Co-operatives in New Zealand

• Co-operatives are a major part of New Zealand’s economy.
• There are various types of co-operatives and a range of co-operative legislation in New Zealand.
• Co-operatives have unique features including operating in accordance with co-operative values and principles with a focus on members’ needs.
• Getting the right mix of skills and experience on co-operative boards can be challenging due to the elected model and narrower pool of potential board members.

Overview

Co-operative business models are common around the world and they form a major part of New Zealand’s economy. Some of the country’s largest and most successful organisations are co-operatives, supporting both urban and regional New Zealand.

The International Co-operative Alliance defines a co-operative as “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.”^[1]

A key distinguishing feature of co-operatives is that their principal business is trading with their members (owners) who benefit through returns based on patronage, rather than investment.  The following diagram illustrates the investment and distribution of surpluses (used with permission from the Business Council of Co-operatives and Mutuals).

Co-operatives are often established as a result of a market imbalance or adversity where a small group (eg of producers, customers or employees) collaborate to achieve economies of scale such as in negotiating terms and sharing costs. The model is adaptive to members’ needs and focused on long-term sustainability of the business which guides their strategy.

The co-operative economy in New Zealand

• New Zealand’s top 30 co-operatives’ total gross revenue represents approximately 20 per cent of the country’s GDP.
• Members form a significant proportion of New Zealand’s SME community (eg farmers, retailers, and service industries).
• Over 50,000 people are employed by co-operatives (this excludes employees of the members themselves).
• New Zealand’s co-operatives sit across multiple sectors, but they are primarily in agriculture and food.^[2]

Types of co-operatives

Widely-recognised types of co-operatives include:

Co-operative legislation

Many co-operatives are co-operative companies, registered under the Companies Act 1993 and the Co-operative Companies Act 1996. Others are established under specific legislation set out below.

The Financial Markets Conduct Act 2013 and the Financial Reporting Act 2013 are also relevant to co-operatives given the need to obtain funds from shareholders, issue product disclosure statements and make distributions/provide rebates.

Most co-operatives have to produce annual reports prepared in accordance with XRB Standards. Reporting and external assurance provides an extra layer to a co-operative’s social licence to operate. Although not mandated, many co-operatives are also starting to prepare sustainability reports. 

See also the Four Pillars of Governance Best Practice  4.6 External reporting.

Good governance in co-operatives

Much of the guidance on governance throughout the Four Pillars is applicable to co-operatives (eg around strategy and risk). However, other governance principles are unique to co-operatives and distinct from investor-owned businesses - for instance, operating in accordance with the co-operative values and principles and ensuring member voice and engagement.

Values and principles

Values of self-help, self-responsibility, democracy, equality, equity and solidarity underpin co-operatives. They are also guided by the following core principles (known as the Rochdale Principles):

1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Member autonomy and independence
5. Education, training and information
6. Co-operation amongst co-operatives
7. Concern for community.

They emphasise democracy and shared equity while providing economic and social returns to members and their communities.

Member focus

The co-operative principles focused on members is part of what makes co-operatives unique. Members share in the control of their co-operative and they elect board members, as a rule, from themselves (providing direct influence over strategy and key decisions). Some co-operatives also allow independent board members to be elected/appointed.

Key matters for co-operative boards include:

• ensuring the co-operative’s purpose is central to its members and that members are central to strategy development
• promoting the right operating system to build and sustain competitive advantage
• aligning incentives so that governance sits effectively with the wider economic participation of members
• nurturing, securing and retaining allegiance of its members.

Getting the rights skills and experiences at board level

Getting the right skills and experience is critical for all boards, but it can be a particular challenge for co-operatives including where elected members have similar backgrounds and expertise. The New Zealand boards and frontier firms report (2020) by the Productivity Commission noted that another challenge is that elected members may be selected for characteristics other than their governance skills.

The International Co-operative Alliance’s Guidance Notes to the Co-operative Principles discusses how these challenges can be addressed:

“The democratic [election] process, by itself, does not guarantee that the board of a co-operative will be competent and have the range of skills and expertise necessary to ensure the proper and effective governance of a co-operative, or have the capacity to hold executives to account. Annual board skills audits are advisable in order to ensure that boards have the collective profile and range of knowledge and skills needed to exercise effective governance control. Where a skills audit identifies gaps in the competence of the board, the gaps may be filled by planned training for board members, by the co-option of non-executive board members with the experience or skills the board lacks, or by positively encouraging members with the skills and expertise needed to stand for election to the board.”

Many New Zealand co-operatives place significant investment into succession planning and professional development. Succession planning can help ensure boards have the right mix of skills, experience and diverse thinking required to lead the organisation. It can also help manage turnover and refreshment of the board. Developing members coming through the pipeline is vital in co-operatives. All board members (and aspiring members) should have access to education and training and be willing to commit to their professional development. 

See also the Four Pillars of Governance Best Practice sections 2.4 Board composition and succession planning and 2.8 Director development.

Key considerations for co-operative boards include:

• ensuring that there is the right mix of skills, experience and attributes on the board to lead the organisation (including a balance of shareholder directors and independent directors)
• managing the costs of a participative model of governance
• using advisors where appropriate, including on advisory boards
• accessing specialist governance education so board members appreciate the nuances of the business model
• reviewing constitutions to ensure they provide frameworks/guidelines to support diversity of skill sets and rotation of shareholder directors
• disclosing governance policies and practices (eg in the annual report) such as committees and remuneration.

It is critical that shareholder directors are clear about their governance role and responsibilities (including acting in the interests of the organisation) and that they take off their shareholder ‘hat’ when they serve on a board. This includes leaving management to manage the business.

Duties and liabilities

People serving on boards of co-operatives have key duties and responsibilities. These will generally be found in the entity’s rules (constitution), governing legislation, other legislation and case law. The consequences of a board member breaching their duties can be significant. Board members should be aware of relevant legal requirements and expectations.

Access to capital

A particular challenge for a co-operative can be the shareholders’ ability/willingness to provide equity capital. The ownership structure creates challenges for accessing funds from financial institutions (lacking understanding of their capital structures and risk) which also impacts start-up. In order to mitigate this, some co-operatives have created classes of shares to enable the generation of additional funds. As both co-operatives and investors continue to adapt, there is an increased focus on how co-operatives can be funded for further sustainable growth.

A sustainable model

The co-operative model has been around since the early 1800s and the International Co-operative Alliance ensures that the founding principles remain relevant to today’s global environment. The model is highly sustainable and resilient with many co-operatives being at the forefront of innovation in New Zealand and globally.

[1] International Co-operative Alliance, Guidance notes to the co-operative principles (2015)
[2] EURICSE and International Co-operative Alliance, World co-operative monitor report (2020)