Structural Issues for the Oklahoma Food Cooperative

The board of directors and management of the Oklahoma Food Cooperative are working through a visioning process to develop some ideas for strategic direction and development of our operations going forward.  One of the issues that has emerged from that discussion is the thought that we have some structural issues.

In 2003, we incorporated using the legislation that was available, a cooperative organization statute originally enacted in 1919.  It did not allow for much flexibility in organizational structure and has a particular limitation on indebtedness as we go forward. Under our statute of incorporation, we can't borrow an amount greater than our paid-in capital.  This means that when we have 4,000 members, the most we could borrow would be $200,000, unless the value of our shares increased, at which time the limit would be 4,000 times the new value.  Since the value of our membership share, according to our Articles of Incorporation, must have some reference to the value of the cooperative, the board can't just arbitrarily increase the value of a share to say $500 thus allowing us to borrow a lot more money.

The reason this is a problem is in the context of buying a location for our operations center, which is one of the alternatives we have when our lease expires in a couple of years. We wouldn't be able to buy much of a warehouse if the most we could borrow was $200,000.

In 2009, a new cooperative statute was adopted by the legislature, the Limited Cooperative Act of 2009, which provides for a more flexible organizational structure for cooperatives.  Before I get to a discussion of the opportunities that it offers us, I want to spend some time on some details of our present incorporations that are in my opinion essential for our future going forward.

Incorporated to provide a benefit to the membership.
Cooperatives exist to provide benefits to their members.  In our case, the direct benefit we provide is a marketplace, a space where willing buyers and producers can meet and make exchanges.  Our present articles of incorporation say:

The purpose of this cooperative is to provide retail marketplaces that sell Oklahoma grown and/or Oklahoma processed foods and non-food items, for the mutual benefit of its producer and customer members.

Acting as the agent of producer members, the Oklahoma Food Cooperative will publicize to its members the products that its producer members have for sale, receive orders from customer members, provide a way for products to be delivered to other members of the cooperative, collect payment from the customers and forward the payments to the producers. Acting as the agent for customer members, we will provide them a catalog of available local food products that includes information about how and where the product was grown or processed. We receive their orders and notify the appropriate producers, arrange for the food to be delivered, receive and process their payments. For both producer and customer members, we will provide a basic screening of products and producers based on our published parameters, and education and training regarding the use and the advantages of local foods. The essential business of the cooperative is to provide a marketplace where our members who are willing buyers and sellers can meet.  

One member, one share, one vote.
This is the most basic aspect of the cooperative form of business organization.  A cooperative is an organization that is democratically controlled by its members.  While the cooperative may at some point issue additional classes of stock for the purpose of raising capital, those shares are non-voting.  Our articles of incorporation say:

This association shall be operated on a cooperative basis for the mutual benefit of its members as patrons and owners of the cooperative.

The connection of share value with the value of the cooperative.
The cooperative, as a business entity, has a value.  This is described on the financial reports of the cooperative, in particular, the balance sheet.  Our articles of incorporation provide that the value of a share is related to the value of the cooperative, with a minimum par value, as required by Oklahoma law, which is set by our Articles of Incorporation as $50.  The March 2011 balance sheet shows that the total assets of the cooperative are $211,220. The membership of the cooperative is about 4,000 people so the actual value of a share (assets divided by membership) is about $52.80.  This ratio has fluctuated quite a bit over the years, in the beginning it was way low. It is a sign of our historic strength that the value of a share has now risen above the par value. If this continues, the board will need to recognize this and adjust the value of a share accordingly. Like the stock market, a slow but steady increase in the value of a share is an indication of the growing strength of the coop, just as a declining share price would be a sign of problems. This mandatory ratio is important for the long-term health of the cooperative.

The Articles of Incorporation say:

The purpose of this article is to ensure that all of the value of the cooperative is owned equally by the members, and that the value of a share reflects the member's ownership in the cooperative, thus dividing the ownership of the cooperative equitably among all its customer and producer members. 

Core values.
In one of the earliest meetings of the Committee to Organize an Oklahoma Food Cooperative, we found unanimous agreement on a set of core values:  social justice, economic viability, and environmental sustainability.

The activities of the Oklahoma Food Cooperative are governed by its Core Values of social justice, environmental stewardship, and economic sustainability. The cooperative shall educate members, and the general public, regarding cooperative principles, the local food movement, its core values, and the practical implementation of these principles.

Going forward, there are a lot of ideas and thoughts going around. Three of them are structural issues, at least in part and I'd like to talk a bit about them here.

The struggle for operations revenues.
The cooperative struggles to have enough operations revenue to pay for what needs to be done.  Most regular food cooperatives operate on a margin of 35% - 40%, whereas we make do with 20%.  We are able to do this because of the sweat equity our members invest. But that has become in itself an on-going issue.  First, we are expecting more and more work from a relatively small group of very committed people, and we periodically burn people out and they drop out.  Second, a volunteer work force means things like --

• people are not required to show up,
• people are not required to stay until a certain time,
• people don't always do what they are asked to do.

Our operating revenues, from the beginning, have been closely connected with our operations.  This was by design of the founders. We discussed annual fees early on, and learned that our particular form of cooperative incorporation didn't really permit that.  And in any event, we felt that as a matter of organizational discipline, our operating revenues should derive from our operations. This would ensure that we would never lose our focus on the production and sale of local farm products. If we need operating revenue, the primary revenue stream has always been the commissions we levy on our sales.

Our sales have increased every year of our operation, and my hope has always been that our sales would catch up with our need for operations revenue, but that's just not happening at the present time.  As sales revenues have increased, so have operations expenses.  When we sell more meat, we need more dry ice and ice chests. When we sell more food, we need more people to sort it and move it around. We desperately need some systems analysis of our work, but funds to pay for that kind of professional evaluation are scarce. We are trying to do something -- operate on a 20% margin -- that no other food cooperative in the United States has succeeded in doing.  A couple of years ago I calculated that to replace our volunteer work force with paid staff would increase our budget by about $250,000.  Or in other words, the value of our sweat equity two years ago was $250,000/year. It is probably more than that now. And we could pay that by the simple expedient of increasing our margin to 35%, which would be a coop charge of 17% for producers and 17% for customers, not quite a doubling, but pretty close.

Or, we could double our sales without doubling our costs.

Or, we could find some additional sources of revenue. That's why we're doing the classified ads. Sure, we think they will be a good service to our members, but they also bring in money.

One of the ideas for additional revenue would be to invest some of our cooperative cash into products that are not produced by local producers in Oklahoma and will never be produced by local producers in Oklahoma, and make them available to our members.  This could be things like toilet paper, tropical spices, Texas citrus, Arkansas or Louisiana rice, Caribbean bananas.  The coop would buy those items wholesale and add a regular retail mark-up.

This has always been my favorite way of increasing coop revenues, but some people really don't like the idea.  I am obviously all for the development of a local food system, but I don't get all of my household's foods from local sources.  We buy orange juice and bananas and toilet paper.  And even though we generally shop at independent stores, that money pretty much vanishes quickly and doesn't do the local economy that much good.  We would much rather buy our citrus and bananas and toilet paper from the Oklahoma Food Cooperative, and have that money support the system that makes it possible for us to buy hamburger from the Semkin family and eggs from Calvan Parker.  And I'd that the profits from the sale of toilet paper and citrus and rice and bananas go towards keeping those products from the Crains and the Rinks and the Lusbys affordable. 

Yes, it would increase our costs, but these products would also make it easier for us to pay employees.

This is a structural issue insofar as it would take a serious debate and action by the board to do this.

So the search is on for additional sources of revenue to complement our sales revenue.  Raising the amount of the cooperative's commission charged to producers and customers is always an option, but in my opinion it should be a real last ditch thing, since that raises the costs.  Of course, the price of everything else that we buy is going up and the cooperative may not be able to insulate itself from the impacts of inflation forever.

Required Patronage.  One structure issue that might be resolved by changing our method of incorporation would be to add a requirement of patronage. That is, to be a member in good standing, you would have to buy X amount of product from the cooperative each year, and/or pay an annual fee or assessment, and/or volunteer X number of hours either on delivery day or on back-office work. The board could invite members to pay a voluntary fee now, but to make a mandatory rule regarding patronage would require re-incorporation under the Limited Cooperative Association Act of 2009.

As always, there are some devils in these details.  We don't necessarily have an absolute shortage of volunteers.  What we have is a shortage of people willing to show up at a definite date and time, work as instructed, be accountable for their results --  AND a shortage of cash to properly compensate them for their work. This of course sounds a lot like employees, and unless we are going to have actual employees, we have to be careful what we demand in this regard lest a government agency decide we are evading our legal responsibilities somehow.

Governance issues. In the beginning, all we had was the board of directors, so the board was governance and management altogether. Now we are way beyond that, but we still have some problems determining what is governance and what is management and the end result is an on-going problem with board involvement with management issues.  We are getting better at making those distinctions, but we still have a ways to go.  And part of our problem may be our governance structure. If I had the opportunity to go back and change one thing in our original incorporation paperwork, it would be to drop the election of a president, two vice presidents, a secretary, and the board appointment of a CIO and treasurer, in favor of electing all members of the board at large, and then the board would elect its own presiding structure and make provision for legal and financial records. The general manager would be unambiguously in charge of operations and the board in charge of governance.  But we didn't know then what we know now and hindsight is of course always 20-20.

Conclusion
This is a brief outline of some of the issues going forward. Everyone in the cooperative need to be thinking about these things since they will be on the agenda going forward.  The earliest that any juridical change could occur would be the 2012 Annual Meeting, but if we decide on structural changes those details will be hammered out in advance of that. Thus, we need an on-going discussion in our cooperative discussion groups about structural issues.