The Endogenous Nature of Corporate Governance: A Comparison of Consumer and Producer Co-ops

Abstract

Whether by borrowing governance measures from one organizational type and applying them to another, or by promoting a single governance model, policymakers are standardizing corporate governance. Differences between firms are overlooked as blanket governance measures are applied that treat all affected firms the same. The problem is that corporate governance is not a one-size-fits-all phenomenon. Applying governance measures originally designed for other firms may produce sub-optimal results. The reason for the sub-optimal results is that corporate governance is believed to be endogenously determined. Firms choose their optimal governance structures and behaviours based on their specific characteristics and the governance issues they face. Any misalignment between the governance measures a firm must adopt and the measure that is best for the firm (given its characteristics) could negatively impact the firm’s corporate governance, and ultimately its performance Extending Hansmann’s theory of ownership to look at the governance of co-operatives, this thesis finds support for the belief that corporate governance is endogenous. Using data from the Co-operative Business Study and three types of statistical tests, Principal Component Analysis, t-tests, and Pearson’s chi-square tests, producer and consumer co-ops are compared to determine: 1) whether the two co-op types differ in terms of their firm specific characteristics, and 2) whether any discovered differences are associated with differences in corporate governance measures. Results suggest that consumer co-ops have higher control costs, and their boards are more involved in overseeing management. In other words, there is an association between how much it costs members to control their co-op and the degree to which management is overseen by the board or by members. These results reinforce the point that corporate governance is endogenous, and they should give policymakers pause when developing governance measures; standardized governance measures may produce sub-optimal results because firm-specific characteristics need to be considered. Instead of developing broadly applied governance measures, policymakers may be better served by creating policies that enhance board cohesiveness and improve directors’ ability to function as a team. By focusing on board members’ soft skills, policymakers can improve corporate governance while still allowing firms to determine their own optimal governance structures and behaviours.