Midterm 132

How is the board of directors (BOD) organized and what do they decide?

- Election of directors specified in bylaws -Bylaws outline the power of BOD: Responsibility for full oversight of coop affairs, members are only indirectly responsible.

What is the intuition behind Hueth's model? (journal article)

- Patrons make a significant upfront contribution to initiate a coops

What are additional objectives a coop could pursue?

- Supply Coop objectives: 1. Maximize total returns as a group 2. Minimize net price paid by patrons 3. set average revenue equal to average costs.

Why do farmers choose to organize and patronize coops?

- Wish to become involved in producing and retailing fuel, fertilizer, and other inputs for their farm operations - Have an incentive to market their own production - Single farmers usually do not have financial capacity - Coops can market products at a lower cost - If marketing firms have market power, a coop can counterbalance the market power. - Coops can increase prices consumers pay -Can reduce risk and create market opportunities - Coops sell their products and educate member farmers in production, quality, environmental management etc) -Economic and political empowerment -Coops might succeed in markets where no alternative market exists.

Why do we see underinvestment in coops?

- free rider issue: Entrepreneurship not directly rewarded -Require large membership for entrepreneurial costs, benefits of economies of size, price premiums, and reliability of supply and demand - investment is limited to only potential membership. no outside investment -Members may have tendency to underinvest

Key developments in the US

- one of the first worker strikes in the US birthed a coop workshop - Tax-relief package ti encourage profit sharing among workers. - Coop-like business model in Ben Franklin's library and fire dep - Years after great depression advanced coop -Owen finds New Harmony Community (1825): Equality and cooperation in work and purchases. -Grange Halls: Farmers learned skills from each other and shared economic hardship. Organized coops for purchasing, processing, and credit and retail. - As a result of : 1. Economic conditions 2. Farmer organization 3. Public policy

How is a coop different from other businesses?

-A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. -A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. -A Coop is a horizontal coordination among independent businesses for the purpose of achieving vertical integration

What is the relationship between the BOD, management, and members?

-BOD is elected by members -BOD manages fully coop affairs -membership voting for BOD is key

What is vertical integration?

-Businesses operating at one stage in the process expand into other stages. - Downstream: Firm moves into production stages closer to consumers. Ex: Oil refiner owns a pipeline. -Upstream: Business supplies its own productive inputs. EX: oil refiner who owns crude oil reserves and a distribution center.

Why are coops one kind of endogenous institutional response to market failure and missing markets?

-Coops ensure private provision of private goods IOFs do not support -

How were principles developed?

-ICA and USDA formed coop standards

What sets coops apart from alternative business forms

-Ownership by members/ patrons/users. - Governed by 1 vote/member or proportionate to equity -Equity capital held from patrons, goal to be proportional to usage. Preferred shares can be held by nonmemebers -taxation by pass-through to member's personal tax return. Coop taxed on nonmember earnings -limited liability - Vertical integration

What are the sources of capital and how are they managed?

-Primarily through equity: Common stock, preferred stock and membership certificates, retained patronage refunds, direct investment. allocated equity- distributed to patron as patronage refunds unallocated- retain by the coop as "shock absorbers," usually by nonmember business -grants, debt capital, equity capital.

How does basic economic theory of the firm apply to coops?

-Theory of a firm: Purpose is to decide what to produce, how to produce it, and how to distribute what is produced.

What rules need to be spelled out in the bylaws?

1. Classes of membership and their qualifications 2. the governance system, including the role and responsibilities of the BOD and how they are elected 3. Rules for certain actions such as annual meetings, bylaw amendments, or dissolution. - rules or policies that explains how organization operates. - membership requirements and rights -voting procedures: Elections of directors, meetings of directors -Patronage allocation and distribution -Board-management relations -membership termination -coop dissolution

Starting a new coop: What are the nine steps in starting a coop?

1. Preliminary exploration 2. Gauge broader interest 3. Form steering committee 4. Clarify purpose of business 5. Conduct feasibility study 6. Hold membership drive 7. Develop business plan 8. Prepare legal documents 9. Early start-up phase

What are the two primary roles of coops?

1. SUPPLY products and/or services to their members, either consumers or businesses. 2. PROCESS and/or MARKET their members' production or services downstream.

Are there commonly agreed upon Coop principles?

Contemporary Co-op Principles (USDA): user-benefit, user-owned, user-controlled. Seven Cooperative Principles (ICA): Voluntary & Open Membership Democratic Member Control Members' Economic Participation Autonomy & Independence Education, Training & Information Cooperation among Cooperatives Concern for Community

What are the main events in the worldwide development if coops?

Industrial Revolution- a response to the social upheaval affecting people: 6 day work weeks, 12 hour work days, child labor, penny loans. led to experimentation with communal colonies (robert owen, charles fourier, louis bland, and others) rochdale pioneers- Formed urban consumer coop in england. sold to members unhappy with local merchants.

How is vertical integration relevant to the role of coops?

Vertical integration might be motivated by need to attain more assured access to upstream and downstream markets. - Reduce fluctuations on prices via controlling large share of market