Creating a Strong Leadership Team

1. Creating a Strong Leadership Team Anne Reynolds, UW Center for Cooperatives 608/263-4775 reynolds@aae.wisc.edu John McNamara, Union Cab 608/242-2039 ext 361 john_mcnamara@unioncab.com

2. Being a co-op director is a very prestigious and responsible position. • The long run success of a cooperative depends more on a strong board than on a strong manager. • The board by law is responsible for leading the co-op. The board can delegate duties to hired management, but they cannot delegate this responsibility. • Naturally for a successful cooperative there should be a strong board and a strong manager that work well together as a team.

3. Legislative authority • WI. Chapter 185.31: All powers of the cooperative shall be exercise by or under the authority of, and the business and affairs of a cooperative shall be managed under the direction of, the board, except as otherwise provided in the chapter.

4. Unique Role of a Co-op Director: • Represent the best interest of members in the short run and long run. • Directors of IOF’s are concerned with profit and return on capital. • Directors of co-ops are concerned with price, services, quality, profit and return on capital. • Being a director of a co-op is more challenging than being a director of an IOF.

5. “The board of directors faces a two-fold challenge: (1) It represents stockholders or members of the business and (2) it is vested by law with the duty to reasonably conduct the affairs of the company….It represents the heart of what makes a corporation a useful and workable organization.” “The Board of Directors of Cooperatives”

6. Board role and responsibilities • Establish cooperative policy • A major responsibility of the board of directors is that of developing broad objectives and policies. • The starting point for formulating objectives and policies is having a well defined vision and mission statement: Vision: Fundamental reason the co-op is in existence; what does the co-op want to achieve? Mission:How will the co-op achieve its vision? • Policies as how the board will operate and policies for management.

7. Establishing policies continued: • Polices will reflect what members want out of the business. • Well informed policies provide guidelines for achieving the basic objectives directors set for the co-op. • A policy is a guideline to action. It is flexible. That is, it is not a rule, regulation, standard practice or a procedure. • Policies are usually fairly broad rather than specific. • Policies need to allow some individual judgment from management. The degree of flexibility will vary from one co-op board to another.

8. Types of policies • What types of policies do you have? 1. Policies of the board: -Voting - Conflict of interest - Employment of board members/relatives - Member representation - Board ethics - Director nomination - Board evaluation - Decision making

9. Types of policies 2. Policies on finance and accounting - Risk management - Financial reserves - Insurance - Employment of an auditor - Bonding 3. Public relations - General public - Member relations - Employee relations

10. Types of policies 4. General business operating policies - Plant and office costs - Equipment - Quality control - Personnel in contact with public - Operational efficiency - Pricing, discounts, etc.

11. Board Roles and Responsibilities • Represent co-op members. • All members or a group of members? • Be an unbiased “voice” for all members. • Member expectations • Conflict resolution role • Peer support initiatives

12. Effective communication is essential. • Board is a two-way conduit of information 1. From members to board/manager 2. From manager/board to members • Keep members informed of co-op activities, policies, and strategic direction

13. Board Roles and Responsibilities • Hire and supervise management • Making the perfect match • Succession and the future • Supervision or interference • What about other employees? • Does the board have an annual appraisal and evaluation of the manager/president/CEO? If so, describe the procedure.

14. First, let’s review why boards need to annually, at a minimum, appraise and evaluate the manager/CEO. • By failing to evaluate the manager, boards miss an opportunity to express support for the manager’s strengths and strengthen his/her performance. • Neglect of this board responsibility can be costly, resulting in higher management turnover, mistrust, and ongoing poor performance. • Fulfills the board’s fiduciary and legal responsibilities.

15. Managers need feedback on performance. Good managers welcome honest feedback. Also, this annual review provides an opportunity for boards to express formal appreciation to the manager for a job well done. Most important: Manager’s performance affects the performance of the entire cooperative — assuring successful performance is one of the board’s chief responsibilities.

16. The assessment should be taken in the context of: • The manager’s job description • Annual goals and objectives for the cooperative established by the board and management • Manager’s individual performance goals • Implications for performance related compensation

17. Examplesof mutually agreed upon short term or annual goals may be: • Increase butter sales to food service by X% • Increase fertilizer sales by X% • Reduce total operating costs by X% • Explore merger opportunities and report back to the board

18. Six suggested steps to conducting an appraisal and evaluation of the manager/president/CEO • Agree to conduct the assessment Both the board and manager should have an opportunity to discuss the assessment process. • Decide who will lead and participate in the assessment. Board chair or chair of personnel committee? Executive committee or compensation committee? How will all board members will be involved? Involvement of staff/employees? Manager self-evaluation?

19. Steps continued: (3) Distribute an assessment instrument A letter from the chair to those participating in the assessment explaining the assessment process, that the information will be compiled in a composite summary report; individual responses will remain anonymous. (4) Tabulate and analyze the assessment results • Compare results of the board’s assessment of the manager with the manager’s assessment of his/her performance. • Board should understand what constitutes unacceptable performance and the related implications.

20. Steps continued. (5) Review the results with the manager and develop an action plan. • Review strengths and limitations and develop an action plan. • Explain the implications for compensation. (6) Support the manager’s future development • A major objective of the assessment process is to encourage self-discovery and improvement. • Agree on annual goals (performance standards) for the up-coming year and for the next annual review. • Agree on strategies for correcting deficit performance or ultimate consequences Review handout -- sample assessment tools.

21. Board roles and responsibilities continued: • Fiduciary: Responsible for protecting the cooperative assets. • Accounting system • Financial health • Resources to serve

22. Board role and responsibilities continued: • Preserve the cooperative’s character • What makes it unique? • The cooperative’s strengths and weaknesses • Expectations • Flexibility or abandonment

23. To carry out their fiduciary responsibility to protect the cooperative assets, directors must meet three duties: • Duty of loyalty • Duty of care • Duty of obedience

24. Duty of loyalty: • Directors should have an undivided loyalty to the entire co-op. The director may not represent the special interest of one group of members over the memberships as a whole. • Directors must refrain from conflict of interest • Directors are obligated to act in good faith • Cannot divulge confidential information • Have a code of ethics • Independence as a director is a mindset that includes no agenda, no bias, and a willingness to challenge

25. What practices or policies does your board of directors rely on to ensure the board represents the “entire” cooperative? What potential conflicts of interest could you encounter as a director of this cooperative? What actions should you take if you believe you may be in conflict of interest?

26. Duty of Care: • The standard of conduct is defined as the degree of skill, diligence or reasonable care that an ordinary prudentperson would exercise in similar circumstances. • To meet the duty of care, directors use reasonable care to: • Prudent selection of management • Provide adequate supervision • Delegating responsibility and monitoring performance • Directors’ are presumed to have knowledge of the cooperative’s books and records.

27. Perhaps the most important responsibility of directors is to ask the right questions of management.B. Henehan and B. Anderson handout • You can no longer be passive. Directors need to be engaged at every board meeting. • You will not get into trouble for making the “wrong” decision, just careless, uniformed, or conflicted decisions.

28. Basic thumb rule: Ask the question(s) that would help you explain a board action to a member. Ask questions that cannot be answered by yes or no. Questions such as: • What impact will this idea have on the cooperative and individual members? • How does the idea influence our profitability? • How will the idea help us to achieve our strategic (long range) plan? • How does the idea compare to our competition? • How much money, people and facilities will the idea take to reach the goals of the project? • What other alternatives were considered? What are the pros and cons of each?

29. Thus, directors must act in good faith and make decisions on an informed basis: • Attend meetings • Review adequate information prior to board meeting (do your home work) • Active participation in board deliberations • Monitor and control

30. To meet the duty of care, a director has the right to rely on: • Advice of legal council and public accountants • Officers or employees • Expert advisors • Committees of the board

31. Duty of Obedience: • In role of agent for the cooperative, a director must comply with: • Public statute • Articles of incorporation • Cooperative bylaws • Board polices

32. Director Liability: • A director is protected if they fulfill these three duties • Directors should have liability insurance • Make sure: • Good board minutes are kept; record votes • Always speak with one voice • Have a board manual • Absence from a board meeting (unless beyond control) will not excuse you. • Claiming you were “out of the loop” won’t work • Claiming the action was manager’s responsibility won’t cut it.

33. How does board make informed decisions? • Rubber stamp manager’s recommendations? • Have difficulty in making timely decisions? • Ask good questions: • What problem are we trying to solve? • How does the decision fit our long-range plan? • Does the current financial condition support the idea? • What happens if we don’t do this? What are the alternatives?