BOD Governance Training

7/29/2019 BOD Governance Training

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Governance EducationDecember 2010


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Agenda

Role of the board

Relationship to officers

Fiduciary duty reviewDuty of care cases


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Role of the Board

By statute, a co-op must be governed by itsboard of directors which shall take all actionfor and on behalf of the corporation, except

those actions reserved or granted tomembers. MSA Section 308B.455

A director individually or collectively with

other directors does not have authority toact for or on behalf of the coop unlessauthorized by the board. MSA Section 308B.455


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Role of the Board

A director may advocate interests ofmembers or member groups to theboard but the fiduciary duty of eachdirector is to represent the bestinterests of the co-op and all members

collectively. MSA Section 308B.455


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Relationship to Officers

Co-op is required to have the following

officers but can appoint more:

President (or chair) :must be a member and a director

One or more vice- presidents (or vice-chairs):the firstvice-president must be a member and a director

Secretary (or records officer):need not be a member or adirector; can be combined with financial officer

Treasurer (financial officer):need not be a member or adirector. MSA 308B.475 subd. 1

Officers other than the General Manager(CEO) cannotbind the co-op unless authorized by the board


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Relationship to Officers

A board may employ a general manager or

chief executive officer to manage the day-to-

day business of the co-op

If so employed, the CEO shall have the authority toimplement the functions, duties and obligations of theco-op except as restricted by the board, the bylaws orarticles. MSA 308B subd. 5


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What This Means

Work as a whole and not as individuals orrepresentatives of a constituent

Select top management and plan for succession

Provide general direction regarding co-opstrategy and management operation of thebusiness

Oversee and guide managements performance

and co-op financial performance

Oversee compliance with laws

Advocate but collaborate


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Fiduciary Obligations

Directors and Officers have threeprimary fiduciary duties:

Duty ofCare be competentDuty ofLoyalty put co-ops interest first,

deal fairly

Duty ofObedience follow the rules These are found in statute and case

law


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Duty of Care

Requires directors and officers toact:

In good faith

In a manner the director reasonablybelieves to be in the best interest of theorganization and

With the care an ordinarily prudent personin a like position would exercise undersimilar circumstances Minnesota Statute 308A.455

Same duty as corporate and

nonprofit directors and


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This Means

Attend Board and Committee Meetings

Be Informed: Industry, Operations,Governance

Review Materials before Meetings

Obtain Expert Opinions when Needed


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This Means

Participate ask questions; weigh pros andcons, alternatives, cost benefit andachievement of mission, understand risks

and compliance programCan consider interests of employees,

customers, suppliers and creditors,

economy, members. MSA Section 308B.455subd. 4

Good governance is fundamentally about

rigorous dialogue


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You Can Rely on Others

Reliance Doctrine

Director is entitled to rely on informationprovided by officers, employees, experts

and committees who are:Believed to be reliable or

Licensed professionals (for example, our

auditor) Unless actual knowledge that reliance is

unwarranted Minn. Stat. 308B.455 subd. 2


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a s c ng n ooFaith?

Fact-based and changing concept

Determined by the courts

Nonfeasance Malfeasance


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a s c ng n ooFaith?

Some key cases describe theevolution

Graham v. Allis Chalmers (1963) (antitrust) In re Caremark (1996) (antikickback)

Stone v. Ritter (2006) (anti money laundering)

In re Citigroup (2009) (derivative litigation)


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as aws ere eryProtective

Graham v. Allis Chalmers (1963)(antitrust)

absent cause for suspicion, there is no

duty upon directors to install or operate acorporate system of espionage to ferretout wrongdoing which they have no

reason to suspect existsBoard can wait for red flags


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ay e a asnEnough

In re Caremark (1996) (antikickback) while directors could be liable for failure to

monitor, only sustained or systematic failure of

the board to exercise oversight such as anutter failure to assure a reasonable informationand reporting system exists will establish thelack of good faith

Board must supervise and monitor

Not just policy but actual behavior


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What is Bad Faith?

Stone v. Ritter (2006) (anti moneylaundering)

Approved and clarified CaremarkTo establish bad faith or

malfeasance, must show directors Knew they were not discharging their fiduciary

duty or

The directors demonstrated conscience

disregard for their responsibilities such as by


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Today- Business Risks

In re Citigroup (2009) (derivativelitigation)

The mere fact that a company takes onbusiness risk and suffers lossesevencatastrophic losses does not evidencemisconduct

Oversight duties are not designed to subjectdirectors to personal liability for failure topredict the future and to properly evaluatebusiness risk

Citigroup had procedures and controls in place


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If You Do This

You may get the benefit of thebusiness judgment rule

Process oriented presumption that youacted with due care

No after the fact judicial interference withyour decision you can be wrong!

But, irrationality is the outer limit of theBJR (waste/bad faith)


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If You Do This

Application in co-ops is uncertain.One court refused to adopt BJR to co-ops and instead appears to endorse areasonableness standard. Willens v. Willens v.Wisconsin Ave. Coop.

Difference is on burden of proof and

rationalized based on inherent self-interest of member/directors


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Some Other Protection

Co-op may indemnify directors.MSA 308B.471

But, must have acted in good faith and

received no improper personal benefitA few other requirements for criminal

matters

Article VIII, section 1 of MississippiMarket bylaws indemnify our boardmembers if they act consistent with their

duties


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Some Other Protection

Co-op purchases insurance MM has D & O insurance with Executive Risk

Indemnity Inc: Combined Maximum aggregate

is $1,000,000 per year, with a $7,500deductible (paid by co-op) per claim


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Duty of Loyalty

Requires undivided allegiance whenmaking decisions affecting organization

This Means

No self dealing (using your position forpersonal financial gain)

No dealing with the Co-op unless

disclosed and approved by disinteresteddirectors without you in the room andterms are fair when compared with thirdparty rates


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Duty of Loyalty

Conflict of Interest PolicyComplete conflict of interest

disclosure each year and updatewhen necessaryMississippi Market board signs Code of

Conduct each year

Remember to report changes


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Confidentiality

Keep information not disclosedpublicly confidential

This could include: Items discussed in executive session

Trade secrets, if any

Strategic plans

Business opportunities


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Duty of Obedience

Must obey the Co-ops articles,bylaws, and applicable laws

Must be faithful to the organizationsmission and compliance program

Must not act in a manner inconsistent

with the organizations goals


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Questions?

Documents

BOD Governance Training