Academic journal article European Research Studies

Assessing Incentive and Monitoring Schemes in the Corporate Governance of Maltese Co-Operatives

Academic journal article European Research Studies

Assessing Incentive and Monitoring Schemes in the Corporate Governance of Maltese Co-Operatives

Article excerpt

1. Introduction

Co-operation is a leading factor to success and co-operatives were formed with this very idea of mind-that of forming a type of business that will be successful not only economically but also socially and culturally. In fact a co-operative society (or co-operative in short) is defined by the Co-operatives Societies Act (2001) Chapter 442 of the Laws of Malta (CSA) as:

"an autonomous association of persons united voluntarily to meet their economic, social and cultural needs and aspirations, including employment, through a jointly-owned and democratically-controlled enterprise, in accordance with cooperative principles" (Art.21, p.9)

Co-operative principles were first developed by the first co-operative society that was set up in England in 1843 when the workers of the textile mills in Rochdale craved to enhance their way of living. They acted on the idea of providing their own necessities and thus formed a co-operative society. The International cooperative alliance, a non-governmental federation representing all co-operatives, lists the seven principles which are the foundation of every co-operative, these being: (i) Voluntary and open membership, (ii) Democratic Member Control, (iii) Member Economic participation, (iv) Autonomy and Independence, (v) Education, Training and information, (vi) Co-operation among co-operatives, and (vii) Concern for Community

These principles are important and relevant wherever co-operatives operate, and Malta is of course no exception. The Maltese co-operative institutional framework is made-up of the Co-operatives Board (CB), the Central Co-operative Fund (CCF), Koperattivi Malta (KM) and Malta Co-operative Federation (MCF), each having their own individual role. Five main types of co-operatives operate in Malta, these being: producer, worker, consumer, social and service co-operatives, all based on their structure of ownership.

In a number of aspects, co-operatives are similar to other types of entities. One aspect is the parallel, if not even greater, importance of corporate governance within such entities. Corporate governance (CG) is the combination of mechanisms to ensure that the management, being the agent, takes into account the benefit of the stakeholders, being the principals (Goergen and Renneboog, 2006). CG within a co-operative is mainly in the hands of three major parties: the committee of management (CoM), professional managers and members that direct and control the co-operative. The separation of ownership and control may pose an agency problem for CG (Kim, Nofsinger et al, 2010; El-Chaarani, 2017; Giannarakis, 2016) and the solution proposed to solve this problem is the adequacy of the level of incentive and monitoring schemes in application. These will help align executive interests with those of the shareholders and the board of directors.

Incentives are considered as a reward or compensation for the occurrence of an action with the intent that such action will be repeated. These incentives can be individual or group based, financial or otherwise and are a means of motivating executives to perform their task as efficiently and effectively as possible. Monitoring schemes observe the actions that are taking place and are defined by Jensen and Meckling (1976) as being the observation of one's effort that is accomplished through supervision and accounting controls, among other devices.

Both incentive and monitoring schemes within co-operatives may differ from those of a company but their importance is not diminished. Nevertheless, the extent to which incentive and monitoring schemes have been linked to co-operatives is limited and this is even more so in the Maltese scenario. Baldacchino and Bugeja (2014) stated those in charge of governance in Maltese co-operatives may themselves need to be trained in order to be able to appreciate and introduce such schemes that may help minimise conflict of interest. …

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