1. DICK OLSON ATTORNEY AT LAW
FISHER, OLSON, & JUNTUNEN, LTD.
315 FIRST AVE N, GRAND FORKS, ND

2. Overview of Board of Directors
The greatest threat to the survival of a cooperative is the board of directors.
The board is ultimately accountable for the policies, practices, and procedures that will determine whether the Co-op will live or die.
The job of a board member is to improve the bottom line for members. In order to do this the board must make management of the Co-op better.
It in inevitable that a Co-op will fail without a good board.

3. General Responsibilities of a Director
Steward of the Cooperative.
Knowledgeable of the Co-op’s functions and the role of a director.
Be vigilant of the duties required of an ordinary prudent director.
Be available to listen, inform, and provide advice to patron-members
Continually educate oneself on the Co-op

4. Duties of a Director Duty of Attention/Diligence Duty of Care
Duty of Loyalty
Duty of Obedience

5. Duty of Attention/Diligence
Active Participation in the affairs of the Co-op which includes:
Regularly attending meetings.
Review of information provided by employees, experts, and committees.
Monitoring committee and employee activities to ensure work is being completed.
Educate members about the organization.

6. Duty of Care
The care that a reasonably prudent person in a similar position would use under a similar circumstance

7. Duty of Care Use care when making decisions regarding Co-op.
Act in good faith and in the best interest of the Co-op.
Use care when reviewing the Co-op’s performance.
May rely on information received from one or more officers or employees of the company.
Legal counsel, public accountants, or other person that the director believes are within professional expertise.
The committee of board members of which he is not a member, if the member believes that the committee merits confidence

8. Duty of Care (cont’d)
Make sure the Co-op has a good manager and he/she is performing the job as directed.
Be proactive in anticipating any problems or issues that the Co-op may face and prepare the Co-op accordingly such as setting credit limits, personnel policies, marketing, and management.

9. “Business Judgment Rule”
The director who diligently attends his duties and exercises his business judgment on questions facing him will not be considered negligent even if his judgment is faulty”
It is an unbiased judgment made with reasonable care.
It is not a rule of law, but has done well in the courts when defending directors.

10. Duty of Loyalty
Refrain from engaging in personal activities that could endanger the Co-op.
Do not use the director position to further private interests
There should be no conflict between the director’s corporate duty and the director’s self interest-director may be held liable if there is damage to Co-op

11. Duty of Loyalty (cont’d)
Hold the confidential information received as a board member in confidence until or unless it is made public.
Support the decisions made by the board even though you didn’t vote for the decision
Do not compete with the cooperative
HOW SHOULD YOU AS DIRECTORS CONDUCT YOURSELF ACCORDING TO THIS DUTY?

12. Duty of Obedience
Must perform the director duties in accordance with state and federal laws and the terms of the Co-op’s charter.
Read, understand, and conduct business according to the articles and bylaws.
Retain services of professionals familiar with Co-ops.
Retain attorneys and auditors/accountants who have training and experience with cooperatives

13. Duty of Obedience (cont’d)
Personal liabilities to the Co-op should be paid immediately when due
Trustees, quasi-trustees, fiduciaries, and agents are to operate in scrupulous good faith.
Ensure that there are proper minutes at each and every meeting to support the actions taken by the board.
HOW MANY OF YOU HAVE A COPY OF YOUR CO-OP’S ARTICLES AND BYLAWS?

14. Director Problems Micromanaging-attempting to do manager’s job.
Knowledge of problem w/o action
i.e. sexual harassment, employee alcohol or drug problems, safety issues such as rogators/terragators, employees’ driving record.
Accusation by members that directors are guilty of misconduct because manager bankrupted Co-op.

15. Removal of Director
Do the bylaws provide Due Process to the removed person?
Notice and a Hearing
Obtain appropriate legal counsel to assist you.

16. Director Liability Director Negligence Attending meetings
False and misleading financial statements
Exceeding charter or articles of incorporation
Non-compliance with resolutions passed by the board
Environmental violations
Intentional Acts-adverse to the interests of the business
Conflict of interest

17. Board Code of Ethics
An ethics policy should be developed to define the expected behavior of the directors, officers, and employees of the Co-op. The code of ethics should be an overview of the policies and procedures of the Co-op.
Ethics should be doing the right thing for the right reasons. Much more is expected than ever before out of our industry with regard to our ethical standards and behaviors. All of us are expected to maintain the highest ethical practices in our work and dealings both inside and outside the company.

18. Code of Ethics (cont’d)
Treat each other with respect, fairness, and dignity, offering equal opportunities to all individuals.
Do not compromise safety and health-this includes drug free environment and proper training and safety equipment
Expect the directors and all employees to comply with all laws and regulations.
Use confidential information only for the purpose that is was developed or given.
Avoid conflicts between personal interest and official responsibilities within the organization.

19. Code of Ethics (cont’d)
Directors, or any employee are prohibited from receiving gifts from any potential business relationship that may induce the person to award contracts that may compromise the best interest of the Co-op.
Protect the assets entrusted from loss or misuse
Everyone has a share in the creation of good public relations of the Co-op.

20. Auditors-questions to ask before hiring an auditor.
Has the auditor worked with cooperatives before?
Does the auditor have other cooperative clients?
Does the auditor have sufficient knowledge of cooperative accounting/finances?
Is the auditor current with cooperative accounting practices and law?
Does the auditor have any personal ties to the membership, board, or operations of the cooperative?
Does the auditor have a personal relationship with the manager or any other cooperative employee?
Does the Auditor have professional references that can be checked and are those references positive?
Are the auditor’s charges reasonable and competitive with those of other auditors with similar credentials?

21. Auditors-questions to ask after the audit
Were the correct procedures followed in conducting the audit? Can you explain the procedures?
Did management cooperate fully? Could dealings with management have been improved?
Did you encounter any problems with the way the Co-op handles its financial reporting and accounting procedures?
What were the audit’s general findings?
Was anything different from the previous year’s findings
What did you find that should most concern us?
What financial areas should we attempt to improve?

22. Auditors (cont’d)
Are the interest rates on our loans in line with market rates?
Should we seek any accounting policy changes?
What should we know that doesn’t appear in your report?
What haven’t you told us?
Is there anything else that we should ask you?
ASK YOURSELF: Did I create enough notes to accurately describe conditions to members?

23. Auditor-Evaluating the auditor.
Did the auditor meet with the audit committee when requested?
Did the auditor address issues “tone at the top” and antifraud programs and controls in place in the organization?
Did the auditor inform the audit committee of any risks, of which the committee was not previously aware?
Did the auditor adequately discuss issues of the quality of financial reporting, including new and significant accounting principles that may be applicable in your business?
Did the auditor communicate issues freely with the board, or was the auditor protective of management?
Does it appear that management exercises undue influence on the independent auditor?
Does it appear that the independent auditor is reluctant or hesitant to raise issues that would reflect negatively on management?
Is the audit committee satisfied with the planning and conduct of the audit, including the financial statements and internal control over financial reporting?

24. Evaluating the Auditor (cont’d)
Are you satisfied that the auditor remains independent and objective both in fact and appearance?
Is the board satisfied with the relationship with the auditor?
Was the audit fee fair in relation to what the board knows about fees charged to other companies?
Did the auditor make constructive observations, implication, and recommendations in the areas needing improvement?
Were you satisfied with the scope, nature, extent, and timing by the auditor?
Did the auditor work to reduce redundancy of the audit?
Are you satisfied with the knowledge and skills of the audit staff?
Are you satisfied with the leadership assigned to your audit?
Did the auditors work professionally and out of mutual respect with your staff?
Would you hire the auditor to complete future audits?

25. Matters to be considered in Articles and Bylaws
Eligibility of Board Members
Contracts between officers or directors and association
Removal of Directors
Filling vacancies of Directors
Meetings of Boards of Directors

26. Evaluation of Board of Directors
Why evaluate the Board of Directors?
More accountability is expected by:
Patrons/Members
Governmental Agencies
Public policy interests in business ethics
In recent years there have been stricter enforcement of laws, more lawsuits involving board members, and greater consequences by mistakes by boards.
Allows boards to assess strengths and weaknesses
Provides board with a means to prioritize board activities in the future.

27. Evaluation of the Board of Directors (cont’d)
Clarifies and defines the overall standards of performance of a board.
Encourages the directors to focus on accomplishments and areas of needed improvement
Encourages directors to focus on accomplishments and areas of needed improvement
Shows the competence of the board of directors.

28. Evaluation of Board (cont’d)
Who should evaluate the Board of Directors?
Self-Evaluation-all board members participate
A committee of the Board does the evaluation
A non-board committee does the evaluation
An evaluation is done by an outside consultant which may be particularly useful if the board has never evaluated its performance. The outside consultant can establish standards to base future evaluations.
A board should be evaluated either annually or biannually for strategic planning and potential purposes.

29. Directors are Responsible for Manager Evaluation
Monthly Reports by Manager
Annual “State of the Co-op”
Manager to conduct Employee Review annual and to keep confidential personal files.

30. Manager Evaluation Criteria
Financial Performance of Co-op-Sales v. Costs
Manager-Leadership abilities and human relations skills
Employee hiring, training, and supervision skills
Management team-is it cohesive-function on the same page
Project finished in timely and efficient manner
Communication with the Board and Members
Retention of old business-development of new business
Managers understanding of unique operation of Co-op and patrons-members

31. Mergers, Consolidation, Acquisitions, Dissolution, and Liquidation issues
Responsibilities of Directors
Consider Timing for Expansion/Partnerships
Costs of the growth
Is the deal too good to be true?
Additional expenditures?
Membership involvement
Is membership approval required?

32. Mergers (cont’d) Evaluate Services and Profit centers
Be prepared to drop certain services if they can not be justified financially (i.e. consistently loses money)
Review each area of service independently (i.e. mechanic/tire changer)
Patronage Equity (member investment)
Consider when actions are reducing member equity
Professional Advice to assist in decision making
Banker
Lawyer
Accountant

33. Summary
Much is expected of Directors in time, effort, attention to Co-op matters and availability. Adhering to ethical standards and behaviors is only one of the many requirements of the Co-op Director of today. Directors have the responsibility of overseeing management of the cooperative and must keep informed while acting in a prudent manner while making decisions.

34. Summary (cont’d)
It is imperative that directors are in compliance with the many duties and responsibilities imposed by law in order to avoid problems. Serving as a director is a responsible position without much monetary compensation. You must want to see your Co-op do well in order to enjoy the benefits of service.