Competitive Board Elections

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

The board of directors is critical to the success of a cooperative.  The board is responsible for approving major strategic and financial decisions.  They also have the critical tasks of both monitoring and partnering with the CEO.  Almost everything that happens, or doesn’t happen in a cooperative is due to the board of directors.  Cooperatives operate under the principle of democratic member control. The election of directors is where this democratic principle is put to action.  The goal for every cooperative should be to have competitive elections with more than one outstanding candidate for each open board position.

The path to outstanding board candidates starts with member education.  Members need to know how the board functions and the desired qualities for board candidates.  Members must have an understanding of the board role, and the challenges facing the cooperative in order to make an informed choice on director candidates.  Every cooperative should be educating the membership to foster an awareness and appreciation of the value created by the board.

In order to have a competitive board election the right individuals must be in the pool.  Potential board candidates must have demonstrated integrity in accord with the board’s code of conduct. Board candidates need to be independent thinkers but also must be able to contribute to the group decision-making process.  A board member must be able to consider an issue with an open and critical mind.  They must also support the policies and decisions made by the board and support the CEO when he/she is applying board policies.

Attracting board candidates should be a year around job.  Members must be educated so that they can understand the desired qualities of board candidates.  As they become better informed more members may consider running for the board.  Members are busy but they also allocate their skills and energies where they are valued and appreciated.  The path to creating a board candidate starts with asking them.

In today’s environment your cooperative needs a diverse team of engaged and dedicated directors.  Democratic member control is a powerful cooperative principle.  Strive to bring it to life in your cooperative through meaningful, competitive board elections.

Structuring to Meet Diverse Member Needs

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

In my last article I discussed consensus based decision making in the context of a cooperative with a diverse membership. Under consensus decision making, the cooperative leaders consider the wide range of needs of a diverse membership and then chart strategies focusing on the common needs. The downside is that the cooperative may concentrate on “business as usual” and fail to act on opportunities to meet the needs of some member groups. Over time this can prevent the cooperative from changing with its membership base.

An alternative strategy is to develop structures that allow the cooperative to focus on multiple member segments. A simple example is organizing into functional departments such as fertilizer, petroleum and grain. That organizational structure creates division managers who are focused on meeting and anticipating the needs of particular customer group. In a larger cooperative that concept can be expanded to include staff positions with greater specialization. For example, the fertilizer department might have an individual with specific responsibilities for specialty crops or precision application.

The challenge for cooperatives is in expanding that concept of multiple specializations to the governance level. The board’s role is always a balancing act, allocating the cooperative’s scarce resources to competing opportunities and member needs. As the cooperative becomes diverse, boards struggle to identify and fully understand opportunities that relate to one segment of members. Implementing structures such as advisory boards, focus groups, or key customer groups can help the board think through areas where there is a critical mass of member needs but perhaps not a consensus of member needs. A focus group representing no-till producers can help the board to better understand where the cooperative is and is not matching up with their service and product needs. The board must still of course consider whether the cooperative can profitably configure itself to meet those needs. The focus group allowed them to investigate an opportunity that might not have been on their radar screen.

The cooperative cannot be all things to all members. However, as membership becomes diverse it also can’t be one thing for all members. In a cooperative with diverse membership the management and governance system must allow the leaders to not only be on the ball but to keep their eye on multiple balls.

Simple Steps to Address Board Diversity

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

In my previous newsletters I have discussed the benefits of board diversity.  Boards with a healthy amount of diversity are more innovative and more strategic.  Board diversity improves the perception of the organization.  Research on Fortune 500 companies shows a clear correlation between board diversity and improved firm performance.  Agricultural cooperatives trail every other cooperative sector, as well as most investor owned firm sectors, in the diversity of their boards of directors.  In the case of gender diversity, which is probably the low hanging fruit for agricultural cooperatives, the cooperative’s membership structure may be a barrier to female board members.

The point of board diversity is to expand the pool of highly qualified candidates, not to set any sort of formal or informal quota.  There are some simple steps to addressing board diversity.  First, consider your membership policies and think through how women could run for the board of directors.  A simple solution might be to publicize board nominations in advance and establish a written procedure to express interest.  That would allow you to get a membership application from potential female candidates.  Another step is to have one or more females on your nominating committee.  A women member is much more likely to be able to identify qualified and interested female board member candidates.  A good election process with multiple candidates for every board seat helps open the door to diversity.  A female candidate obviously has an uphill battle in a cooperative with a culture of re-electing every incumbent director in an unopposed election.

A final step, if your cooperative has implemented an associated board, is to appoint one or more female members to the associate board.  The associate board is typically appointed by the board and CEO so that change can be implemented easily.  Even though they do not have a voting role, the associate board brings new perspectives into the board room.  The associate board is a great way to connect with members who may be unsure whether they want to commit to running for a board seat.  It also grooms them for a possible role as board member.

I have published a white paper on this topic which is published on the CHS Center for Cooperative Growth at the link below.  I also have a video and there are three outstanding videos from female board members at progressive agricultural cooperatives.  One of the themes in the videos is why the individuals ran for the board.  The recurring answer is that someone asked them.  In some of our cooperatives we need to remove barriers keeping women out of the board room.  In most, we just need to extend an invitation.

Center for Cooperative Growth:

http://www.chscenterforcooperativegrowth.com/

Barriers to Diversity on the Cooperative Board

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Chair

Oklahoma State University

As I discussed in a previous newsletter, agricultural cooperatives trail most other cooperative sectors and most investor-owned corporations in terms of gender diversity in their boards of directors.  That gives rise to the question as to whether there are barriers to the cooperative board. One issue is membership status.  It is not always obvious whether a wife, farming with her husband, is eligible to run for the board of directors.  In some cooperatives both the husband and wife are voting members while in others only the husband is listed as a member.  A woman who is interested in running for the board can obviously apply for membership but the ambiguous membership status likely discourages participation.  Because of the one member-one vote structure, it is important for cooperatives to have as many active and interested members as possible on their voting roles.  Getting both halves of the farm family on the voting roles has benefits beyond expanding the pool of board candidates.

Another potential barrier is the nominating committee.  Regardless of whether the committee is made up of a mix of directors and non-directors or only non-directors, the committee often has strong links to the board.  The nominating committee may, consciously or unconsciously, select candidates similar to the existing board.  Not all cooperatives have a policy requiring multiple board candidates.  When a cooperative has a culture of incumbent board members running unopposed it is difficult to encourage a female member to run for the board.  If the nominating committee is not actively identifying quality female candidates or if the election appears biased toward the status quo, the likelihood of female board members is diminished.

 

In my next newsletter I’ll discuss some simple, practical ideas for increasing board diversity.

The Performance Conversation

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Evaluating performance is a critical responsibility for both managers and boards.  The formal evaluation system is an important tool.  Another, aspect of the process, and one that receives less attention, is the performance conversation.  Performance conversations can and should be implemented throughout the year, for example, on a quarterly basis.  The performance conversation provides a context for a two-way discussion on the success in achieving the cooperative’s goals and personal goals.  Part of the conversation should focus on identifying impediments for success.  For example, during a performance evaluation with the CEO the board should discuss what the manager needs from the board.  That element helps to make it a forward looking process and a two way conversation.  Regular performance conversations are compatible with and complementary to formal performance appraisals.  The performance appraisal provides a measurement of success and a means of developing formal goals.  It is an essential tool, but by its very nature, it looks back at past activity.  The format is not always conducive to a two way dialog.  The performance conversation can be less formal, more frequent and more participatory.

Make a resolution to have better performance conversations in the New Year.

Sources of Risk for Grain and Farm Supply Cooperatives

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Grain and farm supply cooperatives operate in a risky environment.   One of the key responsibilities of the board and management is to mitigate risks consistent with the cooperative’s risk capacity.  During the last few months I have been working on a simulation tool to help cooperative managers and boards better understand and manage the risks facing their cooperative.  Each cooperative is unique, and the firm’s complete risk profile can be understood only through an in-depth enterprise risk management assessment.  However, there are major sources of risks such as grain volume and grain margin, fertilizer volume and fertilizer prices and accounts receivables that are similar across cooperatives.

As an illustration, one can consider a typical cooperative which is represented by the composite financial statements of all Oklahoma cooperatives in the CoBank database.   This example cooperative has a grain volume of 3M bushels, 12,000 tons of fertilizer sales and total sales of around $28M.  When all volumes and margins are set at historic averages the cooperative has before patronage profits of around $900,000 including $166,000 of regional patronage. The cooperative has a return on assets of over 20% and a return on equity of 30% reminding us how easy life would be if weather and market volatility disappeared.

Volatility was modeling using historic variation in wheat yields at the county level, weekly fertilizer prices at the wholesale level and weekly grain basis.  The variation in fertilizer volume was modeled from USDA data on annual fertilizer sales at the state level.  Not surprisingly, grain volume is the largest source of variation in the cooperative’s cash flow.  Grain volume accounts for around two thirds of the total risks modeled.  Fertilizer price risk accounts for around 10% of total risk while grain margin risk accounts for around 5%.  The remainder of risks for this hypothetical cooperative come from price and volume fluctuations in other farm supply categories and the variation in equity redemption payments.

The simulator provides a tool for a cooperative to take an initial look at risk exposure and/or examine equity retirement systems.  If your cooperative is interesting in being a guinea pig, let me know.  In my next newsletter I will discuss how equity management and patronage decisions influence risk.  That is also part of the exciting case study at next week’s advanced OCCD program.

Market Risk for Grain and Farm Supply Cooperatives

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

In the last newsletter I discussed the sources of risk for a grain and farm supply cooperative.  With the state in the grips of a historic drought, many managers may have been underwhelmed with the breaking news that weather was a major risk factor for grain cooperatives.  Some of the other risk factors include variation in the amount of fertilizer sold, price changes on fertilizer in inventory, and variation in petroleum prices.

The standard deviation of county grain yields is around 60% for most wheat producing counties. If wheat yields were normally distributed (the classic bell shaped curve) that would mean a grain cooperative has a 25% chance of receiving only 40% of their long term average.  We could expand the discussion of modeling grain yields, but it is also interesting to see how the other risks stack up.  The USDA published data on annual fertilizer use on wheat. Using that data the standard deviation in fertilizer use is roughly 14% of the mean.  That would imply a supply cooperative has a 25% chance of selling 86% of their historic average and a 5% chance of selling 72% (minus 2 standard deviations) of their average volume.

Price data can be used to estimate the risk in fertilizer and petroleum margins.  When fertilizer is $500/ton and the cooperative has a $50/ton margin there is a 25% of an actual margin of $40/ton and a 5% chance of a $30 margin,  That is another picture of the price risk from fertilizer in inventory.  In the case of petroleum, a cooperative with a $.16/gallon average margin (the national average but probably low for rural locations), There is a 25% change of a $.11 margin for a particular time period and a 5% chance of a $.06 margin.  Of course, there are similar probabilities for above average margins so the price risk in fuel may average out.

The variation in volume and margins is just one part of the risk picture for your cooperative.  Cooperatives can undertake strategies to control risks.  Risk capacity is affected by patronage, equity revolvement and many other board decisions.  The best part of fertilizer and petroleum risks is that they can take our mind off our continuing drought risk.

The Member Communication Plan

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Most cooperatives set ambitious goals during their strategic planning sessions.  Not surprisingly, not all goals are achieved.  Improving member communications seems to routinely appear on the list of goals for the coming year.  However, there often is little progress year after year.  One explanation for the lack of progress in improving member communications is that few cooperatives have a formal communication plan.

A communication plan starts with identifying what messages the cooperative wants to convey.  Those messages need to be more specific than just “we are a great cooperative”.  Each board must consider the particular value package they want to convey.  In general it is a combination of the message that the cooperative exists to improve the producer’s profitability and that the members own and control the business.  Cooperative leaders need to develop several specific messages that resonate. The second step in the communication plan is identifying the target audience.  That audience is obviously cooperative members.  However most cooperatives have diverse membership and the board should identify key target audience and tailor communications to each audience.

The third step in the communication plan to identify the strategies.  For example, the strategy may be to focus on the website as the primary communication vehicle and use other channels to push the audience to the website.  Another, equally valid strategy might be to focus on face to face communication.  There may be different strategies for different core audiences.  The final part of the plan is the specific tactics for each strategy.  Example tactics might include updating at least 5% of the website content on a daily basis, having direct contacts with a specified percentage of the membership or holding a given number of small group meetings per year.

Just as the fixed asset budget allows the board and management to think through infrastructure decisions, the communication plan allows the cooperative leader to set specific goals for member communication and track the progress.  If improving member communication is a reoccurring theme on your improvement list, consider developing a formal communication plan.

What is Missing on Your Web Site?

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Our multi-state survey of communication practices and follow-up communication audits reveal the web site as a major component of member communication.  Many cooperative web sites omit important information.  The web site should have your locations, services, hours of operation and contact information. Phone numbers, email, address and contact forms should be easily assessable and visible.  Phone numbers and emails should not be uploaded as part of an image but rather in a format where the user can copy or click to place the call or send the email conveniently.  The web site is also a great place for a short version of your mission statement.

Clear navigation is essential on a website just as a legend is essential on a map. The various pages on the site should have clear, easy to understand names and a convenient navigation bar.  Those should include a “contact us”, “FAQ” and “about us” sections.  The web site should be designed so that users can accomplish their key goals, whether it be viewing the current wheat price or finding information on the membership meeting.

Social media is not going to leave anytime soon so it is worth the investment in time and effort to promote your social media presence on the website and use the social media to drive traffic to key areas or information on the site.  Up until a few years ago, designing for the web meant designing for a computer.  Now it means designing for anything with an internet connection.  Laptops, tablets and smartphones, all have different screen sizes.  This creates the need for responsive design which allows the website layout to adapt to the screen on which it is being browsed.

Finally, don’t forget to include cooperative information on your website.  The website should describe how to become a member, the date of upcoming member meetings and board member eligibility requirements..  The board of directors should be listed (preferable with photos) along with other key member committees such as the director recruitment committee.  The principles of member ownership, member benefit and member control are the essence of the cooperative organization.  The website should describe, in simple terms, how the cooperative retains reserves and distributes profits in cash and stock.  The process of equity revolvement should also be described.  There are some good examples of cooperative website that describe their business model in short, easy to grasp terms.  You might also consider including the board chair and CEO reports from the annual meeting.  Many key members were likely not in attendance.

Your website is an important link to your member-owners.  Take a fresh look at yours and make sure your members are having a positive experience.

How Cooperatives Use Their Web Sites

March 26th, 2015 by Phil Kenkel

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

Eighty five percent of grain, farm supply and cotton ginning cooperatives maintain a web site.  That data comes from our recent multi-state survey on cooperative communication.  Ag cooperatives are slightly behind Farm Credit cooperatives (100%) and rural electric cooperatives (95%).  Of the agricultural cooperatives with web sites, over 90% maintained market information and weather, while 75% had USDA reports and around 70% had industry news stories.

Since managers and board members describe their web site as a key communication tactic, it is interesting to see what is and isn’t being communicated.  Among cooperatives with web sites only 74% provided information about the services the cooperative provides.  Farm Credit System (89%) and RECs (100%) were more active in this area. A similar percentage of Ag cooperatives (73%) included news or updates about the cooperative.  This was also lower than the percentages reported by Farm Credit cooperatives (89%) and RECs (92%.  Those percentages suggest that agricultural cooperatives may be missing some opportunities to update their members about their cooperative’s services and progress.

Only a third of grain, farm supply and cotton cooperatives provide any information on cooperative governance on their web site.  This was much lower than the sister cooperatives where 90% to 100% provided information about the board, voting procedures and how to join the cooperative. The most marked differences between the cooperative sectors was in the area of information targeting youth audiences.  Only 18% of the agricultural cooperatives with web sites reported that they had information targeting youth audiences on their web site.  Ninety percent of Farm Credit System cooperative and 64% of RECs targeted youth on their web sites. Most boards and managers express concern whether the next generation of producers appreciate the cooperative system.  Targeting those audiences on our own web sites would be a good first step in increasing their awareness.

Stay tuned for more communications about cooperative communications!