Effect of Ownership Structure, Firm Characteristics, and Characteristics of

Corporate Governance on Indonesian Cooperative Performance

Cupian
Study Program of Islamic Economic
Faculty of Economic and Business, Universitas Padjadjaran
Abstract
The participation of cooperatives based on this reality can be reinforced due to indications
that Indonesia's economic policies of the past until now, still be required as an integral
part for the success of economic development. Despite the existence of cooperatives
currently only regulated at the level of the Act as other economic entities, but the role of
cooperatives as one of economic policy remains a vital and has strategic position. Overall,
the cooperative movement with its structure, characteristics and characteristic corporate
governances still faces a bright future as an business and social entity in contributing to
economic growth and social prosperity. To redouble progress we need to do more to realize
its potential: to better educate the public and policy makers, to document and disseminate
best practices, to re-empower members, to create an enabling regulatory environment, and
to reinvigorate coop values and principles in the new economy.
Introduction
Based on this reality, it can be reinforced that indications that Indonesia's economic
policies of the past until now, still requires the participation of cooperatives (coops) as an
integral part for the success of economic development. Despite the existence of coop
currently only regulated at the level of the Act as other economic entities, but the role of
coops as one of economic policy remains a vital and has strategic position. Raising coop as
an important entity in Indonesia's economic policies, on the other hand also raises
expectations that the coop is an economic entity of the most understandable, familiar and
acceptable to the general public (Arsad, 2013).
Ownership Structure of Indonesian Cooperatives
Diametrically from other forms of another company. Among these is the removal of
worker-employer sorting, namely the inclusion of the union as owner of a company or
members of the coop. As confirmed by the Hatta, "There is no employer and no worker in
coops, all of them are workers who work together to organize joint purposes". The main
character of the populist economy or democracy economy essentially lies in the removal of
individualistic and capitalistic character from the face of the Indonesian economy. On the
micro level, among other things means that the inclusion of customers and employees as
members of a coop or a company owner. While on the macro level, it means upholding the
peoples sovereignty and placed the social economic prosperity over the individual
prosperity (Arsad, 2013).

By appointing populist or democratic as the basic principles of the Indonesian

economic system, the principle is by itself not only has an important position in
determining the economic patterns that must be held by the state at the macro level. It also
has a very important position in determining the company pattern that should be developed
on a micro level. Companies should be developed as businesses entities that are owned and
managed collectively (coop) through the application of Share Ownership by Workers.
Enforcement of the populist economic sovereignty and make a prioritization of people
prosperity over the individual prosperity can only be done by applying these principles.
The ownership characteristics of cooperatives and the features of collective
decision making cooperative governance relatively expensive in terms of transaction
costs (Valentinov, 2004). Unlike a market in which two actors are involved or investorowned firms in which authority is held by a few investors, cooperatives are characterized
by high involvement and interaction among all members in decision making and in the
distribution of benefits. Therefore, interpersonal relations are the foundation upon which
internal transactions are based.
A coop is rooted in the community. Trust and credibility within the community are
key assets for coops. Also in the context of Indonesia, the closeness of contact between
members and managers, which is so fundamental to the existence of a coop, becomes
critical to the sense of trust and credibility. What matters to a member who holds an equal
stake in the success of the coop is to know what actions are being taken by decision
makers. Accountability is not an abstract concept to them as it may be in large coops where
accountability proves more difficult as the connection between member and manager
becomes more distant. Accountability resonates because it roots the coop in its community
(Hayami, 2009).
The Role Of Firm Characteristics On The Concept Of Coop Economy
The Coop is in between of two Economic ideology at least has 2 (two) main characteristics
in conceptual that distinguish it with other ideology, especially liberal economic ideology
and socialist economic ideology. The two main characteristics of coops economy are: (1)
There is a unity between the owners and users in a coop, and (2) It is related to a network
of coop economy entities. Based on the construction of the merging of the owners and
users has made the coops not only have a function as a profit seeker institution but also as
an institution that gives services to its member. Meanwhile, what is meant as populist
economic enterprise is that the coops are always concerned with the interests and in favor
of the economically weaker segments of society. Based on this understanding, the first
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characteristic of coop economy contains the values of independence and democracy. These
characteristics in the application are realized in the form of policy formation,
implementation, and monitoring which are carried out by the members themselves in a
transparent, accountable, and equitable. Meanwhile, the second characteristic of coop
economy contains human values and protection. These characteristics in the application are
realized in the form of appreciation for human dignity and the common good (Hansmann,
1996).
The unique characteristic that differentiates coops from other enterprise structures
is its dual nature: they are business enterprises based on a membership-owned model. The
associate aspect of a coops takes place to pursue the social goals of its members. As such,
coops form an integral part of the private sector, pursuing successful commercial business
practices based on the values of self-help, self-responsibility, solidarity, and democracy. In
relation to other enterprise structures, coops are an alternate way of doing business but at
equally profitable levels. And the dual model is successful whether at the level of smallcredit coops in Indonesian National coop banks, such as Bank Bukopin.
The essence of coop is that individuals can achieve their goals by combining efforts
with other people. One can achieve far more in concert with other people. Coop, such as
mutual aid, collective entrepreneurship, and self-help, comes natural to people. A coop, as
an enterprise, is therefore a business expression of this natural human instinct. The seven
coop principles of the 1995 ICA statement stress membership by design. The first four are
about membership which attest that members are the heart of the coop sector. Coops have
a transformative agenda and show characteristics that are proper of Indonesias civil
society organizations. The central belief is that coops and cooperation can make the
country a better place.
Characteristics of Corporate Governance of Indonesian Cooperative
Governance problems that plague coops also account for their poor reputation and neglect
by policy makers and the wider public. Among the most salient governance problems that
participants identified are those of confusion on the role and mission of the coop, the
entrenchment of power elites, conflicts between the principles of profitability and the
social objectives of the coop, opacity in decision making, weak oversight and control
mechanisms, and lack of clear rules on how to adapt strategic objectives to changes in the
market environment, particularly those stemming from a global economy. Any of these
problems, when they emerge in public corruption cases, generate a direct impact on the
image and reputation of coops.
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The crisis experienced by the coop movement, therefore, can be largely explained
by poor governance frameworks. Associated with poor coop role, one of them is identified
as vulnerable as coops of various political interests. There is indication that the coop is
only used as a venue to find bargaining position among the political forces. Based on
experience of the New Order. government, it shows phenomenon, whereby the Village
Coops Unit (KUD) through specific policies alleged to have emerged as one of the
elements taken into account in the mechanism of sound achievement in the general
election. It is also alleged that there is a jealousy of other economic actors outside the
coop. However, the poor results were not a failure of the coop model, but a failure of
broader governance in countries. It was the coop model that became saddled with the
broader governance failures.
Despite the governance complexity that arises from having such a wide diversity of
coops, the movement has achieved a significant degree of authoritative consensus on what
defines and constitutes a coop. The 1995 ICA statement on identity is widely
acknowledged as the authoritative pronouncement of coop values and principles. The
definition of a coop captures its dual entrepreneurial and associative nature: a coop is an
autonomous association of persons united voluntarily to meet their common economic,
social and cultural needs and aspirations through a jointly-owned and democraticallycontrolled enterprise. The values of a coop are based on self-help, self-responsibility,
democracy, equality, equity and solidarity. The 1995 ICA statement also establishes seven
principles which guide the manner by which coops put their values into practice (Thomas,
2007) .
The board of directors is a critical link between members of the coop and the
managers. Among its key functions are establishing performance targets, the
employment/dismissal of management, definition and validation of remuneration policy,
and oversight of overall coop operations. The role, cohesion, solidarity and integrity of the
board of directors are essential elements for the performance and relevance of the coop
within the market place and its broader social setting. Therefore it is key to have clear
procedures for the selection and election of directors, plus to provide induction programs
and on-going training and professional development (Hendrikse, 2007).
There is a pressing need to address the corruption problem that arises from having
board of directors performing functions on a voluntary basis. But even if the work of
directors continues on a voluntary basis, the coop annual report should specify the benefits
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and entitlements that they receive in compensation. The point is to promote transparency
and not whether services should be voluntary or under a remuneration policy.
On a global scale, succession planning is a big issue for coops. It takes leadership
to examine systems that place limits on terms in office so that you institutionalize the need
to seek new talent and stop the perpetuation of entrenched elites. The basic lesson about
succession reveals that elites recruit peers, and thus shut out younger generations from
succession planning. The UK corporate governance code, adopted over 10 years ago,
requires that coops train directors and establish training for potential directors. New
Zealands Fonterra identified and screened potential directors from its membership base,
trained them and partnered them with mentors so that they would be ready to succeed as
future directors. It is critical to have programs that engage young co-operators, those in
their late 20s and young 30s, and support them for leadership renewal (Ralph et al.,
1988).
In developing countries likes Indonesia where the individual feeling of helplessness
to improve ones life is acute, there is a strong spirit to want to work together and cooperate. Individuals seek coops, not because of altruistic reasons, but because it may be the
only method open to them. They may feel that all other systems and opportunities are
denied to them. In such situations, the concept of a members role in good governance
becomes critical. Interest in better governance is the awareness that directors or those that
lead them can fail them. Here, membership renewal is talking about mechanisms that can
be put in place for members to hold directors accountable.
The Coops have a special challenge to ensure that members are rewarded for their
individual effort and their individual entrepreneurial drive. Members should never have to
face the assumption that in joining a coop their individual entrepreneurship disappears.
Thus, how can coops create the incentives for individual farmers to produce a better corn
crop, and not lead to a problem where crops are sold in one batch and it does not matter
whether you strive to produce a high-quality product? There is a difference between the
collective entrepreneurship of the coop and the individual entrepreneurship of the
individual as a member of the coop. It is important to balance the collective and the
individual entrepreneurship within coops, and to strive for a steady equilibrium as coops
adapt to changing market forces and consumer preferences (Qiao Liang et al., 2015).
For corporate governance reform, greater member awareness of coop purposes will
lead to greater demands for accountability and transparency. For example, just a decade
ago, training courses for directors did not include nor saw the value of presenting issues
such as risk, ethics, and auditing. Today, however, whole modules are delivered on these
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topics. Thus, there is a good potential interface between actions that support membership
renewal and those that seek to strengthen coop governance frameworks.
However, short-term member perspectives were highlighted as a danger that
undermines the economic success of coops. As members and directors know more about
what a coop iswhat is its central mission and the concrete benefits it can provideand
as they become re-empowered, they can take on a greater role in building and sustaining
the coops mission. An empowered membership is central to effective self-regulation and
to check counter-productive government interference.
As members are empowered and good corporate governance (cgc) practices are
adopted, expectations on coops will rise and continue to rise over time. Thus a cgc must
have multiple entry points so that coops which are at different stages of good governance
practices can benefit appropriately in improving their standards. It is very important for a
cgc to incorporate a discussion of the broader institutional framework that structures the
incentives for how a coop sector develops and operates. If it is important to provide
practical and simple guidelines, it is equally important to introduce how such operational
tools are impacted by the existing institutional framework (Wollebaek and Selle. 2002).
The values and principles that govern coops are high-level and applicable no matter
what type of management or tier structures characterize a particular coop. Understanding
and achieving clarity on the coop identity would go a long way in being able to face
governance challenges. Three types of needed clarity were highlighted: (1) clarity by the
board on coop vision and mission; (2) clarity by managers and employees on operational
practice; and (3) clarity by members on loyalty and sense of ownership (Thomas, 2007).
The widely accepted values and principles of the coop movement provide a firm
base from which to start building a corporate governance framework. It lays out a road
map upon which to act, with built-in flexibility to adapt to the size and diversity of existing
coops, but at the same time recognizing that new generation coops add further confusion to
the process. What is important to recognize is that corporate governance has to enhance the
compliance of coop principles and values (the very essence of coops), otherwise a
corporate governance framework is no different from investor-owned companies.
The new generation coops
All the types of coops were referred to within a taxonomy of traditional and new
generation coops. The characteristics most commonly associated with traditional coops
are, amongst others: open and direct membership, long-term affiliation, one person-one
vote, equal pricing across all members, and cost averaging in serving members. New
generation characteristics, on the other hand, stem from challenges of having to operate in
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a more competitive global market: differentiating voting power as the need arises to bring
in outside equity, separating the price for goods supplied from the return on capital,
valuing shares at fair market value, and removing cross-subsidies by paying the price
differentials among members. Hence, new generation coops face the challenge of adapting
coop values and principles to business practices that resemble more closely investorowned companies. But experience and practice reveals that there are ways to make this
adjustment. Coops may need to call themselves new generation because of their business
practices within a global economy, which is perfectly acceptable, but they have also
learned to operate in adherence to a basic set of principles and values.
The generation coops can redouble progress by doing more to realize its potential:
to better educate the public and policy makers, to document and disseminate best practices,
to re-empower members, to create an enabling regulatory environment, and to reinvigorate
coop values and principles in the new economy. This support must go hand in hand with
technical assistance and practical toolkits that coops can use to improve sustainability and
competitiveness as private sector enterprises. The combined efforts of practitioners, agents
of change, and international donorsin the same spirit that underlies the coop movement
will be of particular importance in Indonesia where coops can serve as an important
means to reach economic growth and social prosperity .
Conclusion
Overall, the coop movement in Indonesia still faces a bright future. It is due to a better
understanding of how coops contribute to economic and social prosperity. The unique
characteristic that differentiates coops from other enterprise structures is its dual nature:
they are business enterprises based on a membership-owned model. The associate aspect
of a coops takes place to pursue the social goals of its members. A coop is rooted in the
community. Trust and credibility within the community are key assets for coops. Also in
the context of Indonesia, the closeness of contact between members and managers, which
is so fundamental to the existence of a coop, becomes critical to the sense of trust and
credibility. As members are empowered and good corporate governance (cgc) practices are
adopted, expectations on coops will rise and continue to rise over time. Thus a cgc must
have multiple entry points so that coops which are at different stages of good governance
practices can benefit appropriately in improving their standards.
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