CORPORATE GOVERNANCE IN CO-OPERATIVES

What is Governance?

GOOD CORPORATE GOVERNANCE

The manner in which power is exercised in the management of resources for sustainable development. It is vital in efficient production and deliver of goods and services, accountability in the use of power, protection of members rights and freedoms and maintenance of an organized corporate framework within which each member can contribute fully toward finding innovative solutions to common problems.

What is the aim of good corporate governance in the co-operative? 

Good corporate governance seeks to promote:-

1. Efficient, effective and sustainable co-operatives that contribute to the welfare of the members and society in general by creating wealth, employment and solutions to emerging challenges.
2. Responsive and accountable co-operative.
3. Co-operative that are managed with integrity and transparency.
4. Recognition and protection of members and stakeholders rights.
5. An approach based on corporate ideas, legitimate representation and participation.

In the co-operative sector, good governance should concern itself with the systems, practices, procedures and processes and the manner in which the rules and regulations are applied and followed. In short, governance addresses the leadership role in the institutional framework.

Governance can also be seen as the manner in which power in an organization is exercised in the stewardship of the organizations total portfolio of assets and resources with the objective of maintaining and increasing shareholder value and satisfaction. It is also concerned with creating a balance between economic and social goals between individual and communal goals.

Principles of good corporate governance

1. Authority and duties of members (shareholders)-members of the co-operative society must severally and jointly protect, preserve and actively exercise the supreme authority of the society in general meetings i.e. they must ensure among other things:-only competent and reliable persons, who can add value, are elected into the office, the management committee is constantly held accountable and responsible for the efficient and effective governance of the society so as to achieve its objectives and change the composition of the board that does not perform to their expectation and in accordance with their mandate.
2. Leadership-the board should exercise leadership, enterprise, integrity and judgement in directing the society and act in the best interest of the society in manner based on accountability, transparency and responsibility.
3. Strategy and values-the board should determine the purpose and values and the strategies to achieve them.
4. Structure and organization-the management structure, organization, systems and people must ensure that the structure functions in order to achieve the society objectives.
5. Viability and financial stability-at least on annual basis, the board must monitor and evaluate the implementation of strategies, policies and management performance.
6. Corporate compliance-the society must comply with all relevant laws, regulations, governance practices, accounting and auditing standards.
7. Communication-the board must communicate with all stakeholders effectively. Members should receive any information that would materially affect their membership or any resolutions of interest to them as members.
8. Internal controls and procedures-systems, processes and procedures must be reviewed regularly. This will ensure accuracy in decision making.
9. Development and strengthening of skills-the board and employees must be trained continuously in line with technological and management development, Equally, members must be enlightened regularly to ensure that they effectively exercise their rights.
10. Adoption of technology-in order to survive and thrive, the technology, skills and systems must be adequate to run the society and compete in the competitive market environment.
11. Recognition of risk-it is crucial to identify the key risk areas and the the key performance indicators and constantly monitor these factors.
12. Social and environment responsibility-the society should operate within the mandate entrusted to it by society and shoulder its social responsibility e.g. conserve resources, shouldn't exploit its labour, shouldn't neglecting the needs of the local community, shouldn't evade taxation or engaging in other antisocial practices.

Society Governance Problems

1. The principal-agent problem
2. The co-operative governance structure
3. Borrower domination problem
4. Lack of clear proper rules of decision making
5. Unqualified personnel
6. The co-operative democracy of one member one vote regardless of amount invested
7. Inadequate supervision

The role of members in corporate governance

Why should the shareholder be interested in good governance? The shareholders are concerned about corporate governance to ensure:-

1. A sustainable responsible enterprise
2. Growth of the society
3. Corporate leadership that ensures efficiency, responsiveness, accountability, transparency, profitability and increased shareholder value.

Duties of members/shareholders

1. Ensure that only competent and reliable persons are elected
2. Ensure that the board of directors is held accountable and responsible for the efficient and effective governance

Role and function of the board of directors

1. Exercise leadership, sound judgement and prudence in directing the society
2. Determine the purpose and values of the society
3. Put in place a proper management structure (organization, systems and people)
4. Monitor and evaluate implementation of strategies, policies and plans
5. Regularly review systems, processes and procedures to ensure effectiveness of its internal systems of control
6. Appointment of senior management including the CEO
7. Set out a code of ethics

Important aspects of the Code of Ethics

1. Personal conduct
2. Corporate behavior
3. Obligations of:-

• Directors and managers
• Employees and professionals
• Shareholders
• Financiers, suppliers
• The state

Special care should be made in the Code of Ethics to the duty of care and responsibility and liability of professionals who are called upon to perform any professional tasks for the society.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A CO-OPERATIVE SOCIETY?

Advantages of Co-operative Society

1. Easy to form:

ADVANTAGE

The formation of a cooperative society is very simple as compared to the formation of any other form of business organisations. Any ten adults can join together and form a co-operative society. The procedure involves in the registration of a cooperative society is very simple and easy. (https://funnyardstick.wordpress.com/2012/03/21/understanding-a-co-operative-society/).

2. No obstruction for membership:

Unless and otherwise specifically debarred, the membership of cooperative society is open to everybody. Nobody is obstructed to join on the basis of religion, caste, creed, sex, colour etc. A person can become a member of a society at any time he likes and can leave the society if he does not like to continue as member. Based on one of the principles of co-operatives of voluntary and open membership.

3. Limited liability:

In most cases, the liabilities of the members of the society is limited to the extent of capital contributed by them. Hence, they are relieved from the fear of attachment of their private property, in case of the society suffers financial losses or goes bankrupt.

4. Service motive:

In Co-operative societies members are provided with better good and services at reasonable prices. The society also provides financial help to its members at concessional rates unlike mainstream banks. It assists in setting up production units and marketing of produce of small scale farmers.

5. Democratic management:

The co-operative society is managed by the elected members from and among themselves. Every member has equal rights through its single vote but can take active part in' the formulation of the policies of the society. Thus all member are equally important for the society. Derived from the principle of democratic member control.

6. Stability and continuity/Perpetual succession.:

A co-operative society cannot be dissolved by the death, insolvency, lunacy, permanent incapability of its members.  It has got separate legal existence from its members. New members may join and old members may quit the society but the society continues to function unless all members unanimously decided to dissolve the society.

7. Economic operations:

The operations carried on by co-operatives societies are economical due to the eliminations of middlemen. The services of middlemen maybe provided by the members of the society at minimum cost or eliminated completely. The recurring and non-recurring expenses are minimized. Further, the economies of scale of production or procurement, automatically reduces the price of goods, thereby minimizes the selling price.

8. Surplus shared by the members:

The society sells goods and services to its members on a nominal profit. In some cases, the society sells goods and or services to outsiders. The profits are utilized in meeting the day-to-day administration and other costs of the society. The procedure for distribution of profit/surplus is stated in the Co-operatives Societies Act Cap 490. Some portion of the surplus is distributed as dividends or interest on deposit and some kept as reserve (i.e. 20%).

9. State patronage:

Government provides special assistance to co-operative societies to enable them achieve their objectives though currently through Finance Bill 2013, the government is introducing excise duty of 10%. Government also extends, or used to, many type of subsidies to co-operative societies strengthening their financial stability and sustainable growth in future.

Disadvantages of Cooperative Society:

Despite the many advantages, co-operative societies suffer from certain limitations or drawbacks. Some of these limitations are:

1. Limited resources:

DISADVANTAGE

Co-operative societies financial strength depend on the capital contributed by its members. The membership fee is limited so is the monthly contributions in case of Saccos as their members belong to the lower and middle class. Thus co-operatives initially are not suitable for the large scale businesses which require huge capital. Though this can be overcome by increasing membership with the downside of minimal returns to its members.

2. Inefficient management:

A co-operative society is managed by the members only. They may not possess any managerial and special skills. This is considered as major drawback of this sector.

3. Lack of secrecy:

Co-operative societies do not maintain secrecy in their businesses because the affairs of the societies are openly discussed in meetings. But secrecy is very important for the success of a business organisation. This paved the way for competitors to compete in more effective ways.

4. Excessive Government interference:

Government may influence the decision of the Board which may or may not be favorable for the interest of the society and its members. Excessive state regulation, interference with the flexibility of its operations and therefore affecting adversely the efficiency of the management of the society. Rare occurrence in Kenya

5. Absence of motivation:

The members may not feel enthusiastic because the law governing the co-operatives puts some restriction on when to invest or decision making process which can be lethargic and bureaucratic.

6. Disputes and differences:

The management of the society constitutes the various types of personnel from different social, economical and academic background. Many a times they strongly differs with one another on many important issues. This becomes detrimental to the interest of the society as it may lead to delayed decisions. The different opinions and disputes may paralyses the effectiveness of the management.

This article originally appeared on http://www.preservearticles.com/201101193579/advantages-and-disadvantages-of-cooperative-society.html and was adapted for this blog.

WHAT IS A CO-OPERATIVE?

"The people's welfare can best be secured by institutions organized by the people themselves, because these institutions are most likely to possess the characteristics that appeal to the people and therefore the stability to perpetuate their services"- Alphonse Desjardins.

What is a Co-operative?

A co-operative is define as an autonomous association of persons united voluntary to meet their economic, social, cultural needs and aspirations through a jointly-owned and democratically controlled enterprise. A co-operative may also be defines as a business owned and controlled equally by the people who use its services or who at it, who are referred to as members (International Co-operative Alliance).

Like companies co-operatives are economic organizations whose income generating activities are devoted to the economic and social welfare of their members by providing services which enable individuals to improve their personal skills and economic means for self advancement.

Co-operative is an idea, a thought, a certainty that yes we can, that anything the human mind can believe, the human mind can achieve. It is also important to note that "every individual forms his own estimate of himself and that basic estimate goes far towards determining what he or she becomes. You can do more than you believe you can. You can do more than you believe you are. Belief stimulates power within yourself. Have faith in faith. Don't be afraid to trust faith."

Co-operative approach implies:-

• Treating people as origin of action, not as objects to be manipulated or serviced
• Encouraging people to work together and help one another solve mutual problems
• Designing useful structures, processes, products and services so as to meet people's needs rather than profit making purposes alone.

CO-OPERATIVE PRINCIPLES

7 CO-OPERATIVE PRINCIPLES

(a) Voluntary and open membership

The society shall always be guided by the principle of voluntary and open membership in its member recruitment drive without political, ethnic, religious, gender or social discrimination.

(b) Democratic member control

The society will be fully controlled by members who will have equal voting rights on the basis of one member one vote.

(c) Economic participation by member

Members shall contribute equitably to the capital of the society and share in the results of its operations.

(d) Autonomy and independence

The society shall operate on mutually acceptable terms with its stakeholders who will ensure its autonomy and independence.

(e) Education, training and information

The society shall foster reciprocal, on–going education programmes for members, leaders, staff and the community so that they can teach and learn from each other or from the appropriate resource persons in understanding and carrying out their respective roles.

(f) Co-operation among co-operatives

In order to better serve the interests of the members and the community, the society shall actively co-operate with other co-operatives locally, regionally, nationally and internationally.

(g) Concern for community in General

The society shall show concern to the community in which it exists and operates.

COMPLIANCE ISSUES AS PER THE ACT AND RULES-SACCOS

The latest revised Act and the new Rules of November 2004 have introduced amendments and provisions which should be complied with by all co-operative societies. The compliance issues that affect societies include:-

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  I LOVE BEING COMPLIANT

• every co-operative society shall hold its annual general meeting within four months after close of its financial year (by 30th April for Sacco Societies)
• every co-operative society shall present to members its audited accounts and balance sheet for each year within four months after close of financial year. The audited accounts shall be displayed in a conspicuous place for members to read at least two weeks before they are presented to members in a general meeting.
• the audited accounts and balance sheet shall be presented to the Commissioner for registration before they are presented to members in a general meeting
• borrowing powers shall be fixed by members in a general meeting subject to approval by the Commissioner.
• every co-operative society with employees shall have terms and conditions of service for staff. The terms and conditions shall be approved by the commissioner.
• the manager shall be a counter signatory to all documents and contract of the society.
• all society committee shall file an indemnity-Form V of the Co-operative Societies Act shall be signed by the management committee members agreeing to uphold the values of accountability, honesty and transparency in dealing with the affairs and resources of the society and accepting liabilities arising from lack of upholding such values. This is done within fourteen days after being elected, and if they do not, they will automatically lose their positions. The indemnity figure shall be fixed by members in a general meeting.
• all committee members shall fill wealth declaration forms within thirty days after elections, and if they do not, they automatically lose their positions.
• supervisory committee should write periodic reports (quarterly) and table their findings at management committee meetings. It shall also submit its reports to the commissioner present the report to the general meeting.
• committee members shall be elected for three years, subject to one third retiring annually but being eligible for re-election.
• every society shall have members funds separated into shares and deposits.
• every society shall maintain a reserve fund where one fifth of the net surplus in any years shall be credited. An account should be maintained for the fund.
• no co-operative society shall invest its funds in non-core business except with the approval of the Commissioner and the general meeting through a special resolution.
• estimates of income and expenditure shall be prepared and presented to members for approval in a general meeting at least three months before the end of the preceding year.
• every member of a co-operative society shall appoint a nominee or nominees, who shall inherit his/her shares or interest in the society upon his death.

EXCERPT FROM: Savings and Credit Co-operative Societies Act; Start-up Kit (Swiss contact Co-operatives Department)

OBEJECTIVES OF SACCO SOCIETIES

The objects for which the society is established are to organize and promote the welfare and economic interests of its members.

In particular, the society undertake:

a) To promote thrift among its members by affording them an opportunity for accumulating their savings and deposits and create thereby a source of funds from which loans can be given to them exclusively for provident and productive purposes, at fair and reasonable rates of interest; thereby enabling them to use and control their money for their mutual benefit.

b) To ensure personal growth through the introduction of new products and services that will promote the economic base of the members.

c) To ensure progress of members and society through continuous education programs on proper use of credit, reduction of poverty, human dignity and co-operation.

d) To apply the co-operative principle of co-operation among co-operatives in order to promote members’ interests. In furtherance to the objects the society shall affiliate to the relevant National Co-operative Union and the Apex society.

For the attainment of the above objects, the society may do acts and things that are permissible under the Act, rules and these By- laws including but not limited to acquire property and chattels and doing all such other things as are incidental or consequential to the economic enhancement of its members interests provided such act is approved by the members in a general meeting.

DID YOU KNOW THE MANDATE OF THE DEPARTMENT OF CO-OP DEVELOPMENT AND MARKETING?

The Mandate of the Ministry of Industrialization and Enterprise Development Department of Co-operative Development and Marketing is specified in the Presidential Circular No. 1/2005 on organization of the Government of the Republic of Kenya as follows:-

• Co-operative Policy Implementation
• Co-operative Legislation and Extension Services
• Co-operative Education and Training
• Co-operative Financing policy.
• Co-operative Savings, Credit and Banking Services Policy
• Co-operative Governance.
• Co-operative Tribunal.
• Co-operative College
• Co-operative Marketing, including Value addition and processing.
• Promotion of Co-operative Ventures.
• New Kenya Co-operative Creameries.