Boards put the business strategy and structure under the microscope more regularly, about every two to three years, but for members, reviews on the relevance of the structure should be every seven to 10 years.
The structure of co-operatives has come under the spot light in recent months as several co-ops embark on changes or signal reviews that could result in changes to their capital structure.
Shareholders in meat company Silver Fern Farms recently agreed to sell half the operation’s arm of the business to Shanghai Maling, creating a hybrid co-operative.
Through a new entity, SFF Co-op, they will own the other half but the $261 million Shanghai Maling is paying will be used to pay off debt, invest in plants and to fund the further roll out of SFF’s Plate to Pasture added-value strategy.
It is money SFF felt it could not get from shareholders or a NZ partner.
Westland Milk and dairy genetics co-operative LIC have also signalled capital structure and funding reviews, possibly creating structures outside the co-operatives to fund expansion.
Alliance Group is embarking on major structural change and its chairman Murray Taggart said cost cutting and conservative management since it nearly collapsed in 1991 would provide the $125m of funds for the three-year investment programme.
Wilson said change was a constant for co-operatives for reasons such as sourcing new capital for acquisitions or investment or to manage redemption risk as Fonterra did in 2012 Fonterra by introducing trading among farmers (TAF).
TAF also enabled shareholders to buy Fonterra shares when cashflow allowed or to cash up and sell the economic rights to shares when cashflow was tight.
Wilson said co-ops needed to consider change to ensure structures matched strategy and to address challenges and opportunities.
Co-ops that resisted change tended to be those that failed, he said.
Traditionally co-ops have funded capital expenditure and investment through debt but increasingly companies have become debt adverse.
Fonterra has a retained earnings policy but TAF has reduced balance sheet pressure allowing the company to focus on other aspects of the business such as offering members interest-free loans to help them through the low payout period.
Taggart said cost-cutting and conservative management would help Alliance fund its transformation programme but he believed given a viable, attractive proposition, shareholders would fund a new investment.
The experience of the early 1990s when Alliance came close to collapse taught some fundamental business lessons such as preserving financial strength after a major transaction and that it was not a given that buying another meat company included livestock supply.
He said co-ops invested in downstream activities but tended to protect their capital and only sparingly went to shareholders for fresh funds but, given the right project, it was not something he was averse to doing.
