Innovative shareholding arrangements for producer groups providing machinery or marketing services to smallholders

Abstract

Smallholder producer groups are vulnerable to institutional problems when they pursue value-adding enterprises requiring capital and predictable deliveries. This paper provides insights into creative shareholding arrangements introduced by two producer groups to upgrade their business strategies from ‘transactional’ to ‘value-adding’ status. The first group planned to offer machinery services to reduce production costs and improve the quality of smallholder paddy rice. The second group intended to take advantage of a domestic niche market for non-traditional, high-value, rice varieties. Members and directors of these producer organizations were wary of free-rider problems that undermine collective efforts to finance assets and meet supply contracts. This study draws on the New Institutional Economics concepts of ill-defined ownership rights to analyze the innovative shareholding schemes devised by these groups to prevent free riding. It treats the producer groups as case studies, and the research is both exploratory and applied set within the framework of action research. Both groups issued non-redeemable, tradable, class B shares. Class B shares are appreciable but confer no (or limited) voting rights, allowing members to benefit as investors and as patrons while maintaining democratic control of their organization. The key, however, is to align investment with patronage in order to avoid conflicts of interest that discourage member investment and compliance with supply contracts. The first group linked member investment to progressive discounts on the cost of machinery services, thereby creating a strong incentive for larger patrons to buy more shares. The second group treated each share as a tradable obligation to deliver a specific quantity of high-value paddy, thereby requiring larger patrons to buy or lease more shares. This research adds to a small pool of literature that examines the attributes of well-defined ownership rights in smallholder organizations that pursue value-adding business strategies.