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Demutualization of cooperatives:
Reasons and effects.
Keywords: cooperative, demutualization, growth, conversion, transformation
Authors: Elena Meliá Martí and Mª Pía Carnicer Andrés
Affiliation: CEGEA (Centre for Research in Business Administration). Universitat
Politècnica de València.
Abstract
Demutualization is an increasingly common reality in the world of European
cooperatives. It can be held in its purest form, with the disappearance of the mutual
base entity and its conversion to other forms, or understood in a broader concept as
the implementation of models that deviate from the cooperative principles and from the
traditional cooperative model.
This paper analyzes, first of all, the causes or reasons that drive cooperatives
into a demutualization process. Secondly, from a sample consisting on the 80 largest
agri-food cooperatives in the European Union (of the dairy, meat, horticulture and
supplies sectors), we will select those that have chosen in their expansive model the
creation of a business corporation and the entrance of external investors (reducing
therefore the percentage of the cooperative control over the entity) in order to analyze
the profile of cooperatives that have demutualized; and finally, using panel data, it will
be studied the degree of fulfillment of those objectives that led to the migration to other
formulas (as business corporations).
1. - Introduction
The production of agricultural cooperatives represents the 60% of total
agricultural production in the EU-15. In some countries the cooperative market share
exceeds 90%, such as the milk production in Denmark, Austria, Finland and the
Netherlands, pork in Denmark and cut flowers in the Netherlands, facts that show the
farmers’ confidence in this form of association (Juliá and Meliá, 2008).
The agri-food industry in which they operate is characterized by high price
volatility (Committee on Agriculture and Rural Development, European Parliament,
2009), the growth of agricultural production costs, as a result of the increase in input
prices, the consequent reduction in agricultural incomes and the increasing
concentration of demand. Therefore, cooperatives have adopted various business
growth strategies, through formulas such as mergers and acquisitions, joint ventures,
the creation of federated structures, etc.., consolidating large cooperative groups in the
European Union.
There are several studies that prove this fact, as is the case of Hudson and
Herndon (2000) whose results from a survey of a sample of 500 U.S. cooperatives in
2000 showed that 78.5% of the surveyed cooperatives had participated in a merger or
acquisition over the past five years, distributed as follows: 25.4% had been involved in
a merger, 30.5% in an acquisition, 33.2% in a joint venture and 11.8% have had an
strategic alliance (Hudson and Herndon, 2000).
Demutualization has been analyzed and studied by several researchers all over
the world. However, there is not a clear definition of the term. In general, the term
demutualization is associated with processes such as conversion or transformation.
There is a tendency for large cooperatives towards creating business corporations, with
greater flexibility to respond to the requirements of the global and competitive
economic context in which they operate.
Most authors describe demutualization as a process in which the cooperative
ceases to exist and / or becomes an economic entity, far from the mutual nature
(Chaddad and Cook, 2004). However, there exists disagreement in the degree of
detachment that should be given in order to call it ‘demutualization’.
According to Chaddad and Cook (2004), conversion, increasingly known as
demutualization (Birchall, 2001), refers to changes in the ownership structure of user
owned and controlled organizations from a mutual to a for-profit, proprietary
organization. As a result of demutualization, residual claim and control rights are
reassigned among stakeholders with implications to firm behavior and performance. In
particular, cooperative membership rights are converted to unrestricted common stock
ownership rights in a corporate organization. In order to get extra financing, most of the
demutualizations are followed by public listing, and members are invited to exchange
their shares and become members of the corporation.
There are some studies that have analyzed the reasons given by the entities
that have opted in this process of expansion by formulas that involve a greater or
lesser level of demutualization; among them the following are included (Cronan, 2007;
Fulton and Hueth, 2009):
-
the need to access capital beyond the membership base
-
the desire by members to be able to access their equity or realize the market
value of the co-op
-
the desire to unlock the value in co-operatives/mutuals for members and other
investors and to enable this to be freely tradable
-
the requirement for a more commercial, flexible, competitive and less restrictive
corporate structure
-
the lack of a sufficiently strong understanding of and support for co-operative
and mutual principles, values and member service within the organization
-
a public policy environment which often doesn’t fully understand the needs and
operational character of co-operative and mutual organizations
-
Poor management of the cooperative.
2. - Objectives
This paper presents a triple objective:
First, it attempts to explore the concept of demutualization (through existing
references in this area), the reasons that cause it and the different formulas used by
cooperatives to address it.
Secondly, from a sample consisting on the 80 largest agri-food cooperatives in
the European Union (of the dairy, meat, horticulture and supplies sectors), we will
selected those that have chosen in their expansive model the creation of a business
corporation and the entrance of external investors (reducing therefore the percentage
of the cooperative control over the entity) in order to analyze the profile of cooperatives
that have demutualized (compared to those that have not demutualized).
Finally, using panel data, it will be studied the degree of fulfillment of those
objectives that led to the migration to other formulas (as business corporations).
3.- References
BIRCHALL, J. (2002). “Mutual, non-profit or public interest company? An
evaluation of options for the ownership and control of water utilities”. Annals of
Public and Cooperative. Economics, Volume 73 Issue 2, pp.181.
CHADDAD, F. and COOK, M. (2004). “The Economics of Organization Structure
Changes: a US perspective on demutualization”. In: Annals of Public and
Cooperative Economics 75:4, pp. 575–594.
COMMITTEE ON AGRICULTURE AND RURAL DEVELOPMENT, EUROPEAN
PARLIAMENT (2009). “Report on the prices of food products in Europe, 24th
February
2009”.
Presented
to
the
European
Parliament.
(http://www.europarl.europa.eu)
CRONAN, G. (2007). “Something for Nothing - It's Fabulous”: An Australian
Perspective of Demutualisation. New South Wales Department of Fair Trading,
Australia.
pp.
1-13
http://www.ica.coop/coop/mutuality/garrycronansomethingfornothing.pdf
FULTON, M. and HUETH B. (2009) “Cooperative Conversions, Failures and
Restructurings: An Overview”. Journal of cooperatives. Vol 23. pp. 1-11.
HUDSON, D. and HERNDON, C. (2000). “Mergers, acquisitions, Joint Ventures
and Strategic Alliances in Agricultural Cooperatives”. Research Report 2000009. Mississipi State University.
JULIÁ, J. and MELIÁ, E. (2008). “Social Economy and the Cooperative
Movement in Europe: Contributions to a New Vision of Agriculture and Rural
Development in the Europe of 27”. CIRIEC-España, Revista de Economía
Pública, Social y Cooperativa, n. 62, Special Issue, pp. 147-173.