What Co-op Directors Do

Understanding the difference between manager and director roles is a key requirement for board effectiveness and harmony, and the roles in a cooperative are unique among businesses. In an agricultural cooperative, the manager is seldom a member of the board; in a worker's cooperative, the manager is almost always a member of the board. In either case, a decisive difference exists between the director and manager roles and responsibilities.

Directors maintain a longer term and more strategic perspective. They are concerned with how the cooperative can better serve members' needs and what general changes may be necessary in organizational and operating policies. The manager is action and tactical oriented in running the day-to-day operations in response to the goals and objectives set by the board. Members delegate direct control of the cooperative to the board of directors, who in turn delegate daily operational control to the manager.

Preserve Character

Preserving the cooperative character would seem to be an easy responsibility for directors. Each State has at least one statute that describes the principles and practices a business must follow to be regarded a cooperative. Federal laws also have requirements specific to cooperatives related to government programs, antitrust, and taxation. Additionally, the cooperative's articles of incorporation and bylaws state what the cooperative is and how it must operate. Directors can be held legally liable as individuals for violating these laws and regulations.

However, a subtle but very real threat to the cooperative character can develop over time. Management and board philosophy can drift from the cooperative's formerly adopted mission or by losing touch with members' changing needs. Without continual education of the key participants - manager and staff, directors, and members - the cooperative character, except that defined by law, can slip away with perhaps not even a whimper of protest and become regarded the same as any other business.

Safeguard Assets

Members invest money in a cooperative with expectations of some kind of beneficial return, whether it is in the form of fulfilling a need, increasing income, or otherwise contributing to an enhanced quality of life.

They entrust the board of directors to make sound business decisions that not only protects their investment but also increases the value in terms of producing benefits. Directors are held accountable for both their actions and those of hired management. The board is responsible for equitably distributing benefits, often among a diverse membership. In doing so, directors must judiciously weigh the needs of the cooperative as a business and the requirement to return benefits to member owners.

Such critical financial decisions demand independent review. Therefore, the board is responsible for retaining an outside and independent individual or firm to audit the cooperative's financial decisions and records each year. The annual report to members documents the results of that audit.

Hire Manager

The single most important decision the board of directors makes that can determine the success or failure of the cooperative is hiring the manager. And among the more difficult board decisions is deciding to fire the manager for unacceptable performance. Finding the right manager takes a diligent search and objective appraisal of candidates' qualifications. Beyond business education and experience, the board looks for characteristics of leadership, compatibility of attitudes and goals, and knowledge of the uniqueness of the cooperative.

The board delegates control of the cooperative's day-to-day operations to the manager, including the freedom to hire and fire staff, develop business plans, make financial decisions, sign contracts, and represent the cooperative in business and community activities. The board provides direction, guidance, and control of the manager through bylaw provisions, written policies, budgeting, strategic planning, reporting requirements, and performance accountability.

A written job description, personal performance criteria, and clearly stated and achievable business objectives provide the basis for the board to conduct an annual review of the managers performance.

The performance review process provides the board an opportunity to discuss the manager's strengths and weaknesses. A successful session produces ways to improve performance, including an agreement on what is expected of the manager during the coming year.

Set Policies

A policy is a statement that provides guidelines for actions to attain the objectives of the cooperative, and reflects the cooperative's basic philosophy. It is the duty and responsibility of the board to originate and approve general policies that relate to functions the cooperative performs and how it conducts business. These policies cover all aspects of cooperative activities, internally and externally. They provide a basis for making consistent decisions that can minimize conflict and maximize equitability.

Policies may be broad in content, such as describing the desired role for the cooperative in the community; or quite specific, such as setting hours of operation and observed holidays.

Policies cover board and manager functions and relationships; member, employee, and public relations; organizational requirements; and operational activities such as credit, pricing, functions performed, purchasing, marketing, and services provided.

Policies should be written, approved with a board official's signature, and reviewed periodically - some at least once a year - to determine if they are still applicable or need to be updated.

Distribute Benefits

At the end of the business year, the cooperative's performance is recorded on a year-end statement of operations and balance sheet. The board of directors must then determine how the net income (or loss) will be distributed.

Several demands on net income must be considered. It is prudent business management to set aside a portion of the net income in a reserve fund, in case an unexpected event with adverse financial impact should occur. Cooperative principles require that benefits be returned to members on the basis of their patronage, but also that members must finance their cooperative on the basis of use. So the board must decide the percentage of the patronage refund to be paid to members in cash and how much they should reinvest to operate the cooperative. Federal tax law requires that at least 20 percent of the refund must be paid in cash.

Reinvested patronage refunds become the member's equity (ownership) in the cooperative. As new equity is accumulated, old equity is revolved back to the member. This is called equity redemption, and it is the board's responsibility to assess the financial strength of the cooperative and decide how much of the old equities can be paid back to members.

Plan for the future

Directors are the ideal planners of the cooperative's future. As members, they know what needs the cooperative should strive to fulfill. As directors, they can provide leadership in developing the plans to meet those needs and see they are carried out.

The planning process begins with an assessment of the general business climate, both for the cooperative and for members and how that climate may change over the planning time period. Long-range planning considers organizational growth, either internally or through merger, in terms of business volume, membership, and territory served. Plans are developed for replacing or adding new facilities and equipment. Changes in products and services are considered. Financial and personnel requirements are estimated. Strategies are developed, timetables established, and progress review and evaluation points set.

Although planning for the cooperative's future is the responsibility of the board of directors, the actual planning process is carried out jointly with operating management. Larger cooperatives may even have a planning unit and involve substantial contributions to the plan itself from key staff members.

Evaluate Themselves

Self evaluation can lead to self improvement, even when it occurs subconsciously without form or direction. However, persons - or groups - in positions of leadership need to make a conscious effort to evaluate their performance in an organized manner. A board of directors needs to go through a formal process each year to determine how well it fulfilled the cooperative's objectives.

Regardless of the format or system, the evaluation goal is to determine the individual strengths and weaknesses of directors in carrying out their duties and responsibilities and their effectiveness as a board. Performance elements range from those specific and measurable to those general and judgmental.

Performance that is specific and measurable can be determined as simply as with or "no" answers, dollar amounts, percent attained, or by other concrete evidence. Was an annual audit conducted? Did the board meet as planned? Was the manager evaluated? How well was the business plan carried out? Were policies reviewed? Was the long-range plan updated?

General and judgmental elements may be assessed only through the composite opinions of individual directors. How well did the board work with the manager? Were board meetings conducted harmoniously? Was the board dominated by the manager or the board chairman? Did directors place member interests above their own? Did the board focus on member needs?

In addition to looking at director and board performance related to the cooperative's business operations, performance needs to be assessed in terms of carrying out responsibilities to members and personal and business relationships in the community or territory in which the cooperative operates.