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The Circle of Responsibilities for Co-Op Boards

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The Circle of Responsibilities for Co-Op Boards The Circle of Responsibilities for Co-op Boards REPRINT Management Tip Series By James Baarda Foreword All boards of directors are under increasing pressure to perform well and justify their decisions. Cooperative boards are no exception. But increasing scrutiny of director behavior is not always accompanied by better information about exactly what directors are supposed to do and how they are to perform their many duties. The series of articles reprinted here originally appeared during 2002 as Management Tip articles in three issues of USDA’s "Rural Cooperatives" magazine. These articles lay out fundamental guidelines for cooperative directors. Along with practical guides, the articles explain underlying principles and give suggestions for specific actions cooperative boards and directors can take to improve their service to cooperatives. Cooperative members can use this well-received series to assess board and individual director performance and make informed choices about directors. Directors can apply the information to carry out the full range of their responsibilities with the assurance that they are satisfying the high standards of conduct required of them. The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, D.C. 20250-9410 or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity provider and employer. Cooperative Information Report 61 Reprint Published: February 2003 2 January/February 2002 / Rural Cooperatives MANAGEMENT TIP Co-op boards’ circle of responsibilities By James Baarda The three articles in this series cer- tive meaningful. An added source of USDA/RBS Ag Economist tainly don’t give all the answers. Howev- guidance is a cooperative’s own bylaws. [email protected] er, existing information related to coop- The bylaws are not the place to give erative directors, as well as the directors detailed descriptions of what the board is Editor’s Note: This is the first of a of other kinds of organizations, can be supposed to do, and bylaws typically do three-part series about cooperative boards of distilled and focused for cooperative not. However, in describing certain directors. This article identifies the sources of director use. Concise guidelines are giv- processes and actions of the cooperative, authority for boards and describes seven en that can be tailored to the needs of bylaws often identify decisions the board basic responsibilities imposed on every coop- individual directors on the boards of a must make on specific issues. Some of erative board of directors. The next article specific cooperative. these will be described when board func- discusses the legal standards directors must This article identifies authority that tion and personal responsibilities are not- meet and outlines practical ways directors gives directors the rights and responsi- ed in the next article in this series and— can protect themselves as well as the cooper- bilities to carry out their work as direc- even more so—when special issues are ative. The last article describes the numer- tors on behalf of the cooperative and its described for directors in the final article. ous special difficulties faced by cooperative members. Then it describes the seven The problem faced by directors (who directors and shows why a cooperative direc- basic responsibilities imposed on all represent members) when members want tor’s task is more difficult than for directors directors of all cooperatives: the “circle something that will be detrimental to of other organizations. of responsibilities.” their cooperative (to whom directors also owe a duty) is also noted in the final arti- eing a director of a coop- Board authority cle. erative isn’t easy. In fact, it What gives a board of directors its Finally, the board will establish its own B is harder to be a good authority? The basic authority, and the internal structure, rules and operations to cooperative director than ultimate statement of responsibility, is supplement the broader statements in the a director of almost any other organiza- imposed by law. Statutes under which statutes and the bylaws. These cannot tion, including the largest corporations cooperatives are incorporated identify remove or diminish the responsibilities in the country. Cooperative directors the board of directors as the key institu- imposed by statute, but can create a make decisions that aren’t required in a tion responsible for the direction and framework in which the overall responsi- non-cooperative corporation, and bad management of the cooperative. A typi- bilities and authority are useful in the decisions can hurt the cooperative and all cal cooperative statute says: “The affairs everyday work of the board. of its members. of the association shall be managed by a These are the technical sources of Frequently, directors just have too board of not less than five directors, authority. The ultimate authority, little information about what they need elected by the members or stockholders though, comes from the cooperative’s to do as directors. Information that is from among their own number.” Varia- members. The cooperative is theirs, and available to help them become excellent tions exist, of course, among statutes without members’ desire to create and directors is often not appropriate for and states, but the theme is always the perpetuate the cooperative, the board cooperative directors. Often, advice is same: the law places a cooperative’s would not exist. Members place their so general it isn’t applicable and some is management and guidance in the hands trust, their needs, and authority in a so specific that it cannot be applied easi- of its board of directors. board of directors of their own choosing. ly. Advice and information may not The statutory mandate is broad but focus on the real issues and sometimes isn’t described in further detail by most Circle of seven responsibilities the advice is conflicting. statutes. This is one reason that further Despite significant differences among explanation is needed to make the direc cooperatives in the United States in Rural Cooperatives / July / August 2002 3 size, function, complexity, organiza- thorough understanding of the cooper- to serve patrons in one way or another. tional form, financing methods and ative’s resources and its employees so An overall responsibility of the board is membership makeup, it is possible to they can be used to the members’ best to establish policies with respect to summarize a “circle” of seven responsi- advantage in a successful cooperative. acquisition and preservation of the bilities applicable to all cooperative 2. Board establishes cooperative cooperative’s assets. Cooperatives are policies entrusted with other people’s money Directors put their and must account for it at all times. The General definitions: member representation assets of a cooperative were purchased role into effect by mak- with member money, and the coopera- Responsibilities: What boards of directors must do to ing policy. Indeed, many tive is obligated to those members. meet their obligations to the cooperative under laws discussions about coop- This board responsibility is shown and other guiding sources. erative directors summa- in two specific obligations. First, the rize the board’s job as board is responsible for guaranteeing Standards of conduct: Sometimes called duties, stan- establishing cooperative that the cooperative establish and use dards specify how the responsibilities must be carried policy. Policies may be accounting systems that keep track out. They impose standards of conduct on the board broad and long-range or of all aspects of the cooperative’s and individual director board members. they may be specific and finances and resources. The account- immediate. Both are ing system must also accurately Liabilities: These are consequences when directors necessary. If the board reflect the true financial condition of fail to carry out required responsibilities with the fails to establish cooper- the cooperative. required standards of conduct. Liability may be ative policy, either some- The second obligation is that the imposed on the cooperative or individual members one else will establish the board monitor the cooperative’s finan- of the board. policy or the cooperative cial performance and establish policies will operate without that protect the cooperative from direction and control. In financial shocks and risky situations boards of directors. Of course, each of either case, the cooperative cannot be that undermine its financial health. the responsibilities will be carried out successful and disaster is likely to follow. Proper audits and careful board differently depending on the coopera- 3. Board hires and supervises man- response to audit reports is the first tive, but fundamentally the circle of agement step towards meeting this responsibili- seven responsibilities describes all Directors do not run the cooperative ty, but a range of board decisions can cooperative boards of directors. themselves. Employees are used to do spell financial success or failure. 1. Board represents cooperative the work necessary, given policies the Whether financially related policies are members board has established about the purpos- short-term or long-term, the board of Cooperatives are created and oper- directors has the ulti- ated to serve members’ needs. Mem- Boards of directors and management often struggle mate responsibility for bers invest in the cooperative, they with the division of duties, supervision, and opera- the cooperative’s finan- patronize it and they exercise ultimate tional detail between the board and management.
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