DICK OLSON ATTORNEY AT LAWDICK OLSON ATTORNEY AT LAWFISHER, OLSON, & JUNTUNEN, LTD.FISHER, OLSON, & JUNTUNEN, LTD.315 FIRST AVE N, GRAND FORKS, ND 58206-5788315 FIRST AVE N, GRAND FORKS, ND 58206-5788

Overview of Board of Overview of Board of DirectorsDirectors

The greatest threat to the survival of a The greatest threat to the survival of a cooperative is the board of directors.cooperative is the board of directors.

The board is ultimately accountable for the The board is ultimately accountable for the policies, practices, and procedures that will policies, practices, and procedures that will determine whether the Co-op will live or die. determine whether the Co-op will live or die.

The job of a board member is to improve the The job of a board member is to improve the bottom line for members. In order to do this the bottom line for members. In order to do this the board must make management of the Co-op board must make management of the Co-op better.better.

It in inevitable that a Co-op will fail without a It in inevitable that a Co-op will fail without a good board.good board.

General Responsibilities General Responsibilities of a Directorof a Director

Steward of the Cooperative.Steward of the Cooperative. Knowledgeable of the Co-op’s functions Knowledgeable of the Co-op’s functions

and the role of a director.and the role of a director. Be vigilant of the duties required of an Be vigilant of the duties required of an

ordinary prudent director.ordinary prudent director. Be available to listen, inform, and provide Be available to listen, inform, and provide

advice to patron-membersadvice to patron-members Continually educate oneself on the Co-opContinually educate oneself on the Co-op

Duties of a DirectorDuties of a Director

Duty of Attention/Diligence Duty of Attention/Diligence Duty of CareDuty of Care Duty of LoyaltyDuty of Loyalty Duty of ObedienceDuty of Obedience

Duty of Duty of Attention/DiligenceAttention/Diligence

Active Participation in the affairs of the Active Participation in the affairs of the Co-op which includes:Co-op which includes: Regularly attending meetings.Regularly attending meetings. Review of information provided by Review of information provided by

employees, experts, and committees.employees, experts, and committees. Monitoring committee and employee Monitoring committee and employee

activities to ensure work is being completed.activities to ensure work is being completed. Educate members about the organization.Educate members about the organization.

Duty of CareDuty of Care

The care that a reasonably prudent The care that a reasonably prudent person in a similar position would use person in a similar position would use under a similar circumstanceunder a similar circumstance

Duty of CareDuty of Care

Use care when making decisions regarding Co-op.Use care when making decisions regarding Co-op. Act in good faith and in the best interest of the Co-op.Act in good faith and in the best interest of the Co-op. Use care when reviewing the Co-op’s performance.Use care when reviewing the Co-op’s performance.

May rely on information received from one or more May rely on information received from one or more officers or employees of the company.officers or employees of the company.

Legal counsel, public accountants, or other person Legal counsel, public accountants, or other person that the director believes are within professional that the director believes are within professional expertise.expertise.

The committee of board members of which he is not The committee of board members of which he is not a member, if the member believes that the a member, if the member believes that the committee merits confidencecommittee merits confidence

Duty of Care (cont’d)Duty of Care (cont’d)

Make sure the Co-op has a good Make sure the Co-op has a good manager and he/she is performing the manager and he/she is performing the job as directed.job as directed.

Be proactive in anticipating any problems Be proactive in anticipating any problems or issues that the Co-op may face and or issues that the Co-op may face and prepare the Co-op accordingly such as prepare the Co-op accordingly such as setting credit limits, personnel policies, setting credit limits, personnel policies, marketing, and management.marketing, and management.

““Business Judgment Business Judgment Rule”Rule”

The director who diligently attends his duties The director who diligently attends his duties and exercises his business judgment on and exercises his business judgment on questions facing him will not be considered questions facing him will not be considered negligent even if his judgment is faulty”negligent even if his judgment is faulty”

It is an unbiased judgment made with It is an unbiased judgment made with reasonable care.reasonable care.

It is not a rule of law, but has done well in the It is not a rule of law, but has done well in the courts when defending directors. courts when defending directors.

Duty of LoyaltyDuty of Loyalty

Refrain from engaging in personal Refrain from engaging in personal activities that could endanger the Co-op.activities that could endanger the Co-op.

Do not use the director position to further Do not use the director position to further private interestsprivate interests There should be no conflict between the There should be no conflict between the

director’s corporate duty and the director’s director’s corporate duty and the director’s self interest-director may be held liable if self interest-director may be held liable if there is damage to Co-opthere is damage to Co-op

Duty of Loyalty (cont’d)Duty of Loyalty (cont’d)

Hold the confidential information received as a Hold the confidential information received as a board member in confidence until or unless it is board member in confidence until or unless it is made public.made public.

Support the decisions made by the board even Support the decisions made by the board even though you didn’t vote for the decisionthough you didn’t vote for the decision

Do not compete with the cooperativeDo not compete with the cooperative HOW SHOULD YOU AS DIRECTORS HOW SHOULD YOU AS DIRECTORS

CONDUCT YOURSELF ACCORDING TO CONDUCT YOURSELF ACCORDING TO THIS DUTY?THIS DUTY?

Duty of ObedienceDuty of Obedience

Must perform the director duties in accordance Must perform the director duties in accordance with state and federal laws and the terms of the with state and federal laws and the terms of the Co-op’s charter.Co-op’s charter.

Read, understand, and conduct business Read, understand, and conduct business according to the articles and bylaws.according to the articles and bylaws.

Retain services of professionals familiar with Retain services of professionals familiar with Co-ops.Co-ops. Retain attorneys and auditors/accountants who Retain attorneys and auditors/accountants who

have training and experience with cooperativeshave training and experience with cooperatives

Duty of Obedience Duty of Obedience (cont’d)(cont’d)

Personal liabilities to the Co-op should be paid Personal liabilities to the Co-op should be paid immediately when dueimmediately when due

Trustees, quasi-trustees, fiduciaries, and Trustees, quasi-trustees, fiduciaries, and agents are to operate in scrupulous good faith.agents are to operate in scrupulous good faith.

Ensure that there are proper minutes at each Ensure that there are proper minutes at each and every meeting to support the actions taken and every meeting to support the actions taken by the board.by the board.

HOW MANY OF YOU HAVE A COPY OF HOW MANY OF YOU HAVE A COPY OF YOUR CO-OP’S ARTICLES AND BYLAWS?YOUR CO-OP’S ARTICLES AND BYLAWS?

Director ProblemsDirector Problems

Micromanaging-attempting to do manager’s Micromanaging-attempting to do manager’s job.job.

Knowledge of problem w/o actionKnowledge of problem w/o action i.e. sexual harassment, employee alcohol or drug i.e. sexual harassment, employee alcohol or drug

problems, safety issues such as problems, safety issues such as rogators/terragators, employees’ driving record.rogators/terragators, employees’ driving record.

Accusation by members that directors are Accusation by members that directors are guilty of misconduct because manager guilty of misconduct because manager bankrupted Co-op.bankrupted Co-op.

Removal of DirectorRemoval of Director

Do the bylaws provide Due Process to Do the bylaws provide Due Process to the removed person? the removed person? Notice and a HearingNotice and a Hearing

Obtain appropriate legal counsel to assist Obtain appropriate legal counsel to assist you.you.

Director LiabilityDirector Liability

Director NegligenceDirector Negligence Attending meetingsAttending meetings False and misleading financial statementsFalse and misleading financial statements Exceeding charter or articles of incorporationExceeding charter or articles of incorporation Non-compliance with resolutions passed by the Non-compliance with resolutions passed by the

boardboard Environmental violationsEnvironmental violations Intentional Acts-adverse to the interests of the Intentional Acts-adverse to the interests of the

businessbusiness Conflict of interestConflict of interest

Board Code of EthicsBoard Code of Ethics

An ethics policy should be developed to define the An ethics policy should be developed to define the expected behavior of the directors, officers, and expected behavior of the directors, officers, and employees of the Co-op. The code of ethics should be employees of the Co-op. The code of ethics should be an overview of the policies and procedures of the Co-an overview of the policies and procedures of the Co-op.op.

Ethics should be doing the right thing for the right Ethics should be doing the right thing for the right reasons. Much more is expected than ever before out reasons. Much more is expected than ever before out of our industry with regard to our ethical standards and of our industry with regard to our ethical standards and behaviors. All of us are expected to maintain the behaviors. All of us are expected to maintain the highest ethical practices in our work and dealings both highest ethical practices in our work and dealings both inside and outside the company.inside and outside the company.

Code of Ethics (cont’d)Code of Ethics (cont’d)

Treat each other with respect, fairness, and dignity, Treat each other with respect, fairness, and dignity, offering equal opportunities to all individuals.offering equal opportunities to all individuals.

Do not compromise safety and health-this includes Do not compromise safety and health-this includes drug free environment and proper training and safety drug free environment and proper training and safety equipmentequipment

Expect the directors and all employees to comply with Expect the directors and all employees to comply with all laws and regulations.all laws and regulations.

Use confidential information only for the purpose that is Use confidential information only for the purpose that is was developed or given.was developed or given.

Avoid conflicts between personal interest and official Avoid conflicts between personal interest and official responsibilities within the organization.responsibilities within the organization.

Code of Ethics (cont’d)Code of Ethics (cont’d)

Directors, or any employee are prohibited from Directors, or any employee are prohibited from receiving gifts from any potential business receiving gifts from any potential business relationship that may induce the person to relationship that may induce the person to award contracts that may compromise the best award contracts that may compromise the best interest of the Co-op.interest of the Co-op.

Protect the assets entrusted from loss or Protect the assets entrusted from loss or misusemisuse

Everyone has a share in the creation of good Everyone has a share in the creation of good public relations of the Co-op.public relations of the Co-op.

Auditors-questions to ask Auditors-questions to ask before hiring an auditor.before hiring an auditor.

Has the auditor worked with cooperatives before?Has the auditor worked with cooperatives before? Does the auditor have other cooperative clients?Does the auditor have other cooperative clients? Does the auditor have sufficient knowledge of cooperative Does the auditor have sufficient knowledge of cooperative

accounting/finances?accounting/finances? Is the auditor current with cooperative accounting practices and Is the auditor current with cooperative accounting practices and

law?law? Does the auditor have any personal ties to the membership, Does the auditor have any personal ties to the membership,

board, or operations of the cooperative?board, or operations of the cooperative? Does the auditor have a personal relationship with the manager or Does the auditor have a personal relationship with the manager or

any other cooperative employee?any other cooperative employee? Does the Auditor have professional references that can be Does the Auditor have professional references that can be

checked and are those references positive?checked and are those references positive? Are the auditor’s charges reasonable and competitive with those Are the auditor’s charges reasonable and competitive with those

of other auditors with similar credentials?of other auditors with similar credentials?

Auditors-questions to ask Auditors-questions to ask after the auditafter the audit

Were the correct procedures followed in conducting the Were the correct procedures followed in conducting the audit? Can you explain the procedures?audit? Can you explain the procedures?

Did management cooperate fully? Could dealings with Did management cooperate fully? Could dealings with management have been improved?management have been improved?

Did you encounter any problems with the way the Co-Did you encounter any problems with the way the Co-op handles its financial reporting and accounting op handles its financial reporting and accounting procedures?procedures?

What were the audit’s general findings?What were the audit’s general findings? Was anything different from the previous year’s Was anything different from the previous year’s

findingsfindings What did you find that should most concern us?What did you find that should most concern us? What financial areas should we attempt to improve?What financial areas should we attempt to improve?

Auditors (cont’d)Auditors (cont’d)

Are the interest rates on our loans in line with Are the interest rates on our loans in line with market rates?market rates?

Should we seek any accounting policy Should we seek any accounting policy changes? changes?

What should we know that doesn’t appear in What should we know that doesn’t appear in your report?your report?

What haven’t you told us?What haven’t you told us? Is there anything else that we should ask you?Is there anything else that we should ask you? ASK YOURSELF:ASK YOURSELF: Did I create enough notes to Did I create enough notes to

accurately describe conditions to members?accurately describe conditions to members?

Auditor-Evaluating the Auditor-Evaluating the auditor.auditor.

Did the auditor meet with the audit committee when requested?Did the auditor meet with the audit committee when requested? Did the auditor address issues “tone at the top” and antifraud programs and Did the auditor address issues “tone at the top” and antifraud programs and

controls in place in the organization?controls in place in the organization? Did the auditor inform the audit committee of any risks, of which the committee was Did the auditor inform the audit committee of any risks, of which the committee was

not previously aware?not previously aware? Did the auditor adequately discuss issues of the quality of financial reporting, Did the auditor adequately discuss issues of the quality of financial reporting,

including new and significant accounting principles that may be applicable in your including new and significant accounting principles that may be applicable in your business?business?

Did the auditor communicate issues freely with the board, or was the auditor Did the auditor communicate issues freely with the board, or was the auditor protective of management?protective of management?

Does it appear that management exercises undue influence on the independent Does it appear that management exercises undue influence on the independent auditor?auditor?

Does it appear that the independent auditor is reluctant or hesitant to raise issues Does it appear that the independent auditor is reluctant or hesitant to raise issues that would reflect negatively on management?that would reflect negatively on management?

Is the audit committee satisfied with the planning and conduct of the audit, Is the audit committee satisfied with the planning and conduct of the audit, including the financial statements and internal control over financial reporting?including the financial statements and internal control over financial reporting?

Evaluating the Auditor Evaluating the Auditor (cont’d)(cont’d)

Are you satisfied that the auditor remains independent and objective both Are you satisfied that the auditor remains independent and objective both in fact and appearance?in fact and appearance?

Is the board satisfied with the relationship with the auditor?Is the board satisfied with the relationship with the auditor? Was the audit fee fair in relation to what the board knows about fees Was the audit fee fair in relation to what the board knows about fees

charged to other companies?charged to other companies? Did the auditor make constructive observations, implication, and Did the auditor make constructive observations, implication, and

recommendations in the areas needing improvement?recommendations in the areas needing improvement? Were you satisfied with the scope, nature, extent, and timing by the Were you satisfied with the scope, nature, extent, and timing by the

auditor?auditor? Did the auditor work to reduce redundancy of the audit?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 knowledge and skills of the audit staff? Are you satisfied with the leadership assigned to your audit?Are you satisfied with the leadership assigned to your audit? Did the auditors work professionally and out of mutual respect with your Did the auditors work professionally and out of mutual respect with your

staff?staff? Would you hire the auditor to complete future audits?Would you hire the auditor to complete future audits?

Matters to be considered Matters to be considered in Articles and Bylawsin Articles and Bylaws

Eligibility of Board MembersEligibility of Board Members Contracts between officers or directors Contracts between officers or directors

and associationand association Removal of DirectorsRemoval of Directors Filling vacancies of DirectorsFilling vacancies of Directors Meetings of Boards of DirectorsMeetings of Boards of Directors

Evaluation of Board of Evaluation of Board of DirectorsDirectors

Why evaluate the Board of Directors?Why evaluate the Board of Directors? More accountability is expected by:More accountability is expected by:

Patrons/MembersPatrons/Members Governmental AgenciesGovernmental Agencies Public policy interests in business ethicsPublic policy interests in business ethics

In recent years there have been stricter In recent years there have been stricter enforcement of laws, more lawsuits involving board enforcement of laws, more lawsuits involving board members, and greater consequences by mistakes members, and greater consequences by mistakes by boards.by boards.

Allows boards to assess strengths and weaknessesAllows boards to assess strengths and weaknesses Provides board with a means to prioritize board Provides board with a means to prioritize board

activities in the future.activities in the future.

Evaluation of the Board Evaluation of the Board of Directors (cont’d)of Directors (cont’d)

Clarifies and defines the overall standards of Clarifies and defines the overall standards of performance of a board.performance of a board.

Encourages the directors to focus on Encourages the directors to focus on accomplishments and areas of needed accomplishments and areas of needed improvementimprovement

Encourages directors to focus on Encourages directors to focus on accomplishments and areas of needed accomplishments and areas of needed improvementimprovement

Shows the competence of the board of Shows the competence of the board of directors.directors.

Evaluation of Board Evaluation of Board (cont’d)(cont’d)

Who should evaluate the Board of Directors?Who should evaluate the Board of Directors? Self-Evaluation-all board members participateSelf-Evaluation-all board members participate A committee of the Board does the evaluationA committee of the Board does the evaluation A non-board committee does the evaluationA non-board committee does the evaluation An evaluation is done by an outside consultant An evaluation is done by an outside consultant

which may be particularly useful if the board has which may be particularly useful if the board has never evaluated its performance. The outside never evaluated its performance. The outside consultant can establish standards to base future consultant can establish standards to base future evaluations.evaluations.

A board should be evaluated either annually or A board should be evaluated either annually or biannually for strategic planning and potential biannually for strategic planning and potential purposes.purposes.

Directors are Responsible Directors are Responsible for Manager Evaluationfor Manager Evaluation

Monthly Reports by ManagerMonthly Reports by Manager Annual “State of the Co-op”Annual “State of the Co-op” Manager to conduct Employee Review Manager to conduct Employee Review

annual and to keep confidential personal annual and to keep confidential personal files.files.

Manager Evaluation Manager Evaluation CriteriaCriteria

Financial Performance of Co-op-Sales v. CostsFinancial Performance of Co-op-Sales v. Costs Manager-Leadership abilities and human relations Manager-Leadership abilities and human relations

skillsskills Employee hiring, training, and supervision skillsEmployee hiring, training, and supervision skills Management team-is it cohesive-function on the same Management team-is it cohesive-function on the same

pagepage Project finished in timely and efficient mannerProject finished in timely and efficient manner Communication with the Board and MembersCommunication with the Board and Members Retention of old business-development of new Retention of old business-development of new

businessbusiness Managers understanding of unique operation of Co-op Managers understanding of unique operation of Co-op

and patrons-membersand patrons-members

Mergers, Consolidation, Mergers, Consolidation, Acquisitions, Dissolution, Acquisitions, Dissolution, and Liquidation issuesand Liquidation issues

Responsibilities of DirectorsResponsibilities of Directors Consider Timing for Consider Timing for

Expansion/PartnershipsExpansion/Partnerships Costs of the growthCosts of the growth Is the deal too good to be true?Is the deal too good to be true? Additional expenditures?Additional expenditures?

Membership involvementMembership involvement Is membership approval required?Is membership approval required?

Mergers (cont’d)Mergers (cont’d)

Evaluate Services and Profit centersEvaluate Services and Profit centers Be prepared to drop certain services if they can not be justified Be prepared to drop certain services if they can not be justified

financially (i.e. consistently loses money)financially (i.e. consistently loses money) Review each area of service independently (i.e. mechanic/tire Review each area of service independently (i.e. mechanic/tire

changer)changer) Patronage Equity (member investment)Patronage Equity (member investment)

Consider when actions are reducing member equityConsider when actions are reducing member equity Professional Advice to assist in decision makingProfessional Advice to assist in decision making

BankerBanker LawyerLawyer AccountantAccountant

SummarySummary

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

Summary (cont’d)Summary (cont’d)

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