INSTITUTIONAL FACTORS AFFECTING THE PERFORMANCE OF FARMER COMPANIES IN SRI LANKA

Sri Lanka introduced farmer companies to link its smallholder farmers to high value institutional markets. Some of these firms are performing reasonably well but many have failed. This study set out to identify institutional, group and management factors that distinguish successful companies from failed companies in an attempt to identify best practice for policy and management purposes. In particular, this paper uses a case study approach to compare a failed ‘value-adding’ company with a similar but successful farmer company. The evidence revealed weaknesses in institutional and managerial arrangements within both companies but the flaws ran much deeper in the failed company. To achieve best practice, it is recommended that (i) all directors be nominated only by shareholders; (ii) proportional voting rights replace democratic voting rights; and (iii) share trading between shareholders be permitted and facilitated. Facilitators should allow shareholders to set company objectives; ensure that they understand its institutional arrangements and apply good governance practices; help new companies to establish processes for developing and implementing business strategies; and have a clearly defined exit plan to focus on capacity building rather than managing.