directing change through governance
DESCRIPTION
Directing Change through Governance. Phil Kenkel Bill Fitzwater Cooperative Chair Oklahoma State University. Traditional View of the Board of Directors. Basic competencies Duties Care Loyalty Obedience Distinguishing board and manager responsibilities. Evolving View of the Board . - PowerPoint PPT PresentationTRANSCRIPT
Directing Change through GovernancePhil KenkelBill Fitzwater Cooperative ChairOklahoma State University
Traditional View of the Board of Directors
Basic competenciesDuties
◦Care◦Loyalty◦Obedience
Distinguishing board and manager responsibilities
Evolving View of the Board Sarbanes-OxleyDodd-FrankAudit CommitteeRisk Oversight CommitteeThe Strategic Board
Changing Cooperative IndustryLargerMore complexMore zeros on the financial
statementsJoint ventures, alliancesMergers, AcquisitionsSuccession PlanningInfrastructure reinvestment
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
Board AlignmentInternally alignedAligned with the cooperative’s
strategyAligned with the CEOAligned with member interests
Internal AlignmentClear understanding of roles and
responsibilitiesClear expectations for board
membersEfficient board procedures
Board ProceduresFrequency, format and length of
board meetingsPrioritize informational needsOperational information and
budgets that can be compared with strategic goals
Agenda and information packet distributed with sufficient lead time
Group DynamicsAn effective board is comprised
of peers who respect and work well with each other
Boards are not natural teamsBoard chairperson plays a key
role◦Promote constructive debate◦Build consensus◦Summarize and frame decisions
Barriers to Internal AlignmentBoard Politics
Under Performing Directors
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
Under Performing DirectorsThe most sensitive issue of internal
alignmentAdditional trainingAsk and over-extended director to trim
other commitmentsBoard chair may have to ask the under
performing director to resignIn an aligned board directors are
committed to performing at full potential and have the courage to address educational needs
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.”
Board CompositionSkill 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
Imagine a Soccer Team with 11 Goalies
Recruiting and Retaining DirectorsA member responsibilityBoard 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
Alignment with Cooperative StrategyThe unaligned board reverts to
monitoringStrategic alignment allows the
board to prioritize issuesAligned board has clarity in
regard to the cooperative’s strategy
Not just consensus, the directors own the goals
“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.”
Strategic AlignmentStrategy is often proposed by the
CEODeveloped through interactive
dialog with the boardConsider 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
Strategic AlignmentInfrastructureEquity retirementRisk managementManagement succession
Board Role in Risk ManagementInformed oversightDebate and develop a shared
vision for risk appetiteConsider financial reserves,
borrowing capacity, member equity at risk
Ultimately it’s a philosophyProcesses in place to control risks
within your capacity to absorb lose
Management SuccessionCritical governance topic for
most cooperativesInsufficient 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
Alignment with the CEOFirst, 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
Challenges to the Board-CEO PartnershipBoard has long run perspectiveCEO focuses on day to day issuesBoard devotes substantial but limited
timeCEO devotes continuous attentionBoard’s information comes from the
CEOBoard is a deliberating bodyCEO makes individual, short time
frame decisions
Alignment with the CEOCommunication and adjustment on
both sidesBoard provides feedback on matters it
expects to be informed onCEO adjust decisions and information
flowCEO provides information on current
business environmentBoard adjust their advice from long
term issued to short term strategies
Alignment with the Member’s Long Term InterestMost 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
Alignment with Member InterestInsufficient 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
Aligning with Member InterestAligning 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.
Metrics and ToolsMonitor ROA and ROEGoals 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
The Cooperative Business Model Has a Lot of Moving Parts
The board needs financial tools on their dashboard
Creating the Aligned BoardContinuous improvementEducation
◦Comprehensive orientation◦Governance◦Strategy◦Finance◦Risk management◦CEO succession planning
Chemistry between Board and CEOBoard chair person is gatekeeper for the
boardCEO is gatekeeper for staff and opreration
issuesChair is sounding board for the CEO for
emerging issuesCEO provides insights into business
environment and policy and strategy issuesInformal meetings allow both the chair and
CEO to reflect on issues before framing the issue for board deliberation
Meeting AgendasChair and CEO work together to
establish agendasSufficient 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
Member CommunicationOften overlooked responsibility of the
boardMembers must be informed about
operating environment and decisionsInformed members can provide feed
back to the boardDirect contactMultiple communication channelsYounger producers will respond to
blog, Twitter feed or Facebook posting
Board EvaluationOnly 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
“Good boards are made up of accomplished leaders who value continuous improvement. Those directors work to find ways to make a good board better!”
The Aligned BoardDirectors 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