PREFACE 

This publication is part of(J series designed to visually present basic information about 

cooperatives. Jllustrations have been created for easy conversion to 35rnm sUdes or overhead transparencies. 

The series was written by Gene Ingalsbej former director of information for USDA IS 

Agricultural Cooperative Service, now retired. The series consolidates and updates on initial group o( highly illustrated publications developed by C. H. Kirkman, Jr., (ormer cooperative education specialist, now retired. Series content covers what a cooperative is and 

how one is Ofganized, what functions cooperatives per(ormj and what are the responsibilities of key participants - members, employees/ the m(Jnage/~ and directors. 

This publication focuses on the hoard ofdirectors. It covers characteristics members 

should consider in choosing a director to represent them, alternatives for nominating and 

electing directors, and (unctions and responsibilities of directors. 

Cooperative Information Repon 14
 

\{eviewed and ,.pproved for reprinting, September 1997.
 

Con:->oliJates and \\1 pcr~E'dE's cm 14,
 

What Co·op Directors Do and cm IS,
 

Measuring Co-op Directors.
 

WI-IATCO-OP DIRECTORS DO 

THE CO-OP BOARD OF DIRECTORS 

ooperatives usually have too many owners for all of them to participate often in helping make business decisions. So the owners elect a few people who they feel can best

make most decisions for them. This leadership group is called the board of directors. 

The board of directors/ most importantly, functions to direct the business affairs of the 

cooperative. It is the cooperative's cen tral decision center. [n carrying out this responsibility, 

however, the board performs several important supporting roles. Tt is a listening post, hearing 

from management and membership. It is a communications hub, imparting information 

between members and management. It is an adVisory body to members and management, providing recommendations and guidance. But in every role and action, the board is accountable 

to members. 

The cooperative's bylaws determine the nature and composition of the hoard through 

written provisions describing eli rector eligibility, method of selection, term of officE', and board 

organization. A typical board will have seven to nine members. To function in an organized 

maIlner, directors elect from among themselves a chairman, vice chairman, secretary, and treasurer. These officers are sometimes designated as the executive committee, which in larger 

boards may include one or more additional directors. Other board committees may be formed 

to assign oversight of particularly important aspects of the cooperative, such as finance or member and public relations. 

Meetings are held on a set frequency, often monthly, with pre-determined dates desirable. 

An agenda is developed. Minutes are kept. A nominal amount of compensation may be provided, usually to cover directors' expenses to attend board meetings. 

The IuHuwillg IJdge:, 1J1t'St'lll addillollJl infOllllJlioll Oll: (1) "vho makes J good director; (2) 

how directors are selected; and (3) what directors do. 

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SELECTING A DIRECTOR 

electing good directors is perhaps co-op members' most important ownership responsibility. Their decision may determine how effectively the cooperative contributes to the 

profitability of their farm or other business. 

When considering an individual for the cooperative's board, a member might ponder the 

answers to several questions. Would I be comfortable having this individual make personal 

business decisions for me? Does the individual demonstrate the ability to think through a 

problem independent of others? Would this person place the best interests of the cooperative 

above persona] interests or special interest groups? Does this person demonstrate leadership 

qualities? Would this person as director enhance the cooperative's image? Is the person respected in the community? 

Does the potential director appear to keep up with current events, particularly in agriculture 

and the sectors in which tl1e cooperative is involved? Would this person be a vigorous and 

effective promoter of the cooperative? Would this potential director be Vigilant in keeping the 

cooperative orlen ted to serving members' best interests? 

While a "yes" answer to these questions shapes the underlying characteristics of a good 

director, other more tangible and specific qualities need to be present. 

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A GOOD DIRECTOR SHOULD BE ABLE TO:
 

MAKE GOOD
 

DECISIONS 

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SELECTING A DIRECTOR, continued 

good potential director uses the cooperatives products and services fuJi y. Just doi ng so 

makes a visible statement of belief in the value of cooperative effort. Further, maximum use gives the member first-hand, cutting edge knowledge aboLlt the cooperative's 

services, which provides a sound basis for directing change. Maximum personal support also 

enables the member to be an effective director in seeking new members and encouraging present members to increase their patronage. 

Members demonstrating a genuine interest in the cooperative's performance have a quality 

needed to be a good director. Instead of just complaining to others, or "voting with their feet" 

by trading somewbere else, they seek answers to their concerns frorn their directOI or the manager. They realize that ultimately cooperative performance is their responsibility. 

Members who participate regularly in decisionmaking exhibit a key director quality. They 

attend meetings and express their views. They volunteer or accept requests to serve on committees, or to represent the cooperative. They vote regularly on issues presen ted to them. They 

encourage others to help the cooperative better serve mcmIX>fs' needs. 
 

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SELECTING A DIRECTOR, conlinued 

[j erving on the board of directors can take a lot of time. So persons being considered for 

the board must have the time to serve, or express a willingness to make time to carry 

out the formal- and informal- duties of a director. 

Typically, documented time for official cooperative business - travel to and from meetings, meeting time, and committee work - may be only 1 or 2 days per month. But it is unaccounted time that can add up. Directors may spend time writing letters, or writing and giving 

talks. They read materials to prepare for meetings, or just to become better informed. Selfdirected or formal train ing to be a better director takes time. Directors get phone calls from 

members, or questions whenever or wherever they meet. With every visit to the cooperative, 

the director is vulnerable to "take a minute or two" to consider an issue or some aspect of the 

cooperative's activities. 

Directors are often asked to represent the cooperative at community events, and perhaps to 

take leadership roles in community organizations in behalf of the cooperative. Particularly in 

larger cooperatives, they are periodically asked to visit State and Federal legislators. Often, cooperative-related time will be at the expense of the director's farm-business or personal time. 

10 
A GOOD DIRECTOR HAS TIME FOR: 

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KJ1~EPING

INFORl v lED REPRESEN~HNG THE CO-OP 
SELECTING A DIRECTOR, continued 

ome people seem to have a knack for picking up information, piecing facts together, 

being right on target with their views, and "veIl known for having something worthwhile to say. Chances are they are good conversationalists, but with a keen ability to 

listen. They demonstrate a talent for expressing their views in a clear and well organized fashion. Look for these attributes in selecting a director. A key requirement for a good director is to 

establish two-way communications \vith the manager, other directors, and members. 

Needed actions to maintain the vitality and growth of the cooperative aren't always readily 

apparent at the time decisions must be made. And some decisions may be unpopular to a sizable segment of the membership. Directors with good communications skills are needed to 

clearly present the rationale for board and management actions to the membership. 

As a good communicator, a director can be a pmverful force for strengthening member support, promoting the cooperative in the community, and in other ways intluencing the business 

environment in which the cooperative operates. 

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SELECTING A DIRECTORl continued 

unique busines~ judgment is needed by directors of a cooperative. As members, they 

run a profit-oriented busine~s as a sole proprietorship, a family partnership, or in a few 

cases a family corporation. As directors of a cooperative, they are responsible for a service-oriented business owned by hundreds of producers. 

Fundamental business prinCiples, such as adequate capitalization, sufficien t cash flow, 

operating efficiency, and quality control, still apply. But the new application of business judgment comes from the special relationship between member and cooperative. Decisions must 

be sound and beneficial from the standpoint of both, rather than at the expense of one. 

And rather than gaining approval by discussion at the family dinner table, the directors must 

have the support of a majority of many owners. Thus, decisions must attempt to strike a balance in addressing needs of members, whether they own large or ~mall, general or specialized operations. 

Whether a member has sound business judgment may be difficult to determine. Farm or 

other business size alone may not be a valid indication, nor the member 'with the newest eqUipment or freshly painted buildings. A better barometer, perhaps, is the member who, over time, 

seems to be making the most with available resources and is known to be a solid thinker. 

Members with relevant college degrees or other business experience could bring a special expertise to the board. 

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SELECTING A DIRECTOR, continued 

• ointing to the need for honesty and trustworthiness in directors should not even have 

to be mentioned. But it is important to point out news media reports to the contrary 

in the business world. At the extreme are examples of dishonest or illegal acts that have 

caused businesses to fail. Short of that extreme are instances in which actions of officers of a 

company cost the owners a great deal of money, either from business transactions or subsequent 

legal actions. 

A director should have good personal traits anel exhibit even temperament. Nothing is 

more disruptive than an emotional outburst in a board meeting. Thin skins and quick tempers 

don't make good directors. Rather, the memher who demonstrates an ability to get along with 

other people has a quality needed in a director. In assessing all the qualifications a member 

exhibits, an important final question to resolve is: Will this member's personality mesh with 

those of other directors and the manager? 

Members should choose a director with the kind of personal character they are comfortable 

with as the representative of the cooperative and, in some respects, with each of them personally-on any occasion or in any situation. 

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SELECTING A DIRECTOR, conllnued 

embers who are involved in community activities are potentially good directors. 

They may belong to civic, church, and school organizations; participate in fund raiserS or community booster projects; or be involved in another business, even perhaps 

a cooperative. They may be active in organizations extending outside of the community, such 

as commodity trade associations, farm organizations, and academic and professional clubs. 

Their suitability and capability to be a director would be even stronger if they are serving, or 

had served, in a leadership role in these activities. 

Such involvement gives the director a wealth of information sources and personal contacts 

who coule! be valuable in many situations. Further, the director would have a broader understanding of the personal ancl institutional relationships that make up a community. Such a 

backgrOLlnd gives the director a perspective to help direct the cooperative's operations wi thin 

the larger context of its community and bllsines~ environment. 

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SELECTION METHODS
 

O irector selection methods can vary according to the cooperative's size, structure, and 

, function. A method that works well for a small local-area centralized cooperative may 

not be suitable for a large federation of local or regional cooperatives disbursed regionally or nationally. 

Larger organizatJons must be more attentive to equal or equitable representation when 

deciding on selection methods and voting rights. Cooperatives' democratic control principle 

has been interpreted most commonly to mean equal voting rights, yet the principle does not 

preclude using proportional voting to achieve equability in serving members. 

Selection methods under normal circumstances arc presented here. Not covered are situations requiring the filling of an unexpired term, or when mergers and consolidations occur. 

Usually, but not always, the cooperative's bylaws provide guidance on how directors are to 

be selected. State statutes may contain provisions related to director selection. 

The nominating committee is presented as the preferred method, although valid rationales 

exist for alternatives. 

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SELECTION METHODS, continued 

any cooperatives elect directors "at large," meaning the entire membership can vote 

directly to fill each director position, and each director represents the entire membership. As a cooperative grows, or the composition of its member~hip changes, or it 

combines with one or more other cooperatives, the "at-Iarge" method may become impractical. 

A cooperative then must develop a different system to produce equitable representation of 

the membership. One method is to divide the cooperative's territory into geographical districts 

with nearly equal members.hip numbers. Another is to establish roughly equal territories based 

on volume of member business. Some cooperatives may establish districts along major commodity lines. A few large cooperatives have provisions for a public "at-large" director who can 

contribute a special expertise, such as an agricultural economist, a lawyer, or a financial or governmental affairs specialist. 

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DIRECTORS MAY BE SELECTED BY:
 

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SELECTION METHODS, continued 

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cant influence on djrector selection even though most cooperatives' bylaws provide for
 

nominations from the floor.
 

How the nominating committee is selected can vary. Bylaws may determine the procedure. 

Additionally, a handbook describing the duties of the nominating committee would be helpful. 

The committee may be appointed by the board chairman, or elected by the membership. 

Regardless of method, the members need to be familiar with director qualifications, the articles and bylaws, and leading candidates among the membership. Directors, hired management, 

or staff should not serve on the committee. However, former directors have the experience to 

be good committee members. 

Through personal contact, nominating committee members ask potential candidates 

whether they are interested in serving on the board and also determine if they meet the qualifications specified in the bylaws. A biographical sketch of each candidate should be developed 

and made available to the membership before the election. An ideal slate offers at least two candidates for each position, thus giving members a choice. 

Some cooperatives may have such a large membership or be so Widely scattered that district 

member caucuses may be needed to nominate candidates. In some cases, members nominate 

candidates through mail balloting, with the two candidates receiving the highest number of 

nominations becoming part of the official slate. 

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RESPONSIBILITY CHARACTERISTICS
 

[!] nderstanding 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. That uniqueness centers on the employee-only status of the manager in a 

cooperative, compared to the manager in other businesses typically sharing in ownership. In a 

cooperative, the manager is seldom a member of the board. A lnOfe 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. 

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PRESERVE CHARACTER 

reserving 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 reia teel 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 chara<.:ter 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. 

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SAFEGUARD ASSETS 

embers invest money in a cooperative with expectations of some kind of beneficial 

return, whether it is in the form of ful f~ Hi ~g a need, increasing income, or otherwise 

contributing to an enhanced quality ot lite. 

They entrust the board of directors to make sound business decisions that not only protects 

their investment but also increases the val ue 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 benefi ts 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. 

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HIRE MANAGER
 

he 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 direcUoIl, 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 manager's 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. 

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SET POLICIES 

policy is a statement that provides guidelines for actions to attain the objectives of the 

.. cooperative, and retlects the cooperative's basic philosophy. It is the duty and responsibility of the board to originate and approve genera] 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 equitabiJity. 

Policies may he broad in content, such as describing tlle desired role for tlle cooperative in 

the community; or quite specific, such as setting hours of operation and ob~crved 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 3re still applicable or need to 

be updated. 

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DISTRIBUTE BENEFITS
 

t the end of the business year, the cooperative's performance is recorded on a yearend 

statement of operations and balance sheet. The board of directors must then determine hmv 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 ocellI. 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. 

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PLAN FUTURE
 

O irectors are the ideal planners of the co?p~rative's future. As members, they know what 

P needs the cooperative should strive to tultill. 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 anel personnel requiremen ts 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. 

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EVALUATE THEMSELVES
 

elf 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 rnake 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 hm\' well it fulfilled the cooperiltive)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. Performa nee elemen ts range from those speci fic and measurable to 

those general and judgmental. 

Performance that is specific ancl measurable can be determined as )illlply as with "yes" or 

"no" answers, doIJar amounts, percent attained, or by other concrete evidence. Was an annual 

audit conducted? Did the board meet as planned? \Vas the manager evaluated? How well was 

the business plan carried out? Were policies reviewed? Was the long-range plan updated? 

General and juclgmental 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 harmoniollsly? Wa~ 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 carryi ng out responsbilities to 

members and personal ancl business relationships in the community or territory in which the 

cooperative operates. 

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MORE INFORMATION 

Li The Rural Business-Cooperative Service (RBS) of USDA Rural Development provides a 

wide range of assistance for cooperative directors. 

RBS conducts research, collects statistics, provides onsite technical assistance, and 

develops educational materials. The RBS Cooperative Development Division helps farmers and 

other rural residents organize cooperatives and provides continuing assistance as needed. RBS 

develops both general and specific educational materials on cooperative organization and operation. Periodically, the staff conducts director workshops, particularly for directors of new cooperatives. RBS publishes a bimonthly magazine, Rural Cooperatives, oriented primarily toward 

managers and directors. A catalog, Rural Cooperative Publications, Cooperative lnformation 

Report (elR) 4, lists aboLlt 150 titles about cooperatives. A few publications particularly valuable 

for directors are: 

Annual Audits - Board Responsibilities, erR 41
 

Cooperative Finance and Taxation, CIR I, Section 9
 

Cooperative Management, cm I, Section 8
 

Director Liability in Agricultural Cooperatives, cm 34
 

Equity Redemption Guide, CIR 31
 

Sample Policies for Cooperatives, CIR 39
 

Tax Treatment of Cooperatives, em 23
 

What Arc Pa tronage Refunds? CIR 9
 

Working \!\1ith Financial Statements, em 43