The Costs of Democratic Control

Informações

Código: FIN1618
Divisão: FIN - Finanças
Tema de Interesse: Tema 02 - Governança, Fusões e Aquisições e Estrutura de Propriedade

Autores

Daniela Maria Pozzobon

Resumo

In the present study we discuss and examine the costs of democratic control, an importantfactor affecting competitiveness of traditional agricultural cooperatives. Despite there is sometheoretical discussion about this issue, no empirical research has been done on these costs.The present study aims to bridge this gap in the literature. Following the literature, the mainsource of democratic costs in agricultural cooperatives is the level of member participation incooperative governance. In the present study, we have developed more specific theoreticalinsights about this special kind of intra-firm transaction costs, by showing: the importance ofdemocratic costs in cooperative decision making costs; the effect of differences in level ofmember participation on democratic costs; differences in terms of democratic and influencecosts and in terms of agency costs. Furthermore, we distinguish democratic costs betweenboth direct and opportunity costs. By distinguishing between direct and opportunitydemocratic costs, we draw attention to the fact that the mechanisms to increase memberparticipation are not without costs. Frequently, studies focus mainly on the benefits ofincreased member participation, disregarding some of the costs associated with it. With regardto opportunity costs, a further distinction is made between costs associated to over-andunderrepresentation. We also show that the relation between member participation at theboard of directors and democratic costs is more complex than often assumed in the literature.Compared to previous studies, we have focused not only on board size, but also on boardcomposition; i. e., which member groups the board represents. Board composition, withregard to internal stakeholder groups, is important topic to study because a board whichmisrepresents the cooperative is a likely source for opportunity democratic costs, as the boardwill make uniformed decisions or decisions which benefit some member groups, rather thanthe cooperative as a whole. The study has developed theoretical models which show thatmembers should take the relative costs of both direct and opportunity costs in total democraticcosts into account when determining the optimal size and composition of their board. In thestudy, five propositions have been developed. We have chosen agricultural cooperatives tolook for evidences for this study. The results have shown that member participation at thegeneral assembly is low for most cooperatives, even though some of them spend a lot ofresources attempting to improve member participation. Clearly, this strategy has not worked.Cooperatives should consider that increased heterogeneity and complexity of cooperativesmight form an unsurpassable barrier to increasing member participation. In addition, the studyhas shown that most of the studied cooperatives have underrepresented boards. Related to theprevious point, cooperatives also have to be aware of overrepresented boards. The resultsshowed that most of the examined cooperatives have producer groups which dominate theboard to a larger extent than their contribution to the revenues of the cooperative justifies.

Abrir PDF