The relationship between ownership structure, capital

The relationship between ownership structure, capital structure and corporate governance practices: a case study of co-operatives and mutuals in New Zealand

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Introduction

The global financial crisis of 2007-2010 has once again brought into question the efficacy of corporate governance practices around the world. According to the OECD Steering Committee on Corporate Governance “the financial crisis can to an important extent be attributed to failures and weaknesses in corporate governance practices” (Kirkpatrick, 2009). In this regard, researchers have questioned whether boards have the skills, knowledge and understanding of the business they are part of; others argue that board weakness and failures are the result of the lack of shareholder monitoring (Icahn, 2009). However, the widespread concern is why did corporate governance systems fail so massively during the financial crisis? Although failures of the magnitude reported in the financial sector have not occurred in the co-operative and mutuals’ sector, there are still concerns regarding accountability, transparency and performance issues relating to the sector. Furthermore, co-operatives and mutuals face major hurdles when it comes to raising capital (Henry, 2005). Traditionally, cooperatives are solely owned by transacting members (patrons) who benefit primarily through their patronage - a combination of low cost transactions and cost rebates. Although many countries have amended their legislation to encourage non-member patron investments, the patron-focused nature of the co-operative business reduces attractiveness to investors (Limnos, Watson, Mazzarol, & Soutar, 2012). Also, depending on member trust and loyalty, some members leave their member rebate in their co-operative account and thus, do not receive any interest on capital retained. Co-operatives are also challenged regarding retaining member capital. As the value of members’ shares in co-operatives appreciates over the years, the only way non-active members can extract market value from their investment is by forcing the co-operative to privatise. These issues provide co-operatives with additional challenges in terms of investment and corporate governance.

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Prior studies relating to corporate governance practices, ownership structure and capital structure have largely focused on large and publicly listed companies. The nature of corporate governance practices in co-operatives and mutuals is less understood. Ownership structure, which has strong implications for governance, capital structure and variables relating to governance such as board size, gender balance, etc., are receiving increasing attention in relation to publicly listed companies. As co-operatives and mutuals are an important component of business in New Zealand, it is important to add to our knowledge about the performance and governance structures of these entities. This study addresses important gaps in the literature, concerning the nature of corporate governance practised by co-operatives and mutual societies and the relationship between ownership structure, capital structure and agency cost in co-operatives and mutuals. Evidence is also provided concerning whether ownership structures and capital structures changed during the global financial crisis period. 2

Background

Over the years, co-operative business has increased worldwide. For example, co-operative business involves two-thirds of Kenyan coffee production, two million farmers in South Korea, a third of Canadian maple syrup production, 95 per cent of New Zealand butter. The combined turnover of top 100 co-operative enterprises in Australia is around $15 billion and, in the US, co-operatives involve more than US$654 billion worth of businesses (Carrell, 2007; Center for Cooperatives, 2012; Centre for Entrepreneurial Management and Innovation (CEMI), 2013). Co-operatives in New Zealand grew quickly from one in 18711 to 5002 in the 1920s and 1930s (Philpott, 1937). The improvement in transportation, processing technologies, and energy systems after World War II saw further growth in activity, but with a consolidation of the dairy co-operatives in 1950s the number declined to 168 in 1960s (Fonterra, 2012). Cooperatives in New Zealand dominated each stage of the agricultural supply chain (total market share in excess of 75 per cent) and 60 per cent of the market share in food retailing (Evans & Meade, 2005; van Diepenbeek, 2007). Co-operatives accounted for 80 per cent of agricultural production in New Zealand in the early 19th century and have remained dominant since (Evans & Meade, 2005). Currently there are approximately 200 co-operative and 1

First agricultural cooperative was established at Highcliff on the Otago Peninsula (Mathieson, nd; Petchey, 1998). 2 Mostly dairy cooperatives

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mutual enterprises in New Zealand, with the majority regarded small3, and contributing to a total of 3 per cent towards GDP4 (New Zealand Cooperatives Association, 2012). The Industrial and Provident Societies Act 1908 (hereafter IPS Act 1908) enabled the formation of organisations for the mutual benefit of their members (Evans & Meade, 2005). However, organisations formed under the IPS Act 1908 were not allowed to be established for the primary purpose of making profit for their members, but they were allowed to make distributions to members based on their participation. The 1939 amendment to the IPS Act 1908 further restricted the purpose of the organisations formed under the Act. Under the Amendment Act, organisations must be either “a bona fide co-operative society”, a society where its activity “will improve the conditions of living or the social wellbeing of members of the working classes”, or be for “community benefit”(Evans & Meade, 2005). The voting rights were also restricted to generally one-member-one-vote, which is a restriction not necessarily shared among co-operative companies (Evans & Meade, 2005). Recognising the importance of co-operatives to New Zealand, the Co-operative Companies Act 1996 was enacted to enhance formation of distinct legal cooperative structures. The Cooperative Companies Act 1996 serves as the companion act to Companies Act 1993, and the IPS Act 1908. Since co-operatives can take any legal form, the use of the term “co-operative” has been restricted. For example, companies registered under the Companies Act 1993 can only use the term “co-operative” in their name if they are also registered under the Cooperative Companies Act 1996. However, co-operatives registered under the Co-operative Companies Act are not obliged to use the term “co-operative” in their name. The restriction of the term “co-operative” allows a co-operative company to have shares with a nominal value, and to issue (including from reserves), or accept surrender of, shares at that nominal value, which are not normally allowed under the Companies Act. The Co-operative Companies Act also allows co-operative companies to give their transacting shareholders rebates (unless their constitution specifies otherwise) which reverses the requirement under the Companies Act to have board resolution for shareholder discounts.

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New Zealand’s six largest cooperatives are found in the International Alliance Global 300 list of the world’s 300 largest cooperatives. 4 The combined revenue of all cooperatives and mutuals is more than NZ$39 billion and employ more than 43,000 people directly.

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In addition, co-operative companies under the Co-operative Companies Act are required to provide the Companies Office with an annual board resolution confirming that the company has carried out its co-operative duties in the reporting period (Evans & Meade, 2005). Table 1 provides a summary of the reporting requirements of co-operatives and mutuals under the Co-operatives Companies Act 1996 and Industrial & Provident Societies Act 1908. 3

Literature Review

Both, theoretical and empirical studies of corporate governance practices in IOFs provide anecdotal (Ingley & McCaffrey, 2009) and empirical evidence (Brown & Caylor, 2006a, 2006b; Larcker, Richardson, & Tuna, 2007; MacAvoy & Millstein, 2003) to support the view that good governance practices leads to improved financial performance. The same rationale suggests that improved corporate governance practices in co-operatives and mutuals would also lead to lower risk and maximisation of the use of scarce resources. According to Sexton and Iskow (1992), there are several factors that make co-operatives economically inefficient, such as the lack of the use of market measures (stock price) to value a firm and the existence of principal-agent and principal-principal agency problems. Since most co-operatives are not publicly listed, it is difficult to evaluate how chief executive officers (CEOs) have contributed to shareholder wealth creation. Furthermore, difficulties in writing a perfect contract means that CEOs have power when it comes to negotiating remuneration (Grossman & Hart, 1988) and this problem is further exacerbated when there is no appropriate yardstick to measure CEOs performance. In Jensen’s (1986) view, performance measurement that is not linked to wealth creation leads to expropriation of resources. Furthermore, the existence of information asymmetry among members (shareowners) encourages CEOs to further expropriate resources. According to Jensen (1986), the separation of the control and risk-taking role (members) from the day-to-day decision-making role (CEO) gives rise to principal-agent problems. On the other hand, the principal-principal agency problem arises in co-operatives because of the existence of illdefined contracts and ownership based on the proportion of patronage. The ownership benefits and costs faced by members and non-members in co-operatives are poorly aligned (Cook, 1995; Cook, Iliopoulos, & Chaddad, 2004). For example, new members can join a cooperative at any time and enjoy the same benefits as the existing members without having to 4

pay the full value of their entry.5 This practice leads to internal free rider problems because new members of the co-operative enjoy the same patronage returns as existing members. For example, members’ supplying (buying) goods and/or services to (from) a co-operative are expected to receive (pay) prices (including any patronage-based share of the co-operative’s surplus) in excess of (below) what they would have received (paid) if they had sold (bought) their supplies to (from) other businesses. Also, transferability of current ownership claims are not based on observable market returns, co-operative owners lack incentive to monitor CEO performance. Furthermore, the heterogeneity among members increases the divergence in member-patron interests. Divergence of interest among member-patrons encourages formation of interest groups to influence the co-operative’s operation for their own benefit and at the expense of other owner-patrons. Also, professional managers may be given priority to achieve organisational growth over member value creation (Mazzarol, Limnios, & Simmons, 2012). The existence of “one-shareholder one-vote” rule regardless of the size of the shareholding tends to discourage democratic participation of individual shareholders/members because it does not reward individual participation, and also increases the risk of free-riding. Furthermore, in many co-operatives voting is also based on a per-unit-of-production method. The per-unit-of-production voting allows large shareholders to keep the payouts figure down thus making it unprofitable for small farmers to continue operating and, consequently, increases their own proportion of shareholding and voting power. Since co-operatives and mutuals are not publicly listed, there are no external pressures for managers to perform, such as pressure from a threat of takeover or from a major shareholder (O'Sullivan & Diacon, 2003). For this reason Ang, Cole and Lin (2000) argue that agency costs are higher when an outsider manages the firm and agency costs tends to be inversely related to managerial ownership. Co-operatives tends to have diverse goals which do not readily translate into traditional measures of business performance and therefore it becomes difficult to monitor managerial performance and also managerial behaviour becomes difficult to be constrained by market forces (Cornforth, 2004). Furthermore, different members (principals) have different objectives, or differing attitudes to risk, so there is a possibility that agency problems may also arise because of these differences, thus, leading to principal5

Members normally pay only a nominal sum for the share or shares they acquire as opposed to the market value of a proportional ownership stake.

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principal agency problems. In this regard, extent literature provides support for the view that existence of large shareholders leads to higher agency costs (Ang et al., 2000; Gugler, 1999). Therefore, we propose our first hypothesis as follows: Hypothesis 1: Proportion of ownership has a positive effect on agency costs of co-operatives and mutuals. Extant literature suggests that there are both costs and benefits of using leverage in IOFs. Jensen (1986) and Grossman and Hart (1982) argue that the external bondholders provide a monitoring role that leads to an improvement in efficiency. The level of free cash flows available to managers are reduced when companies have restricting debt obligations, and this discourages even self-interested managers from undertaking investment options that are not value-increasing (Harvey, Lins, & Roper, 2004; Leland & Pyle, 1977). Furthermore, managers have all the information about the company they manage and shareholders do not, thus leading to information asymmetry. Flannery (1986) argue that even if information asymmetry does exist between managers and shareholders, debt forces managers to pay dividends, and monitoring by bondholders gives confidence to investors and creates value for the company as well. Barnea, Haugen and Senbet (1985) argue that co-operatives have weak share ownership rights which can lead to suboptimal allocation of resources, so by having debt allows those resources to be utilised in an efficient manner because bondholders provide external monitoring. In contrast,

Jensen and Meckling (1976) and Kim and Maksimovic (1990) argue that

managers use leverage to undertake projects that increase their reputation or personal wealth. Harvey et al. (2004) argue that the incremental benefits of debt are associated with firms that have over-investment problems as these firms are more prone to limited growth opportunities. According to Russo, Weatherspoon, Peterson and Sabbatini (1999), capital structure of co-operatives with powerful managers significantly differs from those having non-powerful managers. They report that leverage is higher in co-operatives that do not have powerful managers (equity ratio of 10%) compared to those that do (equity ratio of 40%). According to Russo et al. (1999), increased financial distress has potential to reduce efficiency, increase transaction costs, reduce profit opportunities and limit co-operatives’ ability to respond to market demands in a timely manner.

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Hailu, Jeffrey and Goddard (2005) argue that agency costs of debt tend to be firm-specific. Since co-operatives face different regulatory environments depending on the nature of their business activities and have a different business structure, they argue that different cooperatives face different magnitude of agency costs. The size of agency cost is an important determinant of a firm’s capital structure (Hailu et al., 2005) as agency cost also relates to other important issues faced by the firms, such as, asymmetry information, investment incentives, risk incentives and bankruptcy problems (Barnea et al., 1985; Jensen & Meckling, 1976). This indicates that both the level of leverage and capital structure do have an effect on agency costs. Based on this, we propose our second hypothesis as follows: Hypothesis 2: Leverage has a negative effect on the agency costs of co-operatives and mutuals. Fama and Jensen (1978) and Coughlan and Schmidt (1985) argue that board members appointed from outside the company bring expertise and knowledge that help to monitor managerial decisions and also help to build networks to secure strategic resources required by companies. In this regard, the New Zealand Securities Commission (NZSC) (2004) recommended that the boards of the publicly listed companies should have an independent chair, the majority of members should be non-executive directors and a minimum of one third of the members should be independent6. However, the empirical research evidence regarding the effect board independence has on company performance has been inconclusive. Some authors (Denis & Sarin, 1997; Hossain, Prevost, & Rao, 2001) find a positive relationship between board composition and company performance. While others (see Agrawal & Knoeber, 1996; Bhagat & Bolton, 2008) find a negative relationship between board composition and firm performance measured by Tobin’s Q. Some studies (Byrd & Hickman, 1992; Chin, Vos, & Casey, 2003) suggest there is no relationship between board composition and company performance. According to Cornforth (2004), boards in co-operatives and mutuals have a difficult task of aligning shareholders’ goals with those of the manager. First, co-operatives and mutuals are established to serve their members’ interests and hence, profitability is a means to an end and not an end in itself. Second, boards need to manage diversity of goals which may not translate 6

A non-executive director is classified independent only when he or she does not represent a substantial shareholder and where the board is satisfied that he or she has no other direct or indirect interest or relationship that could reasonably influence their judgement and decision making as a director.

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into business performance, thus making it difficult to exert influence. Furthermore, Spear (2004) argues that the internal pressure from members tends to be weak in co-operatives and mutuals because of low member participation. Studies conducted by Hossain et al. (2001) and Reddy et al. (2008a) relate to this current study as they show that New Zealand publicly listed companies do have a majority of independent directors on their boards. Based on these findings, we argue that the independent directors are an important mechanism for mitigating agency problems in New Zealand cooperatives and mutuals. Based on the above, we propose our third hypothesis as follows: Hypothesis 3: Board composition has a negative effect on the agency costs of co-operatives and mutuals. According to Singh and Davidson (2003), the size of the board has an effect on agency costs. Pearce and Zahra (1992) argue that large boards create networks that are beneficial for companies, whereas others (Jensen & Meckling, 1976; Shaw, 1981) argue that large boards are inefficient as they take a longer time to reach consensus. In support, Eisenberg, Sundgren and Wells (1998) report that smaller boards help to improve performance. According to Jensen (1983), boards should have seven or eight members to function effectively. It is important to note that the median board size for publicly listed companies in New Zealand is eight, (Reddy et al., 2008a) which according to Jensen is an optimal board size for companies in the US. However, we argue that eight members are less than optimal for co-operatives in New Zealand. With a small pool of people available to be board members, it is argued that it will be difficult to obtain the right balance of skills, expertise and environmental linkages with a smaller board. Therefore, we argue that to balance skills required in the board room, co-operatives and mutuals in New Zealand may require a larger board than might otherwise be the case in larger economies. Therefore, it is assumed that board size will have a negative effect on co-operatives’ agency costs. Based on the above, we propose our fourth hypothesis as follows: Hypothesis 4: Board size has a negative effect on the agency costs of co-operatives and mutuals. Agency theoretic literature suggests that there is a direct relationship between board incentive, experience and monitoring. Furthermore, behavioural scientists regard incentives 8

to be the key moderating factors between an individual's ability and his or her performance (Hillman & Thomas, 2003). Board incentives and experience play a key role in regard to the extent to which the board is willing to provide resources and monitoring. We argue that board incentives and experience will affect the magnitude of board monitoring. Based on the above, we propose our fifth and sixth hypotheses as follows: Hypothesis 5: Board compensation has a negative effect on the agency cost of co-operatives and mutuals. Hypothesis 6: Board experience has a negative effect on the agency cost of co-operatives and mutuals. 4

Research Method

4.1

Data

The firm-related data for co-operatives were collated from each co-operative’s website. Additional data were also collected from New Zealand Cooperatives Association (NZCA) website (www.nz.coop), Ministry of Economic Development website (www.med.govt.nz) and New Zealand Companies Office website (www.companies.govt.nz). Data for cooperatives and mutuals cover the period 2005 to 2011. Co-operatives and mutuals that did not have all the information and those belonging to the banking and finance sector were excluded from our sample.7 Our final sample includes 160 co-operatives and mutuals’ firm-year data. Furthermore, share ownership data for co-operatives and mutuals was only available for 2008 and 2011 comprising 37 co-operative and mutuals firm-year observations. 4.2

Dependent Variables

Ang et al. (2000) use an expense ratio measured by a proportion of total expenses less cost of goods sold, compensation and interest expense to total annual sales as a proxy for agency cost. However, Singh and Davidson (2003) use a slightly different measurement for expense ratio; that is, a proportion of operating expenses to annual sales as a proxy for agency cost. Operating expenses measured by Singh and Davidson exclude costs of goods sold but include selling costs, rent, insurance and general and administration expenses. Singh and Davidson argue that their method of measuring expense ratio gives a close approximation of management compensation and its consumption and also reflects how managers have utilised 7

We thank the anonymous reviewer of the journal for suggesting this point to us.

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company resources. A high value for expense ratio reflects high agency costs arising from excessive CEO and/or managerial perquisites and a lower value reflects lower agency costs. We use a similar method to Singh and Davidson (2003) to determine expense ratio as follows: OpExp2Sale s =

Total Expenses − Cost of Goods Sold Total Annual Sales

Ang et al. (2000) and Singh Davidson (2003) use asset utilisation ratio (measured by annual sales to total assets) to ascertain whether management uses company assets effectively. This ratio also captures the costs related to all management functions and sales of products and services. A high value for asset utilisation ratio indicates management is using company assets very effectively, whereas, a low value means that management is investing resources in non-cash flow generating assets and therefore destroying company value. We use a similar method to Ang et al. and Singh and Davidson to determine asset utilisation ratio as follows: AssetUtilis ation =

Total Annual Sales Total Assets

Lerman and Parliament (1990) and Hardesty and Salgia (2004) use return on assets (ROA) ratio (measured by profit after tax divided by total assets) to measure productivity of assets and to provide a measure for managerial performance. A higher value of ROA indicates that managers have performed well and a low value indicates that the decisions made by the managers were not well rewarded.8 Therefore, ROA is determined as follows: ROA =

4.3

Profit After Tax Total Assets

Independent Variables

Co-operative shareholding structure is either one of the following: (i) percentage of ownership held by primary shareholders or (ii) equal shareholding structure. According to Ang et al. (2000), primary shareholders in co-operatives perform a similar monitoring role to that of a block shareholder in a publicly listed company as they have the resources and large 8

It is to be noted that net profit in cooperatives and mutuals are determined after allowance is given for member rebates. Because of this process it is likely that net profit may provide a distorted view of cooperative and mutuals’ performance during the financial year. For this reason, the empirical results for the variable ROA need to interpreted with caution.

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enough investments in the company to warrant closer monitoring. Based on the above information, we also measure co-operative shareholding as: (i) proportion of shares held by the top three shareholders (TOP3) and (ii) equal shareholding structure (EQUAL). To determine the effect of equal shareholding on performance, we have created a dummy variable EQUAL which is equal to “1” if co-operatives have equal shareholding, otherwise “0”. We use natural log of board size (ln(BDS)) as a proxy for board size (BDS) and proportion of independent directors on the board (Number of independent directors/BDS) as a proxy for board composition (PIND). The natural log of board fees (ln(BDFees)) is used as a proxy for board compensation. Experienced board members help to build reputation, improve decision making processes and provide guidance regarding strategic direction and hence improve monitoring. We use the natural log of the number of years directors have had experience in board positions as a proxy for board experience (ln(BDExp)) which may be taken to also be a proxy for board knowledge. We have used four different proxies for leverage, that is, IndAdj-LEV1, IndAdj-LEV2, IndAdj-LEV3 and IndAdj-LEV4. LEV1 is the ratio of total debt to total assets, LEV2 is the ratio of total bank loan to total assets, LEV3 is the of proportion of borrowing from the members to total assets and LEV4 is the proportion of cooperatives and mutuals borrowing from other sources to total assets. 9 To calculate the IndAdj-LEVi10, we first computed the industry average LEVi for each industry in each year of the sample. Second, we subtracted the industry average LEVi from the LEV of each cooperative and mutual to determine industry-adjusted LEVi (IndAdj-LEVi). Table 2 provides details of the calculation of the dependent and independent variables used in this study. IndAdj-LEV1 reflects on the co-operatives’ total obligation and risks arising from their total liabilities. Co-operatives also borrow money from their members because bank borrowing is more expensive or banks are not willing to lend money.11 If a co-operative has already borrowed money from the bank, the bank may consider it risky to lend additional funds, or, if they do lend, will charge higher interest rates. The pecking order theory developed by Myers 9

LEV4 = LEV1 – (LEV2 + LEV3) Where i ranges from 1 to 4. 11 The major challenge co-operatives face is the classification of member capital accounts as debt on their balance sheet (Limnos et al., 2012) and banks lack of understanding of the nature of co-operative business and co-operative members role as patrons, owners and investors (Nilsson, 2001) 10

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and Majluf (1984) states that when it comes to raising capital, companies always consider the lowest cost of borrowing first. Co-operatives find borrowing from members cheaper and involve less paperwork. Furthermore, managers prefer to borrow from the members and other sources because they feel they will be monitored less. It is of interest to see how different measures of leverage (IndAdl-LEV1, IndAdj-LEV2, IndAdj-LEV3 and IndAdj-LEV4) affect agency costs and whether co-operatives follow pecking order theory when seeking funds. Since co-operatives in New Zealand are of different sizes, there is a possibility that size may have an effect on our empirical analysis. Singh and Davidson (2003) state that firm size captures the business diversification effects of large companies, which may have a positive effect on performance measured by asset utilisation ratio. Therefore, to control for the size effect, we have used a natural log of co-operatives’ annual total sales as a proxy for size (ln (Total Annual Sales)). Ang et al. (2000) investigate the relationship between a company’s banking history, age and performance, and report that a company’s efficiency is positively correlated with its age. This finding supports the view that when compared to new companies, older companies have learned over the years and have developed efficient systems that contribute positively towards their operations and survival. Therefore, we use the natural log of age (ln (Age)) as a proxy for co-operatives’ age to capture the effect years of operation have had on their performance. To compute industry-adjusted leverage, we created three industry (3) dummy variables. IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or the grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industries, otherwise “0”. IND3 is the dummy variable equal to “1” if co-operatives belong to trade & retail services, otherwise “0”. 4.4

Model Specification

Using panels for the years 2005 to 2011, ordinary least squares (OLS) regression measures the effect of governance and control variables on co-operatives’ agency costs measured by OpExp2Sales, AssetUtilisation and ROA. Our model is formulated as follows:

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AC = α + β1 BDS + β 2 PIND + β 3 BDFees + β 4 BDExp + β 5 AGE + β 6 IndAdj − LEV1 + β 7 SIZE

+e

.................(1)

Where AC is the agency cost measured by OpExp2Sales, AssetUtilisation or ROA and SIZE is Ln(Total Annual Sales). The effect of different bondholders on agency costs is investigated using model 2 as follows: 4

AC = α + β 1 BDS + β 2 PIND + β 3 BDFees + β 4 BDExp + β 5 AGE +

∑ β IndAdj i

− LEVi + β 10 SIZE

i =1

+e

.......... .......(2)

where i = 1, 2, 3, 4 The effect of TOP3 shareholders on agency costs is investigated using the following model 3 as follows: 4

AC = α + β 1 TOP3 + β 2 BDS + β 3 INDDIR + β 4 BDFees + β 5 BDExp + β 6 AGE +

∑ β IndAdj - LEV i

i =1

+ β 10 SIZE + e

5.

Analysis

5.1

Descriptive Statistics

.......... .......(3)

Table 3 provides a summary of descriptive statistics for the panel data, including means, medians, minimum, maximum and interquartile ranges. The mean (median) of the variable TOP3 is 12.41 (7.78) per cent, thus indicating existing shareholders hold only a small proportion of shares in the co-operatives. The minimum proportion of shares held by TOP3 shareholders is 0.03 per cent and the maximum is 66 per cent. The largest shareholder holds, on an average (median), only 6.88 (3.11%) per cent of the shares in co-operatives compared to publicly listed companies where the largest shareholder(s) own an average 62 per cent (Reddy, Locke, & Scrimgeour, 2010). The mean for EQUAL is 0.275, indicating that approximately 28 per cent of co-operatives in our sample have equal shareholding arrangements.

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i

The mean (median) of OpExp2Sales is 0.549 (0.421). This indicates that (on average) for every dollar of sales generated by co-operatives, 55 cents goes towards meeting operating expenses relating to sales, rent, insurance and general and administration. The mean (median) asset utilisation ratio is 170.2% (116.7%), thus indicate that co-operatives are generating sales which are 70.2% more than the value of the assets employed. The mean (median) of ROA is 0.022 (0.013), thus indicating that co-operatives, on average, are only generating an after tax return on assets employed of 2.2 per cent for every dollar. The average (median) board size (BDS) is 8.2 (8). This is consistent with the average board size of publicly listed companies (average 6.8 and median 7) (Reddy et al., 2010) and public sector corporations (average 7.05 and median 7) (Reddy, Locke, & Scrimgeour, 2011). The average (median) number of independent directors in co-operatives is 0.91 (0). The number of independent directors in co-operatives and mutuals is very low, similar to publicly listed companies (0.76) and public sector corporations (0.94). The average board experience is 7.5 years in co-operatives compared to 7.6 years for publicly listed companies. This indicates that boards of directors in co-operatives and mutuals have considerable experience as board members. The mean (median) board member compensation is $170,060 per year compared to $162,000 in publicly listed companies. The board compensation figures indicate that board members are generally well rewarded for the task undertaken. The mean (median) of IndAdj-LEV1 is 0.23 (0.19) which indicates that co-operatives have borrowed $0.23 cents in every dollar of assets they own. The mean (median) of IndAdj-LEV2 is 0.10 (0.08) which indicates that co-operatives have borrowed from the bank 10 cents for every dollar of assets they have. The mean (median) of indAdj-LEV3 is 0.09 (0.03) which indicates that co-operatives have borrowed nine cents for every dollar of assets they have from their members. The mean (median) of IndAdj-LEV4 is 0.19 (0.13) which indicates that cooperatives borrowed 19 cents for every dollar of assets from other sources. Overall, the figures for IndAdj-LEV4 indicate that co-operatives prefer to borrow more funds from other sources rather than borrowing from the bank and/or members. The mean (median) age of co-operatives is 34.75 years (29 years); the minimum is one year and the maximum is 97 years. The size of co-operatives varies considerably. The mean (median) of total assets is $774 million ($563 million). The minimum size of co-operatives’ total assets is approximately $348,000 and maximum size is $1.50 billion. The mean 14

(median) of annual sales of co-operatives is $1.05b ($66.6 million). The minimum level of annual sales by co-operatives is approximately $8,000 and the maximum amount is $2 billion. The sectorial figures indicate that 23 per cent of New Zealand co-operatives belong to the meat & fibre or grocery industries, 38 per cent belong to fertiliser & top dressing or arable & horticulture industries and 38 per cent belong to trade & retail services industries.

5.2

Cross-Sectional Descriptive Statistics for the period 2005 -2011

Table 4 reports the cross-sectional descriptive statistics of the dependent and control variables. The figures for AvgOpExp2sales indicate that average operating costs fluctuated during the sample period. AvgOpExp2Sales increased from $0.54 per dollar of assets in 2005 to $0.72 per dollar of assets in 2011. However, the figures for AssetUtilisation show that sales generated from using one dollar of total assets declined from $2.29 in 2005 to $1.52 in 2011. The decline in sales could be an effect of the global financial crisis. The figures for AvgROA show an increase from 3 per cent in 2005 to 5 per cent in 2011, suggesting that profitability increased despite increases in operating expenses and a decline in sales. . The figures reported for AvgTOP3 show that the average shareholding of the top three shareholders declined from 13.88 per cent in 2008 to 10.71 per cent in 201112. The other variables show slight changes during the sampling period. However, the figures for AvgBDFees indicate that board compensation increased by 56 percent from $202,743 in 2005 to $317,185 in 2011. The figures for Industry-adjusted leverage show some slight fluctuations during the sampling period. Overall, the capital structure of co-operatives and mutuals remained fairly consistent during the financial crisis period.

5.3

Pairwise Correlation

Table 5 reports the pairwise correlation matrices for the independent variables. The highest correlation is between BDFees and INDDIR at 0.69, indicating that higher board fees tend to be in co-operatives and mutuals that have independent directors. This result is not surprising as independent directors are normally paid fees to be part of the board. The next highest

12

Note: data for the period 2005 to 2007 and 2009 to 2010 was not available.

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correlation is between BDS and TOP3 at 0.66. The correlation coefficient is negative and significant at a 1% level suggesting that when board size increases the level of shareholding of TOP3 shareholders declines. The correlation between SIZE (ln(Total Annual Sales)) and TOP3 is -0.63, indicating that as co-operatives get larger (in terms of size), the shareholding of the top three shareholders tends to decline. The correlation between SIZE and BDFees is 0.62, indicating that board fees increase as the size of cooperatives and mutuals increase. Apart from these exceptions, other correlations range between 0.03 and 0.59. Since none of the correlations between independent variables is above 0.75, the likelihood of multicollinearity issues rising from the OLS regression is low (Field, 2005).

5.4

OLS Regression of OpExp2Sales, AssetUtilisation, or ROA and Independent Variables

Table 6 reports the OLS regression results of the relationship between the dependent variables (OpExp2sales, AssetUtilisation, ROA) and the independent variables. Results reported in column 2 in Table 6 show the coefficient of PIND is negative and is statistically significant at the 5% level, thus indicating that if the number of independent directors’ increases by one, the ratio of operating expenses to sales (agency costs) will decrease by 0.631 units. This finding suggests that independent directors are a good mechanism for mitigating agency costs in co-operative and mutuals in New Zealand. Also, the coefficient of SIZE is negative and statistically significant at 5% level, thus indicating that larger cooperatives are better at managing agency costs. This finding suggests that larger cooperatives have better resources to engage in monitoring and are better at utilising resources. The coefficient of BDS is positive and is statistically significant at 5% level, thus indicating that large boards tend to increase agency costs in co-operatives and mutuals in New Zealand. The result for BDS indicates that if board size increases by one member, the ratio of operating expenses to sales (agency costs) increases by 0.302 units. Also, the coefficient of BDFees is positive and is statistically significant at the 5% level, thus indicating that an increase in board fees leads to an increase in agency costs measured by operating expenses to sales. The results for BDS and BDFees suggest that they are not good mechanisms for mitigating agency costs in co-operatives and mutuals in New Zealand.

16

Results reported in columns 4 and 6 in Table 6 for the dependent variables AssetUtilisation and ROA are similar to the results reported in column 2. These results confirm that independent directors are a good mechanism for mitigating agency costs in co-operative and mutuals in New Zealand. The results for SIZE also suggest that larger co-operatives are better at mitigating agency costs. Furthermore, the coefficient of BDEXP is positive and statistically significant at 1% level, indicating that experienced board members are better at monitoring managerial decisions. The results for BDEXP suggest that as the experience of board members increases by one year, the asset utilisation ratio increases by 4.55 units. This result indicates that board experience is an effective mechanism for mitigating agency costs in cooperatives and mutuals in New Zealand. The coefficient of IndAdj-LEV1 reported in column 4 is positive and is statistically significant at 5% level, indicating that increased borrowing leads to an increase in ROA. The results reported for BDS and BDFees in columns 4 and 6 are similar to those reported in column 2, that is, both BDS and BDFees are not good mechanisms for mitigating agency costs in co-operatives and mutuals in New Zealand. In summary, the results reported in Table 6 provide support for hypotheses 3 and 6.

Table 7 reports the OLS regression results of the relationship between the dependent variables (OpExp2sales, AssetUtilisation, ROA) and the independent variables as well as the effect of different types of bondholders (IndAdj-LEV2, IndAdj-LEV3 and IndAdj-LEV4) on agency costs. Results reported in columns 2, 3 and 4 of Table 7 for the variables PIND, BDEXP, SIZE, BDS, BDFees are similar to those reported in Table 6. Additional information provided in Table 7 is in regard to IndAdjLEV2, IndAdj-LEV3 and IndAdj-LEV4. The coefficient of IndAdj-LEV2 in column 2 of Table 7 is positive and is statistically significant at 5% level, thus indicating that increased bank borrowing will lead to higher agency costs in co-operatives and mutuals. Similar findings for IndAdj-LEV2 are reported in columns 4 and 6 when using asset utilisation and ROA as the dependent variables. The coefficient of IndAdj-LEV2 is negative and is statistically significant at 10% level. Although statistical significance is weak, it does indicate that higher bank loans will lower both, asset utilisation and ROA. The results reported for IndAdj-LEV2 in columns 2, 4 and 6 are not surprising as an increase in bank lending increases bank risk which leads to higher interest rates, thus 17

increasing the cost of borrowing and reducing co-operatives’ profitability. The coefficient of the variable IndAdj-LEV4 in column 6 is negative and statistically significant at the 10% level. This indicates that co-operative borrowing from members and short-term creditors (accounts payable and other payables) tends to be more effective, because it is usually cheaper than borrowing from the bank, and leads to an increase in profitability. In summary, the findings reported in Table 7 provide support for hypotheses 2, 3 and 6.

Table 8 reports the OLS regression results for the dependent variables (OpExp2sales, AssetUtilisation, ROA) and the independent variables as well as the effect of large shareholding (TOP3 TOP32, TOP3) on agency costs. Results reported in columns 2, 4 and 6 of Table 8 for the variables PIND, BDEXP, SIZE, BDS, BDFees are similar to those reported in Table 6 and Table 7. Additional information provided in Table 8 regarding TOP3, TOP32, TOP33, indicates that large shareholders in co-operatives and mutuals do not hold large enough stakes to warrant incurring costs for monitoring managerial and board actions. Since the costs of monitoring outweigh the benefits, the tendency for small shareholders is to leave monitoring to the board and/or external parties. As a consequence, boards and managers are left unchecked to pursue self-interest activities.

5.4.1 Robustness Check Four tests were undertaken to ensure the robustness of our statistical analysis. First, pairwise testing of the independent variables was undertaken to ensure there are no multicollinearity issues in the data (see Table 3). Second, to ensure dependent variables were not serially correlated with the independent variables, pairwise correlation was undertaken for the dependent and the independent variables. The results13 show that all the correlations are below 0.656 indicating that there are no serial correlation issues relating to the data.

13

Results are not reported but can be obtained from the authors if required.

18

Third, the ownership variable (TOP3) was tested for endogeneity related to the dependent variables. The test showed negative results, indicating that there is no endogeneity effect between dependent and TOP314. Fourth, a Tobit model regression was utilised to check whether OLS results are biased. Results reported in Table 9 for Tobit model regression are consistent with the OLS regression results reported in Table 6. These findings suggest that the OLS regression results reported in Table 6 are not biased.

6

Research Implications and Conclusion

Several prior studies have highlighted the shortcomings of the co-operative business model; ineffective control of managers, profit distribution systems that lead to shorter time horizons, and the requirement for managers to meet shareholders’ diverse goals (Dow, 2003; Hansmann, 1996). Hansmann (1996), contends that the cost of conflicting interests among owner members and lack of homogeneity may have become too high for cooperative and mutuals. The scant literature that does exist provides some understanding of the co-operative and mutual form of business models; however, the nature of corporate governance practised by co-operatives and mutuals are less understood. Prior corporate governance studies relating to IOFs have reported that ownership structure and capital structure have strong implications for mitigating agency problems. Other variables, such as board size and board composition have also received an increased level of attention as well. In this regard, we have examined a number of different corporate governance mechanisms, including board size (BDS), board independence (PIND), board experience (BDExp), board compensation (BDFees), leverage (total and that provided by the members). Our empirical evidence provides support to the view that greater board independence, greater board experience, lower external leverage (borrowing from members) and larger firm size have potential to lower agency costs measured by OpExp2Sales, AssetUtilisation and ROA in co-operatives and mutuals. However, board size (BDs) and board compensation (BDFees) increases agency costs in co-operatives and mutuals. 14

Results for the test are not provided but can be obtained from the authors on request.

19

The proportion of independent directors in co-operatives and mutuals are at very low levels compared to IOFs, thus highlighting issues regarding board entrenchment. Although results show that board experience has a tendency to reduce agency costs, recruiting fellow farmers or shareholder owners as board members may lead to subjective decision-making rather than acting independently on issues affecting the entity. Moreover, recruiting farmers or shareholder owners into board positions prohibits introduction of expertise from outside the organisation that may be able to offer new and different perspectives and thus help improve decision making. Although an interesting feature of the co-operatives and mutuals business model is “oneshareholder one-vote” regardless of the size of the shareholding, it does not reward the democratic participation of individual shareholders/members. Therefore, the principles linked to wider engagement of members seem to be missing when it comes to the governance structures of co-operatives. Also, co-operatives that have voting based on per-unit-ofproduction tends to suffer from principal-principal agency problems where large shareholders tend to keep payouts figures down thus making it unprofitable for small farmers to continue operating and consequently, increases the ownership proportion and voting power of shareholding. It is assumed that share trading among members may lead to a single large owner or large blockholders who may have resources and also is willing (because of their proportion of shareholding) to invigilate managerial decisions. The coefficient of variable TOP33 in Tables 8 and 9 are positive and statistically significant at 10% level, thus suggesting that large owners may indeed be beneficial in cooperatives and mutuals to mitigate agency costs. It is surprising to note that an increase in board fees has a potential to increase agency costs. It seems that board fees are determined internally by the board members and having fees set by an independent party may provide better reflection of the boards’ workload and achievements. The success and survival of co-operative and mutual businesses has increasingly been challenged in the competitive global environment. Ability to increase independent directors, increase members’ voting power, form capitalist corporations (e.g. Fonterra) and/or merge with companies outside the social economy are some of the ways in which cooperatives could transform and survive. However, any transformation of co-operatives need to take into 20

account the motivation of forming co-operatives in the first place, that is, “delivering benefits to members via lower input costs and superior prices at sale” (Giannakas & Fulton, 2005). We urge readers to exercise caution when generalising the findings of this study as it is restricted to the New Zealand environment and the sample size is relatively small. Although this study is timely and deals with concerns regarding ownership structure, capital structure and governance issues in the sector, the extent to which co-operatives and mutuals can work to lift governance practices will provide future research opportunities.

21

7

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Table 1 Comparison of features under the Co-operatives Companies Act 1996 and Industrial & Provident Societies Act 1908 Business Features Co-operative Companies Act 1996 Industrial & Provident Societies Act 1908 Name of business May, but does not need to have “coMust end in Society operative” in the name Limited or Co-operative Society Limited Minimum Minimum of two shareholders Seven number of shares holding one share each Minimum Two (to meet 60% transacting Seven number of shareholder requirements) shareholders/me mbers Rules Must have a constitution Need to have a set of rules to state society’s activities and processes for operation. Democratic Only transacting shareholders may Generally based on a voting vote on resolutions unless the principle of “one personconstitution states otherwise. Voting one vote” is on a ‘one-shareholder-one vote” basis. Business A co-operative company is a company A society is a legal entity continuity under the Companies Act 1993, has a that may continue in legal entity that may operate in perpetuity perpetuity, provided complies with its obligations under the Acts. Annual reports to Yes Yes shareholders Annual accounts Yes, Co-operative companies are Yes to be audited issuers under the Financial reporting Act 1993. Issuers file a copy of their financial statements and audit report with the Registrar of Companies each year. Type of business Co-operative activities as per stated May conduct any lawful that can be in the constitution and matters business, accept banking conducted incidental thereto Annual meeting Yes Yes of shareholders/me mbers Distribution to Yes, in relation to participation in the Yes, generally in relation to shareholders/me co-operatives participation in the society mbers provided (Source: Ministry of Economic Development, nd)

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Table 2 Dependent and Control Variables and their Method of Estimation Total Expenses less Costs of Goods Sold divided by Total OpExp2Sales Annual sales AssetUtilisation Total Annual Sales divided by Total Assets ROA Profit After Tax divided by Total Assets Sum of the shares held by the top three shareholders divided TOP3 by the total shares outstanding Dummy equal to “1” if co-operatives have equal shareholding, EQUAL otherwise “0” BDS Natural log of the board size PIND Number of independent directors divided by the board size Average number of years board members have experience in BDExp board positions BDFees Natural lo of the total board fees received by board members LEV1 Proportion of total liabilities to total assets LEV2 Proportion of total bank borrowing to total assets LEV3 Proportion of total member borrowing to total assets LEV4 LEV1 – (LEV2 + LEV3) IndAdj-LEV1 Average of the industry adjusted LEV1 IndAdj-LEV2 Average of the industry adjusted LEV4 IndAdj-LEV3 Average of the industry adjusted LEV3 IndAdj-LEV4 Average of the industry adjusted LEV4 SIZE Natural log of the total annual sales AGE Natural log of the co-operatives and mutuals total age IND1 is the dummy variable equal to “1” if co-operatives IND1 belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives IND2 belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if co-operatives IND3 belong to trade & retail services industry, otherwise “0”. IND4 is the dummy variable equal to “1” if co-operatives IND4 belong to have banking & finance industry, otherwise “0”. Yr1 Natural log of 1 if the year 2005 Yr2 Natural log of 2 if the year 2006 Yr3 Natural log of 3 if the year 2007 Yr4 Natural log of 4 if the year 2008 Yr5 Natural log of 5 if the year 2009 Yr6 Natural log of 6 if the year 2010 Yr7 Natural log of 7 if the year 2011

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Variable Dependent OpExp2Sales AssetUtilisation ROA Control TOP3 (%) BDS PIND Ln(BDFees) BDExp IndAdj-LEV1 IndAdj-LEV2 IndAdj-LEV3 IndAdj-LEV4 AGE EQUAL Ln(TA) Ln(Sales) SECTOR IND1 IND2 IND3

Table 3 Descriptive Statistics for Selected Variables Mean Median Minimum Maximum

Inter-Quartile range

0.549 1.702 0.022

0.421 1.167 0.013

0.003 0.023 -1.806

7.516 7.513 0.646

0.027 – 1.202 0.040 – 6.329 -0.149 – 0.537

12.416 8.234 0.948 $11.702 7.519 0.226 0.096 0.093 0.191 34.750 0.275 $17.595 $17.616

7.778 8 0 $11.818 7.667 0.188 0.078 0.034 0.134 29.0 0 $17.846 $18.014

0.03 2 0 8.854 2 -0.108 -0.082 -0.068 -0.760 1 0 $12.760 $8.967

65.69 17 4 14.516 14 0.869 0.395 1.056 0.962 97 1 $23.466 $23.713

0.083 – 36.72 3 - 14 0-4 9.210 – 14.382 3.143 – 13.0 0.0 – 0.590 -0.071 – 0.341 -0.057 – 0.704 -0.431 – 0.832 3 - 94

0.23 0.38 0.38

0 0 0

0 0 0

1 1 1

$13.851 - $23.731 $12.143 – $23.498

Note: OpExp2Sales is the proportion of the total operating expenses to total annual sales and AssetUtilisation is the proportion of the total annual sales to total assets. ROA is the proportion of the profit after tax to total assets. TOP3 is the proportion of the shares held by the top three shareholders. BDS is the number of members on the board and PIND is the number of independent directors on the board. Ln(BDFees) is the natural log of the board members’ fees. BDExp is the average number of years board members in a particular co-operative have experience in board positions. LEV1 is the proportion of total liabilities to total assets and IndAdj-LEV1 is the average of the industry adjusted LEV1. LEV2 is the proportion of total bank loan to total assets and IndAdjLEV2 is the average of the industry adjusted LEV2. LEV3 is the total member borrowing to total assets and IndAdj-LEV3 is the average of the industry adjusted LEV3. LEV4 is the proportion of the borrowing from all other sources and IndAdj-LEV4 is the average of the industry adjusted LEV4. AGE is the natural log of the cooperatives age. EQUAL is the dummy variable equal to “1” if shares in co-operatives are held equally by members, otherwise “0”. Ln(TA) is the natural log of total assets and Ln(SALES) is the natural log of total annual sales. IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if cooperatives belong to trade & retail services industry, otherwise “0”.

27

Table 4 Cross Sectional Descriptive Statistics of Dependent and Control variables 2005

2006

2007

2008

2009

2010

2011

AvgOpExp2Sales

0.54

0.61

0.61

0.49

0.41

0.59

0.72

AvgAssetUtilisation

2.29

1.99

1.77

1.29

1.34

1.30

1.52

AvgROA

0.03

0.03

-0.05

0.05

0.04

0.01

0.05

AvgTOP3 (%)

NA

NA

NA

13.88%

NA

NA

10.71%

AvgBDS

8.31

7.91

8.17

8.46

8.29

8.33

7.90

AvgPIND

0.91

0.91

0.83

0.88

0.92

0.96

1.0

AvgBDExp (yrs)

7.20

7.95

7.50

7.50

7.67

7.08

7.61

AvgBDFees ($)

$202,743 $230,415 $264,720 $285,508 $285,598 $311,824 $317,185

IndAdj-LEV1

0.36

0.26

0.20

0.19

0.19

0.19

0.19

IndAdj-LEV2

0.09

0.10

0.11

0.10

0.12

0.09

0.07

IndAdj-LEV3

0.08

0.11

0.11

0.10

0.09

0.10

0.07

IndAdj-LEV4

0.19

0.12

0.16

0.21

0.21

0.24

0.22

AvgAGE

30.48

31.70

33.26

33.67

34.67

35.67

37.52

SIZE

17.75

17.68

17.61

17.57

17.62

17.43

17.70

23

23

23

24

24

24

19

N

Note: AvgOpExp2Sales is the proportion of the total operating expenses to total annual sales and AvgAssetUtilisation is the proportion of the total annual sales to total assets. AvgROA is the proportion of the profit after tax to total assets. AvgTOP3 is the average of the proportion of the shares held by the top three shareholders. AvgBDS is the average number of members on the board and AvgPIND is the average proportion of the independent directors on the board. AvgBDFees is the average of board members’ fees. AvgBDExp is the average number of years board members in a particular co-operative have experience in board positions. LEV1 is the proportion of total liabilities to total assets and IndAdj-LEV1 is the average of the industry adjusted LEV1. LEV2 is the proportion of total bank loan to total assets and IndAdj-LEV@ is the average of the industry adjusted LEV2. LEV3 is the total member borrowing to total assets and IndAdj-LEV3 is the average of the industry adjusted LEV3. LEV4 is the proportion of the borrowing from all other sources and IndAdj-LEV4 is the average of the industry adjusted LEV4. AvgAGE is the average co-operatives age. SIZE is average of the natural log of the total annual sales. N is the number of co-operatives and NA denote no data.

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-0.656*** (0.000) -0.376** (0.019) 0.134 (0.415) -0.609*** (0.000) 0.234 (0.152) 0.212 (0.196) 0.612*** (0.000) -0.139 (0.400) -0.195 (0.2350 -0.625*** (0.000)

0.466*** (0.000) -0.156** (0.049) 0.527*** (0.000) -0.001 (0.989) 0.124 (0.118) -0.240** (0.0020 -0.131 (0.100) 0.218** (0.006) 0.528*** (0.000)

0.060 (0.455) 0.693*** (0.000) 0.005 (0.952) -0.035 (0.663 -0.108 (0.173) -0.166** (0.036) 0.258** (0.001) 0.530*** (0.000) 0.057 (0.495) -0.125 (0.118) 0.136† (0.087) 0.055 (0.495) -0.327*** (0.000) 0.507*** (0.000) -0.046 (0.568) 0.071 (0.394) 0.069 0.012 (0.408) (0.876) -0.020 -0.141† (0.804) (0.091) -0.025 0.299*** (0.769) (0.000) 0.161† -0.132† (0.097) (0.054) -0.106 0.921*** (0.184) (0.000) -0.022** (0.004) -0.226** (0.004) 0.224** (0.004) 0.164** (0.038)

-0.359*** (0.000) 0.076 (0.342) -0.320*** (0.000)

-0.371** (0.000) 0.059 (0.457)

-

IndAdjLEV4

0.078 (0.327)

-

AGE

-

SIZE

29

*** denote significance at 1% level; ** denote significance at 5% level and † denote significance at 10% level Note: TOP3 is the proportion of the shares held by the three largest shareholders. BDS is the number of members on the board and PIND is the number of independent directors on the board. BDExp is the average number of years board members in a particular co-operative have experience in board positions. . BDFees is the natural log of the board members’ fees. LEV1 is the proportion of total liabilities to total assets. LEV2 is the proportion of total bank loan to total assets and LEV3 is the total member borrowing to total assets. AGE is the natural log of the co-operatives age and SIZE is the natural log of total annual sales.

SIZE

AGE

IndAdjLEV1 IndAdjLEV2 IndAdjLEV3 IndAdjLEV4

BDFees

BDExp

PIND

BDS

TOP3

TOP3

Table 5: Pairwise Correlation Matrix of the Independent and Control variables IndAdj- IndAdjIndAdjBDS PIND BDExp BDFees LEV1 LEV2 LEV3

Constant BDS PIND BDEXP BDFees IndAdjLEV1 AGE SIZE Year Effect F-value (P-Value) R2 Root MSE N

Table 6 OLS Regression of Dependent and Control Variables OpExp2Sales AssetUtilisation ROA Coefficient Robust Coefficient Robust Coefficient Robust Standard Standard Standard Error Error Error 0.044 0.188 4.870*** 0.498 1.334 0.163 (0.20) (1.15) (3.65) 0.302** -1.246** -0.050† 0.138 0.409 0.032 (2.17) (-3.04) (-1.76) 0.024 -0.631** 1.062† 0.329 0.787 0.064 (0.37) (-1.91) (1.85) 0.045 0.006 1.516*** 0.110 0.275 0.022 (0.41) (0.26) (5.50) 0.318** -1.143*** -0.040† 0.104 0.214 0.022 (3.07) (-5.34) (-1.78) 0.353 -0.026 2.989** 0.250 0.998 0.079 (1.41) (-0.33) (2.99) -0.043 0.009 0.611*** 0.046 0.122 0.010 (-0.93) (0.89) (5.00) -0.217** 0.740*** 0.022† 0.066 0.097 0.012 (-3.30) (7.66) (1.80) Yes Yes Yes 7.06 21.47 5.80 (0.000) (0.000) (0.000) 0.36 0.55 0.24 (0.41) (1.06) (0.68) 144 144 144

*** denote significance at 1% level; ** denote significance at 5% level and † denote significance at 10% level Note: OpExp2Sales is the proportion of the total operating expenses to total annual sales and AssetUtilisation is the proportion of the total annual sales to total assets. ROA is the proportion of the profit after tax to total assets. BDS is the number of members on the board and PIND is the number of independent directors on the board. Ln(BDFees) is the natural log of the board members’ fees. BDExp is the average number of years board members in a particular co-operative have experience in board positions. IndAdj-LEV1 is the average of the industry adjusted LEV1 where LEV1 is the proportion of total liabilities to total assets. AGE is the natural log of the co-operatives age. SIZE is the natural log of total annual sales. Industry effect was captured by creating industry dummy variables as follows: IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if co-operatives belong to trade & retail services industry, otherwise “0”. Year effects was captured by dividing years where 2005 equals 1 and 2011 equals 7 and taking natural log of the years.

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Constant BDS PIND BDEXP BDFees IndAdjLEV1 IndAdjLEV2 IndAdjLEV3 IndAdjLEV4 AGE SIZE Year Effect F-value (P-Value) R2 Root MSE N

Table 7 OLS Regression of Dependent and Control Variables OpExp2Sales AssetUtilisation ROA Coefficient Robust Coefficient Robust Coefficient Robust Standard Standard Standard Error Error Error 0.499 0.021 5.014** 0.672 1.622 0.157 (0.740 (0.13) (3.09) -0.016 0.225† -1.217** 0.123 0.421 0.025 (-0.64) (1.82) (-2.89) -0.468 -1.384 0.055 0.333 0.884 0.079 (-1.41) (-1.56) (0.69) -0.067 -1.421*** 0.056† 0.144 0.337 0.032 (-0.46) (-4.21) (1.70) 0.351*** -1.244*** -0.044† 0.106 0.253 0.022 (3.31) (-4.91) (-1.93)

1.124*** (4.33) -0.193 (-0.50) -0.254 (-1.41) -0.089† (-1.72) -0.234*** (-3.53) Yes 9.50 (0.000) 0.43 (0.39) 144

0.259 0.386 0.179 0.052 0.066

-1.529 (-1.55) 2.031 (1.57) 0.123 (0.28) 0.576*** (4.09) 0.831*** (6.55) Yes 12.40 (0.000) 0.53 (1.096) 144

0.989 1.294 0.446 0.141 0.127

-0.201** (-2.27) -0.010 (-0.12) 0.197** (2.93) 0.028** (2.10) 0.019† (1.67) Yes 2.26 (0.0219) 0.26 (0.116) 144

0.088 0.087 0.067 0.013 0.012

*** denote significance at 1% level; ** denote significance at 5% level and † denote significance at 10% level Note: OpExp2Sales is the proportion of the total operating expenses to total annual sales and AssetUtilisation is the proportion of the total annual sales to total assets. ROA is the proportion of the profit after tax to total assets. TOP3 is the proportion of the shares held by the top three shareholders. BDS is the number of members on the board and PIND is the number of independent directors on the board. BDFees is the natural log of the board members’ fees. BDExp is the average number of years board members in a particular co-operative have experience in board positions. LEV2 is the proportion of total bank loan to total assets and LEV3 is the total member borrowing to total assets. LEV4 is the LEV1 minus (LEV2 + LEV3). AGE is the natural log of the cooperatives age. SIZE is the natural log of total annual sales. Industry effect was captured by creating industry dummy variables as follows: IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if cooperatives belong to trade & retail services industry, otherwise “0”. Years effects was captured by dividing years where 2005 equals 1 and 2011 equals 7 and taking natural log of the years.

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Constant TOP3 BDS PIND BDEXP BDFees IndAdjLEV1 IndAdjLEV2 IndAdjLEV3 IndAdjLEV4 AGE SIZE TOP3

2

TOP3

3

Year Effect F-value (P-Value) R2 (Root MSE) N

Table 8 OLS Regression of Dependent and Control Variables OpExp2Sales AssetUtilisation ROA Coefficient Standard Coefficient Standard Coefficient Standard Error Error Error 2.054** 3.602† -0.842† 0.844 2.371 0.441 (2.43) (1.72) (-1.91) -0.042 0.044 0.019 0.026 0.078 0.010 (-1.61) (0.56) (1.57) -0.038 0.104 -1.202** 0.256 0.508 0.065 (-0.15) (1.62) (-2.36) 0.306 -0.843 -0.060 0.482 1.551 0.211 (0.63) (-0.54) (-0.28) 0.119 -1.656** 0.146† 0.120 0.629 0.084 (0.99) (-2.63) (1.74) 0.092 0.041 -1.207*** 0.093 0.332 0.051 (1.00) (0.79) (-3.63)

1.634** (2.24) 0.356 (0.72) -0.034 (-0.13) -0.064 (-1.03) -0.150*** (-3.06) 0.002 (1.60) -0.001 (-1.67) Yes 5.69*** (0.000) 0.69 (0.24) 37

0.729 0.493 0.275 0.062 0.049 0.011 0.000

-2.853† (-1.95) -0.775 (-0.69) -0.295 (-0.35) 0.911*** (4.16) 0.839*** (4.67) -0.002 (-0.36) 0.001 (0.36) Yes 14.71*** (0.000) 0.80 (0.69) 37

1.699 1.121 0.838 0.219 0.179 0.004 0.000

-0.207† (-1.92) -0.067 (-0.29) 0.398† (1.87) 0.042 (1.44) -0.019 (-0.83) -0.001† (-1.85) 0.001† (1.71) Yes 4.09** (0.005) 0.54 (0.24) 37

0.224 0.231 0.213 0.029 0.023 0.001 0.000

*** denote significance at 1% level; ** denote significance at 5% level and †denote significance at 10% level Note: OpExp2Sales is the proportion of the total operating expenses to total annual sales and AssetUtilisation is the proportion of the total annual sales to total assets. ROA is the proportion of the profit after tax to total assets. TOP3 is the proportion of the shares held by the top three shareholders. BDS is the number of members on the board and PIND is the number of independent directors on the board. BDFees is the natural log of the board members’ fees. BDExp is the average number of years board members in a particular co-operative have experience in board positions. LEV2 is the proportion of total bank loan to total assets and LEV3 is the total member borrowing to total assets. LEV4 is the LEV1 minus (LEV2 + LEV3). AGE is the natural log of the cooperatives age. SIZE is the natural log of total annual sales. Industry effect was captured by creating industry dummy variables as follows: IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if cooperatives belong to trade & retail services industry, otherwise “0”. Years effects was captured by dividing years where 2005 equals 1 and 2011 equals 7 and taking natural log of the years.

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Constant TOP3 BDS PIND BDEXP BDFees IndAdjLEV1 IndAdjLEV2 IndAdjLEV3 IndAdjLEV4 AGE SIZE TOP3

2

TOP3

3

Year Effect LR chi2 (16) (P-Value) Pseudo R2 (Sigma) N

Table 9 Tobit Model of Dependent and Control variables OpExp2Sales AssetUtilisation ROA Coefficient Standard Coefficient Standard Coefficient Standard Error Error Error 2.054** 3.601† -0.842** 0.765 2.251 0.339 (2.69) (1.76) (-2.48) 0.044 -0.042** 0.019** 0.019 0.058 0.008 (0.75) (-2.13) (2.17) -0.038 0.104 -1.202** 0.151 0.443 0.067 (-0.25) (1.56) (-2.71) 0.306 -0.843 -0.060 0.395 1.163 0.176 (0.77) (-0.72) (-0.34) 0.119 -1.656*** 0.146** 0.127 0.374 0.056 (0.94) (-4.42) (2.59) 0.092 0.041 -1.208*** 0.096 0.283 0.042 (0.96) (0.95) (-4.26) 1.267 1.635*** (3.80) 0.356 (0.87) -0.034 (-0.13) -0.063 (-1.22) -0.150*** (-3.36) 0.002† (1.96) -0.001† (-1.96) Yes 43.34*** (0.000) 1.703 (0.190 37

0.431 0.409 0.258 0.052 0.045 0.001 0.000

-2.853** (-2.25) -0.775** (-0.64) -0.295 (-0.39) 0.911*** (5.93) 0.838*** (6.380 -0.002 (-0.53) 0.000 (0.52) Yes 58.87*** (0.000) 0.487 (0.559) 37

1.267 1.206 0.759 0.153 0.131 0.003 0.000

-0.206 (-1.08) -0.067 (-0.37) 0.398*** (3.48) 0.042† (1.80) -0.019 (-0.99) -0.001† (-1.92) 0.000† (1.76)

0.191 0.182 0.115 0.023 0.019 0.000

28.11** (0.005) -0.563 (0.084) 37

*** denote significance at 1% level; ** denote significance at 5% level and * denote significance at 10% level Note: OpExp2Sales is the proportion of the total operating expenses to total annual sales and AssetUtilisation is the proportion of the total annual sales to total assets. ROA is the proportion of the profit after tax to total assets. TOP3 is the proportion of the shares held by the top three shareholders. BDS is the number of members on the board and PIND is the number of independent directors on the board. BDFees is the natural log of the board members’ fees. BDExp is the average number of years board members in a particular co-operative have experience in board positions. LEV2 is the proportion of total bank loan to total assets and LEV3 is the total member borrowing to total assets. LEV4 is the LEV1 minus (LEV2 + LEV3). AGE is the natural log of the cooperatives age. SIZE is the natural log of total annual sales. Industry effect was captured by creating industry dummy variables as follows: IND1 is the dummy variable equal to “1” if co-operatives belong to meat & fibre or grocery industry, otherwise “0”. IND2 is the dummy variable equal to “1” if co-operatives belong to fertiliser & top dressing or arable & horticulture industry, otherwise “0”. IND3 is the dummy variable equal to “1” if cooperatives belong to trade & retail services industry, otherwise “0”. Years effects was captured by dividing years where 2005 equals 1 and 2011 equals 7 and taking natural log of the years.

33