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Sustainability, corporate social responsibility
and food markets the role of cooperatives (Keywor
ds corporate social responsibility, cooperative,
power, trust, food system) by  Valeria
Sodano Department of Agricultural Economics,
University of Naples Federico II
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Processes negatively affecting food systems
sustainability 1. Environmental and human health
risks associated with the new bio and nano
technologies. 2. Trade liberalization and
deregulation. 3.Rising power of food corporations
and supermarkets. Moral concerns food security,
food safety, food quality, food sovereignty,
human welfare, animal welfare, ecological
sustainability, transparency, traceability. Curre
nt suggested solutions Less state intervention
and command-control policies More market along
with corporate social responsibility (CSR)

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Papers goals and motivation
The gap between corporations claim on their CSR
and their real pursuit of social goals has been
proved by the repeated corporate scandals and by
the real strategies carried out by the main
actors in the system.
The paper studies how the peculiarities of
corporate governance systems of cooperatives and
investor owned enterprises lead to a different
attitude towards social responsibility.

The comparison between different forms of
corporate governance is carried out through The
New Institutional Economics of the Firm
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THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM The
incomplete contract theory of the firm (Hart,
1988 Grossman and Hart, 1986) and the related
theory of Hansmann of the ownership of enterprise
(Hansmann, 1996) state that vertical integration
(and hence the firm) occurs when contracts fail
because of their incompleteness, then the party
more able to exploit the residual claims will
acquire the residual rights of control.
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• THE NEW INSTITUTIONAL ECONOMICS OF THE FIRM
• In the Hansmanns model, the ultimate reason for
  a class of patrons (i.e. persons with whom the
  firm has a contractual relationship) to become
  firms owners is to avoid power abuses by the
  firm.
• These power abuses take three forms 1) the
  classical exercise of market (buyer) power
  towards customers (suppliers) 2) opportunistic
  behaviours associated with asymmetric
  information 3) the exploitation of exchange
  surplus due to a higher bargaining power, in
  those bilateral monopoly situations associated
  with hold-up problems and transaction specific
  investments.
• Incentives to become owners also stem from
  benefits associated with the possibilities to
  exploit weaker contractual partners.

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The New Institutional Economics of the Firm In
these models any process of vertical integration
entails a redistribution process that will favour
the more powerful party, with contradictory
equity and efficiency effects. This result
sharply contrasts with the Williamson explanation
of vertical integration (Williamson, 1985), that
accounts for the shift from one organizational
form (the long-term contract) to another (the
firm) exclusively in terms of transaction costs
minimizing implying an efficiency
improvement Ultimately the neoinstitutional
theory of the firm based on contract
incompleteness proves that firms are forms of
economic organization, alternative to the market,
that do not guarantee for efficiency . Firms can
be conceived of as systems of power. When trust,
besides power, affects relationships inside and
outside the firm, exploitation is mitigated and
more equity is achieved in the process of
resource allocation.
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The New Institutional Economics of the Firm

Spot markets
High transaction costs
Contracts
Complete, enforceable by a third party (exercise
of bargaining power)
Incomplete, non enforceable by a third party
High transaction costs
Firms
Self-enforcing agreements
Exercise of power through Formal authority
relations Endogenous enforcement mechanisms
Inside influence activities Outside influence
activities Market power
Power-based
Trust-based
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The New Institutional Economics of the Firm

Firms
Power-based Competitive behavior
Trust-based Cooperative behavior
Investor owned firms
Cooperatives
The board of directors, designed by shareholders,
is committed to the objective of only profit
maximization. Institutionally investor-owned
firms have no responsibilities towards their
stakeholders besides the respect of formal
contracts signed with them, as settled by law.
Rochdale Principles (1844) undersigned by the
International Cooperative Alliance (1995)
Limited return on equity. Voluntary and open
membership. Democratic member control. Member
economic participation. Autonomy and
independence. Education, training and
information. Cooperation among cooperatives.
Concern for community.
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Requests for CSR Responses by cooperatives Responses by public firms
Contract incompleteness Corrected by trust (symmetric Nash bargaining solutions for the bargaining game associated with hold-up problems) Residual claims exploited through power (inefficient and unequal solutions for the bargaining game)
Avoiding negative externalities Ethical concerns for community and fairness preferences boost the internalization of social costs Concerns for stock values and selfish behaviours prevent from the internalization of social costs
Providing public goods Equity and fairness preferences help to solve free-riding problems Opportunism exacerbates free riding problems
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Empirical evidence
Cooperatives and corporate social responsibility
some evidence from the Italian tomato processing
industry Italy is the second producer (next to
California) of processed tomato in the world.
Production is localized in two agro-industrial
districts, the southern and the northern
district, with approximately the same size but
with a very different structure and
organization.
Results of a wide research project carried out by
the University of Naples during the last three
years (aimed to assess the capability of domestic
firms to cope with the changing competitive
international scenarios) have clearly shown that
in the northern district the presence of
cooperatives, backed by high levels of social
capital, is associated with social responsible
behaviours, and that therefore in this area
public support for the sector can benefit the
entire community. Opposite conclusions were
reached in the case of southern district.
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Empirical evidence
In the research social capital was measured on
the basis of trust indicators accounting both for
impersonal trust (in the form featured by
Fukuyama, 1995) and interpersonal trust, this
latter related to the attitude of actors towards
others trustworthiness (McAllister, 1995). CSR
was measured looking at illegal behaviours and
frauds and at policies carried out to foster
social and environmental sustainability. Cases of
illegal behaviours were found only in the South,
namely the recruitment and exploitation of
illegal African and eastern European immigrants,
and the falsification of tomato purchasing
records in order to access extra EU subsidies.
Vice versa in the North, a lot of sustainable
good practices were found fair trade standards
organic production traceability systems
transparent communication policies support to
civil society organizations engagement in
projects with local administrations.
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• Conclusions
• The kind of ownership and governance structure
  of firms affects their social responsibility.
• Investor-owned enterprises are naturally much
  less responsible than cooperatives.
• The higher social responsibility of
  cooperatives depends on ethical values and social
  norms on which this form of enterprise is
  grounded.
• The evidence that CSR ultimately is possible
  only in a socio-cultural environment rich in
  social capital and moral codes should suggest
  that when this is not the case, only
  command-and-control regulations (i.e the state
  intervention) can promote really sustainable food
  systems.

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Conclusions Traditional economic literature on
cooperatives has widely denounced their economic
weakness, associated with portfolio and horizon
problems, while it has not paid enough attention
to their role in providing positive externalities
and social benefits. Taking into account
these latter issues should lead legislators and
economists to no longer foster the revision of
law on cooperatives in a way as to turn them in
proprietary firms. Instead policies should be
carried out in order to support the cooperative
movement and to strengthen ethical attitudes
within it.
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Definition of cooperative behavior A
cooperative behavior is a behavior through which
one agent internalizes some of the externalities
s/he imposes on other users, and refrains her/his
own use below what would maximize her/his
individual profits.