Directing Change through Governance
Directing Change through
Governance
Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University
Traditional View of the Board of
Directors
Basic competencies
Duties
◦ Care
◦ Loyalty
◦ Obedience
Distinguishing board and manager responsibilities
Evolving View of the Board
Sarbanes-Oxley
Dodd-Frank
Audit Committee
Risk Oversight Committee
The Strategic Board
Changing Cooperative Industry
Larger
More complex
More zeros on the financial statements
Joint ventures, alliances
Mergers, Acquisitions
Succession Planning
Infrastructure 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 Alignment
Internally aligned
Aligned with the cooperative’s strategy
Aligned with the CEO
Aligned with member interests
Internal Alignment
Clear understanding of roles and responsibilities
Clear expectations for board members
Efficient board procedures
Board Procedures
Frequency, format and length of board meetings
Prioritize informational needs
Operational information and budgets that can be compared with strategic goals
Agenda and information packet distributed with sufficient lead time
Group Dynamics
An effective board is comprised of peers who respect and work well with each other
Boards are not natural teams
Board chairperson plays a key role
◦ Promote constructive debate
◦ Build consensus
◦ Summarize and frame decisions
Barriers to Internal Alignment
Board 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 Directors
The most sensitive issue of internal alignment
Additional training
Ask and over-extended director to trim other commitments
Board chair may have to ask the under performing director to resign
In 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 Composition
Skill 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 Directors
A member responsibility
Board 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
Strategy
The unaligned board reverts to monitoring
Strategic alignment allows the board to prioritize issues
Aligned 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 Alignment
Strategy is often proposed by the CEO
Developed through interactive dialog with the board
Consider 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 Alignment
Infrastructure
Equity retirement
Risk management
Management succession
Board Role in Risk Management
Informed oversight
Debate and develop a shared vision for risk appetite
Consider financial reserves, borrowing capacity, member equity at risk
Ultimately it’s a philosophy
Processes in place to control risks within your capacity to absorb lose
Management Succession
Critical governance topic for most cooperatives
Insufficient 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 CEO
First, 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
Partnership
Board has long run perspective
CEO focuses on day to day issues
Board devotes substantial but limited time
CEO devotes continuous attention
Board’s information comes from the CEO
Board is a deliberating body
CEO makes individual, short time frame decisions
Alignment with the CEO
Communication and adjustment on both sides
Board provides feedback on matters it expects to be informed on
CEO adjust decisions and information flow
CEO provides information on current business environment
Board adjust their advice from long term issued to short term strategies
Alignment with the Member’s Long
Term Interest
Most 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 Interest
Insufficient 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 Interest
Aligning 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 Tools
Monitor ROA and ROE
Goals 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 Board
Continuous improvement
Education
◦ Comprehensive orientation
◦ Governance
◦ Strategy
◦ Finance
◦ Risk management
◦ CEO succession planning
Chemistry between Board and
CEO
Board chair person is gatekeeper for the board
CEO is gatekeeper for staff and opreration issues
Chair is sounding board for the CEO for emerging issues
CEO provides insights into business environment and policy and strategy issues
Informal meetings allow both the chair and
CEO to reflect on issues before framing the issue for board deliberation
Meeting Agendas
Chair and CEO work together to establish agendas
Sufficient 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 Communication
Often overlooked responsibility of the board
Members must be informed about operating environment and decisions
Informed members can provide feed back to the board
Direct contact
Multiple communication channels
Younger producers will respond to blog,
Twitter feed or Facebook posting
Board Evaluation
Only 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 Board
Directors 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
