STRUMENTI PER LA DIDATTICA E LA RICERCA – 172 – Cooperative Enterprises in Australia and Italy Comparative analysis and theoretical insights edited by Anthony Jensen Greg Patmore Ermanno Tortia Firenze University Press 2015 This book is the upshot of the research program “Advancing the Co-op- erative Movement in Australia and Italy. A three years research project”, which was conducted by the University of Trento in collaboration with Eu- RICSE (European Research Institute on Cooperative and Social Enterpris- es), and by the University of Sydney, Co-operative Research Group. The program started in February 2010 with a symposium held at the University of Sydney, Business School. It has included a second symposium held at the University of Trento and EuRICSE in July 2011, and a third and final symposium and conference held at the University of Sydney in July 2013. The editors and all the program participant acknowledge and thank the financial and organizational support offered to the conference events and to the preparation of this book by the University of Sydney, Co-operative Research Group, by EuRICSE, and by the University of Trento. EuRICSE, European Research Institute on Co-operative and Social Enterprises, Trento Department of Economics and Management, University of Trento Co-operative Research Group at the Business School, University of Sydney Cooperative Enterprises in Australia and Italy : comparative analysis and theoretical insights / edited by Anthony Jensen, Greg Patmore, Ermanno Tortia. – Firenze : Firenze University Press, 2015. (Strumenti per la didattica e la ricerca ; 172) http://digital.casalini.it/9788866558682 ISBN 978-88-6655-867-5 (print) ISBN 978-88-6655-868-2 (online) Peer Review Process All publications are submitted to an external refereeing process under the responsibility of the FUP Editorial Board and the Scientific Committees of the individual series. The works pub- lished in the FUP catalogue are evaluated and approved by the Editorial Board of the publish- ing house. For a more detailed description of the refereeing process we refer to the official doc- uments published on the website and in the online catalogue of the FUP (www.fupress.com). Firenze University Press Editorial Board G. Nigro (Co-ordinator), M.T. Bartoli, M. Boddi, R. Casalbuoni, C. Ciappei, R. Del Punta, A. Dolfi, V. Fargion, S. Ferrone, M. Garzaniti, P. Guarnieri, A. Mariani, M. Marini, A. Novelli, M.C. Torricelli, M. Verga, A. Zorzi. © 2015 Firenze University Press Università degli Studi di Firenze Firenze University Press Borgo Albizi, 28, 50122 Firenze, Italy www.fupress.com Printed in Italy Acknowledgements The editors thank in a special way Emeritus Professors Russel D. Lansbury (University of Sydney) and Stefano Zamagni (University of Bologna), and Professors Avner Ben-Ner (Uni- versity of Minnesota), Johnston Birchall (University of Stirling) and Carlo Borzaga (University of Trento) for the formal support given to the project of the book. Financial support to the th- ree years research project and to the realization of the book was provided by the Co-operative Research Group at the Business School of the University of Sydney and by EURICSE (Europe- an Research Institute on Co-operative and Social Enterprises) in Trento. The book project was financially supported also by the Department of Economics and Management at the Universi- ty of Trento. Usual disclaimers apply. Graphic design: Alberto Pizarro Fernández, Pagina Maestra snc Picture on cover: Workers’ Mutual Aid Society. Established in 1861, Bagnacavallo (Ravenna), Central Italy. Anthony Jensen, Greg Patmore, Ermanno Tortia (edited by) Cooperative Enterprises in Australia and Italy : comparative analysis and theoretical insights ISBN 978-88-6655-867-5 (print) ISBN 978-88-6655-868-2 (online PDF) © 2015 Firenze University Press Capitolo – nome autore – sezione Table of contents Introduction. Advancing the co-operative movement in Australia and Italy: a three years research program 11 Anthony Jensen, Greg Patmore, Ermanno Tortia PART I Comparative Perspectives A Comparison between Australian and Italian Co-operative Law 21 Troy Sarina, Antonio Fici National Co-operative Organisations in Australia and Italy 37 Richard O’Leary, Greg Patmore, Alberto Zevi Consumer Co-operatives in Australia and Italy 57 Patrizia Battilani, Nikola Balnave, Greg Patmore Financial Co-operatives in Australia and Italy 75 Ivana Catturani, Leanne Cutcher Worker Co-operatives in Australia and Italy 89 Marina Albanese, Anthony Jensen Agricultural Co-operatives in Australia and Italy 113 Eddi Fontanari, Richard O’Leary, Samira Nuhanovic-Ribic, Ermanno Tortia 8 Cooperative Enterprises in Australia and Italy PART II Theoretical insights and case studies TOWARDS A NEW THEORY OF CO-OPERATIVE FIRMS From the Neoliberal to the Participatory Firm: employee participation through industrial relations and governance in Australia and Italy 137 Ermanno Tortia, Martha Knox Haly, Anthony Jensen Worker Co-operatives as Collective Entrepreneurial Action: review of the economic literature and new theoretical insights 157 Cecilia Navarra The Silver Lining of Co-operation: self-defined rules, common resources, motivations, and incentives in co-operative firms 175 Silvia Sacchetti, Ermanno Tortia Organizational Models of Firms and Social Capital: the different aptitude of capitalistic and co-operative firm in accumulating social capital 191 Marina Albanese, Salvatore Villani CASE AND SECTOR STUDIES IN AUSTRALIA AND ITALY Emergence, Evolution, and Institutionalization of Italian Social Co-operatives 209 Carlo Borzaga, Sara Depedri, Giulia Galera Social Media Use in Australian Co-operatives: current applications and future opportunities 231 Olivera Marjanovic, Petri Hallikainen, Nikola Balnave, Greg Patmore, Yasmin Rittau Good and Bad Networks. The role of social enterprises in the fight against organised crime 245 Michele Mosca, Salvatore Villani 9 Table of contents Conclusion. Co-operatives in Australia and Italy: lessons and prospects 265 Anthony Jensen, Greg Patmore, Ermanno Tortia Bibliography 271 List of Authors 297 Anthony Jensen, Greg Patmore, Ermanno Tortia (edited by) Cooperative Enterprises in Australia and Italy : comparative analysis and theoretical insights ISBN 978-88-6655-867-5 (print) ISBN 978-88-6655-868-2 (online PDF) © 2015 Firenze University Press A. Jensen G. Patmore E. Tortia Introduction. Advancing the co-operative movement in Australia and Italy: a three years research program The book strives to capture the past and current developments, and the future status of the cooperative movements in two different countries: Aus- tralia and Italy. It is the result of a three-year research collaborative project titled Advancing the Co-operative Movement in Australia and Italy: A three years research program . The comparative character of the book poses some chal- lenges and difficulties since the book compares two countries that show markedly different development patterns and institutional systems both in terms of corporate law and in terms of system of industrial relations. The legal framework, both general and specific to co-operatives, for the two countries is remarkably different. Australia has a common law tradi- tion that makes it similar to other countries such as the UK and the US, which are characterized by notable limitation of specific legislation for co- operative firms. Italy represents instead one of the best civil law examples of development of the cooperative legislation. As Australia and Italy have witnessed different degrees of creation, diffusion and disappearance of co- operative firms, very different dimensions and patterns of development of co-operatives characterize these two countries. Co-operatives represent a more significant part of economic and social life in Italy than Australia and a fundamental issue in the book concerns the enquiry into the reasons for these cultural and social differences, and for the different scale of the phenomenon. The answers given in the different chapters provide general insights for the field of co-operative studies. One of weaknesses of many comparative publications is their failure to provide clear conclusions linking the contributions and to add expla- nations grounded in the combination of the individual contributions. We strive to overcome this problem through a conclusion that provides a clear set of outcomes from the book, which will benefit both policymak- ers and researchers. In addition we note research that points to the posi- 12 Anthony Jensen, Greg Patmore, Ermanno Tortia tive social, economic and political impact of high levels of co-operatives on society. Part I of the book compares two different co-operative movements in their historical, economic and institutional development. Also the different features of the socio-cultural and political contexts will be considered. Spe- cific focus is devoted to particular types of co-operatives (consumer, work- er, financial, and agricultural/producer co-operatives) and an analysis of the reasons for the strengths and weaknesses of these different types. For example, why are consumer co-operatives weaker in Australia than Italy? Is it because of the legal framework, or instead the attitude of significant ac- tors such as the labour movement and farmers? Or instead the differences can be traced back to more general cultural divides, and be substantiated in alternative socio-economic processes (e.g. based on individualism more than on collective and social objectives). Strong and weak elements of both contexts will be highlighted, but special attention will be paid to the weak- nesses of the Australian movement. Its smaller dimension relative to Italy is not only to be traced back to general cultural and political differences, but also to the different institutional architecture, which in Italy has favoured accumulation of assets and the creation of a dense network of relations and layered governance structures, while in Australia has resulted mainly in the creation of stand-alone structures that, eventually, have not been able to spread and generate a sufficient number of new initiatives. Furthermore, the Australian co-operative movement has been beset by waves of growth and decline and more recently a push towards demutualization, which have weakened even further its limited growth potential. The analyses of the strengths and weaknesses of the two contexts will be especially impor- tant in drawing implications for co-operative theory and practice. Part II of the book stems out of the issues and problems underlined in Part I on the different typologies of co-operatives in Australia and Italy. It contributes in a more general way to the debate on the socio-economic role and institutional analysis of co-operatives. The book revisits the debates concerning the nature of co-operatives as membership controlled organiza- tions and collective entrepreneurial ventures (Birchall 2010). Compared to the most orthodox treatment of the economics of cooperation in the neo- classical and neo-institutionalist tradition, stronger focus will be put on the collective nature of the venture, and on the role of membership rights in informing the definition of the objectives of the organization and in achiev- ing the fulfilment of members’ needs and expectations. The behavioural background of the objectives and action of co-operatives come under closer scrutiny, for example in terms of the motivations of members and of the other groups of stakeholders, and in terms of the surplus of social wel- fare that the cooperative is able to create for its membership and or the related stakeholders (Borzaga, Depedri, Tortia 2011). This is an initial and quite embryonic attempt to develop a behavioural theory of the coopera- 13 Introduction. Advancing the co-operative movement in Australia and Italy tive firms. Given the comparative and empirically grounded nature of the book, these initial steps do not lead to a fully blown new theory, but can serve as initial elaboration and input of future research. Among the more theoretical issues that will be deepened in the book, the collective nature of entrepreneurial action in co-operatives will re- ceive special attention. Some initial reference will be made to the work by Elinor Ostron concerning collective action as governance mechanisms in the management of common pool of resources. This framework gives important insights on how successful horizontal coordination can be achieved among a collection of participating actors in performing com- plex economic activities. Surely the Ostrom approach needs to be rede - fined and adapted to the specific case of co-operatives, which include a stronger entrepreneurial component. Given the collective nature of entre- preneurial action in co-operatives, a related theoretical issue deals with the accumulation and use of common resources in co-operatives (finan- cial, social and productive), since this specific aspect separates them clear- ly from the working of conventional capitalist enterprises. This problem has received relevant scholarly attention in past economic research, but the answer given by economic analysis have generally been negative, as they have evidenced the shortcoming of the accumulation and use of com- mon resource in market-led competition, for example in the literature on underinvestment and undercapitalization of co-operatives, a problem that would beset the dynamic efficiency of investment projects in this form of enterprise. In this context we introduce the concept of cooperative own- ership, which is a third typology of ownership rights that has different features relative to the two most traditional and established ones (private and public ownership). The concept of cooperative ownership can be use- ful in accounting for the existence of non-traditional forms of asset owner- ship in co-operatives, such as indivisible reserves of capital and the more stringent asset lock. These forms are much more difficult to be meaning- fully rationalized within the traditional frameworks of private and public ownership (Ostrom 1990; Navarra 2010; Tortia 2011). In more general terms, we underline that the contemporary debate on co-operatives requires extensions on topics that have not been sufficiently dealt with to date. Co-operatives have often been considered isomorphic to conventional organizations, and characterized by similar hierarchy and agency structure. Instead we see co-operatives as collective entrepreneurial action of independent producers/workers/consumers, and evidence the ab- sence of conventional hierarchy and agency relations. This interpretation requires new frameworks of conceptual and empirical analysis that go be- yond the approaches transmitted by orthodox social and economic theory. This new conception lends itself a whole new range of interpretations, ex- tensions and analyses dealing, for example, with cooperative governance and management. Most academic analysts and policy commentators have 14 Anthony Jensen, Greg Patmore, Ermanno Tortia seen the institutional structure of co-operatives, as they are often charac- terized by common ownership of assets and democratic decision-making processes, as inferior solutions to non-co-operative firms in terms of out- comes. The main reasons for inferior performance of co-operatives relative to conventional firms have been found in different but connected structur- al features. The five most important reasons why co-operatives have been considered inferior solutions to conventional capitalist enterprises are: • a greater difficulty for co-operatives in accessing financial markets. Since investors do not control co-operatives, a lower compatibility is expected between their financial mechanisms and performance and the working of financial markets. While the stock exchange is in almost all cases barred to co-operatives, they have greater difficulties in access- ing bank finance too and offering their bonds to the market. Very often, indeed, they would lack sufficient collateral to receive adequate assis- tance by financial intermediaries; • greater difficulties with reinvesting surplus funds efficiently. This is the so-called under-investment or under-capitalization effect (Furubotn, Pejovich 1970; Vanek 1970; Jensen, Meckling 1979), which is connected with the presence of indivisible, non-shareable reserves of capital and with the truncated temporal horizon of most members in co-operatives. Since the permanence of members in the cooperative is temporally lim- ited, when assets are accumulated in indivisible capital reserves, there will be a tendency to choose only those investment projects that deliver high rate of returns in the short run, thus leading to underinvestment and undercapitalization. Not the same is true in the case of investor owned firms, since their capital is divisible and they can be sold at mar- ket value; • inflated decision making and other organizational costs. Democratic governance (the ‘one member, one vote rule’) in the presence of het- erogeneous members’ motivations, objectives and preferences increases the costs of decision making, increases the probability of contrasts with- in the membership, and may undermine the possibility of shared and effective decisions (Hansmann 1996); • co-operatives may encounter serious difficulties in distributing their value added in a fair way. This is true, for example, when distributive patterns are not clearly defined or definable ex ante, and the dominant and lazier part of the membership (the majority) has an interest to ex- ploit the minority and more productive part. The most notable example is usually found in worker co-operatives, where a majority of unskilled workers can exploit a minority of skilled ones (Kremer 1997); • democratic governance can be affected by the problem of free riding in delivery appropriate levels of effort or other resources. When produc- tion is organized in teams or based on the delivery by members of oth- 15 Introduction. Advancing the co-operative movement in Australia and Italy er non-measurable, or difficult to measure inputs, the lack of a central monitor supports the possibility that each individual member delivers opportunistically low levels of effort (e.g. in worker co-operatives) or low quality inputs (e.g. in producer and agricultural co-operatives) (Al- chian, Demsetz 1972). There is however an emerging literature which points to the features of co-operatives delivering superior performance through superior participa- tive mechanisms as in the Mondragon Corporation Cooperative namely legitimising employment relations, delivering a wider range of issues over which agreement can be reached and the engagement of peer monitor- ing resulting in networked governance and organisational learning of the high performance work system. The new framework or frameworks for the study of co-operatives as mutual benefit mechanisms of coordination of collective entrepreneurial action and economic activity are used as tools for addressing these and other criticisms. So does the gathering of data and other studies in the book. Beyond the study of the internal working of co-operatives these organi- zations need to be placed into their wider social context, by considering their social and communitarian role, as stated in the seventh ICA principle. These elements will be taken into account and made explicit in more than one chapter. Overall we consider our approach as nearer than the most orthodox ones to a coherent explanation of the social role of co-operatives, since it relies on a collective interpretation of entrepreneurship founded in the centrality of membership rights and members’ welfare. Therefore, we evidence the nature of co-operatives as locally embedded enterprises, which first and foremost deliver goods and services to the community, and as contributors to social capital. The governance of co-operatives is analysed not only in positive terms, but also critically, looking at the potential and actual problems that can af- fect it. We define this potentially problematic side of cooperative govern- ance as ‘the dark side of cooperation’ and relate it to well-known instances of distorted social interaction such as free-riding in effort and input de- livery, and the tragedy of the commons, whereby individual self-interest dominates the accumulation and utilization of indivisible capital reserves. Part II consists of two parts. The First Part of the book includes more theoretical contributions, which aim at the development of a new frame- work for the socio-economic analysis of co-operatives. The topics covered in this part include (i) the definition (and the critical assessment) of co-op- eratives as instances of collective entrepreneurial action; (ii) co-operatives and industrial relations; (iii) the contribution of co-operatives to the preser- vation and accumulation of novel social capital. The Second Part includes a series of case or sectorial studies of interest either in the Australian or in Italian context. The topics here include (i) the success of Italian social co- 16 Anthony Jensen, Greg Patmore, Ermanno Tortia operatives; (ii) the role of social media in delivering new cooperative tools for information transfer, knowledge creation and social interaction on the internet; (iii) the fight of social co-operatives and non-profit organizations with organized crime in Southern Italy. One of the main aims of the book is to develop a policy-oriented ap - proach to the study of cooperative action. The study is directed not only to academics and social scientists, but also to practitioners, cooperative en- trepreneurs, and policy makers. The language and methodology used is purposefully kept accessible to a broad audience rather than specialized academics in order to have as wide impact as possible. On the other hand, we aim to substantiate our claims and support our results with precise the- oretical insights and empirical evidence, since these are necessary to car- ry out informed policy advice. Practitioners and policy makers will find particularly valuable the focus on the problems, and on possible solutions thereof, more than on the positive achievements connected with the opera- tion of co-operatives. Other topics, which keep on representing lively areas of debate, but are not central to the book’s chapters, will be covered as well, though in a more tangential way. The finance of co-operatives is a case in point, since it corresponds to fundamental financial needs that very often strike the bal- ance between viable and non-sustainable cooperative endeavours. We will ask how successful are co-operatives in raising funds for expansion and competitiveness; how they are able to accumulate capital by means of self- finance; and how relevant and effective are instruments of common owner- ship such as the asset lock and the accumulation of indivisible reserves of capital. It will be also noticed that in numerous countries (including Italy) many co-operatives, and especially the large ones, have reverted to hybrid forms of finance and ownership by creating or acquiring on the market, in- vestor owned, profit seeking entities (Spear 2012). This pattern of develop- ment, which in Italy was institutionalized in 1983 by the so called ‘Visentini law’, is functional to improving the ability of co-operatives to raise finance and to implement large scale and capital intensive production processes in more traditional and standardized ways (Spear 2012). The hybrid solu- tion has often been considered vital in allowing co-operatives to overcome some of their most relevant weaknesses, that is limited access to financial markets and undercapitalization, but also inflated organizational and deci- sion making costs (Hansmann 1996). In the book we will discuss the viabil - ity of this developmental pattern, and its compatibility with cooperative values and membership-based ownership. Also cooperative self-finance represents a crucial field of comparative enquiry of the Australian and Ital- ian contexts. This is so because the law in Italy mandates the accumula- tion of indivisible reserves of capital, which represent the main channel through which self-finance is effected, while these financial instruments are absent in the Australian landscape. 17 Introduction. Advancing the co-operative movement in Australia and Italy Broader topics related to the finance of co-operatives will be brought into the picture as well. The chapter on banking co-operatives in the Aus- tralian and Italian contexts evidence that cooperative finance is prominent in some European countries (mainly France, Germany, Austria and the Netherland), and is in more localized areas, such as the Trentino Province in Italy and the Basque Region in Spain. The understanding of the histori- cal origins, pattern of development, economic and social role, and devel- opmental trends of cooperative banking in Italy and of credit unions in Australia will allow us to connect our arguments with crucial problems stemming out of the recent financial crisis. Connectedly, we evaluate the effectiveness and resilience of the cooperative solution both in growing economic contexts, such as the Australia, and in recessive conditions, such as the Italian ones (Birchall 2013). The study of cooperative finance will al- so allow us to connect to the way in which the banking system approaches cooperative firms, the preferential role of cooperative banking in support- ing co-operatives, and the complementarity of different institutions and forms of co-operatives (typically banking and producer co-operatives, as in Gagliardi 2009). The whole discussion on the results achieved and on the perspectives of the cooperative movement in Italy and Australia is wrapped up and ana- lysed also from a legal point of view. A whole chapter in the first part of the book is devoted to defining the general legal features of co-operatives in the two countries. Moreover, each chapter in the first part of the book will refer to the existence of distinct legislation regulating the specific typolo- gies of co-operatives. The legal comparative perspective is particularly im- portant in this book, since the Australian and the Italian legal frameworks show sharp differences in the interpretation of the origins and evolution of co-operatives. There are a limited number of relevant books published on the socio- economic theory and institutional development of cooperative firms over the last 15 to 20 years. The rise of neo-liberal economics has shifted the focus away from co-operatives towards traditional capitalist firms (Kalmi 2007; Borzaga, Tortia 2005). This is however at odds with developments such as the United Nations International Year of Co-operatives in 2012, when the UN for the first time endorsed a specific business model as a democratic approach to economic and social development. Also, the re- cent economic and financial crisis has created new room for discussion on non-conventional organizational forms. On the other hand, the crisis of sovereign debt in many European and North American countries forced the reopening of the debate on the reform and decentralization of public welfare systems, in which cooperative firms can play a key role (Stiglitz 2009; Borzaga, Depedri 2013). Though they are an established and known solution, the potential of cooperative firms and other associative mecha- nisms based on self-governance has been overshadowed for decades in 18 Anthony Jensen, Greg Patmore, Ermanno Tortia mainstreams political debate, as the only viable solutions for sustained and sustainable economic development have been found in private firms, and in state intervention (Ostrom 1990; Borzaga, Depedri, Tortia 2014). The pe - culiarities of the historical phase in which we find ourselves, the new in- terest for non-state and non-capitalistic organizational solutions, and the development in cooperative studies can allow to start a new perspective in which co-operatives are not considered any more as marginal and inferior organizational solutions, but are instead fully included among the actors able to reform and improve socio-economic development. As final remark, we underline that taking further steps in the develop- ment of the theory and empirical analysis of cooperative firms is made all the more urgent by at least two recent phenomena. First, economic and so- cial theory has been undergoing radical changes over the last two decades. The emergence and spread of behavioural and experimental economics, together with the development of more traditional heterodox approaches, such as evolutionary and new-institutional economics, has been reshaping economic thinking, providing new ground for a favourable interpretations of the cooperative phenomenon (Borzaga, Depedri, Tortia 2011). Second, the economic and financial crisis that hit the financial markets first, with the explosion of the sub-prime bubble in 2007, then the real economy in 2009, and finally the sovereign debt of some European and North Ameri- can in 2011, represents an epochal event that may well lead to renewed efforts for implementing non-traditional patterns of socio-economic devel- opment (Wolff 2012). In this perspective, there is recognition of an urgent need to restructure both the private and public sector in most advanced countries, as the global economy exists in the shadow of unsustainable growth and escalating environmental damage leading to calls for sustain- able governance of firms. However, while the crisis has severely hit both the private for-profit and the public sections of the economy, not the same is true for third sector organizations, which showed a higher degree of stability and resilience to financial bust, economic downturn and crisis of public finance. The traditional dichotomous interpretation of the econo- my, embracing only the public and the private sectors, needs revision since intermediate domains included in the third sector (non-profit organiza- tions and cooperative enterprises) are being evidenced as a growing and non-marginal phenomenon. This need was already forcefully evidenced in other fields of economics thinking, such as the management of common resources (Ostrom 1990), and is more and more felt also in the study of economic development, economic organization and business enterprises (Stiglitz 2009; Borzaga, Depedri, Tortia 2011). Following several decades of almost complete neglect, the study of non-conventional forms of enterprise has come again to the fore (Stiglitz 2009). PART I COMPARATIVE PERSPECTIVES