Importance of Board Minutes

October 30th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Endowed Cooperative Chair

Introduction

While the minutes of your cooperative board meetings will never make the bestseller list, they are one of the most important documents that you read.  Good minutes document the fact that directors are fulfilling their responsibilities.  The best rule of thumb is that minutes should provide a thorough record of what the board decided and what the board considered in making those decisions.  Board minutes provide a lasting record of actions and decisions of the board that can be referenced easily in the future, or allow cooperative members to understand the board’s activity.

 

What Are Board Minutes?

Board minutes are an official record of corporate business.  They provide a record of action or evidence of interaction.  Copies of the Articles of Incorporation, Bylaws, and minutes of recent board minutes are the primary documents subpoenaed when the cooperative is involved in any legal action; therefore, it is imperative that board minutes are always considered a priority and recorded professionally.

 

Why Are Board Minutes Important?

As previously mentioned minutes serve as a legal paper trail in case of litigation and serve as a record of the factors considered in decision-making.  Minutes are an internal documentation procedure to help provide information to new directors.  They also serve as a reminder to meeting participants of deliberations and/or actions, and as an update for members unable to attend.  Finally, the minutes provide documentation for manager’s follow-up.

 

What Must Be in Board Minutes?

  • Name of Cooperative
  • Type of Meeting (i.e. “Monthly Board of Directors Meeting”)
  • Date and time
  • Time of call to order and adjournment
  • Location
  • Attendees
    • Office
    • Name
    • Total number
  • All agenda items
  • Record of action on agenda items

 

What should be Left out of Board Minutes?

Cooperative bylaws frequently discuss who has access to the board minutes.  In general, any member of the organization has the right to inspect the organization’s board meeting minutes if they can show a valid business purpose.  Confidential information such as individual employee compensation or a patron’s accounts receivable balance should therefore be omitted from the minutes.  A good rule of thumb is to avoid specific financial information that would not be provided at an annual meeting.  This decreases the likelihood that confidential information will be passed on to members or introduced in legal proceedings.  If there is a valid legal reason to examine confidential information, a court can always request the information separately.  It is important to remember that informal communications should be left out of the official minutes.  The minutes should not reflect, and those outside the board should not be privy to, the content of the individual board member’s comments and deliberations that lead up to the official board actions reflected in the minutes.

 

Recording Executive Session Activity

Most boards periodically hold executive sessions at which employees (including the general manager) are not present.  Board secretaries frequently ponder how the session should be reflected in the minutes.  The minutes should reflect the fact that the board went into executive session and the time period of the session.  The minutes should also include any actions or decisions resulting from the executive session.  If the session is lengthily it may be appropriate that the minutes state that an in-depth discussion was held on a particular topic.  However, a fine line exists when determining if the discussion is informal, and reflects a specific board members attitudes and deliberations. Policy actions resulting from the executive session should also be recorded because it is very essential that policy be followed in the future.

 

Recording Committee Actions

Most cooperative boards have standing committees such as the audit committee, the annual meeting committee or the finance and budget committee.  Boards also form ad-hoc committees to research issues surrounding a particular decision.  The question often arises as to how the actions of these committees should be reflected in the board minutes.  In many cases the committee’s actions result in a report and recommendation to the full board.  In these instances the board minutes should reflect the recommendation and the committee’s report should be attached to the minutes.  In other instances, such as an audit committee, the committee’s functions are on-going.  In this case it may be preferable for the committee to maintain a stand-alone set of minutes for the committee meetings.  Before deciding to maintain a separate set of committee minutes the board should be confident that the committee is going to meet and function in a consistent fashion.  Any advantage in accountability in forming a separate audit committee or ethics committee is lost if the committee minutes do not reflect the fact that the committee met regularly and discharged its responsibilities.

 

Supporting Documents

Unless there are confidentiality issues, copies of feasibility studies, consultant’s reports and other material used in making decisions should generally be attached to the board minutes.  There are advantages and disadvantages of referencing (but not attaching) confidential reports.  Referencing the existence of a feasibility study or outside report provides evidence of the board’s due diligence in decision making.  The disadvantage is that it increases the likelihood that members will request the report or that the report will be included in court proceedings.

 

Taking Minutes during the Meeting

If ever there was a gap between a job’s glamour and its importance, such is the case for a board secretary.  It is of utmost importance to have the right person taking the minutes.  Usually cooperative boards appoint a board secretary who records minutes during the meeting, transfers the minutes into a professional, readable format, and submits the minutes to the board for approval at the subsequent meeting.

Unfortunately, recording good minutes during the meeting may prevent the board secretary from adequately contributing to the discussion.  Some cooperatives have adopted the method of allowing an employed recording secretary to fulfill the duties of recording the working minutes during the meeting, and transferring them to readable form.  Having a recording secretary to take care of this predominantly clerical job will allow the corporate secretary to fulfill his/her entire responsibility, not just a narrow portion of it.  This way, the board secretary can focus on the business of the meeting without the distraction of writing minutes during discussion.

Another advantage to this method of using the services of recording secretary is that consistency and continuity is better achieved.  Due to the nature of the board of directors of cooperatives, most boards maintain a considerable turnover rate.  New board secretaries are appointed relatively often, and with every new secretary, comes a new method of recording and formatting board minutes.  Because board minutes are often referenced in the future, continuity is an important consideration.  By employing a recording secretary, continuity can be maintained through board secretary rotations.  The major disadvantage of hiring a clerical recording secretary is maintaining confidentiality.  This may be an insurmountable issue in a small rural community.

Another method to improve the quality of the minutes is asking for a second board member or advisory board member to help record the minutes.  During the meeting, this individual will record a second set of minutes in addition to the notes the board secretary takes.  The board secretary reviews both sets of working minutes, formats the information to a readable format and presents the final draft at the subsequent meeting.  This second set of working minutes also provides an un-biased “double-check” of what occurred at the meeting. Information that one recorder missed was probably picked up by the other.

 

Approving the Board Minutes

All board members are responsible for assuring the accuracy of the minutes before approving them.  Draft minutes are usually held confidential.  Consider whether the minutes disclose any confidential information when reviewing for approval, and if they demonstrate an adequate paper trail of the board’s due diligence.  It is imperative to check the by-laws of the cooperative, which will help discern the level of disclosure to be made in the minutes.  If the laws do not restrict disclosure options, minutes can be regarded as one way for the cooperative to demonstrate accountability.  Most of what the board discusses is important to gain trust from members and potential members in the community.

A good guideline to remember is that it takes less time to review good minutes than it does to review bad minutes.  Ease of reading is very important to the effectiveness of the minutes reported.  Minutes carry the responsibility of being both concise as well as complete.  Nothing needed should be left out of the minutes.  The skill of the board secretary is demonstrated by providing a complete but concise summary of lengthy discussions and resulting board actions.

 

Conclusion

Board minutes may be referenced in future legal actions.  This is one of the main reasons that the minutes must be accurate and thorough.  Board minutes should provide a clear and concise summary of the meeting and reflect the board’s due diligence in decision making.  While the minutes should reflect the major discussions and decisions of the board they should not contain confidential or protected information.  Minutes should record the occurrence, but not the content of executive sessions and be accompanied by relevant supporting documents.  The board is responsible for reviewing and approving all minutes.

Your Opinion Counts!

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

The cooperative research community is always pondering the challenges and opportunities facing cooperatives and how we, as an industry, can better communicate the value of the cooperative business model.  One approach to gaining those types of insights is to harvest the insights of CEOs and board members.  For example the consulting and auditor group KPMG just completed their most recent survey of 400 corporate CEOs.  CEOs reported higher expectations for sales and hiring in 2017 but lower expectations for capital investments.  For the fifth straight year, CEOs cited regulation as the top cost pressure facing their firms.

Now it’s your chance to chime in.  A simple multi-state survey is underway which is investigating your outlook toward challenges and opportunities.  What is even better is that the process has been boiled down to three simple questions.  Who says surveys can’t be fun?  Take a moment to click on the link below and cast your votes for the words that best describe the challenges, opportunities and value package of our cooperative.  I’ll be back in touch with the results from Oklahoma cooperative CEOs and board member and how that compares with the responses from other states.

Your opinion counts so click on the survey link below

https://unlcba.az1.qualtrics.com/SE/?SID=SV_ezmJGSMaoRoi5tr

Two Last Things for Your Board to Get Right

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

A few weeks ago I started discussing the areas that a good board needs to get right.  A good board needs to have the right structure, the right members in that structure using the right process and evaluating the right information to focus on the right decisions with the right follow through.  Admittedly, that is a lot of things to get right.  However, there are two more areas which you might not have thought about.

A good board needs to have the right culture.   Culture involves the “soft” elements of board process and is difficult to define and refine.  Board culture is the accumulation of traditions and habits of work that have developed over time.  Culture involves the written and unwritten rules that guide behavior.  The style of meetings and the style of debate are part of a board’s culture.  Culture also relates to the degree of formality in the boardroom, the level of openness of discussion and the critical thought processes of the directors.  Culture cannot be ignored or taken for granted. It requires careful consideration and nourishment from all members of the board, and especially from the board chair.

The final area your board needsto get right is remuneration.  Board member remuneration is almost a forbidden topic in agricultural cooperatives.  In most cooperatives, board member compensation is mostly symbolic.  Having customer owners on the board is a key difference and key strength of the cooperative business model.  Cooperative members may even be reassured by the fact that board members are basically volunteering their time and thus are only driven by an unselfish desire to improve their cooperative.  While admitting that we cannot compensate board members on a level comparable to corporate boards, cooperatives should not ignore the need to reward board members for their time and effort.

The best path may be through opportunities for education and personal development.  Board education programs improve skills in finance, strategic planning, feasibility assessment, project management, decision making and host of other topics.  Board members can use those same skills on their own operations.  Cooperative industry retreats and conferences also let board members get a big picture view of the issues and development in agricultural industries.  They also allow for cross pollination with CEOs and board members from other industries.  Cooperatives may not be able to compensate directors for what their time is worth, but they can make their board tenure a worthwhile experience.

Building a great board is simple.  You just have to make the right decisions in the right areas at the right time!  As they said in the 1960’s “right on”!

Try Flipping Your Board Meeting Agenda

October 18th, 2017 by Phil Kenkel

Phil Kenkel, Bill Fitzwater Cooperative Chair

One of the innovative teaching ideas is to “flip the classroom” by spending class time working homework problems while students go over the lecture material on their own. I have found that throwing in an occasional “flipped classroom day” is a great way to invigorate interest and discussion.  Many boards of directors have experimented with a similar concept by “flipping the board agenda”.

Instead of beginning the board meeting with the customary review of financials, committee reports, and expenditure approvals, try starting your board meetings with a lively discussion of industry issues and the cooperatives progress toward its strategic goals. Flipping the board meeting agenda can tap into the energy board members bring to the beginning of a board meeting. Scheduling discussion and action on strategy at the beginning of the meeting emphasizes the board’s commitment to that key area of governance.  Considering the big picture issues first may bring a fresh perspective to the more routine issues which are the nuts and bolts of achieving that desired big picture.  Another benefit of the flipped agenda is that strategic discussion tends to unify the board and that sense of purpose carries over into more constructive dialog on the more routine issues.  Putting the challenging, truly interesting material at the front end of the agenda also provides an incentive for habitual late-comers to arrive on time.

The cooperative board has many roles including strategy, oversight and team work with the CEO.  Flipping the board agenda is simply another tool to ensure that the board’s focus on strategy is not overshadowed by the oversight role. Try flipping the agenda for your next board meeting. A little variety might keep your board from flipping out!

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

One of the key aspects of managing a cooperative is the control function.  The controlling function involves checking actual performance against benchmarks and historical standards.  This leads to the concept of “Management by Exception” where management attention is concentrated on the areas of greatest need where outcomes differ from the standard.  Many managers think of management by exception in terms of defining when to take corrective action.  However there are actually two types of exceptions: Problems, when outcomes are below standards and, Opportunities, where outcomes are above standards.  The opportunity branch of management by exception is an underappreciated avenue to increased profitability.

A key aspect of management by exception is to attempt to identify the factors that led to the exception.  In the case of underperformance, that understanding would be used to try and correct the situation.  For example, if the cooperative is experiencing a higher than average level of shrink in the feed warehouse the manager would want to investigate the underlying causes. The cause of the shrink may be found to relate to insufficient training on forklift operation, improper warehouse layout, warehouse condition or even theft.  Now consider the alternate condition: what happens when the feed shrinkage is significantly below what other cooperatives experience or is decreasing over time?  The temptation is to conclude “Joe does a great job of managing the feed warehouse! That frees my time for other issues!”  The manager misses the opportunity to identify and understand the factors that resulted in above average warehouse performance.

In a grain handling and farm supply cooperative there are many opportunities to identify opportunities.  When grain shrink is below average and storage problems are low, the manager can investigate the cause.  Perhaps the timing of aeration or fumigation was different.  Perhaps the grain was received at lower than average moisture, or the fall weather was cooler than normal.   The result is a better understanding as how to maximize stored grain quality.  A similar situation could occur when the cost per acre of fertilizer application is unusually favorable.  The manage could investigate whether there were changes in maintenance procedures, scheduling and routing improved, or again, perhaps weather during the application period was above average.  Even in cases where the cause of the exception was outside the cooperative’s control, identifying the impact may help in future planning.

Employees and managers can learn by correcting what they are doing wrong.  They can also learn by noticing what they are doing right.  Don’t forget the opportunity branch of management by exception.

Return on Investment from Infrastructure Reinvestment?

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

In this series of articles I have been addressing the simple question: “Are we reinvesting enough in our cooperative?”  We have been working through the equation:

Growth rate = reinvestment rate x return on equity

A cooperative’s reinvestment rate is the ratio of net capital reinvestment to net income.  Net capital reinvestment is capital expenditures less economic (or book) depreciation.  Last week we discussed why tax depreciation is a poor measure of actual or economic depreciation.  Our formula would suggest that a cooperative that is reinvesting (net of depreciation) 50% of its net income and has an 8% ROE would grow at 4% per year.  If the reinvestment rate falls to 25% of net income, growth falls to 2%.

Our growth rate formula also shows us that a cooperative’s growth is a function of the return it generates on its net capital investment.  Many boards don’t consider the return on investment from an infrastructure replacement project.  Their thought process is “We have to replace the bin so the rate of return is illrelvant.” However, the return from that investment, along with those of existing assets, does ultimately drive the growth of the cooperative.  Put another way, if our reinvestment in infrastructure is not generating an adequate return, in the long run we cannot deploy the capital to finance it.  Inadequate returns can relate back to our imperfect measures of depreciation.  If we are operating fully depreciated assets we may have a margin structure that is inadequate to support replacement assets. If our capital reinvestment doesn’t generate additional efficiencies, it might have to be paired with some adjustments to margins.

Our growth rate formula also helps to emphasize the importance of feasibility analysis. That was the topic of our recent advanced director educational program.  If we identify and reinvest in higher return projects we can grow our cooperative at a faster rate.  “Are you reinvesting enough?” It depends on how fast you want your cooperative to grow and the returns from your potential investments.  Next week, I discuss how debt financing enters into this equation!

Is Your Board Doing Things Right?

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

One somewhat circular definition of an effective board of directors is that a good board does things right.  That statement becomes more useful when we try to categorize the areas that the board needs to get right.  I’m going to suggest eight areas that your board needs to get right.

A good board also needs the right structures.  Those structures are unique to each cooperative but includes components such as the right number of board members, the right number of board committees, the right structure of an associate board (if used) and the right structure of term limits that creates a healthy amount of turnover.  Structure is one of the easier things to get right.  However, the “right” structure is not static but needs to be tweaked with the life cycle of the cooperative, technology changes and board composition.

The next thing a good board needs is to have the right people. The raw material for a good board is created through an on-going process of educating and building a pool of potential board members and the recruitment, nomination and election processes.  Orientation and integration of new board members into the team is also critically important.  Boards need both diversity and complementariness.  The best boards have a mix of people with different personalities, skills and backgrounds.  All directors need a threshold level of knowledge of accounting, finance, law, cooperative principles and the industries they operate in.  It’s even better when a board member has a particularly strong area where they can be the “go to” resource person.

A good board also needs the right information.  Effective decision making requires informed directors.  As the complexity of cooperatives increase it becomes more challenging for directors to effectively monitor performance, assess opportunities and understand their business environment.  The right information starts with the board meeting packet (which is increasingly stored in the cloud and delivered electronically) but also includes financial dashboards, reports from staff and outside experts and feedback from key customers.  The management team needs to provide information in a format that board members understand.  However board members have the ultimate responsibility to demand that they have the information they need to make the best possible decisions.  Information is more than data.  One way to recognize relevant information is that pertains to the key decisions facing the organization.

There are there of the eight things that a good board needs to get right.  I will expand on the list in my next newsletter.  As the road side signs say:  Get right and stay right!

Internal Rate of Return on Infrastructure Reinvestment

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

The old saying is “You have to spend money to make money!”  In terms of our discussion of growth, the cooperative has to reinvest in equipment and infrastructure to maintain and grow.  Every investment should be evaluated to determine if is forecast to generate an acceptable return.    Many boards and CEOs skip that step concluding that if they committed to replacing the asset the return is ill relevant.  However that return is very relevant for the future return on equity of the cooperative.  If the return on a capital expenditure is low it pulls down the future profitability of the cooperative. One of the best measures of return on investment is the internal rate of return.

In the old days a description of internal rate of return always led to a discussion of the formulas involved.  Nowadays with an IRR function on every spreadsheet we can easily find out what time it is without having to explore how the watch was made.  All we need to calculate internal rate of return is a series of cash flows with the outflows, like the initial investment entered as a negative number and the annual cash flows entered as positive numbers.  The cash flows should include the associated margins less expenses but do not include interest expense, depreciation or loan principle payments.  Those elements are implicit in the calculated return.  (If we wanted to be precise we would include the tax benefit of the depreciation.)  Cash flows for a fertilizer applicator would basically be the annual application income less the fuel, maintenance and labor costs associated with the applicator.

There are many benchmarks for an “adequate internal rate of return” but a simple threshold suggested by our growth rate formula is the desired return on equity.  If capital investments meet that threshold the future profitability and return on equity of the cooperative should be adequate.  If a fertilizer applicator doesn’t generate an internal rate of return higher that our ROE target we know that we need to increase our application fee or expect a lower return on equity in the future..  If we are examining a long term investment like a grain structure we might want to begin with our existing handling margin and storage fees and include a reasonable growth rate in revenues.

The old saving should really be “you have to invest money to make money”.  Internal rate of return forecasts if we are investing wisely.

Guidelines for Employee Suggestions

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Cooperative employees can be a good source of ideas.  At the same time an employee suggestion program can end up being just a channel for employees to vent frustration or to generate wild ideas that the cooperative could not possibly implement.  The solution is to put a little structure, but not too much structure, into the format for suggestions.

The suggestion form (paper or electronic) should begin by asking for a one sentence description of the problem or the procedure currently in place.  Next should be a similarly short description of the proposed solution.  The third section, and one that is often left out, is a short section describing why the change would add value to the cooperative and what it would take to implement it.  Don’t ask for a full blown action plan but you should elicit some details as to the “why and how” of the suggestion.  It’s easy to simply dash off an idea, but in order to be useful you need to ensure that the employee(s) have thought through the suggestion.

That leads to the question of anonymous employee suggestions.  There is a place for anonymous suggestions.  For example, an employee might want to highlight the fact that a safety procedure is commonly being ignored. As a manager you wouldn’t want any impediments to discovering that sort of information.  However, in general, you want to encourage employees to stand behind their ideas. You also want to build an organization culture where feedback and innovations are valued.  From a practical standpoint it is difficult to provide feedback to anonymous suggestions and impossible to provide any recognition or reward.  The “name” section should ask for a list of all of the employees who helped develop the suggestion.  Team suggestions are typically better defined and more thoroughly thought through so you want to subtly encourage employees to run their ideas past one or more of their peers.

Next week I’ll discuss feedback and recognition for suggestions.

 

Grain Margin Risk

October 18th, 2017 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

One of my recent research projects has involved applying the principles of enterprise risk management to grain marketing and farm supply cooperatives.  ERM involves analyzing all of the “risk buckets” for a firm as well as their capacity to withstand risk and their “risk appetite”.  We used data from 10 case study cooperatives to investigate the historic risks for grain marketing and farm supply cooperatives.

Not surprisingly, variation in the volume of grain received was, on average, the largest risk factor.   What was surprising is that variation in grain margin was also a major risk factor.  For some cooperative grain margin contributes more to overall risk than does grain volume.   Grain margin is impacted by numerous factors.  Competition can impact the margin that the cooperative can obtain.  Almost all cooperatives have hedging policies which are designed to limit the cooperative’s exposure to risk from grain price variation.  Despite those programs, a cooperative’s effective margin is impacted by the effectiveness of their hedging and their grain merchandising practices.  Cooperatives are also exposed to basis risks on their hedged positions, which in recent years has been substantial.  Transportation cost changes can also impact the effective margin received.

A final area creating variation in grain margin is grain grading and shrinkage in both quantity and quality.  A cooperative’s effective margin is calculated as the difference from its sales price for all grain less its purchase costs.  If a cooperative inaccurately grades grain it runs the risk of receipting a higher quality of grain or underestimating dockage.  Those differences will be apparent when the grain is ultimately sold on the basis of an official grade and the difference is absorbed through a reduced grain margin.  Some shrinkage always occurs in handling.  Excessive shrinkage (weight loss) reduces the effective margin.  Quality loss from poor stored grain management creates quality shrinkage which can wreak havoc on the effective margin.

As we approach the wheat harvest season, it’s a good time to consider your grain margin risks.  Controlling those risks takes a team effort.   Some risks relate to grain merchandizing and hedging while others depend on grading and receiving and stored grain management.   Grain margin is just one risk bucket, when you take a close look you can see that there are buckets within the bucket.  Just be sure none of your buckets has a hole in it!