Directing Change through GovernancePhil KenkelBill Fitzwater Cooperative ChairOklahoma State University

Traditional View of the Board of Directors

Basic competenciesDuties

◦Care◦Loyalty◦Obedience

Distinguishing board and manager responsibilities

Evolving View of the Board Sarbanes-OxleyDodd-FrankAudit CommitteeRisk Oversight CommitteeThe Strategic Board

Changing Cooperative IndustryLargerMore complexMore zeros on the financial

statementsJoint ventures, alliancesMergers, AcquisitionsSuccession PlanningInfrastructure reinvestment

Board Alignment“Organizational alignment occurs when

strategy, goals, tactics and cultural values are mutually supportive, and when the systems and people of an organization are linked and compatible with each other.”

The concept of alignment encompasses basic competencies and best practices but also provides a framework for continuous improvement

Board AlignmentInternally alignedAligned with the cooperative’s

strategyAligned with the CEOAligned with member interests

Internal AlignmentClear understanding of roles and

responsibilitiesClear expectations for board

membersEfficient board procedures

Board ProceduresFrequency, format and length of

board meetingsPrioritize informational needsOperational information and

budgets that can be compared with strategic goals

Agenda and information packet distributed with sufficient lead time

Group DynamicsAn effective board is comprised

of peers who respect and work well with each other

Boards are not natural teamsBoard chairperson plays a key

role◦Promote constructive debate◦Build consensus◦Summarize and frame decisions

Barriers to Internal AlignmentBoard Politics

Under Performing Directors

Board Politics◦Conflict between constituency

groups◦Geographic board districts

particularly susceptible◦Guarding interests of district instead

of communicating their unique perspective

◦Aligned directors vote in the best interest of the cooperative even if the final outcome is not advantageous to their constituency

Under Performing DirectorsThe most sensitive issue of internal

alignmentAdditional trainingAsk and over-extended director to trim

other commitmentsBoard chair may have to ask the under

performing director to resignIn an aligned board directors are

committed to performing at full potential and have the courage to address educational needs

Under Performing Directors“Too many cooperatives rely on

term limits to remove the underperforming director. If a board member has no interest in or no potential for performing well in the board role, it is time to encourage, and eventually insist that they step down.”

Board CompositionSkill and dedication is the single

most important factor in board effectiveness

Balance of experience, financial expertise and diversity of perspectives

Continuity is important but a degree of turnover keeps a fresh perspective

Imagine a Soccer Team with 11 Goalies

Recruiting and Retaining DirectorsA member responsibilityBoard must develop culture and

procedures to ensure multiple quality candidates

Associate board can be vehicle to groom perspective board members

Comprehensive orientation that allows directors to understand cooperative operations and risk profile

Alignment with Cooperative StrategyThe unaligned board reverts to

monitoringStrategic alignment allows the

board to prioritize issuesAligned board has clarity in

regard to the cooperative’s strategy

Not just consensus, the directors own the goals

“A good test for strategic alignment is to poll the board mid-year about the #1 priority for the cooperative. If there are five different answers, the board is not strategically aligned.”

Strategic AlignmentStrategy is often proposed by the

CEODeveloped through interactive

dialog with the boardConsider whether the

cooperative has the financial and human resources to implement the strategy

Don’t just formulate the plan, be a strategic advisor to the CEO on a continual basis

Strategic AlignmentInfrastructureEquity retirementRisk managementManagement succession

Board Role in Risk ManagementInformed oversightDebate and develop a shared

vision for risk appetiteConsider financial reserves,

borrowing capacity, member equity at risk

Ultimately it’s a philosophyProcesses in place to control risks

within your capacity to absorb lose

Management SuccessionCritical governance topic for

most cooperativesInsufficient time and effort is

being devoted to succession planning

Top priority and should be addressed on a continuing basis

Aligned in vision for CEO and philosophy toward developing internal talent or reloading

Alignment with the CEOFirst, second and third most

challenging issue for board alignment

Ask the right questions, demand information, thoroughly understand the cooperative

Not preempt the CEO’s responsibility for running the company

Micro-managing versus abdicating governance role

Challenges to the Board-CEO PartnershipBoard has long run perspectiveCEO focuses on day to day issuesBoard devotes substantial but limited

timeCEO devotes continuous attentionBoard’s information comes from the

CEOBoard is a deliberating bodyCEO makes individual, short time

frame decisions

Alignment with the CEOCommunication and adjustment on

both sidesBoard provides feedback on matters it

expects to be informed onCEO adjust decisions and information

flowCEO provides information on current

business environmentBoard adjust their advice from long

term issued to short term strategies

Alignment with the Member’s Long Term InterestMost nebulous but most

important aspect of the aligned board

Boards make inter-related decisions on cash patronage, retaining funds, infrastructure investment and equity retirement

These decisions create alignment challenges

Alignment with Member InterestInsufficient reserves and

investment-not protecting the long-term stability

Excess unallocated reserves-reduces member’s long term return

Long equity revolving period-member investment is not aligned with use

Qualified stock was historically justified but may no longer be in member’s interest

Aligning with Member InterestAligning the cooperative with

member interest involves aligning assets with the core membership needs, maximizing profits through efficient operation, managing the balance sheet for liquidity, solvency and adequate reserves and then distributing all residual cash to member owner as cash patronage and equity retirement.

Metrics and ToolsMonitor ROA and ROEGoals for solvency and liquidity“Goodman Formula Calculator”

determines profit level required for given asset growth, cash patronage and revolving cycle

Enterprise Risk Management measures risk exposure and capacity

Tools to model cash flow and implications of alternative equity management programs

The Cooperative Business Model Has a Lot of Moving Parts

The board needs financial tools on their dashboard

Creating the Aligned BoardContinuous improvementEducation

◦Comprehensive orientation◦Governance◦Strategy◦Finance◦Risk management◦CEO succession planning

Chemistry between Board and CEOBoard chair person is gatekeeper for the

boardCEO is gatekeeper for staff and opreration

issuesChair is sounding board for the CEO for

emerging issuesCEO provides insights into business

environment and policy and strategy issuesInformal meetings allow both the chair and

CEO to reflect on issues before framing the issue for board deliberation

Meeting AgendasChair and CEO work together to

establish agendasSufficient time to discuss

strategic issues as well as monitoring

Board are expected to devote more time to internal controls, the audit and risk management

Most boards still only meet 10-12 times/year

Member CommunicationOften overlooked responsibility of the

boardMembers must be informed about

operating environment and decisionsInformed members can provide feed

back to the boardDirect contactMultiple communication channelsYounger producers will respond to

blog, Twitter feed or Facebook posting

Board EvaluationOnly a minority of boards

systematically evaluate the board’s performance

Begin with overall board performance

Can expand to have directors self evaluate their performance

In the aligned board directors have the comfort level to give and accept constructive feedback on personnel effectiveness

“Good boards are made up of accomplished leaders who value continuous improvement. Those directors work to find ways to make a good board better!”

The Aligned BoardDirectors are elected by the

membership to ensure that their long term interest are served

Requires highly accomplished individuals and a high performing team

Board members must draw from their knowledge and skill to professionally manage the board

Board alignment is a framework for continuous improvement