Governance in Estonian Agricultural Cooperatives: Comparison
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Little is known about the board structures and processes adopted by agricultural cooperatives, particularly in Eastern European countries. Researchers address this substantial knowledge gap by focusing on Estonian agricultural cooperatives. They do it by studying extant literature and analysing survey results from a sample of 23 Estonian agricultural cooperatives.

  • board of directors
  • cooperatives
  • Eastern Europe
  • governance

1. Introduction

Agricultural cooperatives play an indispensable role in the efficient and smooth governance of the global agri-food system [1,2][1][2]. Despite this substantial contribution, very little research has focused on the governance of agricultural cooperatives, particularly at the board level (e.g., [3]). This might be partially explained by the until recently common, implicit scholarly assumption that the recommendations of corporate governance research on investor-oriented firms (IOFs) were also applicable to cooperatives (e.g., [4,5,6][4][5][6]). However, recent empirical research on both sides of the Atlantic questions the relevance of IOF-derived recommendations for cooperative governance (e.g., [3,7,8][3][7][8]).
The poverty of research on cooperative governance is more noticeable with respect to cooperatives in Eastern European countries where only a few studies have been published (e.g., [9,10][9][10]). However, even these studies focus solely on the overall governance mechanisms, including the definition and allocation of residual control rights among cooperative stakeholders. Yet, governance is not only about representation systems and implementation of cooperative principles, topics that seem to have dominated the extant literature on cooperative governance (e.g., [1,11,12][1][11][12]). Board-level studies are rare or nonexistent, due to which wresearchers know very little about how agricultural cooperatives in these countries organize their governance structures and processes.
Similarly, little research has been conducted on how agricultural cooperatives in Eastern European countries measure their organizational health (e.g., [10]). The latter concept has emerged in recent years as an alternative to simple financial performance measures that tend to ignore the non-negligible differences between cooperatives and IOFs and, as a result, present a non-realistic view of cooperative performance (e.g., [13,14][13][14]). Cooperative health is defined as a combination of (a) private goods (prices received or paid, services, feeling of community, social capital, and contributed collective good) received by the member-patron and (b) the perceived probability of cooperative survivability [13]. Recent research also highlights the links between board governance and performance, even if measured solely with respect to financial efficiency (e.g., [15,16][15][16]).
Estonian agricultural cooperatives are worthy of scholarly inquiry due to a combination of characteristics that include: (1) their small but growing size and complexity, (2) the reported need to experiment with alternative organizational designs (e.g., [10]), and (3) path dependencies due to the Soviet legacy of the country.

2. Corporate Governance Theories

Corporate governance has been studied mainly through the lens of agency, stewardship, resource dependence, and stakeholder theories. Agency theory focuses on the control of managers, assuming that managers and owners have diverging interests [18,19,20][17][18][19]. Conversely, stewardship theory assumes that managers, owners, and stakeholders have the same interests and, thus, the board undertakes a joint endeavor with management [21,22][20][21]. Resource dependence theory emphasizes the role of the external environment and views corporate governance as the main means to leveraging external expertise and influence because organization success depends on its fit with the external environment (e.g., [23][22]). Stakeholder theory suggests that the main role of the board is to mirror community and society to ensure that the organization serves its mission and purpose (e.g., [24,25][23][24]). Table 1 summarizes the main theories and links them to governance practices.
Table 1. Summary of principal corporate governance theories and corresponding practices [26][25] (p. 31).
Theory Practices
Composition Focus Dynamics
Agency: control of management; managers and owners have different interests
  • Representatives of owners
  • Tendency to homogeneity
  • Tendency to small boards
  • Supervision of management
  • More focus on compliance
  • Monitoring and performance against targets and objectives
  • Conformance as board task [27][26]
  • Type 1 fiduciary governance [28][27]
  • High challenge
  • Controlling
  • Critical style to achieve goals
Stewardship: joint endeavor with management; managers and owners/stakeholders have same interests
  • Unitary, tendency to homogeneity
  • Tendency to smaller boards
  • Strategic thinking as board task [27][26]
  • Type 2 strategic governance [28][27]
  • More focus on improvements in performance
  • Use of resources
  • Appreciative style to achieve goals
  • Collaborative
  • Well-functioning board committees
Resource dependency: leveraging of external expertise and influence as organization success dependent on fit with external environment
  • Experts, boundary spanners, balance between homo- and heterogeneity
  • Board size varies
  • Policy formulation as board task [27][26]
  • Type 3 generative governance [28][27]
  • Predominantly external focus
Stakeholder: mirroring community and society to ensure that organization serves its mission and purpose
  • Representatives
  • Tendency to heterogeneity
  • Tendency to large boards
  • Supervision of management
  • Focus on compliance
  • Monitoring of performance against targets and objectives
  • Conformance as board task [27][26]
  • Type 1 fiduciary governance [28][27]
  • Predominantly external focus
  • Tendency to be active in relation to sectional or political interests
The above theories have received considerable criticism from governance scholars and practitioners alike. For example, Nicholson and Kiel [29][28] as well as Carver [30][29] argue that each theory can explain a particular case but none provides an overall theory of governance applicable to all cases. The former adopt a contextual approach and suggest that the ability of a board to improve corporate performance substantially is likely to depend on context-specific factors, including sector regulation, industry organization, and the current phase of the organizational lifecycle [29][28]. Carver [30][29] argues that without a strong theory to identify and implement the core practices of board governance, the most possible outcome will be intrusive micromanagement. He further suggests that “because governance is a social construct rather than a natural phenomenon, theory must be driven by and anchored in the purpose of boards rather than derived from analyses of current practices” [30][29] (p. 150). Hermalin and Weisbach [31][30] adopt an evolutionary approach to board governance, which suggests that the development of boards and the adoption of different behaviors is a function of the phase of the organizational lifecycle. Shen [32][31] argues that outside director-dominated boards are best in the first phases of organizational lifecycle, but Combs et al. [33][32] indicate that such boards can be harmful in the intermediate years of growth, but become necessary later as a management-disciplining device. However, Carver’s criticism remains valid as wresearchers still lack a comprehensive theory of board governance general enough to be applied to all possible contexts, with adaptions. We now turn to a brief review of the literature on board structures and processes.

3. Board Structures

Research on board structures focuses primarily on five dimensions: (1) independence, (2) board size, (3) board equity ownership, (4) diversity, and (5) chief executive officer (CEO) tenure [5,34][5][33]. Board director independence has been studied extensively (e.g., [5]). The issue of whether including outside directors improves performance has attracted most scholarly attention [6]. Those adopting the lens of agency theory suggest that the board’s primary role is to choose, monitor and replace the CEO, if necessary [35,36][34][35]. Inside directors may not be appropriate in this role as they are influenced by management’s promotion and tenure decisions. On the other hand, outside directors are better positioned to serve this monitoring role. This argument is further supported by the strong incentive of outside directors to signal their status in the market for corporate directors [19][18]. The optimal board size is also an extensively studied research issue (e.g., [37][36]). One of the most consistent empirical relationships in the governance literature is that board size is negatively related to firm profitability [6]. Such evidence supports agency theorists’ hypothesis that smaller boards enhance performance because they are more effective as manager monitors [38,39][37][38]. Other issues that affect negatively a large board’s performance include the little time available to each board member to voice opinions, increased transaction costs of communication and coordination, and the classic second-order free rider problem of large groups that may lead to diffusion of responsibility [40,41,42][39][40][41]. Having invested substantial equity in a firm provides a director with strong incentives to perform its duties optimally. Such directors are more likely to monitor management actively, seek to improve their knowledge of firm operation, be prepared for board meetings, and participate in decision-making (e.g., [43,44,45][42][43][44]. Conversely, diffused ownership may lead to weak incentive to monitor management and be active in the governance of the firm [43][42]. Theoretical models have also resulted in the hypothesis that directors perform better the greater their ownership stake (e.g., [20][19]). The impact of director gender diversity on firm performance has been a controversial topic. Proponents of board diversity suggest that it promotes understanding diversity in customer markets, increases healthy debate leading to creative problem-solving, and decreases turnover and absenteeism among employees by signaling advancement opportunities [46,47,48,49][45][46][47][48]. However, some research supports the hypothesis that diversity has a positive impact on performance, while other studies reject it. For example, based on a large data set from Spain, Fernández-Temprano and Tejerina-Gaite [50][49] find differences between inside and outside board members in terms of the performance impact of board diversity. While age diversity has a positive effect on firm performance in both insider and outsider directors, nationality mix is associated with higher performance levels just in the case of insiders. Educational diversity seems to have a negative effect on performance for supervisory directors. The authors also do not find any evidence about a possible influence of gender diversity on performance. In a study of British small and medium-sized enterprises (SMEs), Shehata et al. [51][50] examine the relationship between board diversity and firm performance. In particular, they investigate the role of gender and age as two dimensions of diversity. Their results show significant negative association between gender diversity, age diversity, and firm performance. CEO tenure as a determinant of firm performance has been studied extensively (e.g., [34,52,53][33][51][52]). Corporate governance research suggests that as control of the firm passes more and more from principals to agents, CEO tenure tends to increase. The more a CEO stays with the firm, the easier it is for them to negotiate less board oversight [54][53]. According to another approach, CEOs may achieve less oversight through a decrease in board independence. According to agency theory scholars, CEOs that stay too long in their position may become engrained because: (1) they have a higher chance to impact board composition; (2) in case of good track record board members would not want to replace them; and (3) the more they stay, the more they tend to control procedure and internal information systems and, as a result, they may withhold information or influence the board’s agenda [32,54,55][31][53][54]. On the other hand, more moderate board control may lead to more innovation and entrepreneurial development of the firm [56][55].

4. Board Processes

Board processes include all decision-making activities of the board of directors [57][56]. Board processes have been primarily studied as an intervening variable between the board structure and company performance (e.g., [58][57]). The academic literature on corporate board processes focuses on seven dimensions of board processes: (1) effort norms, (2) cognitive conflict, (3) knowledge skills, (4) cohesiveness, (5) communication, (6) affective conflict, and (7) trust [38][37]. Effort norms refer to the shared beliefs of the board as a group regarding the level of effort each board member is expected to put towards a task [59][58]. Extant literature suggests that board effectiveness is improved by boards promoting high-effort behaviors [60,61,62][59][60][61]. For example, director engagement, measured by the frequency of board meetings, tends to increase performance, enable board members to monitor managers more effectively, and promote adherence to shareholder interests in decision-making [63,64,65][62][63][64]. Cognitive conflicts are task-oriented differences in reasoning between board members, often exhibited in “disagreements about the content of the tasks being performed, including differences in viewpoints, ideas and opinions” [66][65] (p. 258). Available empirical evidence is inconclusive regarding the impact of cognitive conflict on board performance (e.g., [60,62][59][61]). The capacity of a board to use the knowledge and skills available within it and apply them to board tasks substantially increases board effectiveness (e.g., [60,67][59][66]). Director orientation and development programs may improve governance and performance by both increasing the pool of available knowledge and skills among board members [68,69,70,71,72][67][68][69][70][71]. Board cohesiveness is “the degree to which board members are attracted to one another and are motivated to stay on the board” [59][58] (p. 496). Group pride, interpersonal attraction and task commitment represent identified dimensions of board cohesiveness that have a strong positive influence on board performance (e.g., [73][72]). High-quality communication helps organizations achieve diminished uncertainty, better coordination of activities, and efficient analyses of information [38][37]. Research has shown that communication quality is an indicator of performance [74][73]. Affective conflict is the result of problematic relationships between board members and the resulting behavioral conflicts [38][37]. Unlike cognitive conflict, affective conflict has a negative impact on performance, as it tends to destroy personal relationships and negatively affect the information processing capabilities and decision-making skills of teams [75][74]. The positive impact of trust on the effectiveness of any team, including a board of directors, is indisputable and a common topic of academic discourse (e.g., [76,77][75][76]).

5. Board Governance in Agricultural Cooperatives

5.1. Uniqueness of Cooperative Governance

The governance of cooperatives exhibits substantial differences when compared to the governance of IOFs. Most of these differences emanate from cooperative principles embedded in relevant national legislation, and manifested in the ownership, control structures and processes adopted by cooperatives [13]. Unlike the investors-owners of IOFs, members who own the cooperative are primarily patrons that use the organization’s services; of course, as owners, they also invest in the cooperative. Further, in agricultural cooperatives, farmer-patrons own their cooperative and control it democratically, based on either a one-member, one-vote or a limited proportional voting system. Consequently, member-owners control their cooperative more intimately than the owners of IOFs, particularly in companies with highly dispersed ownership (e.g., [78][77]). However, they may incur higher agency costs than owners of IOFs due to extremely high member preference heterogeneity and the resulting lack of a coherent common intent (e.g., [79][78]), free rider issues related to governance tasks [80][79], and the lack of outside monitoring and management-disciplining mechanisms, such as the stock market for listed companies (e.g., [81][80]). Further, the long-held assumption “a co-op is a co-op is a co-op” has been repeatedly questioned. While agricultural cooperatives were considered similar to each other in the past, organizational economics research during the last 30 years has shown that this is not the case (e.g., [82][81]). Based solely on their ownership and governance structures, numerous types and variations of the traditional cooperative model have been identified [83,84][82][83]. This wealth of ownership and governance models suggests that agricultural cooperatives constantly adapt to their changing environments by experimenting with non-traditional models through either tinkering or reinvention [13,85][13][84]. In addition to the traditional governance model wresearchers observe the extended traditional, the managerial, and the corporate governance models, which increasingly pass decision management functions to professional managers instead of member-patrons [84,86][83][85]. Whether such intra-organizational changes will help member-patrons-owners to achieve their objectives is a question that remains open. However, emerging empirical research suggests that corporate governance recommendations on board structures and processes for IOFs may not apply to agricultural cooperatives (e.g., [3]).

5.2. Board Structures and Processes in Agricultural Cooperatives

Cooperative boards have been studied at either the macro or organizational level (e.g., [87,88][86][87]), with very few contributions digging into the micro-micro level of board composition, structure, and processes adopted. Notable exceptions do exist (e.g., [8]), but most research includes empirical studies, to which we now turn our attention. In section five of the paper, we compare our findings on Estonian agricultural cooperatives to those reported in the studies reviewed nextresearchers now turn their attention. Bijman et al. [1] identify seven governance innovations adopted by European agricultural cooperatives during recent decades in order to improve their performance. These include: (1) the appointment of a professional manager who becomes responsible for decision management, (2) the introduction of proportional voting, (3) the inclusion of outside board and/or supervisory committee members, (4) the legal separation of the cooperative association and the cooperative firm, (5) the introduction of a member council between the general assembly and the board of directors in cooperatives with large and geographically dispersed memberships, (6) a shift from representation on the basis of regions to representation on the basis of products or product groups, (7) and the introduction of non-member owners. The authors argue that such changes in cooperative governance are dictated by an increase in the size and scope of European agricultural cooperatives that result in the need to hire highly qualified managers. However, the latter demands more autonomy, which necessitates strengthening supervisory bodies. Meliá-Marti et al. [89][88] assess whether the seven governance innovations identified by Bijman et al. [1] have been adopted by Spanish agricultural cooperatives. They also add another one, gender diversity. They analyze data from a survey of 105 (out of a population of 223) Spanish agricultural cooperatives and conclude that, despite the rather flexible legal framework of the country, few cooperatives have adopted most of the studied governance innovations. For example, 8% of the sample cooperatives have outside directors serving on their boards, compared to the European average of 27% [90][89]. Bond [91][90] uses a sample of 176 United States’ agricultural cooperatives to test the impact of the board size on organizational performance. However, her low response rate (25%) resulted in a limited number of usable observations and reduced explanatory power of the econometric results. Another shortcoming of this research is the use of solely financial measures of cooperative performance. Nevertheless, the author concludes that board size has a net ambiguous impact on cooperative performance. Berge et al. [92][91] study the governance of nine food cooperatives from Ontario, Canada. The most pressing governance challenges facing these organizations include board member engagement, succession planning, and defining the roles and responsibilities of board members. They argue that as the role of the board changes during the life cycle of a cooperative, the composition of the board must also change (p. 472). As the boards of cooperative become more professional, adopting the so-called policy or corporate model, the skills required by board members will need to change, although the authors are skeptical about who will initiate such changes. Finally, Berge et al. [92][91] argue that current governance theories that were deduced by observing IOFs do not suffice to explain governance within a cooperative, particularly the complexities of such patron-owned firms. Cook and Burress [93][92] use mail survey data from the same sample of United States’ agricultural cooperatives as Burress et al. [94][93] to address the issue of whether long-tenured CEOs in cooperatives are successful in negotiating less monitoring, resulting in high agency costs. Their analysis shows that this is the case because long-tenured CEOs experience less board monitoring. The authors argue that the primary causes are poor processes rather than inadequate board composition. However, the failure to monitor management satisfactorily does not necessarily stem from a CEO’s ability to negotiate less monitoring. It is possible that CEOs with shorter tenures also influence the board, but stricter corporate governance regulations preclude them from having their recommendations influencing board members. The authors conclude that as a cooperative evolves, the monitoring role of the board becomes more relevant than interactions in the day-to-day operations of the cooperative. They propose a special board committee to take over the oversight responsibility, yet active board member engagement is a prerequisite condition for such committees to work in practice. Burress et al. [94,95][93][94] as well as Franken and Cook [3] analyze survey responses and secondary data from an extensive sample of 460 United States’ agricultural cooperatives in order to test several hypotheses from the corporate governance literature. These authors focus on the following key attributes of the surveyed cooperatives. In terms of measures of structural attributes, they use the total number of directors, number of outside directors with voting rights, director and chair tenures, average board member age, percent of equity held cumulatively by current directors, and number of female directors. Their measures of procedural attributes include the days spent in board meetings yearly, chair/CEO meetings annually, hours of full board training and director orientation, as well as percentage of eligible membership voting in the last election. Their overall conclusion is that in terms of director development and board-CEO relations, the recommendations of the corporate governance literature do not always apply to cooperatives. Among the hypotheses confirmed by these authors are: (1) a smaller board improves performance, (2) including outside directors tends to improve performance, and (3) poor past performance leads to shorter CEO tenure. Hakelius [7] uses 13 cases of Swedish agricultural cooperatives to address the question whether cooperative performance is related to board composition and interaction patterns. Specifically, she measures board size, the number of external directors, director tenure and attitudes, frequency of board meetings, the educational level of directors, and the degree of consensus between the board and the CEO. The author uses the perception of the chairperson regarding the cooperative’s performance as the sole measure of organizational performance. She finds some evidence to support her hypotheses that (1) cooperatives with a large board have better overall performance, (2) cooperatives with well-educated directors have a better overall performance, and (3) cooperatives where there is consensus between the directors and the CEO have better overall performance. However, the author finds no evidence that cooperatives in which the board meets frequently have a better performance or that cooperatives with outside directors outperform those without. Huhtala et al. [8] use qualitative data from the 16 largest Finnish agricultural cooperatives comprising 32 in-depth chairperson interviews to study the processes and actor roles that play an integral part in the director selection. Their results indicate that chairpersons approach this question through several paradoxes from two dimensions: administrative culture and the roles and authority of important actors. The authors also identify differences in director selection between sample cooperatives and IOFs. For example, unlike IOFs, they did not observe a powerful role of the CEO in cooperatives’ director selection. In addition, cooperatives do not attract outside directors to serve on their board, nor do they adopt highly professionalized selection processes, such as appointment through nomination committees. As Finnish agricultural cooperatives have grown in size, complexity, and member preference heterogeneity, the director-selection process has become an increasingly cumbersome process and a trend towards adopting corporate governance processes is documented.

5.3. Performance of Agricultural Cooperatives

The measurement of cooperative performance represents a complex issue that has attracted the attention of both scholars and practitioners. Until recent years, cooperative performance was measured using dimensions such as prices paid to farmer-members, technical efficiency, financial performance, growth, market shares, and on-farm services [13,96,97][13][95][96]. In more recent years, however, scholars have introduced composite measures of cooperative performance that are intended to measure additional, also important dimensions of performance, such as relative position in the industry, member satisfaction, vision attainment, etc. [95,98][94][97]. The need for the measurement of these dimensions of performance stems from the realization that a cooperative is a member-patron owned and controlled business entity whose objectives are broader and more diffuse than those of IOFs (e.g., [13,14][13][14]). Cook introduced “cooperative health” as a composite measure of cooperative health, which combines (a) private goods (prices received or paid, services, feeling of community, social capital, and contributed collective good) received by the member-patron and (b) the perceived probability of cooperative survivability (longevity) [13]. Cooperative longevity is measured through the proxy of relative ownership costs (agency costs, collective decision-making costs, and risk bearing costs). Therefore, cooperative health is an index of the above-mentioned variables, which can be combined as member-patron private and collective goods, and relative ownership costs [13].

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