Disadvantages of cooperatives and how to overcome them

McKinsey have produced an extremely useful report on cooperatives. It’s well worth a read if you’re setting up or running a coop, but I wanted to highlight the section I found most useful: The relative strengths and weaknesses of coops compared to shareholder owned companies, and most importantly how to overcome the challenges. I think this is likely to apply more widely to other democratic organisations too.

The McKinsey study showed that cooperatives outperform public companies in many key areas: leadership, direction, culture & climate, motivation and accountability. These strengths are a powerful foundation for a successful business. However, cooperatives lag their shareholder-owned peers when it comes to business agility. Specifically: Co-ordination & control, capabilities, external orientation and innovation & learning. This suggests some massive flaws in how a coop builds on its foundation to actually execute and build a dynamic and successful business.

However, in each case there are examples of coops which have very successfully overcome these challenges and built world-class businesses that can out-compete shareholder-owned enterprises. According to McKinsey, the three areas to work on in order to improve agility are decision-making, pursuing new opportunities and sourcing and developing talent.

Let’s look at how to improve each of these and highlight a few examples of best practice. There are further examples in the full report.

How to improve agility in decision-making

  • Clearly distinguish respective roles and responsibilities of executives and elected officials.
  • Create more efficient processes for consulting with members on strategic direction (in other words, stay democratic, but don’t get too bogged down in the process.)
  • Improve performance-management systems to enable rapid identification and correction of areas of under-performance.

Example: The Co-operative Group in the UK uses technology to facilitate consultation and discussion amongst members to work on issues and gain consensus, which greatly speeds up the process.

I would also add that there are new systems like Liquid Feedback that facilitate mass decision-making as well as more established online social tools like forums and wikis that enable collaboration.

How to improve agility in pursuing new opportunities

  • Expose the coop to more external viewpoints and ideas.
  • Put in place explicit processes enabling different parts of the organisation to work together.
  • Develop opportunities to finance emerging opportunities that might not have immediate benefit to the current membership base.

Example: The Mondragón Network in Spain developed specific R&D facilities to focus on new opportunities. They also convene working groups from across the network to explore new business ideas, and 10% of the coop’s gross profit is diverted to a development fund that finances research, innovation and business development.

I think there’s a huge advantage of coops in that they exist for the long-term benefit of members, not short-term financial results for shareholders, which means they should be able to think and invest more long-term.

How to improve agility in developing and sourcing talent

  • Identify top talent and create leadership-development tracks.
  • Adopt recruiting and training practices that change perceptions of working in a coop vs. a public company.

Example: The Farmer’s Cooperative in Iowa, USA, rolled out a recruiting programme in conjunction with Iowa State University, working closely to offer education, scholarships and mentoring involving very senior personnel from the coop. This helped them to double their intern pool and improve retention of top people.

At the International Summit of Coops this week, education was a recurring theme. Economics and business degrees simply do not seem to cover cooperative economics despite the huge size and potential of the cooperative sector. The coop movement needs to work in education at all levels to increase awareness and forge links that will lead to more talent entering coops.

My conclusion

All of the evidence I have seen is that cooperatives can perform equally or better than shareholder-owned companies, and have the enormous, unique benefit of directly acting in the interests of customers, employees and wider society – now and for future generations. They do not just make a few external owners better off and hope that an ‘invisible hand’ (which may not be there anyway) will do some good along the way. This is why cooperatives hold so much hope for creating a better, post-industrial capitalism. There are certainly challenges for coops to overcome, but in each case there are shining examples the prove it is possible.