In 1958, two students at the University of Sydney, Malcolm Broun and John Sharwood, set up the University Co-operative Bookshop, a student association that bought, swapped and sold books at low prices, operating out of a garage.

Now known as the Co-op, the organisation is one of Australia’s largest co-operatives in terms of members – there are almost two million of them – as well as one of Australia’s largest booksellers.

Co-operatives are different from investor-owned corporations. For one thing, they are supposed to be democratically controlled by their members rather than accountable to investor-owners.

But the Co-op has been taken out of its members’ control. The company bars students from joining its board of directors, doesn’t give members adequate notice of general meetings and misleads members about their rights under the Co-operatives National Law.

A Farrago investigation has revealed that the Co-op has come under the control of a corporate clique, moving further and further away from the principles of the co-operative movement.

In 2004, Ben Hollenstein and Stephen Coles were students at the University of Sydney. Like many students today, they were frustrated with the University Co-operative Bookshop, its high prices for textbooks and delays in deliveries to students. So they took a closer look at the company.

What they found was troubling. The original charter of the 1950s was slipping away as revenue dropped, administration costs rose and payments to board directors became increasingly large. There was also a lack of student representation on the board.

“The Department of Fair Trading stipulates that all members of a co-operative have the right to stand as director but the [Co-op] Rules dictate that directors must have a minimum of five years’ experience at a large company and/or a university degree. It’s like a farmer’s co-operative without farmers,” Hollenstein told The Sydney Morning Herald in 2004.

Hollenstein and Coles presented the board of the Co-op with a petition for a special general meeting (SGM), at which they intended to argue for two positions on the board to be set aside for students. The board at the time, headed by chairman Alister Runge, rejected the petition.

In February of the same year, the co-operative scheduled its annual general meeting in Hobart, despite the fact that only two per cent of its members lived in Tasmania. The two students suspected the location was chosen to keep them off the board. At the meeting, which only 35 members out of a million attended, the board decided to increase the number of members needed to call an SGM from 200 to 1,000 people.

Hollenstein and Coles alleged that the board had circumvented democracy by making the meeting inaccessible to most students. If so, the trick had worked and the co-operative would do so again – the very next month, the board scheduled another general meeting in Hobart. The aim of this SGM, which cost members $100,000, was once again to increase the number of members needed to call an SGM, this time from 1,000 to 10,000 people.

“Insisting on 10,000 signatures on a petition will make it impossible for anyone to force a special general meeting. It’s a ploy to block democracy, not save costs,” said Hollenstein.

This time, Hollenstein and Coles actually flew to Tasmania with a handful of supporters. The meeting opened at 3:00 pm, but was adjourned shortly afterwards, just as the students entered the room.

“As soon as Benny opened the door into the room we heard the chairman, Alister Runge, declare the meeting closed,” said Coles. “How can they pass 10 resolutions, verify the minutes of past meetings, take discussion from the floor and vote in 60 seconds? It epitomises the problems with the Co-op.”

Runge admitted the meeting was short – “less than 10 minutes” – but told The Sydney Morning Herald that the students had “refused” to participate. Hollenstein and Coles made a complaint to the Department of Fair Trading but in the end nothing came of it.

In October last year, during a Senate hearing into co-operatives, Senator Nick Xenophon asked Peter Knock, then CEO of the Co-op, about the barriers students face getting elected to the board of directors.

“Anybody can apply to be a director,” Knock said. “Anybody can put their hand up – and you have to be a member to be a director as well.”  

The Co-op’s Rules tell a different story. To qualify to be a director, members need to have both graduated from a tertiary institution and “participated in the management and/or direction of a medium to large size business over not less than five years”.

Farrago asked Thorsten Wichtendahl, the current CEO of the Co-op, why the company bars students from the board.

“There are postgrad business students that I think would qualify, technically,” said Wichtendahl.

When pressed on the fact that the average student or active Co-op member would not qualify, he said, “Quite frankly, I wouldn’t want to be reporting to a 21-year-old, first-year uni student. I take my guidance, strategic direction, coaching and mentoring from our board of directors – experienced company directors.”

Farrago also asked Wichtendahl about the way the Co-op gives notice of general meetings. Under the Co-operatives National Law, co-operatives need to give notice of an upcoming general meeting in writing.

“We publish it in major newspapers, we publish it on our website and our email campaigns,” said Wichtendahl.

But Farrago’s investigation has revealed that the Co-op does not email notices to members. When asked to provide evidence that they email notice multiple times, the Co-op never responded.

The Co-operatives National Law states that publishing notices in a newspaper may be enough but only if member whereabouts are unknown. However, most of the Co-op’s members provide their email and physical addresses when they sign up.

On 30 October 2011, Wichtendahl tweeted, “Time to shut down unions for good! #qantas” – a strange sentiment from someone now heading a co-operative, a business structure whose history is linked with the union movement.

“I’m not here to discuss my personal views on unions,” Wichtendahl said when we asked him about this tweet.

“I think the member statistics of most unions are declining and that speaks for itself.”

The afternoon of Wichtendahl’s interview, he deleted this tweet from his Twitter, along with six others. Another tweet said, “Burning issue for boards should be lack of productivity growth, not exec remuneration & gender diversity. Wake up, world has moved on!” (12 October 2012).

The Co-op effectively bars students from its board, seems to guard against their attendance at general meetings and does not engage with them democratically. Farrago asked Wichtendahl how the organisation is accountable to its members.

“We have plenty of feedback mechanisms for members to provide their voice,” Wichtendahl told us. “My personal email address is published on the website. People are welcome to contact me any time… I believe we are very accessible.”

Yet Farrago contacted the organisation in January this year to ask to see its constitution and most recent financial report. Co-operatives are legally obliged to provide these documents to members on request.

But it took more than two months for the Co-op to complete the request, after six emails and over ten phone calls. And the constitution they sent was out of date.

Surprisingly, the Co-op does not include student welfare in its Rules’ objectives. The Rules do not mention the word “student”.

Yet according to the company’s website, the Co-op gives all profits back to students. The “We Support” page lists five ways it gives back.

However, three of the examples – “Involvement in Orientation Week”, “Advertising in student and university publications” and “Hosting and attending book launches” – seem to be euphemisms for advertising.

When Wichtendahl was asked about the other two – “Provision of scholarships and book bursaries to universities” and “Donations to support a range of events organised by student societies” – he revealed that these also come with a price tag.

“The university might give us a special deal on a property to let us operate from a store at more favourable terms – or not charge us a commercial rent, as some other universities do,” he said. “And in return we agree to make a five or 10 grand scholarship available… or whatever cause is dear to the university’s heart.”

Some people in the co-operative sector, who did not wish to be named, told Farrago they do not see the Co-op as being representative of co-operatives, given its “lack of positive engagement with its members”.

The co-operative form of business was developed in the 1840s by the Rochdale Society of Equitable Pioneers, who saw a need for a type of organisation that was responsive to the community. They developed the Rochdale Principles, legislated for under Australian co-operatives law. Summarising these principles, the International Co-operative Alliance defines a co-operative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise”.

Research by Farrago suggests that the University Co-operative Bookshop started to drift away from these ideals in the early 1990s. Since then, the board of directors has been wracked by factional disputes.

An article in The Canberra Times in 1993 reported that in the previous two years, several long-serving directors with backgrounds in publishing and academia had been displaced by accountants, who argued for high directors’ fees and different rules for the election of the board. In a scathing letter of resignation, Canberra academic Maurice Dunlevy said the board had “lost the plot” and called for oversight from the Registrar of Co-operatives.

Four years later, the National Retail Manager was sacked after directors on the board hired private investigators who observed him talking to a former director. In what became a huge dispute, one faction of the board demanded the dismissal of four of the eight directors. One of these was Alister Runge – the chairman of the board seven years later when Hollenstein and Coles launched their attempt to improve student participation. Although Runge has since retired from the board, several of the directors remain from 2004.

Another incident surrounding the brief tenure and swift dismissal of acting general manager Frank Romanin in the early 2000s prompted an inquiry by Magistrate Elwyn Edgar Ernest Elms (a glorious name) for the Department of Fair Trading. Elms’ report criticised the co-operative and recommended that an administrator be appointed. Again, no oversight was provided.

The co-operative seems to have kept a low profile until 2013, when it unveiled an “omni-channel rebrand” with a new logo, colour scheme and website. “University” and “Bookshop” were dropped from its name.

“It’s becoming a lot more commercialised, but again, still keeping the heart of the co-operative in place,” Co-op Chief Marketing Officer Greg Smith told Marketing magazine.

Wichtendahl told Farrago, “Over the last five years that I’ve been with the business, we have diversified into other product categories. When I started we made well over 90 per cent of our annual sales from textbooks. Now that figure is under 60 per cent. We have introduced memorabilia and apparel… basically everything students spend money on, we want to be able to sell”.

There has also been a focus on more than just students. Marketing reported a “wish to re-engage alumni” and the broader community.

But the corporatisation of the Co-op has come at the expense of student access to textbooks – supposedly the Co-op’s raison d’être. An academic at the University of Melbourne Law School, who wished to remain anonymous, has had problems with the Co-op under-ordering textbooks. Half the books they asked the Co-op to make available simply were not.

“I am continuing the fight but, again, your firm representation to the Co-op regarding the need for prompt supply of the book will be very helpful in getting the message across (not just for this subject but for the others too where I understand this has been a problem)”, the lecturer implored students in an email.

In the 2015 Senate hearing into co-operatives, CEO Peter Knock spoke about why the organisation felt an evolution in their  business model was necessary. Senator Nick Xenophon asked about an old bookshop at Adelaide University, which had been run by the student union.

Knock: The problem was their business model just sold textbooks. That was how they operated for some years. While they were still profitable, just, they got to the point where they could not fund it any more. The student union said, “We can invest our $2 million there or invest it in fast food.”

Xenophon: So it was a case of beer not books?

Knock: Correct. That is not unusual, as far as uni students go.

What are the next steps? First, the Co-op has registered a list of business names, from “Cobroadband” to “Co-op Insurance”. It’s unclear what the plans with these names are. But it’s possible the Co-op will seek to get even further away from its bookshop roots.

There is also the question of demutualisation. Given the dominance of business people on the board, corporate branding, democratic limitations and the fact that most students don’t really distinguish it from a company, we wondered whether becoming investor-owned was the next step.

“I believe that over the past 58 years there were C-level executives in the company that have certainly explored this as an option,” said Wichtendahl.

“Personally I don’t have the appetite for it… we have the luxury of not having shareholders that want a dividend… but having said that… never say never.”

Wichtendahl says the current board is “very business-minded”. Among others, the board consists of Mounir Kiwan, Dianne Yerbury and Hilal Yassine, whose brother, Talal Yassine, is company Secretary. These four have connections to a number of boards and committees – at Macquarie University, Medina Capital, Crescent Wealth and the Arab-Australia Dialogue, for example.

The Co-op’s financial report from 2014–15 revealed that the 12 directors on the board and “specified executives” received a total remuneration of $1,940,760.

But despite the perks, they’re arguably not doing a great job. The Co-op’s financial accounts show that the organisation suffered $3 million in losses in 2014. The losses increased to $4 million last year. The plan to to expand sales by diversifying products seems to be working – revenue increased from $114.3 million in 2014 to $124 million in 2015.

But the increased focus on expanding revenue isn’t actually achieving much. Gross profit on product sales was $31 million in 2015, only slightly up on the $30 million profit the previous year. Administration expenses grew more than any other expense the Co-op incurred – they were up more than $800,000 in 2015 from the previous year.

No dividend and no obligation to repay capital must be a corporate manager’s wet dream. But the Co-op is still supposed to be accountable – to its members, who own shares.

On 12 April last year, somebody with the username Piangi posted a deal on Ozbargain.com.au.

“Get Your $20 Co­-Op Bookshop Membership Cancelled & Fee Refunded,” the post title read.

“Finished uni and no longer need to buy textbooks from the Co-op? Even when I was at uni, I found that even with the Co­op ‘discount’, other online bookshops were cheaper. If it’s been at least two years since you first joined, you’re entitled to have your membership cancelled and your fee refunded. This was $20 if I recall correctly, but the fee now is $25.”

The deal became popular, with around 200 upvotes from bargain-hunters.

“Didnt [sic] even take 5 minutes, cheers OP!” read one comment.

Eventually, the Co-op took notice. Someone from the organisation went into damage control and started replying to comments. “Don’t forget that you actually do get some quite good deals as long as you are a member,” they commented.

But bargain-hunters are ruthless and not to be dissuaded.

Sometime between April and July 2015, the Co-op changed the terms and conditions on the application for membership.

The old terms and conditions stated that after being a member for two years, you could request to have the company repurchase your shares. The terms and conditions now say, “Shares in the Co-operative are non-transferable and non-refundable”.

The new application for membership invites people to join the Co-op using language that misleads about the real rights of membership on the matter of shares. The application is inconsistent with the Co-op’s Rules, which allow for repayment and transfer of share capital, and misleading in its assertion of statutory rights to repayment. You could go as far as to say that it tricks people into making their share capital a donation to the co-operative.

But if you signed up as a member of the Co-op before 2015, you should still be able to get your shares back. And just to be sure, Farrago checked with the CEO.

“I would think that we would do the right thing and honour any refund requests that we come across,” he said.

It’s time the Co-op became accountable to its members. The first step would be putting a greater emphasis on engaging students democratically, starting with opening up the board of directors to students. At least one spot on the board should be set aside for students, so that students can have some say over the organisation that is supposed to exist for their benefit.