The Governance System for Democratic Firms

The Governance System: Overview

Worker cooperatives are built on a framework of democracy, but this does workers very little good unless the means to exercise their rights and enjoy the protections this framework provides are in place – this is what an effective governance system does. The governance system primarily focuses on how a democratic firm’s policy is established, how this information is communicated throughout the firm, and works to protect the personal rights of the members. It provides the means for matters of organizational direction and policy to be dealt with democratically.

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The Role of the Membership, Board, & Management

A properly functioning governance system clearly articulates the roles of the members, the Board of Directors (including a “grievance council”), and the management.  If the governance system is to function well, the responsibilities of these groups must be clear, and the groups must have real decision-making power. While each co-op and its culture is unique, generally the roles of each of these groups fall into this general form:

The Membership: The members, or shareholders are responsible for all corporate matters and significant policy matters. Additionally, the by-laws can specify issues that should be addressed by the membership as a whole. The Board of Directors: The Board is responsible for all Policy and Governance matters not handled by the Membership. Specifically, they select key managers, approve the budget, and set the strategic direction of the firm. Management: Management is responsible carrying out the regular business of the firm. Management has influence and will often generate or review policy proposals for the board and membership, but they do not have the authority as managers to set policy.

Design Guidelines

It is essential that the governance system be as simple as possible. Complex systems often tum out to be awkward, inefficient, and harder to operate than simpler, cleaner systems. A good governance system should specify very clearly the basic organizational structures and procedures that will be used for dealing with governance matters, but should leave a great deal of room for members to develop specific procedures that are uniquely appropriate for special problems that come up.

Moreover, a good governance system should not require sophisticated knowledge on the part of the members who operate it, nor should it require constant attention and fine-tuning. The challenge for those who design the system, then, is to construct a system that will get done what needs to be done and to do so as simply, efficiently, and inexpensively as possible.

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Simply put, most matters are not policy and should be left to co-op management unless they pass the extensiveness test. For policy matters that pass the significance test, consultation with the membership is appropriate. Finally, an effective grievance policy must be in place, but should only address issues that pass the grievability test.

The Significance Test: Is it a Membership Issue or a Board Issue?

The significance test is used to determine whether an issue should be bought to the attention of the entire membership, or is best left to the Board of Directors. The members of a democratic firm have interests in the organization that extend far beyond the narrow questions of survival and profitability that state law normally leaves to shareholders. Co-op members should care about issues such as the rate of growth, the strategic direction, or the quality of the co-op’s product or service. Members of a cooperative should have involvement in any decision that affects the basic character of the organization. Generally, shareholder votes are required for things like amending the  the articles of incorporation, dissolving the corporation, selling major assets, merging with another firm, or electing the board. Yet a co-op may require its board to refer to the membership as a whole (for review or discussion) any matter of extraordinary significance to the organization.Significance_Test

Consulting the membership is an expensive and time-consuming proposition in all but very small co-ops.  For this reason, an issue should be taken to the membership only when it is truly significant.  Routine policy-making is better handled by the board, which is smaller than the membership; and whose members presumably have developed some skills in analyzing and deciding about organizational policy.

Specifically, we suggest that the board consult formally with the membership as a whole only for items that pass the following “significance test.”  What is significant to one firm, might not be to another, so each co-op should drawn up and approve a list of the types of issues the members will be consulted on.


If a board decision has consequences for the immediate or long-term viability of the organization, the membership should be consulted. This would be the case, for example, if a significant portion of the firm’s resources were to be committed to a potentially risky new venture, if a major loan to the co-op was to be sought, or if significant changes in the organization’s business plan or strategy were being considered.


The membership should be consulted regarding any change in co-op policy about the conditions under which members are invited to join or asked to leave the organization.  In addition, membership control of hiring and termination policies helps protect freedom of speech in the co-op, because members can make sure that the leaders of the organization do not establish policies that allow them to fire people who criticize their performance.            Finally, experience has shown that co-op members care intensely about policies having to do with the hiring and firing of their colleagues — and for this reason alone they should be consulted if the board is considering a change in those policies.


If a board decision would significantly alter the kind of organization the co-op i5, or what it stands for, the membership should be consulted before that decision is made final. This would be the case, for example, if a co-op founded to provide products to low-income people was considering changing its clientele to the well-to-do to improve profitability. Or consider a newspaper co-op, whose members are especially concerned about protecting the paper’s editorials from the influence of advertisers. Any policy that would affect the influence that the paper’s advertising staff has on editorial content would, in this co-op, be subject to review by the membership. Finally, consider a food store that is committed to the sale of nutritious products. If the board were considering adding lines of tobacco and convenience foods of questionable nutritional value in order to expand the clientele of the store, the matter would have to come before the membership — because it could alter the basic character of the enterprise.

The Extensiveness Test: Is this a matter for Management or the Board?

The first task in defining board responsibilities is to determine what issues rightfully belong to management, and what issues are policy matters– and therefore the legitimate concern of the board of directors. Without guidelines for deciding what gets dealt with by which group, there is a real risk that managers will gradually take over the policy-making responsibilities of the board, or that the board as a whole gradually will take over the on-going management of the organization. Either state of affairs is unsatisfactory.

In general, any issue that has extensive impact on the organization is a policy matter and should not be delegated to operating managers. An item passes this “extensiveness test” and is considered policy if:Extensiveness_Test

  1. It affects a large number of co-op members, or
  2. It commits a substantial portion of the financial (or other) resources of the organization, or
  3. It affects co-op operations, personnel, or resources over a long period of time.

Each co-op should determine for itself how many members, how many dollars, and how much time will signal that a decision or policy matter meets this three-part extensiveness test and therefore becomes the business of the board rather than  that  of operating management. To clarify this division of responsibilities as much as possible, each co-op should list the major issues that will be handled routinely by the board, incorporating the extensiveness test so it can be used for issues as they arise.

Defining the goals of the organization and setting the policies that will be followed to achieve those goals.

Selecting the General Manager or Chief Executive, defining their duties and setting their salary.

Evaluating the performance of the Chief Executive, recommending training as needed and replacing them if necessary.

Controlling the finances of the firm (annual budget, financial plan, authrizing loand, determining patronage dividends.)

Making critical decisions that significantly affect more that 50% of the membership; commit a significant amount of the firms funds (the amount should set by the board or members); or commit the firm to a course of action (e.g. in a lease) for more than one year.