2023 is predicted to be a big year for governance as reforms sweep the international stage and in the midst of social, ecological, and regulatory change it is important for all organisations to consider their environmental, social and governance (ESG) credentials. Here at home, Australians are expecting changes to privacy law, sustainability reporting, the implementation of the Respect@Work inquiry and a referendum on the First Nations Voice to Parliament. In such a fluid regulatory environment, co-operatives should take the opportunity to revisit the “governance” part of their ESG credentials to ensure they are positioned to respond appropriately to these changes.
Co-operatives are at their most effective when the directors are accountable and transparent to their members and are delivering on their member value proposition. Good governance matters because it allows co-operatives to achieve their objects and to maintain legal and ethical standing in front of their members. Good governance reduces risks, encourages innovation and enables sustainable growth, longevity, and long-term success of the co-operative.
Governance refers to the framework of “rules, relationships systems and processes” by which authority is exercised by organisations. It broadly refers to the way in which organisations are controlled, how they are held to account and how they balance between economic goals and community wellbeing. Good governance will provide the foundation for a high performing organisation and ensure that it is well placed to respond to a changing external environment.
Co-operatives are democratic organisations that are owned and controlled by their members for a common benefit. Good governance for co-operatives centres on a clear statement of the co-operative’s purpose and making decisions in line with that purpose and for the benefit of the members. When done well it fosters the relationship between members and the Board and can deliver long-term value for the members.
Co-operatives are governed by the Co-operatives National Law (CNL) and the seven core principles of the International Co-operative Alliance:
These principles are the prism through which we interpret the CNL and so create a requirement for good governance as an active component of co-operative management. Good governance facilitates the objectives of the CNL by promoting stewardship over systems and processes that are accountable, sustainable and capable of consistently delivering desired results.
The content of the obligation owed by a co-operative is different to that owed to a traditional shareholder. Member retention is affected by the creation, protection and return of member value. Member value is not just expressed through dividends, but the ability for a member to identify themselves and their contributions with the co-operative as a whole, better purchasing power, or rebates through trading. Members have a vested interest in being a part of an organisation which has a positive and lasting impact on their community. In this way, the environmental, social, and ethical dimensions of a co-operative are foundational concepts that impact the long-term health of the organisation.
Without compliance a co-operative might incur excessive liability or take uncommercial risks, significantly reducing its capacity to pivot to strategic goals or respond to disruptions in the market. But the reverse is also true. Transparent, compliant systems also make it easier for Boards to report to various stakeholders on the big-ticket issues. While keeping up with compliance is a retrospective task, taking time away from the strategic thinking of the Board, compliant systems can be thought of as ‘futureproofing’ to enable Board’s more time for strategy (and to deal with all the issues we identified on the horizon).
A growing co-operative is often threatened by a disconnect between the needs of the members and the management of the board. Understanding and implementing the common goals of members while monitoring a complex economic organisation is an indispensable part of the director’s role.
If a board can rely on the integrity of internal policies and procedures, it can begin to think about its external impact and better align with the environmental, social and governance expectations of its stakeholders. An example of good governance in this regard might be the establishment of a membership or advisory committee to ensure the transparency of communications between the board and members. This provides an avenue that drives member input and enables the board to be receptive to stakeholder needs. The size, structure and composition of the board of directors can be another factor of good governance and a key to ensuring the success of a co-operative. The requirement to maintain a majority of “member directors” allows the board to keep the best interests of the members at the heart of each decision.
Finally, a co-operative might consider introducing additional tools which ensure accountability, communication and transparency. This might take the form of a code-of-ethics or code of conduct for the Board and employees, corporate philosophy or values, processes of internal assessment of directors and other officers and performance assessment programs.
Once a co-operative has ensured its systems are compliant, receptive to the needs of members and efficiently managed, it can begin to think more deeply about its member-value proposition. In particular, the board can consider how the co-operative’s civic, social and environmental impact aligns with its governing philosophy.
Compliance with the principals of good governance is not always easy, however, and professional assistance should be sought where required. The BAL business team has extensive experience in working with co-operatives to ensure that their systems are fit for purpose and compliant with the CNL.
If you have any questions or wish to discuss your circumstances with a lawyer, please contact the BAL Lawyers Business & Commercial team on 02 6274 0999.