MANAGEMENT TIP
Co-op boards’ circle of
responsibilities
By James Baarda
USDA/RBS Ag Economist
james.baarda@usda.gov
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.
eing 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.
