Directing Change through Governance

1. Directing Change through Governance Phil Kenkel Bill Fitzwater Cooperative Chair Oklahoma State University

2. Traditional View of the Board of Directors • Basic competencies • Duties • Care • Loyalty • Obedience • Distinguishing board and manager responsibilities

3. Evolving View of the Board • Sarbanes-Oxley • Dodd-Frank • Audit Committee • Risk Oversight Committee • The Strategic Board

4. Changing Cooperative Industry • Larger • More complex • More zeros on the financial statements • Joint ventures, alliances • Mergers, Acquisitions • Succession Planning • Infrastructure reinvestment

5. 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

6. Board Alignment • Internally aligned • Aligned with the cooperative’s strategy • Aligned with the CEO • Aligned with member interests

8. Internal Alignment • Clear understanding of roles and responsibilities • Clear expectations for board members • Efficient board procedures

9. 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

10. 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

11. Barriers to Internal Alignment • Board Politics • Under Performing Directors

12. 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

13. 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

14. 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.”

15. 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

16. Imagine a Soccer Team with 11 Goalies

17. 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

18. 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

19. “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.”

20. 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

21. Strategic Alignment • Infrastructure • Equity retirement • Risk management • Management succession

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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.

30. 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

31. The Cooperative Business Model Has a Lot of Moving Parts The board needs financial tools on their dashboard

32. Creating the Aligned Board • Continuous improvement • Education • Comprehensive orientation • Governance • Strategy • Finance • Risk management • CEO succession planning

33. 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

34. 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

35. 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

36. 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

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

38. 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