5.13: Demutualization- A Rare but Often Studied Event in Cooperatives and Mutuals

When members of a cooperative or mutual insurance company decide to sell their cooperative or convert to a publicly-held company, which is referred to as demutualization, it gets a lot of attention. Historically, this is a very rare event, with less than 0.01% of the cooperatives tracked over time by the U.S. Department of Agriculture voting to be acquired by a non-cooperative corporation or to demutualize. Cooperatives that were acquired by other firms include Birds Eye Foods, U.S. Premium Beef, and Dakota Growers Pasta. Examples of demutualization include Diamond Walnut Growers, California Avocado Cooperative, FCStone, and Goldkist. A number of processing cooperatives formed in the late 1990s and early 2000s converted from cooperatives to limited liability partnerships because of tax issues; these are not demutualizations since they are still held by members. Common reasons why cooperatives may experience internal conflict among their membership include free ridership, differing time horizons among members with regard to investments in long-term assets, differing tolerance for risk among asset investments, issues in control with regards to information between management and members, and influence costs as the complexity grows in an organization with more lines of business units. These problems are more likely as a cooperative becomes larger and more complex. Despite these issues, cooperatives have flourished in the U.S. and worldwide. The fact that most cooperative members come from multi-generational farming families is likely a reason why there are so few bankruptcies or demutualizations in U.S. agricultural cooperatives. The very few that have happened can trace the reasons to one or more of the issues above; many were wholesaling type cooperatives.