United States

Department of

Agriculture

Rural Business/

Cooperative Service

October 1994

Reprinted October 1997

developed by

Tamm y M. Meyer

Understanding Cooperatives:

Who Runs the Cooperative Busined?

Board of Directors

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Cooperative Information Report 45, Section 5 1’

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When you think about an opera,

there are several key elements

you need for a successful performance -the conductor, the

musicians, a score, and the staging. These elements work

together to make it happen -

the conductor serves as the

guider; the musicians are the

performers; the score is the composition each person follows;

and the staging is the process of

putting it all together.

. . . . .

Cooperatives, as a form of business

owned and controlled by the people who

use it, are the same as an opera in that

they, too, have several important

elements needed to be successful. The

most essential one is the people:

+ Members, as the owner-users;

+ Board of Directors, as the policymaking body;

+ Hired Management, as the supervisor;

and

+ Employees, as the work force.

Each has specific roles and responsibilities in the overall operation of a

cooperative.

Cooperative Management

Management of a cooperative is often

incorrectly thought of as including only

the hired manager and his key staff. This

is far from the truth. Cooperative management should be regarded as a team consisting of four elements - members

(owners), board of directors (elected), the

manager (hired), and other responsible

employees (paid). Each part of the team

has its own distinctive duties and responsibilities for performing management

functions in a cooperative. This allows

them definite, reserved rights in the ownership and control of the business. These

important rights give them the privilege of

taking an active part in the management

of the business. To be effective, each must

exercise these rights; otherwise they will

have no voice in management.

Successful management of a cooperative, therefore, is based on intelligent and

active cooperation of the members with

the board and with the manager/employees, each group shouldering its own

responsibilities to the best of its ability.

BOARD OF

DIRECTORS

MANAGER

1
The board of directors occupy a key

position between

members and hired

management.

Duties, and Responsibilities

of the Board of Directors

This section specifically discusses the

responsibilities of the board of

directors. (Section 4 describes the

responsibilities of members, while Section 6 discusses responsibilities of management/employees.)

A cooperative is a user-owned and

user-controlled business in which benefits are received in proportion to use. But

it is not possible for member-owners to

directly make all cooperative decisions.

That control is preserved by members

electing directors to represent them in

much of the operation of the cooperative.

The board of directors occupy a key

position between members and hired

management. They represent the members as users of the cooperative’s

services, and consequently must be

informed about the needs and directions

of the members. The board must also

remember that the cooperative functions

for the benefit of those members.

Acting as a group, the primary responsibilities of the directors are to employ

the manager, establish operating policies,

and direct the cooperative toward its

overall objectives.

In discussing the roles of directors,

those that reflect an obligation on the

part of the individual person are listed as

duties. Those that require board members to act collectively are listed as

responsibilities.

Duties

1. Become familiar with the articles of

incorporation and bylaws of the cooperative and conduct the business in accordance with their provisions.

2. Attend regular and special meetings of

the board.

3. Understand the terms of all contracts

into which the cooperative has

entered by authority of the board - leases, loan agreements, membership and

marketing agreements, supply and other

contracts, etc.

4. Be familiar with the State law under

which the cooperative was

incorporated.

5. Understand the general legal responsibilities of serving on a board of directors.

6. Be responsive to new ideas and

changes that are in the best interest of

meeting member needs.

7. Commit to participate in training programs to better understand the

cooperative’s operations, and a director’s

role in it.

Responsibilities

In addition to the general duties and

powers of directors as set out in the

association’s articles of incorporation and

bylaws, the following responsibilities are

particularly important:

1. Hire a competent manager; determine

the salary, outline the duties and authority of the position, and formally review

his/her performance at least annually.

2. Adopt broad, general policies to guide

the manager and make them a part of the

minutes. They should include such items

as credit to patrons, source and limits of

supply inventories, general personnel

regulations, etc. It is the manager’s job,

rather than that of the board as a whole

or as individual members, to make the

detailed decisions on how to implement

the board’s policies. Once established,

the board needs to monitor and review

policies annually and make changes

when necessary. Remember, board members make policy decisions. They should

not assume responsibilities that are clearly part of day-to-day operations.

2
3. Develop and adopt long-range business strategies.

4. Require written monthly financial

reports and operating statements for

board meetings in order to be informed of

adverse as well as favorable operations.

5. Direct the manager to prepare before

the close of each year an operating budget for the next fiscal year for board

approval. This budget should estimate

the volume of sales and gross income of

various items to be handled, the expenses by account classifications, and the net

income expected. This constitutes necessary forward planning on the part of the

board and management. The budget

should be reviewed at intervals throughout the year to determine the trends of

the business.

6. Employ a qualified auditor to make an

independent audit at least once each year

to determine the accuracy of the financial

records. This audit, reported directly to

the board, is used to evaluate the effectiveness of the policies and budget, performance of the manager, and insight

into the effect of past decisions and the

need for new ones. An audit is the primary method the board uses to report the

financial condition of the cooperative to

its members.

7. With the aid of the manager, plan and

conduct the annual meeting to keep the

membership informed about the status of

their business, including operations,

finances, and policies.

8. Determine the patronage refund allocation, weighing legal requirements against

the need for reinvesting refunds to provide money to retire old equities and still

meet current capital needs.

9. Obtain competent legal counsel.

10. Keep a complete record of the

board’s actions.

A cooperative director should not

expect to be granted special favors from

the manager or employees and does not

have the following responsibilities:

1. To act independently on matters that

should be decided by the entire board.

2. Be a representative of special

interests, factions, or political entities.

He/she was elected to direct the business

activities of the cooperative, not serve as

a representative of these groups.

Board Size

Incorporation law normally sets the minimum number of cooperative members

serving on the board of directors. Most

have an odd number such as five, seven,

or nine. Extremely large boards can be

cumbersome, slow, and expensive, while

smaller boards can be more efficient and

effective. Generally, small boards will

have more frequent and effective meetings.

Board Officers

The board officers are usually elected

from within the board members,

frequently at a re-organization meeting

after the annual meeting. Each officer has

specific duties as detailed in the cooperative’s bylaws.

Board officers are:

+ The president who presides at all

meetings, carries out the members’ wishes, and watches over the association’s

affairs linking communication between

hired management and members.

+ The vice president who, in the absence

or disability of the president,

performs the duties of the president.

+ The secretary who keeps a complete

record of all meetings of the board of

directors and general membership and

also is the official custodian of the cooperative’s seal, bylaws, and membership

records.

Each officer has specific duties as

detailed in the cooperative’s bylaws.

BOARD OF

DIRECTORS

3
In a cooperative, the

board is responsible

to its members as

users rather than to

investors whose first

objective is to maximize profits.

.,...,__._................................ . . . . . . .

+ The treasurer who keeps watch over

the bookkeeping and accounts to ensure

accuracy and proper handling and also is

responsible for presenting periodic financial reports.

Selection of Board Members

At most cooperatives, before the annual

meeting, the president of the board of

directors appoints a nominating committee

to develop a slate of candidates for election to the board. This committee

nominates cooperative members they feel

can direct their cooperative in meeting its

overall objectives and improving its operations.

In serving, they often look for guidelines to use in selecting the right individual. The following are some of the

important qualifications to consider.

Is the candidate?

+ objective, willing, and anxious to learn;

+ accepted by the members for having

good judgment and business sense;

+ successful in his/her own business

operation;

+ a loyal, participating member of the

cooperative;

+ willing to take the time necessary to

prepare for, attend, and take an active

part in board meetings;

+ able to protect highly sensitive, confidential material, that if disclosed could

damage the cooperative, but still be willing to give, and even insist on giving,

members ail possible information;

+ knowledgeable about cooperatives and

the job of a director, including

listening to members;

+ willing to accept the responsibilities

and obligations of a director;

+ someone who will work well with others as a team, and support majority decisions, even if not agreeing with them;

+ open-minded in considering issues;

+ representative of the goals and direction of the members;

+ recognized as a community leader; and

+ honest and fair.

If the candidate is seeking the job of

director to gain a personal advantage or

favors for friends, it is questionable

whether that candidate should be elected.

Electing someone to the board to gain

that person’s patronage is not in the longterm interest of the cooperative.

Conclusion

The ultimate control of any corporation is

legally in the hands of the board of directors. In a cooperative, however, the board

is responsible to its members as users

rather than to investors whose first objective is to maximize profits. Taking the time

to listen to member-users, learning the

issues, understanding the responsibilities

of directors and how their role differs from

other key people, and making decisions

based on what is in the best interests of

the membership, will allow the cooperative

director to serve members effectively. n

This circular is one in a continuing series that provides training information and presentations for education resource persons who may or

may not be familiar with the cooperative form of business. This series provides the basic background material they need, in a form that

can be readily adapted, with limited preparation time, to a lecture or other presentation.

For a complete listing of the series, write to USDA/Rural Business-Cooperative Service, Stop 3257, Washington, DC 20250.3275

The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin,

sex, religion, age, disability, political beliefs and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with

disabilities who rewire alternative means for communication of program information (braille. large print, audiotape, etc.) should contact

USDA’s TARGET C&r at (202) 720-2600 (voice and TDD).

To file a complaint. write the Secretarv of Aariculture. U.S. Deoartment of Aariculture. Washinaton. D.C.. 20250, or call l-800-245-6340

(voice) or (202)‘720-i127 (TDDI. USDA ii an &al empioyment bpportunity employer. -