (self) regulation
Legislation and regulatory institutions set the frameworks
within which the market for corporate control can operate; it also
sets standards and expectations about good practice in governance, for
example several reports have been produced on governance in the
private business sector: the Cadbury Report on the Financial Aspects
of Corporate Governance (1992), Greenbury Report on Directors
Remuneration (1995), the Hampel Report (1998), Department of Trade
and Industry Review of the role and effectiveness of non-executive
directors (2003). These reports have been mirrored in parts of the
social economy, thus for example the Co-operative Union which has
taken account of the above reports and revised its Corporate Govern-
ance Code of Best Practice for retail societies frequently over the
years, including in 1995, 1998, 1999, 2000, and 2001. Indeed, this
federal body now known as Co-operatives UK has frequently played
an important self-regulatory role in reforming governance in mem-
bers interests.
Changes to legislative frameworks also have unintended conse-
quences, thus the UK Building Societies Act 1986 which deregulated
the sector allowing more flexible operation for competition with banks
(and facilitating conversion to limited company status) led to a far
greater number of demutualisations of these financial mutuals, than
had been anticipated. However, this in turn did much to awaken
many of the remaining mutuals to their distinctive differences and
their unique member orientation, leading to a regeneration of mem-
ber oriented activities for involvement and participation amongst
many of the remaining financial mutuals.
Professionalisation and labour markets
Fama (1980) argues that the existence of an active managerial
labour market serves to motivate good management. In such a con-
text, institutional and professionalisation factors become important.
This helps construct the values and attitudes of professional man-
agers; and institutional factors such as education/training increase
the pressures towards isomorphic corporate governance behaviour
(where training is dominated by mainstream practices) resulting
in similar patterns of governance in non-profit/mutual/co-operative
and conventional corporate sectors. An active labour market can
have a similar degenerative effect on the distinctive values and prac-
tices of DMOs. However where labour markets are segmented along
DMO lines, and as training and business school education become
more differentiated and serve a social economy labour market, there
is the possibility of countering such degenerative isomorphic tenden-
cies. A similar function can be achieved through internal manage-
ment development oriented to the specificity of the social economy
sector see for example a report on such a programme in the UK
consumer co-op sector (Watkins and Bickle 2000).
Summary: The result of lack of coalition formation, low member partici-
pation, and insufficient board control results in weak stakeholder (mem-
ber) control, which is exacerbated by the absence of external control
through the market in corporate control (as argued above) and the gen-
eral weakness of legislation in protecting member rights, though this
varies country by country (see Monzon Campos et al. (1996) for a review).
The consequence of this is that the agents (managers) have
more freedom of action than in conventional enterprises and will
not be under pressure to perform according to member interests. In
the many cases where there is good management, oriented towards
member/consumers, this is unlikely to create performance problems.
But poor managers may exploit this situation with less effort, less
conflict, and more remuneration. This weakness in turn weakens the
original market advantage of such enterprises in trust and collective
goods, by reducing trust and reducing the incentives and controls for
good performance. In the worst case the result is sleepy managers,
cosy board relations and poorly performing social enterprises that eat
into its asset base, often accumulated over generations, until it is taken
over or fails, as markets become more competitive. Poor governance
systems have clearly played a part in the general decline in consumer
co-operatives during last century (Brazda and Schediwy 1989).
This situation relative to the private sector should not be over-
stated (since many argue that shareholder control is weak e.g. Berle
and Means 1932), but institutional investors play the most important
role in balancing manager power in the private sector, and they play
no role in most DMOs.
However conclusions from this analysis also have implications
for the design of governance systems. Use of the control perspective
(P-A theory) emphasises the importance of finding ways to reward
and support good managers/boards, but it also reveals the issue of how
to rejuvenate poorly performing social enterprise. An active member-
ship can provide a crucial countermeasure to poorly performing social
enterprise; but that is unlikely to be sufficient, and countervailing
measures will also need to be developed (see Section 5).
Limits of control perspective
P-A theory suffers from a similar critique to that of rational
choice theory which is based on similar assumptions (see Abell 1992).
For example that of individualism (it is only individuals that
ultimately take action), and optimality (individual actions are opti-
mally chosen), and self-regard (provisionally individuals utility func-
tions and actions are entirely concerned with their own welfare). Such
an individualistic approach does not exclude collective, social or
organisational factors, but it does tend to ignore them or play them
P-A also faces more specific criticisms that have a particular
bearing on DMOs:
- it privileges property rights, neglecting the claims (and power)
of other stakeholders
- it privileges financial considerations (but equity based ones
rather than loans from banks clearly an Anglo-Saxon
business bias), and
- it tends to ignore non-financial motivations such as mutual,
reciprocal social benefits, trust, and other features of social
economy ideology that often helped initiate and support such
Thus while P-A informs a control perspective, it is not the whole
story when analysing governance systems, since it is also important to
develop a perspective that reflects the importance of developing a
dynamic of high trust (together with loyalty and ideological commit-
ment). This brings the best out of relations between stakeholders in
the social enterprise, particularly between members, directors and
managers. As well as ensuring that an appropriate balance is achieved
so performance and trust do not degenerate over time (Cornforth
et al., 1988). This leads to the important consideration of collaborative
dimensions in the design of good governance systems.
4 Trustee model of governance a collaborative philosophy?
In this section we develop a collaborative perspective on govern-
ance systems for DMOs, based on a normative model developed by
Kay and Silberston (1995), which can be used to inform good practice
of managers and boards of DMOs. Kay and Silberston (1995) develop
an implied critique of P-A theory by proposing a model that, they
argue, fits more closely to reality. They base their critique firstly on
the empirical evidence that shareholders do not in fact control com-
panies, as researchers from Berle and Means (1933) onwards have
argued. They also challenge the property rights basis of the claim for
control. They argue that the property rights given to shareholders are
extremely limited, compared with a common sense view of ownership.
For example ownership of a house, gives rights to:
- access;
- use of premises or assets;
- exclude non-owners;
- participate in decisions (particularly about disposal of, and
purchase of, assets);
- share in the costs/proceeds of asset sales/purchases.
They draw on the work of Grossman and Hart (1986) who argue
(in the context of viewing the firm as a nexus of contracts) that the
owner is that person who enjoys rights over it that have not been
given to others by explicit contract (residual contract rights). They
give the example of a hired car which is clearly owned by the hirer,
but the contractee enjoys rights normally associated with ownership.
If one applies this model to the firm it is the managers that appear to
own it, but clearly they do not legally. This leads to argument that
ownership may not be the most important factor in the control of the
firm (particularly as its rights are clearly weak); and that other
stakeholders (notably banks and employees) also have a right for
their interests to be taken into account, and to exert influence to
that effect. In the 1985 Companies Act in the UK the right of share-
holders to exclusive claim of the residual assets in case of liquidation
was reversed, and directors were given an explicit duty to strike a
balance between employees interests and others.
Kay and Silberston identify two clearly different models of
governance. One is based on the idea of concern for shareholder
value, which is prominent in the Anglo-Saxon (USA and UK) contexts,
partly because of a particular economic theory, and partly because of
the threat of hostile takeovers (the importance of the market for
corporate control). (P-A theory fits well with this model). The second
model draws on Japanese, German and non-profit contexts it is the
trustee model.
In this model (similar to the stewardship model Davis et al.
1997) the managers of the enterprise have the duty of preserving and
enhancing the value of the assets under their control, and of balancing
fairly the various claims to the returns on those assets. The idea of
a professional approach (like that of a doctor), and the view of the firm
as a social organisation and a community are discussed in relation to
this view). The two fundamental differences from the P-A model are
as follows:
- the trustees responsibility is to sustain the corporations
assets rather than the value of its shares; this represents a
broader responsibility than financial interests since assets
include skills, customer/supplier expectations (deriving from
long-term trust relations), and reputation in the community.
- rather than giving priority to a single shareholders interests,
in the trustee model, the managers have to balance a diverse
group of existing stakeholder interests (sometimes conflict-
ing), and weigh the interests of present and future stake-
The effect of this is to impose a longer term view of the develop-
ment of the enterprise on the managers. This model thereby also
implied reduced importance for the non-executive director role (rather
than shareholder representative and protector). Kay and Silberston do
however acknowledge two problems associated with this view. First the
problem of resolving, and prioritising a multiplicity of goals, and meas-
uring performance against them (rather than the focus arising from the
sharp clear goal of shareholder value); and second the problem of
coherence in a management team vs diversity reflecting the different
stakeholders. The authors acknowledge the importance of coherence,
but stress management should be held accountable). Part of the way of
strengthening the effectiveness of their model is through legislative
support in their proposed revised companies act.
If this model is applied to democratic member owned organisa-
tions, it is clearly more attractive from the point of view of emphasising
the social dimension of DMOs, where trust
and social economy values
can be functional for good performance and good board/manager/
member relations. Most DMOs would recognise the importance of
considering the interests of all stakeholders, but they would expect
some privileging of member interests.
2 Some refinements may be developed about how loyalty and trust may
be related to contingent environmental factors such as social embeddedness;
for example a study of 900 US savings and loans agencies (SLAs the
equivalent of UK building societies) founded between 1960 and 1987, was
concerned with comparing the effects of different governance arrangements
and capital structures arising out of different ownership structures
comparing mutual and joint stock SLAs. This study concluded by indicating
future lines of research, hypothesising that the conditions favouring mutual
development and survival might be those where members were fairly densely
populated in relatively stable communities (Rao and Neilsen 1992).
Limits of the collaborative trustee model The model has many
virtues, but also a number of weaknesses. It seems to underestimate
the importance of checks and balances on managerial power (and its
effect on their motivation). In both the Japanese and German models,
on which the trustee model is based, banks and (cross-linked share-
holdings) have a powerful role to play in this respect. It also seems to
rest heavily on the professionalisation of managers, and legislative
support, neither of which may necessarily take place to the extent
From a theoretical perspective it ignores (largely) an area
related to P-A theory transaction cost theory, which is also based
on a contracts view of the firm, but emphasises the importance of
trust and core skills. Indeed it may be that a strong emphasis on trust,
asset specificity and core skills may lead to measures of performance
relevant to the operation of this model. A further theoretical point of
criticism is that although in critiquing the P-A model and its rele-
vance to the UK/US context (and likewise for the trustee model and
Japan/Germany). It fails to fully acknowledge that this may represent
a contingency view of governance based on economic or other relevant
theory, and the context (e.g. the extent of a market in corporate
control, or extent of social embeddedness) may be particularly import-
ant. The import of this is both the issue of appropriateness to context
and that of how a dominant model of governance becomes established
in that context (institutional theory may have an important role in
elucidating this issue). However the general thrust of this papers
argument has been that in the design of good governance systems
(for DMOs), it is not a case of either a P-A inspired control model or a
trustee inspired collaborative model, but a balance between the
two albeit that this balance may be different in different institu-
tional contexts.
3 However it may be that the tendencies and propositions emerging from
the above analysis provide a line of research and a basis for evaluating the
dynamics of governance by examining the wider institutional context and how
factors of social embeddedness, ideology, and power are played out.
Institutional theory may, in these respects, help explain dominant modes
of governance arising from typical resolutions of these competing forces
(e.g. deriving from managerial professionalisation and other institutional
5 Countervailing measures on managerial power
Here the perspective shifts to a wider institutional focus for
achieving a well balanced and well functioning framework for govern-
ance systems for a DMO sector. A number of institutional measures
are emerging to provide checks and balances on managerial power in
DMOs, and enhance the trust/collaborative dynamic. These include
corporate governance codes which are strengthening boards, improve-
ments to level of democratic activity by promoting membership and
different types of membership activity (e.g. through membership
groups), social audit as a way of making managers more visibly
accountable, corporate social responsibility measures, and forum
which link members and managers directly. Many of these measures
have been taken up (and even developed) in the more progressive
co-operative societies. Other measures have been discussed in the
UK co-operative movement such as use of non-executive directors
from a central register of sympathetic experts, but so far have not
been taken up.
This paper has argued that managers may be more insulated
from pressures to perform, and be more insulated from stakeholders
than in private business. This places greater emphasis on counter-
vailing measures that will develop good practice in the boards, keep
managers focused, and develop ways of being responsive to stake-
holders. Such countervailing measures include:
- Regulation or voluntary self-regulation to improve govern-
ance standards such as establishing and using codes of
practice, benchmarking appropriate performance indicators
(such as %customers who are members, %members voting,
% elections contested, etc).
- Lively, competent boards this can be achieved through
increasing member participation and training of board
members and active members; developing a clear remit for
board members, and possibly recruiting non-executive board
members; establishing ladders of governance opportunities
for members to become more active and develop skills also
becomes important.
- Good professional manager development in particular
awareness of, and development of corporate social respon-
sibility (CSR), since good CSR practices should be expected
in co-operatives; so that acting as a professional manager
requires a responsible attitude to boards and the governance
- Effective incentive structures for managers; this means
ensuring the remuneration package is adequate, matches
comparable positions in similar managerial labour markets,
and is linked to measures of performance that match the
aspirations of the co-operative and its members and stake-
- Better reporting (such as social audit) to ensure an informa-
tion system provides well founded measures of performance
so that managers can appropriately target their activities.
- Stakeholder dialogue to enhance trust dynamics and ensure
that aside from measuring performance relating to stake-
holders (via social audits and managerial informationsystems),
there are processes and channels in place for ensuring commu-
nication with key stakeholders (especially staff) so that good
partnerships can be established.
6 Conclusions
This paper has argued that members only weakly influence
boards and hence managers. That the low level of membership activ-
ity in consumer/user co-operatives and mutuals raises questions about
the extent to which board members may be considered representative,
and the extent to which the democratic process gives a mandate to the
elected board. It argues that managers in consumer/user co-operatives
and mutuals have more power than in similar private sector organisa-
tions, and that the market for external control is weaker.
The consequences are that managers may be more insulated
from pressures to perform and be more insulated from stakeholders
than in private business. With good management, performance will
not be an issue, the main risk will be if they are succeeded by weaker
managers, and this begins a decline. In the worst case the result
will be sleepy managers, cosy board relations and poorly performing
democratic member-based organisations.
The analysis has pointed towards a series of institutional coun-
tervailing measures that have been informed partly by the control
perspective and partly by a collaborative, trustee perspective that
emphasises the importance of being responsive to stakeholders. The
combination of these two perspectives together with the countervail-
ing measures helps to ensure a balanced governance system, which
combines high-trust relations with checks and balances on managerial
power, so that good social and economic performance of the organisa-
tion is achieved.
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Gouvernance democratique dans les organisations basees sur les
Larticle traite des aspects de la gouvernance dans des organisations
de mocratiques base es sur les membres, comme les coope ratives et les
mutuelles. Il examine les voies par lesquelles les inte re ts des membres
sont pris en compte via le processus de mocratique et la direction. Il
analyse certains des facteurs qui affectent le pouvoir des gestionnaires.
Lauteur de montre ensuite que le syste `me de gouvernance dans ces
organisations pre sente le risque de rendre des managers puissants et
isole s a` moins dadopter des mesures compensatoires.
Demokratische Governance in Organisationen, die auf ihren
Mitgliedern basieren
Dieser Beitrag befasst sich mit Problemen der Governance in demok-
ratisch verfassten Organisationen, die auf ihren Mitgliedern basieren
(democratic member based organisations DMOs), wie etwa Genos-
senschaften und mutualistischen Gesellschaften. Untersucht werden
die Prozesse zur Mediation der Mitgliederinteressen durch den demok-
ratischen Prozess und den Vorstand, und es werden einige der Fakto-
ren untersucht, die die Macht der Manager beeinflussen. Es geht dann
weiter mit der Feststellung, dass das Governance-System in DMOs
und ihrem Umfeld das Risiko beinhaltet, dass die Manager machtig
werden und sich isolieren, wenn nicht Gegenmanahmen ergriffen
Gobierno democratico en las organizaciones basadas en sus
El art culo trata los aspectos relativos al gobierno en las organiza-
ciones democraticas basadas en sus miembros, tales como las coopera-
tivas y las mutualidades. En e l se examinan los procesos a trave s de los
cuales se toman en consideracion los intereses de los miembros por la
v a democratica y de la direccion. Analiza, asimismo, algunos factores
que afectan al poder de los gestores. El autor demuestra, a continu-
acion, que el sistema de gobierno en estas organizaciones presenta el
riesgo de convertir a los directivos en poderosos y aislados, a menos
que se adopten medidas compensatorias.