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Co-op boards' circle of responsibilities. (Management Tip).

Editor's Note: This is the first of a three-part series about cooperative boards of directors. This article identifies the sources of authority for boards and describes seven basic responsibilities imposed on every cooperative board of directors. The next article discusses the legal standards directors must meet and outlines practical ways directors can protect themselves as well as the cooperative. The last article describes the numerous special difficulties faced by cooperative directors and shows why a cooperative director's task is more difficult than for directors of other organizations.

Being a director of a cooperative isn't easy. In fact, it is harder to be a good cooperative director than a director of almost any other organization, including the largest corporations in the country. Cooperative directors make decisions that aren't required in a non-cooperative corporation, and bad decisions can hurt the cooperative and all of its members.

Frequently, directors just have too little information about what they need to do as directors. Information that is available to help them become excellent directors is often not appropriate for cooperative directors. Often, advice is so general it isn't applicable and some is so specific that it cannot be applied easily. Advice and information may not focus on the real issues and sometimes the advice is conflicting.

The three articles in this series certainly don't give all the answers. However, existing information related to cooperative directors, as well as the directors of other kinds of organizations, can be distilled and focused for cooperative director use. Concise guidelines are given that can be tailored to the needs of individual directors on the boards of a specific cooperative.

This article identifies authority that gives directors the rights and responsibilities to carry out their work as directors on behalf of the cooperative and its members. Then it describes the seven basic responsibilities imposed on all directors of all cooperatives: the "circle of responsibilities."

Board authority

What gives a board of directors its authority? The basic authority, and the ultimate statement of responsibility, is imposed by law. Statutes under which cooperatives are incorporated identify the board of directors as the key institution responsible for the direction and management of the cooperative. A typical cooperative statute says: "The affairs of the association shall be managed by a board of not less than five directors, elected by the members or stockholders from among their own number." Variations exist, of course, among statutes and states, but the theme is always the same: the law places a cooperative's management and guidance in the hands of its board of directors.

The statutory mandate is broad but isn't described in further detail by most statutes. This is one reason that further explanation is needed to make the directive meaningful. An added source of guidance is a cooperative's own bylaws. The bylaws are not the place to give detailed descriptions of what the board is supposed to do, and bylaws typically do not. However, in describing certain processes and actions of the cooperative, bylaws often identify decisions the board must make on specific issues. Some of these will be described when board function and personal responsibilities are noted in the next article in this series and--even more so--when special issues are described for directors in the final article. The problem faced by directors (who represent members) when members want something that will be detrimental to their cooperative (to whom directors also owe a duty) is also noted in the final article.

Finally, the board will establish its own internal structure, rules and operations to supplement the broader statements in the statutes and the bylaws. These cannot remove or diminish the responsibilities imposed by statute, but can create a framework in which the overall responsibilities and authority are useful in the everyday work of the board.

These are the technical sources of authority. The ultimate authority, though, comes from the cooperative's members. The cooperative is theirs, and without members' desire to create and perpetuate the cooperative, the board would not exist. Members place their trust, their needs, and authority in a board of directors of their own choosing.

Circle of seven responsibilities

Despite significant differences among cooperatives in the United States in size, function, complexity, organizational form, financing methods and membership makeup, it is possible to summarize a "circle" of seven responsibilities applicable to all cooperative boards of directors. Of course, each of the responsibilities will be carried out differently depending on the cooperative, but fundamentally the circle of seven responsibilities describes all cooperative boards of directors.

1. Board represents cooperative members

Cooperatives are created and operated to serve members' needs. Members invest in the cooperative, they patronize it and they exercise ultimate control of the cooperative. The board of directors is the means by which the needs and desires of individual cooperative members are incorporated into the cooperative. In some circumstances, of course, members vote directly on a cooperative issue. But for the most part, members are represented by the board of directors.

Directors are elected by members and directors' role is to represent those members. To represent members effectively, directors must know what members need. They also assess the cooperative's capabilities to meet those needs. Directors must understand the strengths and weaknesses of the cooperative and make judgments based on a thorough understanding of the cooperative's resources and its employees so they can be used to the members' best advantage in a successful cooperative.

2. Board establishes cooperative policies

Directors put their member representation role into effect by making policy. Indeed, many discussions about cooperative directors summarize the board's job as establishing cooperative policy. Policies may be broad and long-range or they may be specific and immediate. Both are necessary. If the board fails to establish cooperative policy, either someone else will establish the policy or the cooperative will operate without direction and control. In either case, the cooperative cannot be successful and disaster is likely to follow.

3. Board hires and supervises management

Directors do not run the cooperative themselves. Employees are used to do the work necessary, given policies the board has established about the purposes of the cooperative and specific policies guiding cooperative operations. The board hires and supervises management. Normally, direct involvement by board members is limited to only top management, but the board's responsibility does not end with the employment of a chief executive officer. Supervisory responsibilities vary according to structure and circumstances.

4. Board is responsible for acquisition and preservation of cooperative assets

Cooperatives acquire and use assets to serve patrons in one way or another. An overall responsibility of the board is to establish policies with respect to acquisition and preservation of the cooperative's assets. Cooperatives are entrusted with other people's money and must account for it at all times. The assets of a cooperative were purchased with member money, and the cooperative is obligated to those members.

This board responsibility is shown in two specific obligations. First, the board is responsible for guaranteeing that the cooperative establish and use accounting systems that keep track of all aspects of the cooperative's finances and resources. The accounting system must also accurately reflect the true financial condition of the cooperative.

The second obligation is that the board monitor the cooperative's financial performance and establish policies that protect the cooperative from financial shocks and risky situations that undermine its financial health. Proper audits and careful board response to audit reports is the first step towards meeting this responsibility, but a range of board decisions can spell financial success or failure. Whether financially related policies are short-term or long-term, the board of directors has the ultimate responsibility for the cooperative's financial affairs.

It is clear that these responsibilities require a great deal of care, attention, and skill by each member of the board. Board members must understand what a financial reporting system is, what it must do, and what financial information can and cannot tell directors about the performance of the cooperative and its management.

5. Board preserves the cooperative character of the organization

The board, as the policy-making body and representative of the cooperative's members, is responsible for maintaining the special character of the cooperative. If the cooperative is allowed to deviate from principles to the extent that it is no longer a cooperative, the directors have failed in this responsibility. This can be a breach of the trust that members have placed in the board, and in some cases it can be a violation of law.

At the same time, the board appreciates that a wide range of operating methods and structures is available to cooperatives. Preserving cooperative principles doesn't mean that the cooperative is either small or simple. It only means that the fundamental character of the organization is that of a cooperative regardless of size or complexity.

The responsibility imposed on the board to preserve the cooperative character of the organization means that the directors must know what that character is, how it operates in the structure of their organization, and what kinds of events and actions may undermine cooperative fundamentals.

6. Board assesses the cooperative's performance

Every organization evaluates its performance to assess the policies and actions taken during the year and to plan effectively for the future. For cooperatives, performance rules are not identical to those that generally apply to other types of businesses, although they are deceptively similar. A cooperative is indeed concerned with the "bottom line" and its success as measured by financial criteria, but it is not organized to simply benefit itself. The cooperative's performance is ultimately measured by the benefit it confers on those who use it. Performance is judged by the cooperative's fundamental objectives.

This may be accomplished in differing ways, as no single standard of measure is available to the board. The board is faced with multiple criteria, and some may be conflicting. Some criteria may be measured in numbers, and some cannot be measured by any financial documents. Despite the variations, the board must keep its eye on the cooperative's ultimate goals, make careful assessments of performance and strategies, establish appropriate policies, and make hard decisions on behalf of the members.

7. Board informs members

Cooperative boards of directors inform members about the cooperative organization--the members' own business. This duty is rather unique among businesses in its importance and implications for member control.

Without accurate information, members cannot make decisions about their cooperative and will not be prepared to make decisions imposed on them as cooperative members. Members will not be able to understand whether their cooperative is successful, or whether basic changes must be made to correct problems identified by the board. And without accurate and complete information, members will not be able to make judgments about cooperative management or about the board's own performance.

Member information completes the directors' "circle of responsibility" leading to member representation.

General definitions:

Responsibilities: What boards of directors must do to meet their obligations to the cooperative under laws and other guiding sources.

Standards of conduct: Sometimes called duties, standards specify how the responsibilities must be carried out. They impose standards of conduct on the board and individual director board members.

Liabilities: These are consequences when directors fail to carry out required responsibilities with the required standards of conduct. Liability may be imposed on the cooperative or individual members of the board.

Boards of directors and management often struggle with the division of duties, supervision, and operational detail between the board and management. This issue can be detrimental to the cooperative if conflicts are not resolved satisfactorily.

This may be one of the most misunderstood and neglected of directors' responsibilities. In most situations, it does not require specific action on the part of the board, but only if the proper safeguards have been established and are in place for all to see. A periodic review of the cooperative along with established policies and rules requiring operation on a cooperative basis are essential. But nothing gives the cooperative as much protection as an articulated dedication to cooperative principles understood by the board, the members, and management.

Implementing exercise

At your next board meeting, consider conducting a complete assessment of sources of the board's authority, including statutory requirements, bylaw provisions, policies, board structures or another source of board authority.

* What is the source of the authority?

* What does it mean for the everyday operation of the board?

* Does the board fully appreciate its authority--and its limits?

* How can the board respond better to the authority it is assigned?

At each of the subsequent seven board meetings, thoroughly consider one of the responsibilities listed.

* What specifically does the board currently do to meet the responsibility?

* What are the weaknesses in the board regarding its responsibility?

* Does each director have the skill, interest, and time to consider and respond to the responsibility?

* Does the board have the knowledge and information necessary to meet each responsibility?

* What specific steps can be taken to make the board meet every responsibility?

* Is there a consensus on the board's performance?

* Would members agree with the board's self-assessment?

The most effective way to make the responsibilities "up close and personal" is to have each director individually address the issue and propose his or her own solution 'to problems perceived about the responsibility under discussion. Board meetings or ancillary sessions to board meetings can then provide the forum for discussion within the board. These sessions may be more effective if management is not present.
James Baarda
USDA/RBS Ag Economist
COPYRIGHT 2002 U.S. Department of Agriculture, Rural Business - Cooperative Service
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2002 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Baarda, James
Publication:Rural Cooperatives
Geographic Code:1USA
Date:Jul 1, 2002
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