Wednesday, September 01, 2010

Governance @ Amul: Some Reflections

[Published in Forbes India]

The predominant organizational forms for conducting affairs of commerce or development have been restricted to either what the market can provide us – for-profit enterprise or what the state/NGOs can provide us – where the profit becomes subsidiary to a service being delivered. However, we have long believed that the third alternative of co-operatives provides an effective alternative that questions the centrality of capital without questioning the commercial orientation. The fundamental premise on which a co-operative is designed is to shift the focus from capital to turnovers [or patronage as it is referred to in co-operative literature] and assume that if a producer’s collective is set up with pay offs that reward the producers, then the self-interest of these players ensure that they will function as an effective economic organization.

Everytime a co-operative fails a standard reason is attributed: Interference of the State in the management of the co-operative. The co-operative –though designed as an economic organization is often used as an instrumentality of the State to deliver welfare thereby undermining the “economic nature” of the organization. The Gujarat Co-operative Milk Marketing Federation [GCMMF and brand Amul] was till recently shown as a glittering example of what a producers’ collective could actually do.

However, the recent incidents at the helm of affairs at GCMMF, raises questions on whether the assumption of self-interest is indeed true. Till the time Dr.Kurien was at the helm everything seemed to be moving as per principles, and cracks started appearing soon after he stepped down. Dr.Kurien was no milk producer and did not represent the ‘interests’ of the milk producers in a literal sense – that he did not have a ‘self-interest’ as a milk producer himself. However he did espouse their cause almost like a chief executive who was appointed to do a job that was assigned to him. How a system that ran smoothly; insulated from vested interests; that weathered the storm of liberalization and opening up of the markets for competition; that grew into a phenomenon much beyond the state of Gujarat could show cracks in a matter of a few years indicates the fragility of the co-operative form of organization, thereby raising some doubts on whether it is indeed a credible alternative to the market model.

The question is more intricate than just the junking of the co-operative model in favour of a market model. Unlike the sugar co-operatives [that have variously succeeded and badly failed] which are a single tier structure – with the cane producer directly voting for the board of the sugar processing unit, GCMMF is a federal unit of the three tiered structure operating on a representational democracy. Thus people sitting on the board of GCMMF are the ones who have been elected at the village level, elected from amongst those co-ops to the district union and from there elected to the federation. At the primary level the voting to the post is on a one member one vote basis, whereas at the federal level the votes that a person commands is proportional to the business interests his/her institution represents.

The co-operative form is fragile is essentially to do with a horizon problem. The membership [and thus the ownership] could theoretically be transient – only milk producer pourers could be voting members of the milk co-operative and their capital contribution is incidental. Therefore the cost of exit from the co-operative is at best the loss of an assured buyer of the product. So in the light of an alternative that is attractive, the member could defect. Not only could a member defect to an alternative source, but the member could defect to an alternative profession! There is little incentive to build in long term stakes in the co-operatives. This is well discussed in the theory of capital starvation. At exit, there is no exit bonus and for entry into a co-operative there is no entry load or premium. This is an invitation for free-riders.

The fact that Amul and GCMMF held together for such a long time is indicative of two aspects in the public policy that was effectively used by Dr.Kurien and his team.

The co-operative built its systems and became internally strong in the licence raj era when milk processing and distribution was almost the monopoly of the co-operative/State structure. Post liberalization, the dairy and the sugar, the biggest lobbies in the co-operative sector argued for reservation and effectively prevented the private sector from entering into the heartlands of co-operatives. This effectively made it a monopoly and this helped the cause of funneling member funds for expansion. Given that the organization was farmer owned also helped them raise funds at competitive rates because these funds came bundled with some grants.

On the other hand, they were also able to effectively prevent the State from take-over of individual units. GCMMF never looked vulnerable because it was run professionally and in an orderly manner. There was no scandal that tainted the organization in its history and therefore there was no scope for anybody to touch the organization.

So, what is making GCMMF vulnerable?

Suddenly the glue that held the structures together seems to be wearing out. The people at the helm of affairs representing the milk producers do not seem to be representing the interests of the milk producers. In a similar situation, with a crisis in the leadership of a for-profit firm there would have been an attempt at takeover at somebody who thought that it was possible to provide better management and thus better value to the shareholders. The institution of stock market and the regulator also helps. There would have been enough signals in the market that would have predicted this situation and the movement would have happened early on. The change in the chief executive would have followed the change in the basic ownership structure.

Unfortunately the co-operative structure does not have an exchange where supply rights could be traded. Therefore, the change can happen only through the mechanism of a board room or a general body meeting or through the intervention of the state. There could be no market action that could build a tempo for such a change. A brand built and nurtured over a period of fifty years is showing cracks at the hands of a dozen board members who may not behave in a responsible manner. These board members have only an upside with limited downside. They actually lose no capital, no loss if they lose a source that procures the milk that is produced. It is a zero sum game. The ones who would shed tears at the fall of the brand would be somebody whose livelihood depends on the payments received from the milk co-operative. That somebody is far removed – at least three tiers away – from the machinations. Surprisingly the State has shown restraint in case of GCMMF. However, what are the rights of a milk pourer member at this time? When does his or her opportunity [even theoretically] come to change the management or give a signal to the elected management. Is there a single block of shareholders/members who could influence the way the organization functions?

Unfortunately the answer for the above is in the negative. The question then is whether this is a problem with the basic structure of co-operatives or something to do with the tiered structure of milk co-operatives. When we look at the sugar co-operatives where the entity has been designed in order to achieve almost total alignment – the rights of using the facilities [crushing capacity] with the amount of resources one is able to command [acerage under sugarcane] with the capital contribution [a share is equal to a certain acreage of supply] and the membership being restricted [providing for informal entry load and exit premiums] it seems to be working. In case of milk co-operatives the insularity was provided by a strong and dominant leadership that was committed to the cause. However given the tiered structure, there is a danger of the federal brand losing its sheen and the components of the federation declaring independence [as once Mehsana Milk Union had threatened in the past].

While the co-operative form in itself is an important organizational form, it needs to be tweaked and rejigged to factor the opportunistic behavior of the leaders. The state of the art now does not possibly need a three tiered structure. If there is an effective way of handling logistics and decentralizing the processing capacities, and there is no reason why we should not have single tiered large co-operatives designed in a way that maintains the centrality of the purpose. Over a period the corporate world has shown that “self-interest” of a dominant block of share-holders does not necessarily ensure great governance and therefore if there is a significant learning from the corporate world it certainly should be in ensuring the interests of small shareholders [or dairy farmers] through the process of independent persons on the governance structure. In all these years Dr.Kurien provided that independence of thought to the food major. It is time now that the interests of the dairy farmers are protected not only by those who pour milk, but possibly by those who do not, but are capable of providing management support.

Does Amul have the time now or will it be a brand in history, only time will tell.

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