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Director fees and expenses - developing a board performance plan to prepare your system to respond to member and public inquiries.

The article by Harold McCaughrin in this issue of Management Quarterly is indicative of what we believe is a significant trend in the rural electric program, namely an increasing number of consumer and media requests for information about director fees and expenses, and the resulting need for directors to be able to explain and justify why these fees and expenses exist. This suggests that boards (and managers) will need to spend a greater amount of time discussing the level of expense that the board incurs now, and developing a philosophy about what level of expense should be incurred.

To assist boards in this process, we recommend that they consider developing a "Board Performance Plan" as part of the system's annual work plan and budget. Developing this plan will help the board determine its real philosophy about what amount should be paid for the director's fee, how much should be spent on training and education, the level of medical insurance and other benefits to be provided, and the other components that make up the total level of expenses incurred by the board. By participating in this discussion on an annual basis, each director will be better prepared to explain why these expenses occur if questions are raised by consumers or the media.

We will begin by identifying two questions that we will try to answer in this article:

1. On average, what do rural electric distribution systems now spend for director fees, expenses, education and insurance?

2. How much should a system plan to spend, and how does it determine that this amount is reasonable and prudent?

How much does the average board cost?

A review of industry data

In order to establish data about our industry, we have reviewed the 1990 REA Bulletin 1-1 Statistical Report for Rural Electric Borrowers to obtain the total number of consumers served and the total revenues for all distribution systems. A summation of all distribution REA Form 7 Financial and Statistical Reports for 1990 was then used to obtain the total director fees and expenses for all distribution systems and the total number of directors. This is the most recent period for which data is available. From this information, the following results appear to be indicated:
Average total annual fees and expenses per director $5,500

Average total annual board fees and
expenses per consumer $4.64
 ($.39 per consumer per month)

Average total annual board fees and expenses
as a percent of total revenues 0.32%

These results are derived from REA reports. We can't confirm that all systems report all actual costs related to the board of directors and their activities in the same way on REA Form 7. For example, some systems may report all board expenses on part N, line 7, but others may only report the fees and expenses related to board member attendance at meetings and training seminars on part N, line 7, reporting the costs for group insurance premiums and officer and director liability insurance premiums in other general ledger accounts. A recent informal survey of Management Internship Program participants confirms this lack of consistency throughout the industry. Hence, the national data must be looked at very critically before drawing any conclusions.

Given this caveat, systems may still want to produce a similar analysis for themselves. This can be done using the following REA Form 7 line items:

Total director fees and expenses: part N, line 7

Total number of board members: part N, line 6

Total number of consumers: part R, line 10, column I

Total operating revenues: part A, line 1, column b

From this information, you can make these calculations for your system and compare your results to the industry numbers. But can you make a valid argument that your system's results are therefore reasonable or appropriate? We don't believe so for the following reasons:

* Each board must determine what fee it should pay directors for performing their official duties.

* Each board must determine what medical or insurance benefits should be supplied to directors.

* Each system must determine the number of regular, special and committee meetings it requires annually.

* Each board must determine its own objectives regarding which local, state and national activities in which individual directors should participate, and the number of training programs and conferences that directors are expected to attend in order for them to be reasonably informed to make prudent decisions.

Factors such as the number of board members, the fee (the fixed amount paid to a director for each meeting day), participation in state and national meetings and activities, and the amount of training sought all impact the costs related to board activities. The variables of system revenues and size, combined with the other factors, make comparisons to the industry data difficult and misleading. Hence, while national data shows us the average amount that systems spend for board activities, it cannot tell us what the individual system should spend. To answer this question we need another approach.

The Board Performance Plan

Rather than just comparing system data to industry data, we suggest that systems develop a Board Performance Plan as part of its overall work planning process. The Board Performance Plan should identify the level of fees and expenses that the system must pay to attract qualified directors to serve on the board, as well as the number and kinds of training programs and other activities directors should engage in to enable them to continue to meet overall system objectives. A system may then compare its Board Performance Plan with plans developed by comparable systems throughout the state, region, or within the same G&T. This comparison with comparable systems in the same state or G&T will produce more meaningful information than just a comparison with national data.

There are at least five categories of director fees and expenses which compose the Board Performance Plan. These categories are as follows:

The Director Fee

The REA mortgage contract prohibits paying an annual salary to directors. But systems may choose to pay a professional fee to each director on a daily basis for attending meetings or otherwise performing duties on behalf of the cooperative. A meeting is considered to be a gathering where business may be officially conducted. In determining this, there are several questions that a board should address:

* What fee must be paid to attract qualified directors to serve on a rural electric board, given the time commitment required, the potential liabilities to which the director is exposed, and the competition for qualified directors that comes from other organizations and voluntary agencies that seek them to serve on their boards?

* How much do directors of comparable corporations receive?

* How much do comparable rural electrics pay?

* Perhaps most importantly, what would the member/owners consider to be a reasonable fee for directing a multi-million dollar rural electric corporation?

Nationally, rural electric director fees appear to range from under $50 to over $400 per meeting. As noted above, boards should consider what comparable systems in the state or G&T pay for the director fee. We also suggest that systems identify what the neighboring investor-owned utility pays its directors on a per-meeting basis. It may be useful to have this information available as a point of comparison in the event you receive consumer or media inquiries about director fees.

Once a board determines this fee, it must then address two related questions:

* For which meetings should we pay this fee?

-- Regular meetings? -- Special meetings? -- Committee meetings? -- Training and educational seminars? -- Travel days?

* How are travel expenses paid?

Systems may choose to reimburse actual expenses on the basis of the director properly submitting the appropriate documentation. Alternatively, systems may choose to pay directors a per diem (a specific amount provided to cover all expenses incurred while on cooperative business). In this case, the per diem is reportable as income to the director and the director must then maintain proper documentation and file the necessary business expense tax forms.

Training and Education

Our industry is both complex and changing. Ordinarily, rural electric directors do not have any industry-specific expertise when they come on the board. But because they are corporate directors, trustees automatically acquire a number of legal responsibilities, including that they be reasonably informed when voting on any business decision. A director who is not reasonably informed may be held liable in a court of law. For these reasons, it is prudent to undertake a planned course of action to see to it that all directors have the knowledge and skills they need to perform their duties. Having such a plan also prepares directors to explain why it is necessary to incur certain expenses as part of the education process. Dealing with this issue requires answering a number of questions:

* What training must each new director undertake to become quickly informed about industry issues?

* How many training and education days are required to enable more experienced directors to remain knowledgeable about the changing issues in our industry?

* Is there specialized training that should be provided on a periodic or annual basis for some members of the board, such as special programs for board officers or G&T representatives, or programs for directors who feel they need to know more about such issues as rates, transmission access, of EMF?

* Is there a maximum number of annual training days for which directors will be compensated?

Other Meeting Attendance

Rural electric systems are typically involved in a network of affiliated organizations, including the statewide, the G&T, financing organizations, and NRECA. Participation in these organizations, including by attending their annual meetings, regional meetings, legislative rallies, and related activities, can produce tangible benefits for the system. In developing the Board Performance Plan, each system should identify the costs and benefits associated with these activities, as well as which directors should attend individual meetings. Determining this level of participation--the number of meetings attended by each director--will affect the overall board performance budget and also help directors understand why these expenses must be incurred.

Medical, Accident and Life Insurance

Many rural electric systems include some form of medical and accident insurance as part of the fee paid to directors for serving on the board. Boards should ask a number of questions when considering this issue:

* Should the system provide medical insurance?

* Should the system provide accident insurance?

* Should the system provide life insurance?

* If the system is going to provide one or more of these insurance benefits, should the system pay the entire premium or should the board member be expected to pay a portion of the expense?

* Are former directors allowed to participate in the plan, and if so, should the system fund any or all of this expense?

* What insurance benefits do comparable rural electrics provide?

When discussing this issue, the board needs to weigh the benefit level necessary to attract qualified directors to serve on the board with the level which the member/owners would consider to be a reasonable benefit. The payment of a portion or all the premium for coverage (not access to the coverage) for former directors is a sensitive matter and should be carefully studied to make sure it is reasonable and meets all legal requirements. Systems are also advised to make sure the payment of such benefits is authorized by the members in the bylaws and permitted under state statute.

Officer and Director Liability Insurance

Typically, a system's bylaws will provide the board with the power to purchase officer and director liability insurance for financial protection in the event another party brings forth a suit against the board and/or the system claiming they have been wronged by the officers and directors through their failure to conduct business in a proper manner. For example, suppose a board approves the construction of a new headquarters building by a local contractor. If a second contractor offered a lower bid with a better quality of construction, the officer and director liability policy would provide coverage if the second contractor successfully filed a legal claim against the board and the system. The following questions should be addressed regarding this issue:

* From what acts of negligence will a policy cover the board and the system?

* What acts are not covered under the terms and conditions of the policy?

* How much coverage should be purchased?

* What is the cost for this level of coverage?

The answers to these questions may be affected by the market--the availability and the cost of the coverage. In today's market, distribution systems apparently can choose between 1 million and 10 million dollars of coverage. In general, boards are swayed by events in the state or region, such as recent or pending claims or settlements when deciding upon the amount of coverage. Tracking the annual premium is important from the standpoint of assessing the cost versus the coverage provided when making the renewal decisions for the carrier and type of coverage. Also, the attorney, general manager/executive vice president and the insurance agent should review with the board annually what is covered and what is not covered under the policy so the board fully understands the degree of protection it has.

As we indicated in the opening of this article, we believe that boards will be increasingly expected to justify and explain their board expense practices. We predict a growth in member inquiries about this issue, as well as more media interest. Systems and boards can prepare for these inquiries by developing a Board Performance Plan. In developing the plan, the board should seek information from comparable systems in the state, region or G&T. Showing that your system fits the regional or G&T norm is one of the most effective ways to justify the expense levels that your system has chosen. Many systems do not now develop a Board Performance Plan or compile and format this information in the way we have discussed, but if they do so, they will be better prepared to answer the member and other inquiries that may come their way.

Appendix A offers a sample spreadsheet application to record and monitor these expenditures by category. The numbers shown in the spreadsheet are not meant to have any significance for a particular system. The format of the director fees and expenses presented is the relevant purpose of the appendix, not the amount of the costs presented.

We want to emphasize three points:

First, the information collected in each of the categories is not meant to endorse any particular spending level.

Second, the information collected should not be compared on a per director basis but compared to the Board Performance Plan and resulting budget. We have evidence to show that boards lacking such a plan wind up arguing about individual director expenses, to the detriment of the board's ability to collectively make good decisions. The board determines the level of activity through the process previously described, and it is the responsibility of each director and the general manager to provide input into this process.

Third, each director must be able to explain the Board Performance Plan and the costs. The board must then determine what information to disseminate and how to disseminate it to the members. When members or the media ask about director fees and expenses, your system needs to be prepared to respond. Preparation is accomplished in three ways:

1. By developing a Board Performance Plan to follow when carrying out its duties and responsibilities of running a multi-million dollar business, and for individual director development, so each has the knowledge and ability to carry out these duties and responsibilities.

2. By translating the Board Performance Plan into an annual budget and having a detailed accounting system in place to accumulate and monitor these expenditures.

3. By periodically reviewing and always adhering to your system's policy regarding all aspects of director fees and expenses.


Greg Boudreaux has been an employee of NRECA's Management Services Department since 1984. He currently serves as Principal of Board and Management Development, and is responsible for NRECA's curriculum-based courses for directors, managers and supervisors and for developing customized on-site training. He is also manager of RECNET, serving as executive producer for all televised programs offered by the Rural Electric Cooperative Network, an award-winning private network that produces training programs for rural electric utilities.

Prior to joining NRECA, Greg was an assistant dean of the graduate school of the University of Maryland and as a resident graduate professor for the University of Maryland in Tokyo, Japan. Boudreaux holds a master's degree from LSU and a doctorate from Duke University.

Scott Luecal is a Senior Management Consultant with the NRECA based out of Lincoln, Nebraska office. Scott coordinates the Management Internship Program and all other NRECA programs conducted at the University of Nebraska. He instructs portions of these programs dealing with accounting, finance, P.C. applications and strategic planning. Scott conducts other NRECA accounting and financial seminars and training programs. Scott also serves as editor of the Management Quarterly.

Prior to joining NRECA, Scott was with Coles-Moultrie Electric Cooperative, an Illinois distribution cooperative, for nine years and served in the capacities of accountant, office manager and general manager.

Scott received his bachelor of science degree in business administration in 1981 from Millikin University in Decatur, Illinois, and his master's degree in business administration in 1985 from Eastern Illinois University in Charleston, Illinois. Scott is also a 1987 graduate of the Management Internship Program.
COPYRIGHT 1993 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes appendix
Author:Boudreaux, Greg; Luecal, Scott
Publication:Management Quarterly
Date:Jun 22, 1993
Previous Article:What's a co-op director worth?
Next Article:That 'just right' debt-to-equity ratio.

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