How to Manage a Cooperative Business - Network for Business Sustainability (NBS)

You’re likely familiar with formal organizational hierarchies, where there’s a top management team with distinct control and responsibility. Development organizations often establish co-ops that rely on this kind of top management leadership, separate from the rest of the co-op members.

That might work in a traditional business. But we found that introducing these formal hierarchies into a cooperative can be problematic.

Why? Because it can create a mismatch between the “unequal” control that structure brings, and the “equal” ownership that co-ops rely on. These are two distinct forms of ownership and control. Combining them can cause a lot of confusion among co-op members, leading to questions around status, the division of tasks, and how to resolve differences.

When a few co-op members have executive power, the rest of the group will also feel less ownership. Other co-op members are less motivated to work on common goals and to engage in group activities. They start to think more in “individual” as opposed to “collective” terms.

Due to these effects, our results show that co-ops with established executive roles have higher levels of conflict, compared to those with flatter structures in which responsibilities were more evenly distributed across members.

We looked specifically at two governance models:

Hierarchical, with an Executive Team comprised of a chairperson, vice-chairperson, secretary, treasurer, and organizer. These were elected by the membership.
Flat, with a committee structure. Co-op members were assigned to functional committees (marketing, production, finance, etc.) on a rotating basis; a randomly assigned liaison from each committee coordinated with other committees.

Flat governance means less conflict and more engaged members. A member explained: “There’s no leader who’s taking care of [everyone]; no, we are [all] leaders so we will work together as members.”

Recognize the power of informal hierarchies

Organizations have a formal governance structure. But there’s also an informal social structure. In your organization, there might be someone who always knows what’s going on, or offers informal advice, even if they don’t have an official position.

This kind of informal power and control is often linked to characteristics like age, gender, ethnicity, and skill. In Ghana, age is an important indicator of power and status—as is illustrated in popular proverbs like “The mouth of an elder is stronger than a god”2.

So we looked at the role of older members within a co-op. We found that informal hierarchies (i.e., co-ops where there was a significant age distribution, with older and younger members), are very strong and can override formalized power and control.

In the co-ops with strong informal hierarchies, members deferred to the elderly for clarification and conflict resolution. One member commented: “We realize that the old people are always correct. . .They are teaching us how to become somebody in the future.”

This informal hierarchy reduced confusion around roles and responsibilities — in fact, the formal leadership became less important.

Low-conflict cooperatives have flat governance and informal leaders

Reaching the potential of cooperative businesses means reducing the possibility of conflict in cooperatives. Our research shows two clear ways to do that:

Establish flatter structures that more evenly share roles and responsibilities. That way, governance matches the egalitarian principles behind cooperatives. In the co-ops we studied, one member described the result: “The entire group — all members — understand that they have to work to sustain the group.”
Draw on the informal hierarchies that naturally guide social interactions. Consider, for example, establishing diverse groups that build on the natural social hierarchy.

Ultimately, it’s up to the members. In a cooperative, they need to organize themselves and decide their governance. But we hope these insights will help cooperatives build a more stable and prosperous future.

[1] When we began our research, the NGO was starting 40 new co-ops. These co-ops were small (about 20 people) and focused on tasks like soap making or basket weaving. Working with the NGO, we arranged for half the newly-formed co-ops to have a formal hierarchy, and half to have a flat structure. We measured conflict and sense of ownership through surveys with co-op members.

Read the full article

Slade Shantz, A., Kistruck, G., Pacheco, D., & Webb, J. 2020. How formal and informal hierarchies shape conflict within cooperatives: A field experiment in Ghana. Academy of Management Journal, 63(2): 503-529.