Co-Operatives Management and Organization

Co-Operatives Management and Organization

Co-Operatives Management and Organization

Chandak Somayaji

Co-Operatives Management and Organization

Chandak Somayaji

ISBN - 9789361528934

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Preface

We all hear the word ‘co-operative’ as a suffix in many companies, businesses and organizations, but we do not know exactly what it means. Co-operatives are popular in sectors such as agriculture and banking, but we do not know the difference between a private limited and a co-operative. This book aims to educate you about the co-operative meaning, principles and functions.

Co-operatives throughout history have empowered common people, and there are many co-operative businesses established at the international level.

This book will make you understand the basics of co-operative, principles and structure of co-operatives and how it is run along with the financial aspects of it.

Table of Contents

1 Introduction to Co-operatives Businesses 1

1.1 Introdution 1

1.2 Exercise 7

2 Principles of Co-operative Management 8

2.1 Voluntary and Open Membership 8

2.1.1 Introduction 8

2.1.2 Interpretation 9

2.1.3 Guidance Note 10

2.1.4 Future Scope 20

2.2 2nd Principle: Democratic Member Control 21

2.2.1 Introduction 21

2.2.2 Interpretation 23

2.2.3 Guidance Notes 25

2.2.4 Scope 39

2.3 3rd Principle: Member Economic Participation 40

2.3.1 Introduction 40

2.3.2 Interpretation 44

2.3.3 Guidance Notes 47

2.3.4 Future Scope 62

2.4 4th Principle: Autonomy and Independence

Co-operatives 65

2.4.1 Introduction 65

2.4.2 Interpretation 68

2.4.3 Guidance Notes 69

2.4.4 Future Scope 82

2.5 5th Principle: Education, Training and Information 83

2.5.1 Introduction 83

2.5.2 Interpretation 85

2.5.3 Guidance Notes 88

2.5.4 Future Scope 98

2.6 6th Principle: Co-operation among Co-operatives 101

2.6.1 Introduction 102

2.6.2 Interpretation 104

2.6.3 Guidance Notes 105

2.6.4 Future Scope 117

2.7 7th Principle: Concern for Community 118

2.7.1 Introduction 119

2.7.2 Interpretation 123

2.7.3 Guidance Notes 124

2.7.4 Future Scope 134

2.8 Exercise 137

3 Co-operative Management 138

3.1 Introdution 138

3.2 Management Functions 140

3.2.1 Planning 140

3.2.2 Organizing 140

3.2.3 Directing 141

3.2.4 Controlling 141

3.2.5 Role of Management 141

3.2.6 Resources to Manage 145

3.3 Democracy 147

3.3.1 Direct Democracy 147

3.3.2 Indirect Democracy 147

3.3.3 Democracy in Co-operatives 148

3.3.4 Decision Making 148

3.3.5 Annual General Meeting (AGM) 149

3.4 Directors 150

3.4.1 Board of Directors Meeting 150

3.4.2 Operational Meeting 150

3.4.3 The Democratic Structure of the Co-operative 151

3.5 Types of General Meetings 152

3.5.1 Inaugural (constituent) General Meeting 152

3.5.2 An Annual General Meeting 153

3.5.3 Extraordinary General Meetings 153

3.5.4 Special or Ordinary General Meetings 154

3.5.5 Conditions Pertaining to all General

Meetings Regardless of the Type 154

3.6 The Steps in the Decision-making Process 155

3.7 Exercise 158

4 Management Structure 159

4.1 General Body 159

4.1.1 Annual General Meeting and Role & Responsibilities of General Body 159

4.1.2 Role of Board of Directors 161

4.1.3 Chairman and Vice-chairman/ President 162

4.1.4 Chief Executive 163

4.1.5 Secretary 164

4.2 Exercise 165

5 Accounting & Auditing of Co-operatives 166

5.1 Accounting 166

5.2 Books & Registers Maintained by The Co-Operatives 167

5.3 Preparation of Manufacturing Trading and Profit

and Loss Account 170

5.3.1 Checking of Postings in the Ledgers 170

5.3.2 Checking of Central Ledger 171

5.3.3 Drawing Up of The Trial Balance 171

5.3.4 Checking of the Transfer Entries 172

5.3.5 Adjustment and Closing of Nominal Accounts 173

5.3.6 Manufacturing Account 177

5.3.7 Trading Account 177

5.3.8 Profit and Loss Account 177

5.3.9 Revenue Account and Income and

Expenditure Account 178

5.3.10 Principles Governing the Preparation of

Profit and Loss Account 178

5.4 Preparation of Balance Sheet 179

5.4.1 Verification of Assets and Liabilities 179

5.4.2 Verification of Assets 182

5.4.3 Valuation of Different Types of Assets 183

5.4.4 Verification and Valuation of Current Assets 187

5.4.5 Stock in Trade 189

5.4.6 Method of Computing Cost 194

5.4.7 Valuation of Different Classes of Stock 197

5.4.8 Sundry Debtors 200

5.4.9 Loans Outstanding 201

5.4.10 Fictitious Assets 207

5.4.11 Preparation of Financial Ratios 207

5.4.12 Verification of Cash Balance 209

5.5 Computerised Accounting 211

5.5.1 Benefits of Computerized Accounting 213

5.6 Exercise 214

6 Co-operative Audit 215

6.1 Definition of Auditing 216

6.2 Statutory Audit of Co-operative Societies 217

6.3 Salient Features of Co-operative Audit 219

6.4 Main Features of Co-operative Audit 220

6.5 Examination of Overdue Debts 221

6.5.1 Adherence to Co-operative Principles 221

6.5.2 Observance of the Provision of the Act

and Rules 222

6.5.3 Personal Verification of Member’s Loan and Examination of their Pass Books 222

6.5.4 Audit Classification of Society 222

6.5.5 Discussion of the Draft Audit Report with Managing Committee 222

6.6 Working Papers 231

6.7 Payment of Advances 246

6.8 Unusual and Irregular Items 247

6.9 Payment of Dividend and Bonus 248

6.9.1 Repayment of Bank Loan, Cash Credit

and Overdraft 248

6.9.2 Stationery and Printing Charges 249

6.10 Vouching Trading Transactions 250

6.10.1 Purchase Procedures 250

6.10.2 Cash Sales 251

6.10.3 Vouching Ledgers 252

6.11 Classification of Current Assets 259

6.11.1 Depreciation 260

6.11.2 Verification and Valuation of Current Assets 264

6.12 Stock in Trade 266

6.13 Valuation of Stock-in-trade 267

6.14 Loans Outstanding 269

6.15 Confirmation of Debit Balance 271

6.16 Bad Debts 273

6.17 Audit Report 274

6.17.1 Audit 274

6.17.2 Audit Memorandum 278

6.18 Audit Classification 283

6.19 Non-credit Societies 287

6.20 Assessment and Levy of Audit Fees 294

6.21 Exercise 295

Glossary 296

Appendix 299

Index 301

Chapter 1. Introduction to

Co-operatives Businesses

1.1 Introdution

Cooperatives are businesses that are owned and democratically controlled by their members—the people who buy their goods or use their services—not by investors. They operate on the Principle of one member, one vote. That is, unlike investor-owned businesses where voting rights are based on ownership share, each member of a cooperative has the same voting power. And unlike investor-owned businesses, they return profits to their members proportionate to their use of the cooperative, not proportionate to ownership share.

Cooperatives follow seven internationally recognized principles:

1. Voluntary and Open Membership

2. Democratic Member Control

3. Member Economic Participation

4. Autonomy and Independence

5. Education, Training and Information

6. Cooperation Among Cooperatives

7. Concern for Community

Cooperatives are businesses that operate in virtually every industry. More than 750,000 cooperatives serve some 730 million members in more than 100 countries. More than 40,000 cooperatives in the U.S. serve 150 million members. Cooperatives operate in every industry, including agriculture, childcare, energy, financial services, food retailing and distribution, health care, funeral care, insurance, housing, purchasing and shared services, telecommunications, and others. Cooperatives range in size from Fortune 500 companies to small local storefronts.

Cooperatives are formed by their members when the marketplace fails to provide needed goods or services of acceptable quality or at affordable prices. Cooperatives empower people to improve their quality of life and enhance their economic opportunities through self-help.

Consumer cooperatives are owned by the people who buy the goods or use the services of the cooperative. They operate worldwide in areas of retailing, energy and other utilities, financial services (i.e., credit unions), health care, housing, insurance and others. Examples:

1. Kooperativa Forbundet, Sweden: A network of consumer-owned cooperative retailers that enjoy 25 percent of the national retail market.

2. Der Deutsche Genossenschafts- und Raiffeisenverband (Germany): A federated system of credit unions and other consumer cooperatives throughout Germany.

3. Midcounties Co-operative Society (UK): The Midcounties Co-operative is the third-largest consumer co-op in the UK with a turnover of £712 million.

4. Co-op Atlantic (Canada): The second-largest regional cooperative wholesaler in Canada with a membership of 136 cooperative enterprises and stores that serve over 200,000 member families.

Producer cooperatives are owned by producers of farm commodities or crafts and band together to process and/or market their products. Examples:

1. Land O’Lakes, Sunkist, SunMaid, Blue Diamond and Ocean Spray (US): All farmer-owned cooperatives with strong brand recognition and market power.

2. Gujarat Cooperative Milk Marketing Federation (India): A federation of 12 milk cooperatives with 2 million farmer-members that is now the country’s largest food products marketing organization.

Worker cooperatives are owned and governed by the employees. Examples:

1. Mondragon (Spain): A major global producer of food and industrial products, owned and governed by some 50,000 worker-owners. It is the eighth largest corporation in Spain Equal

2. Exchange (US): The oldest and largest for-profit Fair Trade company in the US and sells coffee, tea, chocolate, sugar and cocoa.

Purchasing cooperatives are associations of for-profit businesses that band together to enhance their purchasing power and competitiveness. Examples:

1. ACE Hardware (US): A national cooperative of independent hardware store owners that pools purchasing power and builds the national co-op brand.

2. Carpet One (US): A national cooperative of independent floor covering retailers that now make up the largest seller of floor covering in the world.

Before the Industrial Revolution, production was carried on without machinery. It was at the cottage level and on a small scale. Goods were produced by handicraftsmen as per order and usually for a local and limited market. Foreign trade was only in luxury articles. Under such circumstances, all business activities were generally carried on by sole trading and partnership organizations as needs of capital, ability and skill were limited, and all these could be fully satisfied by such simple organizations. The Industrial and Transport Revolutions brought about radical changes in the system of production and commerce. With the advent of the factory system, large-scale organizations and mass-scale production came into being. With the change in the scale of production from small-scale to large-scale and with the widening of the market from local to national and world boundaries, sole trader and firms as forms of organization naturally outlived their utility. In the second half of the 19th century, a new organization in the form of a Joint-stock Company was introduced in many countries.

Industrial Revolution was brought about by the mechanization of industry, agriculture and transport. Factory industries gradually replaced cottage industries. In the era of cottage industries, there was an equitable distribution of wealth, but with the starting of huge factories and mills, wealth began to concentrate in few hands, and the economic power went into the hands of capitalists and industrial magnates. The firm establishment of capitalistic forms of the business organization led to evils of profiteering and very high rates of interest. Capital became the king in the economic world, and throughout the 19th century, there was regular exploitation of poorer classes of societies practically in every country. With the expansion of the market form the local to national and international boundaries, there appeared a very long chain of middlemen and intermediaries in the machinery of distribution, trying to link the primary producer and the ultimate consumer. This created extraordinary differences in the two prices, producer’s price and consumer price. In order to fight against the evils of middlemen’s profiteering, consumers united together and started their cooperative stores. It aimed at the abolition of the profits of intermediaries. Thus, the exploitation by capitalists compelled the exploited ones to join together for mutual help and establish cooperative societies as an alternative business organization.

Cooperation is as old as human history. At the beginning of human civilization, cooperation was the biological necessity. Cooperation means living together and working together. Cooperative spirit means the development of an unselfish spirit where ‘each shall work for all and all for each.’ In today’s materialistic world also, the survival of mankind without cooperation is impossible. Even in modern business organizations, where employees have a clash of interests, achievements of organizations depend upon the level of team spirit. Despite the competitive struggle for existence among men, helping one another in difficult times enabled mankind to live together. Cooperation is a universal instrument of creation (Bowell). Both cooperation and competition have a role to play in the development of human society and civilization. However, it would still be correct to conclude that cooperative forces have contributed to development much more substantially as a result of group life and group activity. Thus, cooperation is older than cooperatives.

The present-day cooperatives, as a distinct business entity had emerged after the Industrial Revolution in the 18th century as a peaceful reaction to class exploitation. The modern cooperative movement, thus, can be traced back to the latter half of the industrial revolution, which was intended for the removal of the injustice of capitalism and was developed as an association or enterprise for the poor sections that experienced a direct economic difficulty for themselves. Though started as a reaction to class exploitation, and to protect the poor ones, cooperatives as an organization have found an important role in every economic system, i.e., developing economies, developed economies, capitalistic economies, socialistic economies or mixed economies. But their efficiency, role and operational contours are decided by the socio-economic system in which they operate. Therefore, the definition of cooperatives is also affected by the circumstances under which it is explained.

The most comprehensive definition of a cooperative society is the one given by the International Cooperative Alliance as ‘An autonomous association of person united voluntarily to meet their economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise’ (ICA 1995). On the basis of the above discussion, it might be concluded that, as a company, a cooperative society is an incorporated body registered under the Cooperative Societies Act of the State. It is an association of persons on the basis of equality for the promotion or furtherance of their common economic interests. However, it has some fundamental differences with the company form of business organization.

As discussed earlier, the roots of modern cooperative business organizations can be traced back to the peaceful reaction of exploited classes, which developed cooperatives as an association for the poorer sections who had experienced a direct economic difficulty for themselves. Therefore, the basic objective of cooperatives was to be an effective instrument of economic growth and to provide economic protection to relatively poor masses to improve their living standards. Nobel prize winner for Economics, Amartya Sen, recommended ‘intelligent and humane use of the notion of Cooperation because the market economy was heavily dependent on the psychological mechanism of reciprocal trust and cooperative growth and labeled lack of reciprocal trust as one of the most of the serious and evident causes of the present economic crisis.’ The ultimate aim of the cooperation is to develop a man with the spirit of self-help and mutual aid in order that individually he may rise to a full personal life and collectively to a full social life. Cooperatives working as a part of a structure have helped to realize production activities, distribution patterns and have improved the strength and capacities of the relatively weak sections of society by improving their savings and purchasing power side by side, promoting and protecting their interests. In this sense, cooperatives are an effective instrument for securing expeditious economic growth.

Cooperation is one of the most important tools of social transformation, not resorting to revolution but a process of mutual cooperative effort. In the process, it aims at a social change that will ensure optimum economic welfare. The cooperative time movement has assumed great significance since there is no other potentially so powerful instrument for rural development.

1.2 Exercise

1. What is cooperative?

2. What is a cooperative business?

3. How does cooperative business work?

4. What is the basic requirement to qualify a business as a cooperative?

5. Give some examples of cooperative business.

6. What are the principles followed by cooperative businesses?

7. Write a short note on the emergence of cooperative business.

Chapter 2. Principles of Co-operative Management

2.1 Voluntary and Open Membership

Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

2.1.1 Introduction

Voluntary and open membership without discrimination to persons willing to accept the responsibilities of membership is a core principle and has been from the beginning of the cooperative movement in the first half of the 19th century. The statement that: "Cooperatives are voluntary organizations’ reaffirms the importance of people choosing voluntarily to participate in and make a commitment to their cooperative. People cannot be made to be co-operators. It is a voluntary act to join and to be involved with others to achieve shared economic, social and cultural needs and aspirations. The importance of voluntary and open membership is shown by the global cooperative movement’s accepting this as the 1st Co-operative Principle in the Alliance’s first formulation of the Co-operative Principles in Paris in 1937. It was reaffirmed in the re-statement of the Principles in Vienna in 1966 and again when the Principles were re-formulated and elaborated by the Alliance at the third review in Manchester in 1995. This first Principle is an expression of the right to freedom of association. This right of free association, namely to join or not to join with others to pursue common goals, is one of the fundamental rights in the United Nations Universal Declaration of Human Rights and in the 1966 United Nations International Covenant on Civil and Political Rights1 The 1st Principle asserts the right of any person to exercise free choice in deciding to join or leave a cooperative and take collective action to pursue the common economic, social and cultural interests of its members. Inclusiveness and the prohibition of discrimination are in the tradition of the founders of the cooperative movement. In the 1840s, the Rochdale Pioneers were socially progressive and radically ahead of their time in admitting women and all classes of society, irrespective of political persuasion or religious beliefs, as equal members of their cooperative.

2.1.2 Interpretation

Cooperatives are a voluntary organization. A voluntary organization is one that is formed by the free choice of the persons who are members of it. As voluntary organizations,’ cooperatives should have their rights and freedoms and the freedom of their members to form them, protected in law. Open to all persons affirms a general commitment to recognizing the fundamental dignity of every person and their right to involvement in a cooperative, which has been a basic commitment of all cooperatives since their emergence in the 19th century. It affirms that there should be no arbitrary restrictions placed on persons wishing to become members, the only limit on membership being the limit imposed by the purpose of the cooperative. Able to use their services acknowledges that cooperatives are organized for specific purposes. In many instances, they can only effectively serve a certain kind of member or a limited number of members. For example, fishery cooperatives essentially serve those engaged in commercial fishing, usually in a single port or area; housing cooperatives can house only so many members; worker cooperatives can employ only a limited number of members. In other words, there may be understandable and acceptable reasons why a cooperative may impose a limit on membership. Otherwise, a cooperative should not impose a limit on membership. Consumer cooperatives for food distribution, insurance and banking are open to all consumers of their services and/or the localities in which they operate.

Willing to accept the responsibilities of membership reminds members that while membership is open to them, members must also be willing to accept the duties that come with being a member. Responsibility is having a duty to deal with or having control over something. Membership is a central element of a cooperative enterprise that is jointly owned and democratically controlled by persons who chose to join it. A member will usually be an individual (natural) person in a primary cooperative but may also be a corporate (legal) person in a cooperative that provides services to other businesses or organizations.’

Corporate persons may also be members of primary cooperatives where multiple stakeholders are members. Other cooperatives will normally be the members of secondary and tertiary cooperatives. Discrimination is the unjust or prejudicial treatment of different categories of people. In the phrase without gender, social, racial, political or religious discrimination, the preposition without governs the noun discrimination. The Principle, therefore, requires members to be open to all persons without discrimination irrespective of any personal characteristic.

2.1.3 Guidance Note

Voluntary organizations

In the history of cooperatives, there are many examples where the Principle of voluntary association in cooperatives has not been observed. Cultural norms such as women being required to cease to be members of a cooperative when they marry or being denied membership because men are heads of households are a clear breach of this Principle. Some governments that used cooperatives as government-controlled engines of economic development made membership of cooperatives compulsory. This, too, breaches this 1st Principle. The right of a voluntary association to form cooperatives can also be frustrated by national legislative, tax and administrative systems which favor the investor-owned model of business enterprise and do not take account of the specific nature of the cooperative enterprise, hence the importance of cooperatives working politically to influence the legal, financial and administrative regimes in which their business enterprises operate.

Breaches of the 1st Principle of voluntary and open membership do not accord with the letter or spirit of the founding principles of our cooperative movement. They frustrate the growth of cooperatives as autonomous voluntary associations of persons uniting to meet their common needs and aspirations.

If membership is compulsory, membership becomes tokenistic rather than an exercise of the fundamental human right to freedom of association. If members are forced to cease to be members, other than for breach of their responsibilities as members or because they no longer use the services of the cooperative, that too weakens cooperatives and is also a breach of this fundamental 1st Principle.

The voluntary nature of participation in cooperatives is an indispensable organizational trait that makes them viable and sustainable in competitive markets. Cooperatives cannot survive without the voluntary patronage of members who use the services of their cooperative and provide capital for it through membership shares, which grant voting rights, on which they receive only a limited return if any. The role of members as volunteers to serve as elected officers and on boards or committees is also a fundamental characteristic of cooperatives. In some cooperatives, the voluntary support of members for the daily operations of the cooperative is also essential to the success of the cooperative. The statement that Cooperatives are voluntary organizations reaffirms the fundamental importance of people choosing to make a commitment to their cooperative. People cannot be made to be co-operators, nor should they be forced by governments or others to become members.

Where economic pressures or government regulations encourage people to become members, cooperatives have a special responsibility to ensure that all members are fully involved and educated about the voluntary and open nature of their cooperative enterprise so that they voluntarily support it. In some countries, cooperatives, such as utility cooperatives, act as government-sanctioned monopoly enterprises. In these cases, membership is open to those residing within an authorized service territory. Within these service area boundaries, governments should not require individuals to become members in order to receive essential services. For example, cooperatives providing telephone or electric distribution services can provide a mechanism for those who seek service to obtain it while opting out of cooperative membership for religious or other reasons. Open, voluntary membership also means that members are free to cease to be members if they so choose. In some cooperatives, practical restrictions may need to be applied to members wishing to leave, though restrictions on leaving should be limited. For example, in a housing cooperative, a member may be required to assign the occupancy rights of the cooperative home they occupy to a new member. In an agricultural or worker cooperative, withdrawal of capital when a member leaves may need to be phased over time or subject to reasonable delays to avoid destabilizing the soundness of the cooperative’s finances, but the Principle of a member’s right to withdraw from membership should be respected.

Membership

Members of a cooperative are individuals (natural persons) or corporate organizations (legal persons) who are users of a cooperative’s services or participate in its business enterprise as consumers, workers, producers or