News stories about the rejection by state regulators of the proposed “Vermont Health CO-OP” have focused on the organization’s financial weakness, the fact that its rates would be higher than those of its competition, and conflict-of-interest issues. But for Vermont’s cooperative movement, the decision raises an even more fundamental question: What, exactly, is a cooperative, and does this organization truly qualify?
Based on the May 22, 2013 decision of the Vermont Department of Financial Regulation (DFR), the organization calling itself the Vermont Health CO-OP bears little resemblance to what the pioneers of the modern cooperative movement envisioned in 1844. Nor does it look very much like the sort of business enterprise that the International Cooperative Alliance (ICA) would define as a cooperative today, based on the ICA’s officially adopted values and principles. Indeed, it is at least arguable that under Vermont’s cooperative law it would be improper for this organization to use the word “cooperative” in its name.
The Rochdale Pioneers were a group of displaced artisans who responded to the depredations of the Industrial Revolution by pooling their resources as consumers and opening a store that they would own and operate themselves on a democratic basis. The resources of the Vermont Health CO-OP consist of nearly $34 million in federal loans. Consumers did not start this organization – Mitchell Fleischer did.
Mr. Fleischer is president of the Fleisher Jacobs Group in South Burlington, an insurance firm. According to the DFR, Mr. Fleischer:
· recruited every current member of the Vermont Health CO-OP’s Board of Directors,
· serves as president of the Board of the Vermont Health CO-OP, for which he receives $10,500 a month, which is more than four times what the Board leader at Blue Cross Blue Shield of Vermont gets paid, and
· is thereby presiding over an organization that has given his insurance firm the exclusive right to solicit customers for the Vermont Health CO-OP, for which his firm is receiving at least $26,786 per month through the end of 2013.
The Department of Financial Regulation characterizes this arrangement as a “stark, ever-present conflict of interest” that is “illegal” and a source of “insurmountable risks.” The point here, however, is that even if one assumes Mr. Fleisher’s intentions are completely noble, his activities bear little resemblance to what the Rochdale Pioneers did – or, indeed, to the grassroots efforts that created and sustain Vermont’s existing consumer co-ops.
The Bylaws of the Vermont Health CO-OP – which are available on the web site of the Department of Financial Regulation, where they appear as Exhibit 29 to the May 22 decision – likewise paint a portrait of an organization that may not truly be a cooperative. For one thing, at the most basic level, this is a business enterprise that has opted not to incorporate as a cooperative under Vermont law. It’s a nonprofit corporation.
Although the bylaws certainly provide that the members of the Vermont Health CO-OP – i.e., the people who get health insurance through the organization – will elect the Board once the organization actually has such members, there are these troubling loopholes that could undermine the notion of democratic member control:
· Only a majority of the Board members must be members themselves,
· The nominating and governance committee of the Board has absolute control over the process of who becomes a candidate for election to the Board,
· There is no minimum number of voting members that constitutes a quorum for purposes of making an election or other voting-related decision a valid one – it is literally true that one member could make these choices if she were the only voter;
· The Board, rather than the members, can amend the bylaws – and, since the organization is not incorporated as a cooperative, the Board could thereby abandon any pretense of functioning as a real cooperative as distinct from a garden-variety nonprofit organization with a self-perpetuating Board,
· A two-thirds majority of the Board can expel any member of the Board, with our without cause, which means a duly elected but troublesome Board member could be quickly dispatched to oblivion,
· The Board may “choose to have directors who provide expertise but do not vote” as long as non-voting directors “bring specific expertise or be members of the CO-OP management team,” a provision that creates a risk that the Board’s proceedings will be dominated by such nonvoting experts and employees, and
· Until the organization actually starts providing health insurance to consumers and thereby has members, the Vermont Health CO-OP is being governed by its so-called “Formation Board” – i.e., the group recruited by Mr. Fleischer as noted above.
The point here is not to criticize any of these organizational arrangements as inherently bad. The question is whether an organization with these attributes is really a cooperative. And pursuant to Section 1623 of Title 11 of the Vermont Statutes Annotated, a business entity may not do business in Vermont under a registered name that “would lead a reasonable person to conclude that the business is a type of entity that it is not.”
In fairness to Mr. Fleischer and the organization he has founded, there is plenty of precedent for conducting these types of activities, in Vermont and elsewhere, and using the word “cooperative” to describe them. The nation’s network of consumer-owned rural electric cooperatives – including our state’s Vermont Electric Cooperative and Washington Electric Cooperative – were created on a top-down (rather than grassroots) basis under the Rural Electrification Act, a New Deal program that is not unlike the $34 million in federal loans the Vermont Health CO-OP has obtained through the Patient Protection and Affordable Care Act, better known as Obamacare. Few people question the propriety of Cabot Cheese calling itself a cooperative even though its parent organization – Massachusetts-based Agri-Mark – is actually incorporated in Delaware as a conventional business corporation, which is the reason that Vermont dairy farmer Karen Shaw, concerned about possibly excessive executive compensation, lost her bid to inspect the books and records of Agri-Mark despite her member status and the fact that Agri-Mark holds itself out as a dairy cooperative. (See the 1995 decision of the Delaware Supreme Court in Shaw v. Agri-Mark, Inc., 663 A.2d 464.) And there is always the inconvenient truth that most credit unions – nominally cooperatives that live by the cooperative values and principles – have self-perpetuating boards and little if any member involvement in their governance. The Vermont credit union to which I belong – Members Advantage Community Credit Union – actually sent me notice of the May 8 annual meeting after the meeting had taken place.
Whether these concerns are technicalities or matters of importance, one aspect of the Department of Financial Regulation’s decision should send chills up the spines of lots of board members at Vermont food co-ops. Most of these co-ops have Boards that use “Policy Governance” – a rubric invented by Atlanta-based governance guru John Carver that is designed to maximize the autonomy of management and keep the fingers of Board members out of most operations. A Vermont-based organization – the CDS Consulting Cooperative – has played the lead role in promoting the use of this model at food co-ops across the country. Apparently the Vermont Health CO-OP has likewise embraced the Policy Governance model – a fact noted with concern by the Department of Financial Regulation at page 21 of its decision. The Department faulted the founding board of the Vermont Health CO-OP for abdicating its fiduciary responsibilities – among other things, the Board went from January 1, 2012 to October 23, 2012 without holding a meeting. While the Department did not go so far as to blame Policy Governance for the Board’s lack of oversight – and, indeed, the model, if rigorously applied, is rich with oversight opportunities – the Department made clear that a governing body with fiduciary responsibilities may not use Policy Governance as an excuse for letting management do as it likes.
Ultimately, figuring out whether Mr. Fleischer’s organization is inappropriately promoting itself as a cooperative might come down to such a nicety as whether something that calls itself a “CO-OP” is claiming to be a co-op. Under Section 1322 Obamacare statute, a “CO-OP” is a “Consumer Operated and Oriented Plan.” The bylaws of the Fleischer organization – i.e., the “Vermont Health CO-OP, Inc.” – do not use the word “cooperative” anywhere. The decision of the Department of Financial Regulation likewise is consistently careful to refer to the organization as “the CO-OP” without using the word “cooperative.”
One wonders where the National Cooperative Business Association was – and also organizations like the National Cooperative Grocers Association and the National Rural Electric Cooperative Association – when it came to allowing the Obamacare statute to define as a “consumer operated and oriented plan” – i.e., a “CO-OP” – something that is apparently under no obligation to adhere to the cooperative values and principles. According to page 4 of the decision of the Department of Financial Regulation, the Vermont Health CO-OP apparently doesn’t even intend to declare patronage refunds – the sine qua non of cooperatives, from Rochdale forward – but, rather, will return any surplus to members “in the form of improved quality or reduced costs of health care.” To say the least, it would be a challenge for members of the Vermont Health CO-OP to monitor whether they’re actually receiving such a surplus – and query whether their right to obtain information would be any better than Karen Shaw’s were under Delaware’s corporation staute.
“Co-ops” – note the capitalization – “its what Vermonters do” [sic]. So proclaims the main page of the web site (and note that it is a “dot coop” web site) of the Vermont Health CO-OP – www.chvt.coop. The site then proclaims that Vermont “has a long and treasured history of cooperative economic activity.” But the activities and organization described in the May 22, 2013 decision of the Vermont Department of Financial Regulation? They look like something else altogether.
