The Relationship Between Governance Board Performance and The Proportion of Independent Directors With Agricultural Based Cooperatives and Associations in New Zealand

The Relationship between Governance Board
Performance and the Proportion of Independent

Directors with Agricultural based Cooperatives and
Associations in New Zealand
EXP 509-16G
A project completed in partial fulfilment of the degree of

Masters of Business and Management
At The University of Waikato
Date: October 2016
1
Liability Statement
Waikato Management School
Report of an Investigation
Disclaimer of Liability
The following investigation should not be considered to be the work of professional

consultants. Consultation with appropriate professionals should be sought before any action
is taken on this investigation. The author of this investigation disclaims any liability from any
losses or damages, which may be a result of using this investigation. Nor does The University
of Waikato take any responsibility or accountability for the content of this investigation and
disclaims any liability.
2
Restriction
Statement of Restriction
(Restricted)
No person other than a member of the staff of the Waikato Management School may have access to
this INVESTIGATION without prior approval of the Managers at the Management Student Centre.
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Executive Summary
Chapter one explores the foundations of this research. Governance in the agriculture
industry largely is largely underpinned by representative forms of governance. There is a
fundamental concern relating to representative directors understanding of the practices and the
broader challenges tied to implementation as well as recruitment within this area. Governance is a
practice concerned with the long-term, strategic guidance of an organization. Cooperatives and
mutual associations have retained an important position both in terms of their economic
contributions and social contribution to members. The motivation of the research reflects a growing
demand by thought leadership, international trends, and best practices to promote greater business
performance. Similarly, there is a desire to identify a primary indication of the benefits of
independent directors within the context of this research. Applications of the findings from this
research are cautioned. A small data set and inability to directly identify sources of causation limited
applications and interpretations which can be drawn from this research.
Chapter two outlines the existing literature related to this topic. Internationals, cooperatives
can no longer shelter from historical oligopoly competitive protection. The deregulation of New
Zealand agriculture industry following a series of prolonged neoliberal reforms had profoundly
affected on the market demands and associated governance structure requirements. Few studies
have attempted to assess if there is a relationship between governance board performance,
measured regarding economic performance, and the proportion of independent directors within
cooperatives and mutual associations in New Zealand. Furthermore, there is a complete absence of
any research which have researched this topic specifically within the contexts of the agricultural
industry.
Chapter three outlines the methodology employed within this report. Data used within this
report emerges from secondary research. The Tobit model used to test the proportional influence of
independent directors on governance board performance separates dependent and independent
variables. The 17 entities included within this report were separated into three groups to assess the
cumulative nature of the influence of independent directors. Financial indicators used to assess
performance was expense ratio, asset utilization, and return on assets.
Chapter four outlines the findings of the report. A beneficial relationship was found between
additions of independent directors alongside expense ratio and asset utilization. No conclusive
relationship was able to be drawn from the ROA values. Supplementary findings from the research
illustrated an apparent link between a reduced ability to adapt to changing market conditions and
mutual associations.
Chapter five explores the underlying drivers behind the findings emerging from this research.
Significant variation between expense ratios reflect economies of scale and the enhanced abilities to
focus resources towards revenue generating opportunities. Longitudinal variations of ROA values
indicates a correlation with an inability for organizations to adapt to changing market conditions and
provide strategic insight. The causation of this finding is likely to largely reflect fundamental
differences in organization function and attitudes towards risk and organization strategic.
Chapter six outlines the conclusions and overarching recommendation of this research.
Financial performances are firms specific. The findings of this research offer an indication of the
perceived benefits and correlation between governance board performance and proportion of
independent directors within agriculture in New Zealand. Formalized governance training within this
area would enhance the overarching governance capabilities within this area and align with
international trends and thought leadership.
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Table of Contents
Liability Statement......................................................................................................................2
Restriction...................................................................................................................................3
Executive Summary.....................................................................................................................4
Table of Contents........................................................................................................................5
Chapter 1 Introduction..............................................................................................................7
1.1 Introduction to Governance in agriculture..................................................................7
1.2 Research motivation....................................................................................................7
1.3 Objectives.....................................................................................................................8
1.4 Scope............................................................................................................................8
1.5 Limitations....................................................................................................................8
Chapter 2 Literature Review...................................................................................................10
2.1 Introduction................................................................................................................10
2.2 Previous studies.........................................................................................................11
2.3 Governance theory.....................................................................................................12
2.4 Cooperatives...............................................................................................................13
2.4.1 Cooperative Governance....................................................................................13
2.5 Associations................................................................................................................14
2.5.1 Association Governance.....................................................................................15
2.6 Summary....................................................................................................................16
Chapter 3 Method...................................................................................................................18
3.1 Introduction................................................................................................................18
3.2 Secondary research....................................................................................................18
3.3 Model specifications..................................................................................................18
3.3.1 Sample size.............................................................................................................19
3.3.2 Dependent variable................................................................................................19
3.3.3 Independent variable.............................................................................................20
3.4 Scope..........................................................................................................................21
3.5 Limitations..................................................................................................................21
Chapter 4 Findings and Discussion..........................................................................................23
4.1 Findings......................................................................................................................23
4.2 Previous studies.........................................................................................................30
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4.4 Discussion...................................................................................................................31
4.5 Cooperatives...............................................................................................................34
4.6 Mutual associations...................................................................................................35
Chapter 5 Conclusion and Recommendations........................................................................36
5.2 Recommendations.....................................................................................................37
References................................................................................................................................39
Appendices................................................................................................................................48
Appendix 1.1. Panel data included within this report...........................................................48
Appendix 1.2. Proportion of intendent directors during the assessed period......................53
Notes to the Appendix 1.1. Limitations for panel data.....................................................54
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Chapter 1 Introduction
1.1 Introduction to Governance in agriculture

Governance agriculture is underpinned by a variety of challenges and can take a range of
structural forms. The ownership, legal, and governance structures are specific to each organization.
Many farming companies often are relatively small, family orientated, and have a small number of
shareholders, of which all are most often directors. Larger farming companies generally take the
form of governance syndicates and cooperatives. Industry groups are dominated by mutual
associations. The role of governance in agriculture is not limited to financial oversight, but also the
broader position of industry and industry challenges.
Internationally, European agricultural governance entities have more protectionist and less
competitive policies, which are greatly influenced by advocacy groups and regulatory agencies (Aerni
et al., 2009). In contrast, agricultural governance entities within New Zealand are illustrated less
influence thus, public policies within the sector are shaped by research and development and public
debate (Aerni et al., 2009).
Many individuals associated with governance in agriculture have little prior experience
(Institute of Directors, 2016 ; Mason, 2006). The process of electing board members and
appointment within small organizations tend to reflect individual associations rather than serving the
purpose of strengthening collective board offerings.
Mason (2006) highlights that governance in agriculture is largely dominated by a
representative based election process. A study of over 100 dairy businesses has shown that while
farm owners have some non-industry specific governance, few are able to take the experience and
transfer it into effective formal governance for their own business (DairyNZ, 2016). Similarly, while
individuals may have an agricultural degree, there is a fundamental challenge associated with
recruiting appropriate directors that can perform from the outset. The historical growth of
cooperatives in New Zealand and continued prominences reflects the prominent ownership structure
that controlled 90% of New Zealand's milk production in 2001 (Curry et al., 2001).
1.2 Research motivation

The motivation of this research reflects a desire to assess the transferability of the agency
theory within the field of governance and representative based agricultural structure. Since the late
20th century, best practices in governance has sought to instil greater strategic rigor on boards
through the role of independent directors (Afkhami Rad, 2014). This research seeks to provide a
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primary indication of the benefits of increasing independent directors through promoting a
quantitative indication of the financial benefits of shifting away from the dominance of
representative governance within agricultural based cooperatives and mutual associations within
New Zealand.
1.3 Objectives
Objectives within this research strived to;
1. Identify if there is a relationship between governance board fiscal performance and
the proportion of independent directors with agricultural based cooperatives and
associations within New Zealand;
2. Determine if variation is consistent within field of references and internal groups
included within this research; is the variation significant?; and
3. Outline the scope of the relationship through assessing if a conclusive proportional
relationship can be drawn across all entities included in this report and overall
financial rigor of governance boards.
1.4 Scope
The scope of this research within this chapter is limited to an assessment of cooperative and
associations in the agricultural sector within New Zealand over a five year period between 2011 and
2015.
1.5 Limitations
Limitations of this research arise from data availability. The collection of data, perceptions of
director experience, the definition of governance board performance, and entities included within
this report reflected a significant limitation of the report. Limitations bound to the collection of data
is dependent on published data from annual reports. Perceptions of director experience provides a
limitations through the nature of associations with the entity and representative directorship status
not limiting the individual offerings; the former doesn’t provide any causational aspects into the
individual experience, but rather a representative director may, in fact, offer similar benefits as the
fundamental purpose of an independent director, although not enjoy the specific classification. The
definition of governance board performance within this research has been tied to strictly a fiscal
nature and thus, provide limited indications of social or non-financial strategic performance of a
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board. Entity selection was driven by formal associations with New Zealand Cooperative Association,
Christchurch City Libraries list of agricultural associations, as well as the availability of annual reports.
The comparisons of cooperatives and associations reflect a significant skewness in the analysis,
although, the inclusion of both groups reflects a desire to provide an overarching analysis of
representative based governance and organizational performance.
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Chapter 2 Literature Review
2.1 Introduction
Governance relates to the long-term, strategic guidance of an organization; management is
concerned with how to build a ladder, while governances are strictly concerned with determining
which wall to lean the ladder on. Historically, governance has undergone three fundamental shifts
from an overarching focus on accountancy, legislative, and now a strategic guidance of an
organization. Despite increasing field leadership prioritization of independent directors and an
improved collective governance rigor, agricultural based companies display a reduced longitudinal
uptake trend relating to embracing independent directors.
International, cooperatives can no longer shelter from oligopoly competitive protection.
Following the deregulation of the New Zealand dairy industry in 2001, 10 of New Zealand’s 12 dairy
cooperatives at the time merged to form Fonterra in October 2001. Subsequent years and industry
disruptions have seen the 96% share of New Zealand’s total milk production fell to 87% in the
following 13 year period (Patterson, 2014). In recent decades, international management
consultancy firms and thought leadership has called for greater governance rigor within agricultural
cooperatives. ‘Agricultural cooperatives “destroy value” because few cooperatives “... have changed
the way they operate” with deregulated markets‘ (Dempsey, Kumar, Loyd, & Merkel, 2002).
Domestically, prominent agricultural cooperatives have fought internal tension of a business
performance desire to increased independent directorship roles, while membership has rebuked any
moves to reduce the proportion of representative governance roles (Fox & Rutherford, 2016).
Mutual associations share a similar fate to cooperatives while occupying a service focused
segment within the industry. The primary focus of agricultural associations within New Zealand is to
deliver improved industry outcomes through broad claims of representation, research and
development, and advocacy (Federated Farmers New Zealand, 2016 ; McLintock, 1966). Dumanski,
Periretti, Benites, McGarry, & Pieri (2006) highlights these undertones of collective prosperity can
provide both industry innovation and social benefits to members.
This section of the report looks to provide an overview of the background literature
associated with the governance of agricultural cooperatives and mutual associations within New
Zealand. This will be achieved through assessing the background literature associated with both
cooperatives and mutual associations with a national and international setting; there is an absence of
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formal literature specific to the field of governances in the contexts of corporate governance thus, a
New Zealand focus could not be retained.
2.2 Previous studies

Over time there has been a variety of that have researched the broader topic of the
proportional relationship between governance board performances, measured in a corporate
financial setting, and associated ownership structure of organizations (Fox, 1995 ; Reddy & Locke,
2014 ; Zahra & Pearce, 1989). Few studies have assessed the proportional relationship with
cooperatives and mutual associations (Reddy & Locke, 2014); these early studies have largely been
focused on investor-owned firms (IOF) companies, while there is also an absence of specific studies
into agricultural based entities.
DairyNZ (2016) & Institute of Directors (2016) highlight there is a growing interest in
formalized governance structures within the agricultural sector. However, there is a fundamental
challenge of a lack of relevant quantitative research tied to the perceived benefits. Notable studies
by the Small Farms Research Centre (n.d), Lee (2013), Fauzi & Locke (2012) & Reddy & Locke (2014)
have outlined the comparable relationships between ownership structures and financial
performance; the latter offering direct comparisons within a New Zealand setting. Empirical evidence
indicates that there appears to be a proportional relationship between governance board
performance and ownership structure within cooperatives within New Zealand (Reddy & Locke,
2014). Fauzi & Locke (2012) found that larger boards improve performances, while non-executive
directors, inexperience, and concentrated ownership lowers organizational financial performance.
Representative based governance selection processes limit the governance boards abilities to
recruit in core areas where expertise is lacking (Fox & Rutherford, 2016 ; Mason, 2005 ; Shepherd,
1994). Similarly, this process rejects the widely accepted tenet that independent directors can
strengthen the performance of a board, which has direct impacts on organization financial
performances (Jensen 1986 ; Grossman & Hart 1982). By in large, there is a general absence of
research into the relationship between governance board performance and the proportion of
independent directors on the boards of cooperatives and mutual association (Reddy & Locke, 2014).
Current literature also indicates there is a greater scarcity of research relating directly to agricultural
cooperatives and associations within a New Zealand setting.
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2.3 Governance theory
Governance is an art of adding strategic value regarding safeguarding the long-term
performance and productivity of an organization. Governance within New Zealand reflects a
statutory motivational base, which underpins governance board’s function and focuses (Fox, 2012).
Thought leadership within the governance in New Zealand is also heavily influenced by best practice
overseas (Muller, 2014). The leading governance professional development agency in New Zealand,
the Institute of Directors (2016), presents four pillars that modern governances practices should
embody. These pillars relate to establishing and maintaining a sound understanding what
governance responsibilities are, appropriate conduct, organizational expectations, and fiduciary
responsibility.
Historically, governance has undergone three fundamental shifts (Institute of Directors,
2016). Initially, governance was driven by an accounting perspective in accordance with a series of
economic reforms emerging from a prolonged campaign of neoliberal ideology of the 1980s and
1990s within New Zealand (Dean, 2015). Afkhami Rad (2014) highlights that the widespread collapse
of corporate governance within New Zealand in 1974 saw a fundamental shift in the motivation of
governance. The passing of the Companies Act 1993 attempted to provide stability within the field of
governance at this time thus, propelling the underlying positioning of the practice towards a stronger
legislative compliance. This notion of legislative compliance relates to the deregulations of the field,
internally within organizations, as well as the final deregulation of industries that escaped the early
waves of fiscal reforms by successive governments (Dean, 2015). The third fundamental shift has
seen the thought leadership within the field of governance shift towards a focus on strategic
direction. Barker & Anderson (2010) highlight “complex regulatory systems by definition do not lend
themselves to best practice”. Less prescriptive principles are better placed to facilitating a greater
level of governance oversight.
Governance boards face a variety of challenges relating to long-term business sustainability
trust and transparency, and managing industry disruptors. However, the underlying challenge for
boards is managing the difficulties associated with agency theory within a cooperative environment
(Afkhami Rad 2014 ; Arcus, 2016 ; Tosi, 2008). Shepherd (1994) highlights that independent directors
serve as an ‘indicator of the board's orientation towards its external environment... and thus, its
ability to respond to change’.
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2.4 Cooperatives
Cooperative have retained an important position within the New Zealand economy and
broader society since the first record cooperative formed in 1871 (Cooperative Business New
Zealand, 2016). Representing almost 15% of New Zealand GDP, cooperatives accounted for more
than $43 billion in combined annual revenue in the 2014/15 financial year. Evans & Meade (2005)
highlights that this ownership structure has played an important role within New Zealand’s
agricultural setting; cooperatives emerged readily alongside the export developments of perishables
out of the country. By the 1930s, dairy cooperatives accounted for 80% of national production (Dairy
Companies Association of New Zealand, 2016).
Cooperatives operate like many businesses. However, the ownership structure is the defining
difference. Cooperatives are democratically controlled, with elected members providing some
aspects of governance leadership, and exist to primarily serve their membership (Cooperative
Business New Zealand, 2016). Operating under agency theory, cooperatives function to enhance
collective economic performance for members (Reddy & Locke, 2013). Alho (2015) highlights the
benefits of agricultural cooperatives are universally understood to include market access, improved
bargaining power, industry advocacy, and reduced transaction costs.
A fundamental challenges for cooperatives lies with the perception that cooperatives are
inadvertently less economically competitive than IOF; a notion supported by both empirical and
theoretical reason (Bijman et al., 2012 ; Reddy & Locke, 2014 ; Small Farm Research Center, n.d.)
Sexton & Iskow (1992) highlight that several factors make cooperative economically inefficient.
O'sullivan & Diacon (2003) attribute theses inefficiencies to heterogeneous motives and absences of
external pressures for organizational performance. A fundamental challenge faced by cooperatives
and mutual associations is managing internal tensions and the difficulties raising capital (Henry,
2005). Cooperatives tend to have diverse goals which do not readily translate to business
performance (Cornforth, 2004). Domestically, prominent agricultural cooperatives have sought to
enhance business performance desire to increased independent directorship roles, while
membership has rebuked moves to reduce representative governance roles (Fox & Rutherford,
2016).
2.4.1 Cooperative Governance

Cooperative governance is driven by a democratic process in which elective members form a
portion or the entire governance board (Cooperative Business New Zealand, 2016). In New Zealand,
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there is a growing trend for a greater portion of governance board to be composed of independent
directors (DairyNZ, 2016 ; Institute of Directors, 2016 ; Reddy & Locke, 2014). Mason (2005)
highlights that within the agricultural sector, a fundamental challenge faced by cooperatives is
attracting and retaining experienced directors. Boards are complex organizations in themselves ‘that
must rely on the collective strengths by its members’ (Muller, 2014); However, the mandatory
election processes tied to the appointment of representative directors provides a stark internal
contradiction within cooperatives.
Barnea, Haugen, & Senbet (1985) highlights that weak ownership rights can lead to
inefficiencies and suboptimal resource allocation. These suboptimal outcomes stem from significant
power imbalances and information asymmetry (Grossman & Hart, 1982 ; Jensen, 1986 ; Russo, 2000).
This notion of significant power imbalances is further discussed by Russo (2000) and Reddy & Locke
(2014) highlight that leveraging is higher in cooperatives that do not have strong managers.
Experienced governance boards and independent directors are an important mechanism for
mitigating agency problems which remain pertinent to the forefront of governance within
cooperatives and mutual associations.
Agency theory literature indicates that there is a ‘direct relationship between incentives,
experience, and monitoring’ which acts as a moderating factor on directors performance (Hillman &
Thomas, 2003 ; Reddy & Locke, 2014). A further overarching influence relating to cooperative
governance is the establishing and maintaining the appropriate board composition. Singh & Davidson
(2003) highlight that the size of has negative effects on agency costs, while Jensen (1983), Shaw
(1981) and Institute of Director (2016) argue large boards can become inefficient. This notion can be
reflected in a functional analysis of procedural decorum within board meetings; if each member is
given x amount of time to speak, based on realistic meeting estimates (90 minutes to 2 hours)
outlined by Bader (2016), board members ability to add value, a boards collectively ability to move
debate motions and receipt reports from management within this setting is severely reduced.
2.5 Associations
Associations have played a crucial foundational role within provincial communities, and New
Zealand since the first recorded association was formed in 1842 (Smith & Kelly, 2016). Perry (2008)
highlights New Zealand has over 300 associations. In terms of quantifying the economic contributions
delivered by mutual associations domestically, there is a fundamental valuation challenge and
absence of research into the specific ownership structure (Olsen, 1982 ; Stiglitz, Sen, & Fitoussi,
2009).
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The primary purpose of an association is to provide benefits for members through a levy or
subscription based form of membership (Grant Thornton New Zealand, 2011). Associations generally
operate differently from most business due to the prioritization membership outcomes with little
resources owned by the association itself (Grant Thornton New Zealand, 2011 ; Charney, 2015). Ernst
& Young (2012) highlights that like cooperatives, mutual associations usually emerge when an
important industry need or social services are not being currently meet. Mutual associations are
democratically controlled, with elected members providing some aspects of governance leadership,
and operate under agency theory to enhance collective economic performance for members
(Charney, 2015 ; Reddy & Locke, 2013). It is important to note that agency costs tend to be firm
specific (Hailu, Jeffrey, Goddard, & Ng, 2005). Smith & Kelly (2016) highlight that the benefits of
mutual agricultural associations are universally understood to include information sharing, industry
advocacy, research and development, and some social services.
A fundamental challenge for associations lies with the perception that associations are
inadvertently less competitive than IOF; a notion supported by both empirical and theoretical reason
(Charney, 2015 ; Reddy & Locke, 2014). Ernst & Young (2012) & Stiglitz, Sen, & Fitoussi (2009)
highlights that several factors make mutual associations inefficient.
O'sullivan & Diacon (2003) attribute theses inefficiencies to heterogeneous motives and absences of
external pressures for organizational performance. Associations often have diverse goals and can
have a lack of strategic experience required to provide the necessary governance oversight (Harris,
1998). Similarly, Henry (2005) highlights managing internal tensions; meeting long-term goals,
organization prioritizes, and individuals member’s needs, as well as managing the difficulties
associated with raising capital.
2.5.1 Association Governance

Association governance is driven by a democratic process, where elective members usually
make up the entire governance board of an organization (Smith & Kelly, 2016). In New Zealand, there
is a growing trend for greater governance skills within the non-for-profit sector (Bawden, 2008 ;
Institute of Directors, 2016). Cullen (2001) outlines long held concerns relating to the accountability
of not-for-profits, including mutual associations. Perry (2008) highlights a fundamental challenge
faced by mutual associations is attracting and retaining experienced directors. Harris (1998) & Ernst
& Young (2012) highlight that the election based representative form of governance with
associations neither supports industry best practices nor clinically supports achievement of long-term
organizational goals. In contrast, failings of representative governance instead support the social
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service and undertones of collectivism tied to mutual groups (Charney, 2015 ; Dumanski, Periretti,
Benites, McGarry, & Pieri, 2006 ; Ernst & Young, 2012).
Cornforth (2004) highlights that like cooperatives, mutual associations have weak ownership
rights that can lead to inefficiencies and suboptimal resource allocation. The comparable absence of
external pressures from shareholders or stakeholders can promote compliance and
underperformance in management (Carver, 2006 ; Charney, 2015). Reddy & Locke (2014) highlight
that leveraging is higher in mutual associations that do not have strong managers. Similarly,
investment behavior within associations often reflects a board level of experience, although this is
also subjective to differing industry conditions and maturity of the entity (Charney, 2015 ; Fink, 2013 ;
Institute of Directors New Zealand, 2016 ; Lynall & Golden, 2003 ; Quinn & Cameron, 1983).
Association governance faces a variety of challenges, a perception crisis, when management
compliance, information asymmetry, and significant power imbalances develop (Charney, 2016 ;
Jensen, 1986 ; Grossman & Hart, 1982). This management compliance relates to the propagation of
entrenched cultures, and groupthink over fundamental business sustainability progress demands
(Charney, 2016 ; Leslie, 2010). A further overarching influence relating to association governance is
the establishing and maintaining the appropriate board composition that adheres expectations that
accurately reflect modern governance theory (Harris, 1998 ; Leslie, 2010). Mutual associations can
readily have inefficient governance due to a greater propensity for larger board sizes and lower levels
of governance experiences Cornforth (2004). Ernst & Young (2012) highlights that “savvy
cooperatives and mutuals will start by building explicit definitions for the roles and responsibilities of
board directors, and thoses of management”. Singh & Davidson (2003) highlight that the size of has
negative effects on agency costs, while Jensen (1983), Shaw (1981) and Institute of Director (2016)
argue large boards can become inefficient.
2.6 Summary
Governance is the art of providing strategic oversight through the lens of a long-term
overarching functional perspective; governance is concerned with outcomes and procedural
correctness, rather than management actions in themselves. Within ownership structures which
support representative forms of governance, there is a fundamental comprehension challenge as
well as a general lack of experience within the formal leadership. An absence of literature specific to
the area also create challenges with promoting governance actions to enhance the collective
governance abilities of a board. Recruitment from within the membership is limited. Previous
research indicates that cooperatives and mutual associations consistently underperform IOF. Internal
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tension, lack of accountability or external pressures, and experience within a governance setting can
contribute to this outcome; albeit the fundamental motivations of an organization change alongside
ownership structure.
Historically, governance has undergone three fundamental shifts. Governance within New
Zealand reflects a statutory and international best practices foundations. Cooperatives and mutual
associations have played an important role in the New Zealand economy and broader society. Agency
theory and representational leadership underpin the organizational motives within cooperatives and
mutual associations. Diverse goal which does not readily transfer to business performance underpins
the numerous representative organizations within New Zealand. Cooperative and mutual association
governance are driven by a democratic process, which thought leadership and training agencies have
concluded deliver inferior and complex governance outcome. Traditional quantitative board
performance indicators fail to take into consideration of social externalities, while agency costs,
board performance, and financial indicators are specific to an organization and its ownership
structure.
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Chapter 3 Method
3.1 Introduction
In order to assess the governance board performance, assess through strict economic
performance metrics, alongside the proportion of independent directors within agricultural based
cooperatives and mutual associations a Tobit Model of assessment has been used. Data used within
this report is entirely secondary research, based on annual reports and publicized information from
21 entities included in this research. The Tobit Model has been selected to provide an indication of
the nature of a relationship between dependent and independent variables. This method has been
previously used in a variety of previous studies (Estache & Kouassi, 2002 ; Greene, 1993 ; Reddy &
Locke, 2014 ; Singh & Davidson, 2003). Almajali, Alamro, & AL-Soub (2012) & Elvin & Hamid (2016)
highlight that it is appropriate to assess a board performance in terms of it annual profitability, sales
turnover, and asset utilization.
Dependent variable have been categorized as any financial indicator used in within
calculations included in this report. Independent variables have been categorized as the proportion
of independent directors on the governance board of each entity. The scope of the research is a five
year period between 2011 and 2015 for cooperatives and mutual associations in the agricultural
sector within New Zealand.
3.2 Secondary research

For the purpose of this report, data used stems from secondary research. The purpose of the
report is to provide an indication of the proportional relationship and influences governance boards
have on an organization in relation to the proportion of independent directors. This secondary
research has been collected from the official website and annual reports.
3.3 Model specifications

In order to provide a statistically relevant assessment of the variations entities included in
this report, assessments have been based using a Tobit Model of assessment. The model strives to
provide indications between dependent and independent variables based on nonnegative values
within a data set. Foundational applications of the model have been drawn from a study conducted
by Reddy & Locke (2014) which assessed cooperatives and mutuals in New Zealand.
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3.3.1 Sample size
For assessment and comparison purposes, entities included within this report have been
categorized into three different groups based on the proportion of independent directors. The
sample size was 17 entities, in order to provide an indication of the cumulative nature of governance
board performance and the proportion of independent directors within agricultural cooperatives and
mutual associations. The groups are as follows;
Group one: 100% representative based governance positions

Group two: 75-90% representative based governance positions
Group three: <67% representative based governance positions
3.3.2 Dependent variable

For the purpose of this investigation, dependent variables have been categorized as any
financial indicator used in within calculations included in this report. Assessments of organizational
financial performance have been based on expense ratios; acting as proxy indicators for agency
costs, utilization ratios, and ROA ratios.
Ange et al., (2000) used an expenses ratio to act as a proxy indicator for agency costs,
however, this method does not remove the influences management compensation and frequency.
Reddy & Locke (2014) highlights an expense ratio illustrate highly agency costs arising from top heavy
organization structure or compensatory practices. For the purpose of this report, the following
expense ratio below has been used by previous cooperative and mutual association studies
conducted by Reddy & Locke (2014) & Singh & Davidson (2003).
Equation 1.1. Expense ratio equation used within this report
Total Expenses - Cost of Good Sold

Expenses Ratio (Operating Expenses to Sales) = ---------------------------------------------
Total Annual Sales
Asset utilization, measured by the assessing total annual sales alongside total assets,
provides an indication of the organization's abilities to utilize company assets effectively. For the
purpose of this research, it is expected that asset utilization comparisons will illustrate comparable
variations between mutuals association and cooperatives due to ownership structure and entity
19
offerings; associations within this research provide a service rather than a producing a product which
the cooperatives provide. A high value for asset utilization indicates asset utilization efficiency, while
a low value indicates management is investing in assets not pertinent to generating cash flow (Reddy
& Locke, 2014). In a report produced by the Small Farm Program at the University of California,
financial indicators consistent showed reduced economic performance indicator ratios when
compared to investor-owned firms.
Equation 1.2. Asset utilization equation used within this report
Total Annual Sales

Asset Utilisation = ----------------------------
Total Assets
Return on assets (ROA), measured by comparing profit after tax alongside total assets,
provides an indication of the managerial performance and productivity of assets (Reddy & Locke,
2014). The ownership structure of mutual associations is differentiated from a cooperative in terms
of its economic performance motivations; mutual associations are largely regulated by the
Incorporated Societies Act 1908 thus, the primary motivation is not to make a profit and therefore a
low ROA value is anticipated (New Zealand Companies Office, 2016). A high ROA indicates that
management is not only able to invest in assets that are generating cash flow, but also in a profitable
manner.
Equation 1.3. Return on assets equation used within this report
Profit After Tax

Return on Assets (ROA) = -------------------------
Total Assets
3.3.3 Independent variable

Independent variables have been categorized as the proportion of independent directors on
the governance board of each entity. Assessments of the proportion of independent directors are
based on publicized formal documents relating to board composition and annual reports. The
proportion of independent directors is largely correlated to the ownership structure tied to each
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entity (Reddy & Locke, 2014). Established cooperatives underpinned by a strong strategic motivation,
typically have a more liberal ownership structure and a greater proportion of independent directors;
this type of co-operative general has investor shareholders as well as member shareholders. Mutual
associations largely have a board composition that has no independent directors.
For the purpose of this investigation, some calculation and judgment have been made in
relation to categorizing individuals who are classified as an independent director. These judgments
have been calculated based on the Institute of Directors (2016) definitions of the directorship type;
Specifically, Managing Directors has been classified as a representative governing board member and
not an independent director.
3.4 Scope
The scope of this research within this chapter is limited to an assess on co-operative and
associations in the agricultural sector within New Zealand over a five year period between 2011 and
2015.
3.5 Limitations
Limitations of this research arise from data availability. Similarly, the breath of this research
strives to provide an indication of the statistical analysis; no dummy variables or statistical analysis of
the associated standard errors have been used. The collection of data, perceptions of director
experience, the definition of governance board performance, and entities included in this report
reflects a significant limitation of the report. Limitations bound to the collection of data is dependent
on published data from annual reports. Perceptions of director experience provides a limitations
through the nature of associations with the entity and representative directorship status not limiting
the individual offerings; the former doesn’t provide any causational aspects into the individual
experience, but rather a representative director may, in fact, offer similar benefits as the
fundamental purpose of an independent director, although not enjoy the specific classification. The
definition of governance board performance within this research has been tied to strictly a fiscal
nature and thus, provide limited indications of social or non-financial strategic performance of a
board. Entity selection was driven by formal associations with New Zealand Cooperative Association,
Christchurch City Libraries list of agricultural associations, as well as the availability of annual reports.
The comparisons of cooperatives and associations reflect a significant skewness in the analysis,
21
although, the inclusion of both groups reflects a desire to provide an overarching analysis of
representative based governance and organizational performance.
22
Chapter 4 Findings and Discussion
4.1 Findings
Appendix 1.1 outlines panel data for all tested organizations between 2011 and 2015. During this
research, three financial indicators have been used to provide an indication of governance board
performance and the proportion of independent directors across the 17 tested agriculture-based
organizations. Descriptive statistics outlined within tables 1.1, 1.2, 1.3, 1.4, & 1.5 illustrate the
financial summary indicators internally within the group setting to provide an accurate reflection of
governance board performance. Illustrations of the proportional relationship between ownership
structure and financial indicators have been outlined within figures 1.1, 1.2, 1.3, 1.4, & 1.5. For
presentation purposes, ROA has been multiplied by a factor of 10. Similarly, interpretations of the
visual indicators ought to reflect this scaling effect.
Figure 1.1. Illustrates there is significant variations between the groups. There was largely
significant variation between group three in comparison to group one and two. Expense ratios for
group one and two were greater than group three, while asset utilization saw group three
significantly outperform, group one and two. ROA saw groups two and three delivered reduced
comparable averages. Group one proved to be the most consist, showing little comparable variation
throughout all three indicators.
Figure 1.1. Summary comparison plotting financial indicators during 2015
23
As outlined in Table 1.2. there was significant variation across the financial indicators during
the financial year ending in 2015. The greatest variation was registered within the asset utilization
across all three groups, specifically within group three. Overarching trends were largely consistent
with longitudinal trends, with similar relationship occurring in the financial year ending in 2011 and
2014. Group two performed particularly strongly across all three financial indicators during this
period.
Table 1.1. Summary of statistical values across the three groups during the 2014-15 financial year
Expense ratio ST DEV. ST DEV. (Asset Return on assets ST DEV.

FY 2014-15 (EXP ratio) (EXP ratio) Asset utilisation utilisation) (ROA) (ROA)
Group 1 average 0.717 0.150 0.639 0.032 0.109 0.079
Group 2 average 0.747 0.596 1.231 0.507 0.034 0.040
Group 3 average 0.331 0.307 1.846 1.250 0.020 0.028
Downes & Goodman (2014) highlights that expense ratios act as an indication of agency cost
and management ability to focus asset toward revenue generating investments. In 2015, group two
registered the highest expense ratio of 0.747, some 0.03 higher than group one as outlined in Table
1.1; this was significantly higher than group three’s expense ratio of 0.331. Reddy & Locke (2014)
highlights that high expense ratios are undesirable. Significant variation was illustrated within group
two with a standard deviation of 0.596. An average expense ratio of 0.331 indicates that for each
dollar generated 33.1 cents goes towards agency costs.
Significant variation was illustrated within the asset utilization ratio. Asset utilization provides
an indication of an organization's ability to efficiently use resources (Vijayakumar, 2012). In 2015,
asset utilization for group one registered 0.639. This indicated that there was an annual loss of 36.1%
on the invested value. An average asset utilization value of 1.846 indicates that an organization is
generating 84.6% more than the invested value. A low standard deviation of 0.032 was illustrated
within group one, while a group three registered a high level of variation with a standard deviation of
1.250.
Law (2016) highlights that return on assets reflects the profitability of investment in a $1 : $
(calculated value) context. Significant variation was illustrated between the ROA values of on assets
between the analysis group; however, internal variation was limited with standard deviations all
registering values <0.08. Group one produced the largest ROA value of 0.109, five times group three
ROA value of 0.020. This indicates that group one had a return on assets of 10.9 cents for each dollar
invested.
24
Figure 1.2. Illustrates there is notable variation between the financial indicator during 2014
between the groups. The extent of variation is less than the variation during 2015 indicated in figure
1.1. A moderate level of variation was illustrated within the expense ratio. In contrast to the 2015
performance group, one returns the greatest expense ratio. Asset utilisation illustrated a similar
pattern as registered in 2015, with group three outperforming groups one and two. Return on assets
illustrated significant variation between group one and group two and three together.
across all three groups, specifically within group three. Overarching trends were largely consistent
with longitudinal trends, with similar relationship occurring in the financial year ending in 2011 and
2015. Group one performed particularly strongly across all three financial indicators during this
period.

Group 1 average 0.749 0.102 0.946 0.517 0.133 0.143
Group 2 average 0.522 0.277 1.468 0.581 0.035 0.047
Group 3 average 0.317 0.295 1.800 0.942 0.043 0.041
25
Expense ratios within 2014 illustrated notable variation between the groups. Group one
registered a ratio of 0.749, indicating 74.9 cents goes towards agency costs. The greatest level of
variation occurred within group three; group three had an expense ratio of 0.317 with a standard
deviation of 0.295.
Asset utilization varied significantly with the registered values. Group three returned a value
of 1.8 which was almost twice the 0.946 value returned by group one. Notable variation was
recorded within all three groups. Group three produced the highest standard deviation of 0.942,
while standard deviations for group one and two was <0.582. An asset utilization of 0.946 indicates
that for each dollar invested it returned a loss of 5.4%.
Return on assets illustrated a moderated level of variation. Group 1 produced a ROA of
0.133, while groups two and three had very similar ROA values and levels of internal variation. Group
three had the lowest ROA and standard deviations of 0.043 and 0.041 accordingly; this indicated a
return on assets of 4.1% for group three.
Figure 1.3 illustrates a moderate level of variation between the groups. Expense ratios and
asset utilization values registered a similar pattern as encountered in previous years. Group one
registered the highest expense ratio, while group three registered the greatest asset utilization and
ROA values. The registered ROA value for group one indicated an unusually dampened averaged
during 2013.
the financial year ending in 2013. The greatest variation was registered within the asset utilisation
26
across all three groups, specifically within group three. Overarching trends were largely in contrast to
longitudinal trends, with similar relationship occurring in the financial year ending in 2012. Group
one registered a small negative ROA value during 2012.
Group 1 average 0.948 0.164 1.237 0.729 -0.033 0.181
Group 2 average 0.753 0.588 1.433 0.741 0.004 0.053
Group 3 average 0.397 0.259 1.663 0.805 0.024 0.052
Expense ratios within 2013 illustrated a greater level of variation compared to financial
indicator assessment for years ending in 2014 and 2015. Group one registered an expense ratio of
0.948, indicating 94.8 cents goes towards agency costs. Notable internal variation was registered in
group two with an expense ratio of 0.753 with a standard deviation of 0.588.
Asset utilization in 2013 varied less than subsequent years. Group three registered the
greatest value of 1.663 with a standard deviation of 0.805. Group one returned the lowest value of
1.237, indicating each dollar invested returned a profit of 23.7%.
Return on assets illustrated a comparable low level of variation and an overall weak
performance by all three groups. Group one returned a ROA value of -0.033, while the group three
registered a ROA of just 0.024. These results were significantly less than the level of performance
encountered in 2014 and 2015. Group one also illustrated a comparable high level of variation of
0.181 once compared to the standard deviations of group two and three which were 0.053 and 0.052
accordingly. A ROA of -0.033 indicates a net loss of 0.033% in total firm value.
Figure 1.4 illustrates a significant level of variation between the three groups. Expense ratios
and asset utilization values registered similar trends to what was encountered in previous years;
However, group two and three illustrated notable similar asset utilization values. An unusual level of
variation was encountered in the ROA values across the three groups. Group one registered a large
negative value during 2012.
27
across all three groups, specifically within group two. Overarching trends were largely in contrast to
longitudinal trends, with similar relationship occurring in the financial year ending in 2013. During
this period a negative ROA value was returned.
Group 1 average 0.955 0.169 0.951 0.347 -0.100 0.270
Group 2 average 0.764 0.592 1.428 0.741 0.026 0.079
Group 3 average 0.366 0.296 1.643 0.695 0.037 0.052
Expense ratios within 2012 illustrated a similar trend as encountered in 2013 and again
registering a high level of variation compared to the financial indicator assessment for years ending
in 2014 and 2015. Group one produced the greatest expense ratio of 0.955, alongside the lowest
standard deviation of 0.169. The lowest expense ratio was registered in group three which illustrated
a 36.6 cents goes towards agency costs.
Asset utilization produced a moderate level of variation within 2012. Groups two and three
registered the largest asset utilization values of 1.428 and 1.643. Similarly, the standard deviations
for these groups registered 0.741 and 0.695 accordingly; this indicated for each dollar invested group
two was able to deliver a profit of 42.8%.
28
Return on assets illustrated a significant level of variation between the three groups. Group one
registered the lowest ROA throughout the entire data set; a specific ROA for this period was recorded
at -0.1. A comparable high standard deviation of 0.270 illustrated there was significant variation
illustrated internally within the data set for the group - specific illustrations of the variation are
outlined in Appendix 1.1. Group three registered the greatest ROA value of 0.037, indicating a 3.7%
profit for the firms.
Figure 1.5 illustrates a moderate level of between the three groups. All financial indicators
within this period reflect a similar trend to financial years ending in 2014 and 2015. Group one
illustrated the highest expense ratio and return on asset value. The highest asset utilization value was
registered by group three which was some 200% of the value returned by group one. All groups
illustrated positive financial indicators during 2011.
the financial year ending in 2011. The greatest variation was registered within the asset utilisation
across all three groups. Overarching trends largely reflect longitudinal trends, with similar
relationship occurring in financial years ending in 2014 and 2015 alike.
29

Group 1 average 0.868 0.322 1.068 0.501 0.048 0.298
Group 2 average 0.764 0.592 1.428 0.741 0.026 0.079
Group 3 average 0.405 0.330 1.905 1.178 0.028 0.059
Expense ratios within 2011 illustrated a significant level of variation. Group one registered an
expense ratio of 0.868, more than twice group three’s 0.405 ratios; this indicates an agency of cost of
40.5 cents which was the highest for the group throughout the entire data set. Internal variation
within the expense ratios was the greatest in group two which registered a standard deviation of
0.592, while group one and three was 0.322 and 0.330 accordingly.
Asset utilization varied significantly within the three groups. Group three had the greatest
asset utilization value of 1.905 with the largest standard deviation of 1.178. The lowest registered
values were recorded in group one with a value of 1.068 and standard deviation of 0.501; this
indicated a profitability of 6.8% on each dollar invested.
Return on assets registered a low level of variation. Group one had the largest ROA value of
0.048, while group two and three had similar ROA of 0.026 and 0.028; this indicated a return on
assets of between 2.6 and 4.8%. Internally, there was greater variation between groups as outlined in
the standard deviations of each group. Group one registered the greatest level of variation with a
standard deviation of 0.298.
4.2 Previous studies

Few studies have attempted to assess the proportional relationship relating to governance
board performance and proportion of independent directors with cooperatives and mutual
associations. Earlier studies have largely focused on IOF companies. There continues to be a lack of
research specifically relating to agricultural based entities. Reddy & Locke (2014) concluded that
there is a relationship between the governance board performance, measured in a financial
performance setting, and the proportion of independent directors and experience on governance
boards. Reddy & Locke’s (2014) empirical evidence reflected reduced board performance,
independence, and experience led to greater agency cost in cooperatives and mutual association.
The longitudinal illustrated a correlation between the proportion of independent directors as well as
expense ratios, asset utilization values, and ROA values. In 2007, the year with the lowest average
30
proportion of independent directors, registering 0.83, the three indicators were 0.61, 1.77, and -0.05
accordingly (Reddy & Locke, 2014). In 2009, the year with the highest average proportion of
independent directors, registering 0.96, the three indicators were 0.59, 1.30, and 0.01 (Reddy &
Locke 2014). This indicated that as the proportion of independent directors rise, there are positive
effects on reducing agency costs and return on assets; however, this overarching trend was not
reflected in asset utilization thus, indicating the influence of additional factors such as management
abilities. Similar, in 2010 when the average proportion of independent directors registered 1.0 there
continued to be a negative association with asset utilization as well as expense ratio in this instance.
4.3 Governance theory

Research conducted by the New Zealand Institute of Directors & New Zealand Institute for
Economic Research (2015) in the 2015 Director Sentiment Survey aimed to “take the pulse of the
New Zealand director community”. Although this research is not specifically related to governance of
cooperative and mutual association, nor the agricultural industry, the tenent of the research in the
broader governance environment is of importance; Governance is something that is acquired thus, it
is not necessarily innate. The Institute of Directors & New Zealand Institute for Economic Research
(2015) found that 73% of boards spent more time on risk oversight in 2015, than the year prior. 50%
of boards said “they had the skills and experience to deal with increasing business complexity and
risk” therefore indicating a significant capability challenges for the field of governance (Institute of
Directors & New Zealand Institute for Economic Research, 2015 pp.1). Similarly, 62% of board
regularly discuss board composition, in terms of skills and experience, while diversity is a key
consideration for 60% of boards when appointing directors. Institute of Directors (2016c) highlights
that estimates indicate 50% of business within New Zealand are family owned. The findings of the
research conducted offers fundamental insights into the perceived position of risk in the governance
community, both in the contexts of independent and representative, and of course, the later offering
further insights into the domain of representative governance.
4.4 Discussion
From the statistical analysis of this research, there appears to be a relationship between
governance board performance, measured by financial performance, and the proportion of
independent within the assessed organizations.
Longitudinal assessments consistently saw group one largely deliver the highest expense
ratio, while group three deliver the lowest expense ratio values. High expense ratios indicate a high
31
agency cost and an inability of management to align expenses towards revenue producing outcomes
(Ange et al., 2000 ; Downes & Goodman, 2014 ; Reddy & Locke, 2014). In this research agency cost
tied to any expense not directly relating to the cost of sales in accordance with studies conducted
Reddy & Locke (2014) & Singh & Davidson (2003); However, Ange et al., (2000) & Downes &
Goodman (2014) also highlight agency costs which are reflected in expenses ratios are unique to
organisations and can illustrate a positive relationship with increasing board size and remuneration
demands prompted by heightened experience. Over the five-year period, group three repeatedly
delivered the lowest expense ratio in contrast to agency cost theory outlined Singh & Davidson
(2003) which indicated the additions of independent directors which suggest a positive relationship
with rises in agency costs. The dampened effect of this additional burden on agency cost is
underpinned by the retained proportions of representative based governance positions and notions
of the reluctance of cooperatives and mutual associations to ratify significant rises in director
remunerations and align with the diverse goals embedded within cooperatives and mutual
associations (Cornforth, 2004). Similarly, the retained prevalence of representative based governance
positions could also have a dampening effect regarding ownership restructuring that would lead to
rises in director remunerations to attract heightened governance abilities (Fox & Rutherford, 2016).
Group three registered the greatest asset utilization value across all five years. The reduced
performance in 2012 and 2013 could be attributed to the poor performance of Silver Fern Farms
which was down around 17-20% due as Cronshaw (2013) highlights sluggish action within the
marketplace which can be attributed to a management decision by carrying “significantly” written
down stock. Throughout the five years assessed a consistent pattern and strong relationship showed
a correlation between the proportion of representative based governance positions and asset
utilization values. The data illustrates there is a positive influence of independent directors on asset
utilization. It is crucial to note that as Hailu, Jeffrey, Goddard, & Ng (2005) all costs and financial
indicators represent firm-specific electives and therefore, the should be treated accordingly,
however in this assessment a correlation between the variables exist; this has significant implications
return on investment and broader organizational performance as it enables the organization to
retain profit generating assets and thus, reducing fundamental inefficiencies tied this form of
ownership structure (Sexton & Iskow, 1992).
ROA illustrated a large level of variation regarding longitudinal trends. Group one delivered
both the strongest and the worst performance across within this financial indicator. In 2012 and
2013, group one delivered negative values, however, the performance of group two and three also
was notable reduced; this reflects a broader market trend underpinning the agricultural industry
32
within New Zealand. From this research, it would suggest that entities which would fall into the
group one, consisting of entirely representative based governance positions were increasing
susceptible to changes in market conditions. Jensen (1986) highlights that a fundamental concern for
cooperatives and mutual associations is tied to the not wealth creation, but resource allocation.
Institute of Directors (2016) & Reddy & Locke (2014) highlights that presences of independent
directors and director experience significantly affect organizations ability to navigate change
marketplaces. This behavior reflects a lower level of board experience, specifically relating to
corporate governance as well as the absence of strong managers within the assessed organizations
(Lynall & Golden, 2003 ; Reddy & Locke, 2014). Group one’s positive performance in 2011, 2014, and
2015 reflects the ownership structure and business models; group one was composed entirely
associations. Associations within New Zealand largely provide knowledge or membership social
benefit and thus have little tangible assets; this is fundamentally different than benefits of
cooperatives within New Zealand and therefore, facilitates heightened performance within this
financial indicator.
Objective 1. Identify if there is a relationship between governance board financial performance and
the proportion of independent directors within agricultural based cooperatives and mutual
associations within New Zealand.
The statistical analysis conducted within this report indicates that there appears to be a
relationship between governance board performance and the proportion of independent directors
within agricultural based cooperatives and mutual associations in New Zealand. Group three,
composed of organizations with >33.3% independent directors, appeared to experience a negative
correlation with expense ratio and return on assets, while a positive correlation was registered
alongside asset utilization. These findings mirrored the relationship with group one, composed of
entirely representative based governance positions or 0% independent directors, and the three
financial indicators of governance board performance.
Objective 2. Determine if the variation is consistent within the field of reference and internal groups
within this research; is the variation significant?
The statistical analysis conducted within this report indicates that is strong relationships
between the proportion of independent director within agricultural based cooperatives and mutual
33
associations in New Zealand and expense ratios and asset utilization. A comparable strong level of
association was encountered in the expense ratio with standard deviation remaining largely
consistent throughout the longitudinal assessment. A weaker relationship was identified internally
within the groups about asset utilization; this was largely reflective of the influence of individual
organizations which were dampened by the collective reporting of the proportional relationship
through the group assessments. This internal variation was notable thus, suggesting a mild mix of
ownership structure which extended beyond the basis of the proportion of independent directors
which ranged from 10-25% independent directors or 75-90% representative based governance
positions. The significance of variation within the financial indicators tested alongside the varying
proportions of independent directors is limited to a rough indication of beneficial influence from
independent directors on expense ratios and asset utilization within agricultural based cooperatives
and mutual associations within New Zealand.
Objective 3. Outline the scope of the relationship

From the statistical analysis conducted throughout this research, there is no conclusive
proportional relationship which can be drawn from all cooperatives and mutual associations included
within this report. The additions of independent directors represent a multitude of motivations and
similarly results in a multitude of varied outcomes; there does, however, appear to be beneficial
influences although there is no direct proportional relationship which can be drawn from the data
included in this report. This reflects the complexity of governance and overreaching influence of a
varied collections of challenges faced by governance. Supplementary findings within this report
appear to support Russo (2000) conclusion that representative governance hinders an organization's
ability to respond to market changes promptly.
4.5 Cooperatives
The findings from this research conclude that there is a variety of implications for agricultural
based cooperatives within New Zealand. Increased proportions of independent directors appear to
deliver positive outcomes for both expense ratios and asset utilization values. Additional benefits of
independent directors deliver the greatest benefit to particularly in times of economic downturn or
challenging market conditions; this particularly is tied to reducing information asymmetry and
reducing power imbalances where strong managers have a disproportionate influence on an
organization leveraging ability and potential was illustrated within the data set in the FY 2011-12 and
flowing on into the FY 2012-13. Ownership structure within cooperatives generally included at least
34
one independent director thus, implications for cooperatives from this research can only be drawn
from groups two and three. It is important to note that the finding of this report provide a rough
alignment with governance best practices, international trends, and thought leadership as outlined
by the Institute of Directors (2016).
4.6 Mutual associations

Implications relating to agricultural based mutual associations within New Zealand are tied to
the negative association with expense ratio and asset utilization. There appears to be a negative
influence of these variable and the ability for directors to align assets and expenditure towards
efficient and revenue generating areas of the organization. This may in parts reflect the fundamental
motivation difference between mutual association and other business structures. There remain
challenges for mutual associations to promote fundamental shifts pertaining to the perception and
primarily purpose of the entity (Harris, 1998). Similarly, there mutual associations also fail to benefit
from the economy of scales and thus basic operational cost represent a disproportionate portion of
the annual revenue once compared to differing business structures, including that of cooperatives
within New Zealand. This again reinforces Hailu, Jeffrey, Goddard, & Ng (2005) assertion that agency
costs and alike are tied directly to and remain individual to each firm.
35
Chapter 5 Conclusion and Recommendations
5.1 Conclusion
Governance in agriculture is underpinned by complex organizations structures and by in large
representative driven forms of director appointment. Some 50% of business are family operated
thus, there is a fundamental challenge regarding balancing organization priorities with ownership
and governance structure which serve best to strengthen the collective board offerings. These
challenges are particularly dominant in both agricultural cooperatives and mutual associations within
New Zealand. A recent study has indicated that while directors within the agricultural industry have
some form of governance experience, few are able to transfer non-industry specific skill into a formal
governance setting; this presents significant concerns for the recruitment potential for cooperatives
and mutual association in which these individuals serve. Research motivation stems from an absence
of specific research within this area as well as a desire to seek an indication of the benefits of
independent directors within this setting.
Previous studies have largely focused on IOF, albeit there is growing interested in formalized
governance structures, including a greater proportion of independent directors within the agriculture
industry and the broader field of governance. There is a general absence of literature within this
area, however, a notable study by Reddy & Locke (2014) identified an apparent benefit between the
proportion of independent directors and the organization performance across a number of indicators
within New Zealand based cooperatives. In contrast, this research has been unable to identify a
universal beneficial influence and enhanced performance across all financial indicators used to model
the success of governance board performance. Empirical evidence within this research indicates a
positive relationship with both expense ratio and asset utilization in a firm's perspective alongside
the additions of independent directors within agricultural based cooperatives and mutual
associations within New Zealand. Organizations with the greatest proportion of independent
directors were able to consistently return the lowest expense ratio and greatest asset utilization
values, of which both are beneficial to individual firms. It is also important to note that the extent of
causation within this apparent relationship is unknown. In order to remove the effects of individual,
organizational success and influences of outliers, the statistical analysis conducted with this research
has been based on collective performance across a longitudinal setting. The analysis has assessed
financial performance, used as the measure of board performance over a five-year period.
36
Supplementary results included an indication of increased resilience across all organizations
with a proportion of independent directors, although no measurements of individual independent
director influence have been made. This externality of the research offers an insight into the broader
principle-driven approach sought by resilience cooperatives and mutual associations which reflect a
broader strategic outlook on the organization and market challenges. Similarly, this assumption is in
alignment with thought leadership within the field of governance and results from the 2015 Director
Sentiment Survey (Institute of Directors & New Zealand Institute for Economic Research, 2015 ;
Institute of Directors, 2016). The research appears to indicate that there is a relationship between
governance board performance and the proportion of independent directors, while the strength of
the relationship significantly varied between ownership structure, reflected across the free test
groups, and the financial indicators. The complexities of governance in itself, while once alongside
firm specific financial indicators conclusively indicators that no direct proportional relationship can
be drawn from this research. Cooperative with >25% independent directors consistently had the
lowest expense ratio and greatest asset utilization values which were in contrast to existing
perceptions that additions of independent directors will lead greater agency costs (Sexton & Iskow,
1992). A variety of implications for cooperative and mutual association governance underpins this
research. Cooperatives appear to be best positioned to adopt governance best practices,
international trends and thought leadership which calls for greater levels of independent directors
which align with rough indications illustrated within this research. Similarly, mutual associations
appear to illustrate a collective governance weakness in the management of these areas, however,
initially appear to have positive effects on ROA values. This initial trend does not correct for the
economics of scale and organizational function differences, in which mutual association's primary
focus is to deliver knowledge or a social benefit to membership.
The success of cooperatives and mutual associations are rapidly changing as globalization,
and market deregulation demands fundamental shifts in the ways the organizations have historically
conducted business. The small sample size, limited statistical analysis, and varied firm specific
financial indicators offer a variety of limitations to the application of the data. Interpretations of this
proportional relationships and conclusions identified within this research ought to reflect the
correlation trend and specific governance focus on cooperative and mutual associations within the
agriculture industry in New Zealand.
37
5.2 Recommendations
Recommendations relating to this research included are tied to the board industry valuation
of formalized governance. Following this statistical analysis, there appears to be a rough correlation
of between governance board performance and the proportion of independent directors within
agricultural cooperatives and mutual associations. Both business structures would by in large benefit
from undertaking a fundamental shift towards attracting individuals with the required skill and
experience rather than recruiting under the guise of representative based governance. Similarly,
formalized governance training in mutual associations would strengthen individual firm’s abilities to
respond to market changes.
38
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Appendices
Appendix 1.1. Panel data included within this report
FY 2014-15 EXP ratio Asset ut. ROA TA TCA PAT Total annual sales Total exp Total cost of sales
New Zealand Grassland Association Inc. 0.70 0.62 $0.094 $412,147 $411,827 $38,566 $255,873 $217,307 $36,922
Dexter Cattle Society 0.72 0.63 $0.084 $43,111 $43,351 $3,604 $27,357 $23,753 $4,020
Brown Swiss Cattle Breeder Association 0.54 0.61 $0.221 $5,185 $2,968 $1,147 $3,183 $2,036 $327
Taihape and Districts Agricultural and Pastoral Association No data available
Deer Farmers Association 0.90 0.69 $0.038 $129,291 $129,291 $4,907 $88,640 $83,733 $3,670
Group 1 average 0.72 0.64 $0.109
Horticulture New Zealand 0.34 2.12 $0.109 $3,597,244 $4,348,884 $391,267 $7,633,003 $7,241,736 $4,660,809
Beef and Lamb 1.30 $0.002 $29,638,000 $28,966,000 $45,000 $38,487,000 $38,442,000 No data available
NZ Pork Industry 0.54 0.57 -$0.001 $5,535,284 $4,638,797 -$4,161 $3,129,450 $3,133,611 $1,447,318
Westland Milk Products 0.47 1.19 $0.036 $538,165,000 $210,609,000 $19,386,000 $639,363,000 $619,977,000 $319,409,000
Fonterra 1.80 1.03 $0.028 $18,315,000,000 $6,077,000,000 $506,000,000 $18,845,000,000 $18,339,000,000 -$15,567,000,000
Tatua Dairy Company 0.59 1.18 $0.029 $241,418,570 $103,754,383 $7,020,420 $285,767,169 $278,746,749 $110,603,176
Group 2 average 0.75 1.23 $0.034
LIC 0.90 0.76 $0.060 $301,509,000 $52,670,000 $18,114,000 $228,385,000 $210,271,000 $4,111,000
Alliance 0.01 2.80 $0.009 $536,123,000 $293,198,000 $4,625,000 $1,498,838,000 $1,494,213,000 $1,476,679,000
Sylaint Milk 0.13 0.77 $0.018 $579,782,000 $137,117,000 $10,600,000 $448,100,000 $437,500,000 $377,100,000
Silver Fern Farms 0.27 3.88 $0.040 $627,081,000 $261,514,000 $24,904,000 $2,434,204,000 $2,409,300,000 $1,749,473,000
Ballance Agri Nutrients 0.32 1.65 -$0.020 $541,874,000 $288,099,000 -$11,070,000 $892,795,000 $903,865,000 $621,268,000
Dairy NZ 0.35 1.22 $0.011 $76,052,000 $45,069,000 $847,000 $92,796,000 $91,949,000 $59,395,000
Group 3 average 0.33 1.85 $0.020
Brown Swiss Cattle Breeder Association 0.71 0.58 $0.087 $4,037 $1,821 $352 $2,345 $1,993 $324
48
Taihape and Districts Agricultural and Pastoral Association 0.71 1.86 $0.377 $18,031 $12,025 $6,802 $33,528 $26,726 $2,827
Deer Farmers Association 0.93 0.75 $0.033 $124,145 $124,145 $4,064 $92,944 $88,880 $2,478
Group 1 average 0.75 0.95 $0.133
Beef and Lamb 1.15 -$0.011 $31,367,000 $30,424,000 -$358,000 $36,044,000 $36,402,000 No data available
NZ Pork Industry 0.46 0.63 $0.027 $5,299,697 $4,385,447 $140,606 $3,360,540 $3,219,934 $1,657,501
Westland Milk Products 0.37 1.73 $0.001 $478,635,000 $239,293,000 $503,000 $830,170,000 $829,667,000 $522,022,000
Fonterra 0.99 1.43 $0.012 $15,529,000,000 $6,484,000,000 $179,000,000 $22,275,000,000 $22,096,000,000 $25,318,000
Group 2 average 0.52 1.47 $0.035
LIC 0.86 0.73 $0.089 $283,796,000 $66,133,000 $25,318,000 $207,423,000 $182,105,000 $4,119,000
Alliance 0.01 2.89 $0.012 $504,755,000 $255,804,000 $6,210,000 $1,459,279,000 $1,453,069,000 $1,433,296,000
Sylaint Milk 0.10 1.26 $0.041 $476,886,000 $173,999,000 $19,600,000 $600,518,000 $580,918,000 $523,430,000
Silver Fern Farms 0.29 3.04 $0.001 $760,847,000 $356,146,000 $474,000 $2,309,394,000 $2,308,920,000 $1,647,953,000
Ballance Agri Nutrients 0.30 1.55 $0.016 $593,173,000 $328,233,000 $9,665,000 $920,973,000 $911,308,000 $638,546,000
Dairy NZ 0.35 1.33 $0.096 $69,117,000 $38,963,000 $6,605,000 $91,954,000 $85,349,000 $53,021,000
Group 3 average 0.32 1.80 $0.043
Dexter Cattle Society 1.14 1.01 -$0.241 $34,123 $34,123 -$8,225 $34,445 $42,670 $3,411
Taihape and Districts Agricultural and Pastoral Association 0.97 2.48 -$0.109 $11,229 $9,319 -$1,228 $27,891 $29,119 $2,114
Deer Farmers Association 1.07 0.80 -$0.113 $121,770 $121,770 -$13,802 $97,255 $111,057 $7,114
Group 1 average 0.95 1.24 -$0.033
Horticulture New Zealand 0.53 2.84 -$0.071 $2,854,504 $3,720,840 -$203,682 $8,101,849 $8,305,531 $3,994,832
Beef and Lamb 1.09 -$0.010 $29,316,000 $28,507,000 -$307,000 $31,821,000 $32,128,000 No data available
NZ Pork Industry 0.52 0.65 -$0.038 $5,266,846 $4,312,348 -$202,643 $3,407,700 $3,610,343 $1,845,706
49
Fonterra 1.80 1.30 $0.051 $14,373,000,000 $5,646,000,000 $736,000,000 $18,643,000,000 $17,907,000,000 -$15,611,000,000
Group 2 average 0.75 1.43 $0.004
LIC 0.83 0.70 $0.099 $275,494,000 $77,500,000 $27,298,000 $193,624,000 $166,326,000 $5,844,000
Alliance 2.85 $485,036,000 No data available $1,383,610,000 No data available
Sylaint Milk 0.15 1.24 $0.034 $346,067,000 $131,149,000 $11,600,000 $430,000,000 $418,400,000 $354,862,000
Silver Fern Farms 0.32 2.39 -$0.034 $833,279,000 $403,983,000 -$28,551,000 $1,993,236,000 $2,021,787,000 $1,378,010,000
Dairy NZ 0.41 1.24 -$0.017 $65,862,000 $41,293,000 -$1,131,000 $81,599,000 $82,730,000 $49,334,000
Group 3 average 0.40 1.66 $0.024
Dexter Cattle Society 0.90 0.88 $0.005 $42,346 $42,346 $210 $37,080 $36,870 $3,411
Taihape and Districts Agricultural and Pastoral Association 1.23 1.53 -$0.578 $12,517 $9,695 -$7,238 $19,133 $26,371 $2,827
Group 1 average 0.96 0.95 -$0.100
Beef and Lamb 0.99 -$0.095 $30,330,000 $26,261,000 -$2,877,000 $29,886,000 $32,763,000 No data available
NZ Pork Industry 0.58 0.60 $0.015 $5,495,988 $4,508,943 $81,942 $3,283,551 $3,201,609 $1,294,448
Fonterra 1.81 1.31 $0.041 $15,117,000,000 $6,692,000,000 $624,000,000 $19,769,000,000 $19,145,000,000 -$16,721,000,000
Group 2 average 0.76 1.43 $0.026
LIC 0.87 0.67 $0.074 $260,501,000 $76,878,000 $19,251,000 $174,744,000 $155,493,000 $2,727,000
50
Sylaint Milk 0.12 1.36 $0.016 $277,258,000 $60,288,000 $4,400,000 $376,800,000 $372,400,000 $328,143,000
Silver Fern Farms 0.28 2.53 -$0.039 $796,365,000 $375,046,000 -$31,121,000 $2,015,720,000 $2,046,841,000 $1,474,551,000
Dairy NZ 0.34 1.37 $0.094 $64,229,000 $40,119,000 $6,040,000 $87,962,000 $81,922,000 $51,662,000
Group 3 average 0.37 1.64 $0.037
Brown Swiss Cattle Breeder Association 1.30 0.85 -$0.337 $3,739 $1,522 -$1,259 $3,183 $4,442 $318
Taihape and Districts Agricultural and Pastoral Association 0.81 1.95 $0.093 $19,755 $17,398 $1,830 $38,564 $36,733 $5,475
Group 1 average 0.87 1.07 $0.048
Beef and Lamb 0.87 -$0.106 $33,485,000 $29,123,000 -$3,554,000 $29,202,000 $32,756,000 No data available
NZ Pork Industry No data available
Fonterra 0.11 1.28 $0.050 $15,530,000,000 $7,560,000,000 $771,000,000 $19,871,000,000 $19,100,000,000 $16,861,000,000
Group 2 average 0.35 1.47 $0.014
LIC 0.85 0.70 $0.103 $236,838,000 $64,284,000 $24,335,000 $165,592,000 $141,257,000 $0
Sylaint Milk 0.08 1.22 -$0.013 $245,264,000 $66,732,000 -$3,100,000 $298,900,000 $302,000,000 $277,755,000
Silver Fern Farms 0.26 3.07 $0.046 $674,497,000 $307,742,000 $30,801,000 $2,073,894,000 $2,043,093,000 $1,496,456,000
Ballance Agri Nutrients No data available
Dairy NZ 0.42 1.27 -$0.025 $60,077,000 $35,920,000 -$1,489,000 $76,169,000 $77,658,000 $45,495,000
Group 3 average 0.40 1.91 $0.028
51
Appendix 1.2. Proportion of intendent directors during the assessed period
Proportion of Proportion of Proportion of
Group 1 independent directors Group 2 independent directors Group 3 independent directors
New Zealand Grassland Association Inc. 0% Horticulture New Zealand 11% LIC 37.50%
Dexter Cattle Society 0% Beef & Lamb New Zealand 25% Alliance 33.30%
Brown Swiss Cattle Breeder Association 0% New Zealand Pork Industry Board 25% Sylaint Milk 50.00%
Taihape and Districts Agricultural and
Pastoral Association 0% Westland Milk Products 25.00% Silver Fern Farms 37.50%
Deer Farmers Association 0% Fonterra 25.00% Ballance Agri Nutrients 33.33%
Tatua Dairy Company 30.00% Dairy NZ 37.50%
52
Notes to the Appendix 1.1. Limitations for panel data
For the FY 2014-15, Taihape and Districts Agricultural and Pastoral Association was not included in the
calculation of the financial indicators due an absence of data. Beef and Lamb New Zealand was not included in
expense ratio calculations due to an absence of total cost of sales reported in the annual reports.
For the FY 2013-14 Beef and Lamb New Zealand was not included in expense ratios due to an absence of
cost of sales reported in the annual reports.
cost of sales reported in the annual reports. Alliance Group was not included in the calculation of expense ratio and
ROA calculations due to an absence of total current assets, profit after tax, and total cost of sales.
cost of sales reported in the annual reports. Alliance Group was not included in the calculation of expense ratio and
ROA calculations due to an absence of total current assets, profit after tax, and total cost of sales.
cost of sales reported in the annual reports. New Zealand Pork Industry and Ballance Agri Nutrients were not
included in the calculation of the financial indicators due an absence of data. Alliance Group was not included in the
calculation of expense ratio and ROA calculations due to an absence of total current assets, profit after tax, and total
cost of sales.
No calculations within this research have included the total current assets held by an organisation, however,
it is also important to include the figures alongside panel data within the appendix to facilitate comparison and offer
broader contextual data of net movements within the broader financial indicator data.
53

The Relationship Between Governance Board Performance and The Proportion of Independent Directors With Agricultural Based Cooperatives and Associations in New Zealand

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The Relationship Between Governance Board Performance and The Proportion of Independent Directors With Agricultural Based Cooperatives and Associations in New Zealand

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The Relationship between Governance Board

Performance and the Proportion of Independent

A project completed in partial fulfilment of the degree of

Date: October 2016

Waikato Management School

The following investigation should not be considered to be the work of professional

1.1 Introduction to Governance in agriculture

1.2 Research motivation

2.2 Previous studies

2.4.1 Cooperative Governance

2.5.1 Association Governance

3.2 Secondary research

3.3 Model specifications

Group one: 100% representative based governance positions

3.3.2 Dependent variable

Equation 1.1. Expense ratio equation used within this report

Total Expenses - Cost of Good Sold

Equation 1.2. Asset utilization equation used within this report

Total Annual Sales

Equation 1.3. Return on assets equation used within this report

Profit After Tax

3.3.3 Independent variable

Figure 1.1. Summary comparison plotting financial indicators during 2015

Expense ratio ST DEV. ST DEV. (Asset Return on assets ST DEV.

Figure 1.2. Summary comparison plotting financial indicators during 2014

Expense ratio ST DEV. ST DEV. (Asset Return on assets ST DEV.

Figure 1.3. Summary comparison plotting financial indicators during 2013

Figure 1.5. Summary comparison plotting financial indicators during 2011

Expense ratio ST DEV. ST DEV. (Asset Return on assets ST DEV.

4.2 Previous studies

4.3 Governance theory

Objective 3. Outline the scope of the relationship

4.6 Mutual associations

Silver Fern Farms. (2012). Annual report 2011. Retrieved from

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